Real Estate Espresso: Recent Episodes
Victor Menasce
Your morning shot of what's new in the world of real estate investing. Daily real estate investment outlook from investor, syndicator, developer and author Victor J. Menasce, so that you can compress timeframes as a real estate investor or developer. Weekday shows are 5 minutes of high energy, high impact awesomeness. The weekend edition consists of interviews with notable guests including Robert Kiyosaki, Robert Helms, Peter Schiff, Chris Martenson, Mark Victor Hansen, George Ross, Ed Griffin, Dr. Doug Duncan, and many more.
As real estate investors we need to be paying attention to many aspects of the economy. After all, we are investors first and foremost and real estate investors second.
Our investments do not occur in isolation. They are influenced by the surrounding environment. If the stock market rises, how does that affect real estate? If the stock market crashes, how does that affect real estate?
On today’s show I’m going to predict a stock market correction and using history as a guide, predict the impact on the economy as a whole and real estate in particular.
A stock market correction (a decline of 10% or more from recent highs) can trigger or accelerate an economic downturn.
Real Estate Espresso Podcast:
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iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
Keith Weinhold is based in Anchorage Alaska. I had the pleasure of visiting with Keith on his home turf a few weeks ago where he gave my wife and I a tour of the city.
On today's show we are talking about divesting fully from Anchorage and redeploying capital into the Tampa Bay area. Tampa and Anchorage are almost extreme opposite ends of the country. A unique element of Keith's strategy has been to invest in new construction properties. The benefits include lower maintenance and higher tenant retention.
Keith is the host of the "Get Rich Education Podcast", running weekly since 2014. You can connect with him there.
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Hugh O'Reilly is based in Toronto where he has a background in law and as the head of a major pension fund. Today he advises technology startups in the property tech space. On today's show we are talking about Landlogic.ai and what is possible using these advanced tools.
To connect with Hugh, visit https://www.landlogic.ai/ or email him directly at hmboreilly@gmail.com
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about the impact of recent US Federal Government policy changes and then the government shutdown on real estate.
There are several government agencies involved in commercial financing. These include the US Department of Agriculture, the department of housing and urban development, the department of Veterans Affairs, the Federal Housing Finance Agency (FHFA) and the Small Business Administration.
Loan applications involving Fannie Mae and Freddie Mac also rely on reports generated by government agencies that are currently closed. All of these sources of financing are either delayed or are at a standstill.
There have also been numerous policy changes that have affected loan approvals since the most recent federal election.
How could this be a problem?
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
ALN Apartment Data published a new national report this week. It's hot of the press. Two major developments have defined the multifamily sector this year, and both have been widely felt. The first, a deceleration in new apartment supply, was anticipated as the 2024 construction boom reached its peak. The second, a broad resurgence in apartment demand, has exceeded nearly everyone’s expectations.
While the slowdown in new deliveries was written into the forecast, the scale and breadth of the demand recovery have caught the industry by surprise. This is not just a rebound — it’s a synchronized surge across asset classes, market tiers, and regions.
Through September, over 580,000 net new units have been absorbed nationwide. That’s more than double last year’s total through the same point in time and just shy of the exceptional 2021 figure.
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
WEBINAR REGISTRATION
I’d iike to invite you to learn more about an exciting opportunity located in Bradenton Florida. Bradenton is next to Sarasota for those of you who are familiar with Florida. This market has an industrial moratorium that is driving one asset class to new heights, specifically light industrial. This 35 acre property, right in the middle of Bradenton has an existing Charter School on 11 of those acres and 24 acres of land that we are developing. We are hosting a webinar on Wednesday October 8 at 7PM Eastern time. This opportunity is only open to accredited investors residing in the US in compliance with SEC regulations. To learn more, click on the link in the show notes and we will see you on Wednesday evening, October 8 at 7PM.
Today's question comes from Irene who writes:
I own a portfolio of short term rentals here in Kihei Maui. Most of these are condo’s across the street from the beach. The HOA has undertaken replacement work of some of the plumbing infrastructure which required the opening up of walls and replacement of pipe. In the process of demolition, they destroyed the bathroom cabinetry, which quite frankly was not necessary. As they were nearing completion we started to replace the cabinetry. The security team from the HOA then notified us that we needed to stop work because we did not have a building permit for the improvements. I’m not an expert in construction. How should I be responding to the HOA and a building inspector if the building inspector shows up.
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
WEBINAR REGISTRATION
On today's show I'm speaking with Jack Tucker on why there is an acute shortage of industrial land in Bradenton Florida.
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Bradenton Industrial Webinar
I’d like to invite you to learn more about an exciting opportunity located in Bradenton Florida. Bradenton is next to Sarasota for those of you who are familiar with Florida. This market has an industrial moratorium that is driving one asset class to new heights, specifically light industrial. This 35 are property, right in the middle of Bradenton has an existing Charter School on 11 of those acres and 24 acres of land that we are developing. We are hosting a webinar on Wednesday October 8 at 7PM Eastern time. This opportunity is only open to accredited investors residing in the US in compliance with SEC regulations. To learn more, click on the link in the show notes and we will see you on Wednesday evening at 7PM.
On today’s show we are looking back in history for some of the narratives that surrounded the adoption of new technology.
The year was 1999. At the time, it seemed like the internet was the answer, what’s the question? Companies were spending hundreds of millions burying optical fibre anywhere they could. After all, the internet would need lots of fibre to carry all of that traffic. There was tons of investment in the core of the network to carry all of this traffic. I personally was an executive in the tech industry. I left Nortel in 1997. The next company I was at was Tundra Semiconductor. We were designing microprocessor core logic chips that were used in all kinds of applications. One of our customers was Motorola who was shipping 250,000 cellular base stations a year. These would eventually be upgraded from the GSM base station to the Edge base station and then eventually the 3G base station. Back in those days, the emphasis was on building out the core of the network.
Later in my career I took progressively more senior positions in the tech industry. By 2004 I was VP of Engineering at AMCC that was headquartered in San Diego. I was also President of AMCC Canada. My company had raised about $1B in the public markets at the height of the Dotcom frenzy. As a result, we had all kinds of startup companies parading through our board room with the hopes of getting acquired by a company with a ton of cash.
I learned to ask three very simple questions of every startup company. The answer to these questions revealed more than anything else. The technology, the features, the cool factor, none of it mattered.
Real Estate Espresso Podcast:
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iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Samuel Morgan Wiseman is based in Scottsdale Arizona where he is a principal at Protopian Capital. On today's show we are talking about how to structure deals involving blended capital from private foundations as part of the capital structure. To connect with Samuel or to learn more, visit https://protopiancapital.com/
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Ben Reinberg is based in Newport Beach. He specializes in industrial and in medical office. On today's show we are talking about the factors influencing medical office. To learn more and to connect with Ben, visit https://www.alliancecgc.com/ or visit his personal website at https://www.benreinberg.com/
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Bradenton Webinar Registration
I’d iike to invite you to learn more about an exciting opportunity located in Bradenton Florida. Bradenton is next to Sarasota for those of you who are familiar with Florida. This market has an industrial moratorium that is driving one asset class to new heights, specifically light industrial. This 35 are property, right in the middle of Bradenton has an existing Charter School on 11 of those acres and 24 acres of land that we are developing. We are hosting a webinar on Wednesday October 8 at 7PM Eastern time. This opportunity is only open to accredited investors residing in the US in compliance with SEC regulations. To learn more, click on the link in the show notes and we will see you on Wednesday evening at 7PM.
On today’s show we are looking at the continuing signs of weakness in the US economy. Of course with the government shut down , there are no numbers coming out of the BEA, or the BLS. Today would have been the monthly jobs report which consists of two reports. There is the headline employment report, sometimes called the establishment survey and the household survey. The employment report made headlines in a significant way when the numbers for the past year were revised down ward by over 900,000 jobs.
The financial markets have come to rely on these reports when it comes to bidding on interest rate futures. The theory is that if the economy is strong and employment is strong, then the Fed will put more emphasis on suppressing demand by raising the cost of capital. This is the so-called hawkish stance where fighting inflation takes centre stage. If the economy is weak and jobs are disappearing, then the Fed in theory should take a more stimulative approach to reduce the cost of capital and encourage hiring. This was the stance in the last FOMC meeting which resulted in a 0.25% rate cut.
So we have no data coming out and the market doesn’t really know what to do. But there is data coming from private sources that are well respected.
Payroll processing company ADP produces are regular report based on the aggregated and anonymized payroll data of more than 26 million U.S. employees. This week’s report showed that the US economy shed 32000 in the month of September. ADP gathers their data weekly.
We can confidently predict another 0.25% rate cut at the next FOMC meeting at the end of October and then a further rate cut at the December meeting.
For those of us in real estate, this is good news. It means those variable rate loans that are indexed to SOFR will see a reduction of 0.5% before the end of the year.
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Bradenton Webinar Registration
I’d iike to invite you to learn more about an exciting opportunity located in Bradenton Florida. Bradenton is next to Sarasota for those of you who are familiar with Florida. This market has an industrial moratorium that is driving one asset class to new heights, specifically light industrial. This 35 are property, right in the middle of Bradenton has an existing Charter School on 11 of those acres and 24 acres of land that we are developing. We are hosting a webinar on Wednesday October 8 at 7PM Eastern time. This opportunity is only open to accredited investors residing in the US in compliance with SEC regulations. To learn more, click on the link in the show notes and we will see you on Wednesday evening at 7PM.
On today’s show we are talking a look at the latest research of new construction and whether there are constraints that are driving costs higher, even as fewer projects are getting built in the current environment. Specifically, I’m summarizing from research papers on the topic. These come from
https://www.researchpublish.com/upload/book/The%20US%20labor%20Shortage%20in%20Construction%20Industry-27122023-8.pdf
https://billd.com/2024-market-report/
https://www.agc.org/2024-construction-hiring-and-business-outlook
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Our book this month is the second book in a two part series. The first book is called "The War of Art" by Stephen Pressfield. The second book is Turning Pro. You can think of the first book as the statement of the problem and the second book as the solution.
The relationship between Steven Pressfield's "The War of Art" and "Turning Pro" is best understood as a two-part guide to the creative process: one book identifies the problem, and the other provides the solution.
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about scarcity through zoning. I often have discussions with investors about whether things should be easy or not. If it’s easy, anyone can do it. The barrier to entry is low and eventually the market will become saturated.
We see this regularly in cities like Houston where there are no zoning restrictions. This means you can put anything anywhere, and people do. For the most part, the market forces seem to take care of things and common sense generally prevails. But if you wanted to put a daycare next to an oil refinery you could. If you wanted to build a strip club next to a church, you could.
The good news is that you face very few regulatory barriers. That makes it easy, or at least easier. As long as the municipal utilities district has capacity and commits to serve your property, you can build. As long as your design meets the requirements of the fire Marshall and the building code, you can build. The good news it’s easy, and the bad news is it’s easy.
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are looking at what is happening in precious metals and the narrative attached to these recent record setting prices.
This past week gold has hit new all time record highs of just above $3800. Price peaked at $3820 an ounce, surging nearly $40 an ounce in the opening moments of trading on Monday morning. So far gold is up 10% in the last 30 days and up 41% in the past year.
Of course the purists out there will probably argue that gold has not risen. It’s the dollar that has fallen in reference to gold and that gold is the only true historic store of value.
We are seeing similar moves in the other benchmark metals. Silver also hit 14 year highs this week above $47 per ounce as of the time of this recording. That is an increase of 20% for the month and 45% in the past year.
It’s a similar story for platinum and palladium. Platinum is up 18% for the past month and 58% for the past year. Palladium is up 17% in the past month and 27% in the past 12 months.
We know that several things happen in an inflationary environment. Purchasing power for those on fixed income gets wiped out. Savings get wiped out and debt gets wiped out. We can also see asset prices rise unless we are talking about a Venezuelan style inflation where asset prices collapse due to a complete breakdown of the economy.
So in an inflationary environment you don’t want to be the one holding the debt. In fact the people at Morgan Stanley just updated their recommendation for a balanced portfolio. The traditional Wall Street version of the balanced portfolio has been 60% stocks and 40% bonds. They never mention real estate of course because they can’t sell real estate and they don’t make any money if you buy real estate.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Marcy Sagel is based in Baltimore, Maryland where she runs MSA Interiors. Her firm specializes in design of multi-family apartment projects nationwide. She is working at a very high level with some of the most notable developers in the nation. To connect with Marcy, visit https://msainteriors.com/
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Shane Pogue is based in Dallas Texas where is specializes in Investigative Due Diligence. He helps investors with their due diligence process. To connect with Shane, reach out to him on LinkedIn at https://www.linkedin.com/in/shane-pogue-6b900a11a/
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
I’d like to invite you to our upcoming Build To Scale Mastermind Nov 9-13 in Tulum Mexico. This exclusive four day event is for you to learn how to scale your business and your life. This is an opportunity for you to spend 4 high quality days with the leadership at Y Street Capital and take your investing business to the next level. To learn more, click HERE.
On today’s show we are looking at the value of a piece of property that has a rail connection on it.
When it comes to transportation and logistics, rail is significantly less expensive than trucking. Rail costs about $0.02 per ton mile versus about $0.10 per ton mile or more when transporting by truck. For bulk commodities, and for shipping containers rail can be much less expensive.
That means that transporting a 20 foot long shipping a container by truck from Los Angeles to New York would cost about $7,500. By comparison, that same trip by rail would cost about $1,400. The savings are substantial. But once you get the rail car to the destination, you still need to switch from rail to road for the last mile, or perhaps the last few miles. This short haul trip is going to be disproportionately expensive.
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Join us at the Build To Scale Mastermind in Tulum Mexico on November 9-13. This is an opportunity to spend 4 high quality days with the leadership at Y Street Capital and learn how to scale your business and your life. Click HERE to find out more.
The office apocalypse has been felt across most major markets worldwide. The impact of the pandemic was to reduce the need for conventional office space. There are still people working from home who were in an office environment in 2019. But slowly, demand for conventional office space is normalizing. We are seeing it in multiple markets.
On today’s show we are going to look at San Francisco. This city took a major hit in office vacancy. Several commercial real estate reports indicate that the peak office vacancy rate in San Francisco was 36.6% in the first quarter of 2024, according to CBRE. We've seen a turnaround in leasing activity with net absorption of 779,919 square feet. Listen to find out who is leasing and why.
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about how to reduce the cost of construction. Is it worth your time to look for savings in a construction project, or should you just accept that things cost more? On one of our projects we have been going through a value engineering exercise. This is where you look closely at the design specifications and find ways to save money in the project without compromising the end product.
You can sometimes face escalating costs because of the assumptions being made in the project. Our team has been meeting twice a week, and sometimes three times a week to pull cost out of this one particular project.
I’m going to show you a few ways in which we are saving money on a large scale. What I’m going to share are real life examples from one of our development projects.
We saved nearly $1M in the budget in about an hour of work.
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today show, we are talking about the impact of the newly announced $100,000 fee associated with the H1B visa to the United States.
According to my research, historically the United States had admitted 65,000 H1 B visas per year with an additional 20,000 visa for those holding advanced US degrees.
Anytime there is a major policy shift. The marketplace will adapt and find a new way to optimize the allocation of talent. Silicon Valley was cited as one of the Main reasons for the policy change.
The tech industry has seen significant layoffs over the past year. Companies like Microsoft, Amazon, Google, Facebook have all released tens of thousands over the past year.
The policy change will probably see some of those laid off workers getting rehired and those international workers covered by a visa, now a very expensive visa, being sent home to their country of origin.
The largest user of H1B visas is Amazon with over 14,600 visa holders. At $100,000 a year each, this would cost an additional $1.4B in fees to the US government. I personally would be surprise if any company would just roll over and pay for an additional $1.4B in fees.
The top users are Amazon, TCS from India with about 5500, Microsoft with a little over 5100, Meta with about 5100.
Even Walmart has about 2400. I would bet that Walmart would move those positions to their software design center in Toronto or Ottawa and save $239M dollars with zero loss of productivity.
When I ran an engineering organization, we did not use the H1B Visa program to import labour per se. We used the program to bring a few people from some of the remote design centres and immerse them in the culture in our Sunnyvale office so that they could in turn cross pollinate the culture across the organization. It gave that individual a foreign expat assignment and at the same time improved the cohesiveness between the different design centres around the world. They would later return to their remote design centre.
I personally believe that the use of the H1B Visa will drop to nearly zero with the imposition of this new policy. That means another 100,000 people in high paying jobs will likely leave the US. These people will probably continue to work for the same company from their country of origin, if they are an individual contributor. If they are in a managerial role, then the relationship gets more complicated. I truly can’t think of too many companies that will be willing to pay that $100,000 fee for the visa.
This year 2025 was the first year in which US population has shrunk in almost 100 years.
Shrinking population means a shrinking economy, especially when you consider that 70% of the GDP is based on consumption.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
There is a seismic shift—not in real estate, but in a sector that will fundamentally reshape how we think about how health care services are delivered.
That in turn will have an impact on the needs for real estate in a health care setting.
Family medicine has evolved. When I was a child, the family doctor was a self employed professional. Their office had one name on the door, and behind the waiting room was a sliding glass window for the receptionist, who often also doubled as the doctor’s assistant. That model is completely obsolete and has been replaced by the family health team clinic which has several owners, numerous associates, nurses, a nurse practitioner, and even other services like a dietitian, a blood lab, an imaging lab. All of these things under one roof in the name of efficiency. Increasingly, these clinics are not owner operated, but instead are associated with a larger healthcare provider.
But just like technology has disrupted retail and media, it’s now coming for healthcare.
The first wave was simple telehealth—video calls with your doctor. This was multiplied out of necessity during the pandemic. That was a good start. It saved a trip for a quick follow-up or a prescription refill. But it is limited.
The game changer is the technology that brings diagnostic equipment to the patient. Some health care systems have already adopted the technology. Somewhere between 60-80% of office visits can be handled by telehealth, augmented with the diagnostic equipment.
The change is coming, and it is clear as day. Commercial real estate has taken a beating since the pandemic. Medical office has been one of the remaining segments of stability in the office market. I can’t tell you how quickly the technology will penetrate the market. I predict that within the next five years, today’s existing technology will achieve sufficient market penetration that we will see a significant reduction in medical office footprints.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
Jon Ostenson is based in Atlanta, Georgia where he specializes in brokering business. On today's show we are talking about businesses the break the franchising stereotype. Many are complementary to real estate investments. To connect with Jon and to learn more, visit https://franbridgeconsulting.com/
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Chuck Cuda is focused on redevelopment of deeply distressed inner city retail projects in the Kansas City area. The focus is on value creation and removal of blight. This is a strategy that could be viable in most US cities.
To connect with Chuck and to learn more, visit https://opescre.com/ or email him directly at cuda@opescre.com. Also check out his new book "The Ego Strength" available on Amazon.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we talking about the role a general contractor. On a large project there are a lot of moving parts. There can be several subcontractors working at the same time on different aspects of the project. You can have plumbers in one building, electricians in another, windows being installed in another, and exterior cladding being installed with telescoping lifts. At the same time you can have drywall, painting and finishing happening in other parts of the project. There is just a lot going on.
A big part of the job of the general contractor is to monitor progress for the scope of work in each of these areas. They need to be monitoring the staffing that the subcontractors are bringing to the project and setting clear expectations with the subcontractors on their level of staffing on the project.
Some things do take time. Nine women can’t make a baby in a month. But you can improve the progress with nine times the number of drywallers, nine times the number of painters, and nine times the number of carpenters. Construction schedules are very compressible.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
On today’s show we are going to take a look at the Federal Reserve’s announcement on Wednesday of this week. There has been lots covered about this on virtually every news channel. What I'm covering hopefully is different from what you might be hearing.
All eyes were on the Federal Reserve today. But the Bank of Canada also cut their key lending rate by 0.25% today bringing the Canadian central bank’s rate down to 2.5%. Most Canadian banks followed the rate announcement with a cut to their prime lending rate of 0.25% down to 4.7%. This is the rate that Canadian banks charge to their customers. In the summer of last year, banks were charging 6.7% for loans. Today, that’s 4.7%. This makes a difference. While the news is welcome, This rate cut is a reflection of economic weakness in Canada which has been impacted by the trade war with the US. Canada’s unemployment rate is high at 7.1%.
While the US unemployment rate is officially 4.3%, we have to remember that the BLS has tinkered with the definition of unemployed over the years. They still do report the numbers as they did in the 1970’s and 1980’s. This is the U6 metric which if it were compared to the unemployment rate back then, would be at 8.3% in the US.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
Today is another AMA episode (Ask Me Anything). Our question comes from Greg who writes:
After listening to your recent segment on oil production data, it does not seem any data from the US government is accurate. We’ve known for a long time the jobs data is flawed. It would seem there are much better ways of collecting data. Is this simple incompetence or are there anterior motives for publishing bad data; additionally, is the data from other developed nations this bad?
Thank you for your insight. Love the show.
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On today’s show we are looking to connect the dots between new home construction, demand for lumber, and home sales. We are answering the question, Is this a possible boom for new rental properties?
So here we are going into the fourth quarter with several headwinds and a couple of tailwinds. If you are looking to start a construction project, this might be an excellent time. Construction labor are looking for work in many markets and will price their labor more aggressively. Labor has become the dominant cost in many projects. Material prices are falling in some segments. Lumber is a great example. We have falling interest rates. I say this irrespective of what the Federal Reserve may announce on Wednesday this week.
The US 10 year Treasury is hovering around 4% and the Canadian 5 year commercial mortgage bond rate fell below 3%. It’s now around 2.92%. All of this happened with no central bank announcements.
So if your capital costs are falling and your material prices are falling, and you are going into a seasonal slower time period with lower demand for labor, these are significant tailwinds. The only headwinds that I can see are the tariffs.
The other headwinds are falling prices for single family homes. But if you’re building rental apartments, and your market has the right supply and demand dynamics for rentals, this might be one of the best times to build, starting in the 4th quarter and into the first quarter of next year.
You might be thinking that you’re building a commercial building and you don’t use much lumber. What’s happening to steel prices ?
OK, Let’s look at that. Steel prices seem to have mirrored the same dynamic as lumber, but to a smaller degree. Prices peaked at the end of July at $3333 per ton. On Sept 11, they were at $3006 per ton. Today they’ve rebounded a bit to $3070 per ton.
We saw the same thing in copper. Prices were $5.80 per pound for copper and they fell in a matter of days to $4.36 per pound. Today the prices are hovering closer to what has been an average for the past year at $4.60 per pound.
So this is not just a softwood lumber phenomenon.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
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We have seen some spectacular revisions in economic data over the past couple of years. We've seen it in labor data, gross domestic product, inflation. These revisions are continuing to come. This time it's in the oil markets. The narratives are failing to explain what's happening behind the scenes. On top of that, the numbers are just plain wrong.
For example US growth in oil demand was underestimated by a factor of 4 by the IEA. Mexico's oil consumption has been under-reported by 100,000 barrels a day for the last five years. The US oil consumption was off by 350 million barrels in the last 3 years. These are not small inaccuracies. Yet futures prices are being determined by these narratives.
Real Estate Espresso Podcast:
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Y Street Capital:
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Fahad Farhat is based in Toronto where he specializes in luxury short term rentals. This conversation breaks the mold on what you think of short term rentals. He manages more than $30M of properties in Florida, Vegas, Muskoka, Toronto and several other key locations.
To connect with Fahad, visit ffrealtor on Instagram or visit his website at artofgreatness.co.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
Aleksey Chernobelskiy is based in Phoenix Arizona where he is the principal at GPLPMatch.com. He brings a vast experience managing multi-billion dollar portfolios. Today, his new venture is adding value by providing a matching service between accredited investors and investment offerings where only the offerings that match the investor's selection criteria are presented. This helps reduce the noise that is so pervasive in the investing community.
To connect with Aleksey, visit GPLPMatch.com or email him directly at Aleksey@gplpmatch.com.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about the design of a multi-unit building on a property that was originally designed for a single family home. There are many urban infill opportunities in major cities across North America. Earlier this week I was looking at a property for a consulting client that has the potential to be redeveloped from a single family home to a six unit apartment building. On today’s show I’m going to take you through the thinking of how we analyze this property to determine the basic feasibility. There are many aspects to this. There is the physical, can I get this to fit on the property in a reasonably cost effective manner. There is the financial where we analyze all of the financial levers in the project. We’re not going to talk about that today, we are just going to talk about the physical aspects of getting a project that complies with the zoning and will be sensible to build.
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On today’s show we are looking at the top five mistakes that rookie investors make when it comes to projects that have a construction component.
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Failing to sync the construction contract and the lending terms
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Failing to budget for pre-purchased materials that will not be included in construction draws until much later
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Failing to bond over offsite improvements
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Making sure you have the right type of construction contract for your project.
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Making early design decisions that cascade a trail of increased costs in the project.
Real Estate Espresso Podcast:
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Y Street Capital:
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When you listen to J Powell speak from the podium at the FOMC meeting he typically talks about managing the Fed’s dual mandate to maintain price stability and to maximize employment. The past several years have been focused on taming inflation. Core PCE inflation measured 0.3% for the past two months June and July. We will get the August report on Sept 26. On an annualized basis Core PCE inflation remains pretty sticky at 2.9%. This is higher than the Fed’s 2% target. It’s not zero, and it’s not runaway inflation either. I don’t even get into the debate about whether the measurement is appropriate or not. We will take it for now that Core PCE is what the Fed needs to set interest rates.
The other side of the coin is the labor market. If you’ve been listening to this show for a while, you will know that I’ve been flagging the inconsistencies between the two surveys that make up the employment report. There is the payroll survey and the household survey. The numbers reported in the two surveys are not consistent and have not been consistent for a long time. The employment report is the one that is most likely being overstated.
Yesterday, The Bureau of Labor Statistics (BLS) has announced a significant downward revision to its employment data for the U.S. down 911,000 jobs compared with the previous estimate. That's a big deal.
So with this latest employment data, it’s almost a foregone conclusion that the Fed will cut their benchmark lending rate at next week’s meeting. The real question is how much, and whether this will affect the medium term bond yield and the 10 year bond yield in particular.
The bond yield is a reflection of risk for those bonds that have a risk premium attached to them. I don’t believe the US Treasury market is carrying a risk premium. So in the absence of a risk premium, the yield is a reflection of the economy. A weaker economic cycle will pull bond yields down as growth is going to take a hit. A stronger economy will bring inflationary pressure on prices which will tend to drive yields up. We have a 30 day t-bill trading at 4.17%, the 10 year treasury trading at 4.08%, and the 2 year trading at 3.55% and the 5 years trading at 3.61%. This is the market clearly signalling that over the medium term, interest rates are heading lower.
That’s good news for real estate investors.
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My wife and I just came back from a 7 day cruise from Seward Alaska to Vancouver in Canada. One of the stops was a port of call created specifically for the cruising industry called Icy Strait Point. This port is built into the side of an island off the coast of Alaska. Most people on the ship would have enjoyed the fresh cooked salmon, and marvelled at the numerous souvenir shops sprinkled throughout this manufactured village. I on the other hand looked at it through the lens of a real estate investment.
Cruise lines are often looking for ports that charge low landing fees. These fees amount to huge sums over time. That’s why each major cruise line has built their own beach club at a private island in the Bahamas. They get a day at the beach with no port fees or landing fees.
The investment structure for Icy Strait Point is a unique partnership where the Huna Totem Corporation, an Alaska Native village corporation, maintains full ownership and operational control, while major cruise lines act as key investors. This model allows the native corporation to retain sovereignty while securing the capital needed for port development.
The investment came primarily from NCL and Royal Caribbean which gives these cruise lines preferential access to the port.
Icy Strait Point is fully owned and operated by the Huna Totem Corporation, which represents more than 1,550 Alaska Native shareholders. All profits from the port are reinvested back into the community of Hoonah.
When you travel, don't just eat the fish and buy a t-shirt, look behind the curtain at the investment structure.
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On today’s show we are taking a deep look at my forecast for the US economy over the next few years. What I’m about to share is not getting covered by the mainstream media as far as I can see.
If we look through history, we know that economic growth and population growth are linked. It’s not that population growth alone is the cause of economic growth. It’s not enough by itself. But we know that you cannot have one without the other.
The US population is now shrinking for the first time in a century. The last time the US population shrank was in the late 1920’s when jobs evaporated during the Great Depression and people who had come to the United States for work left the country.
In the first several months of the new administration, immigration numbers are way down. We have fertility rates at historic lows. We have workforce participation falling as baby boomers retire.
The only way that the US population and hence the economy can grow requires immigration. The US unemployment rate remains low because the workforce is shrinking.
On Thursday we got a jobs report that surprised Wall Street and many economists. The real question in my mind is how many jobs does the economy need to generate if the population is shrinking.
We might need to get used to low employment reports and this could represent the new normal.
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Mark Shuler is a practicing architect in Seattle Washington, now for more than 40 years. He started investing post 2008 and today is has more the 4,000 units under management. Today Mark is concentrated in Houston. We're talking investment thesis and how it's evolving in the Houston market in particular.
To connect with Mark, visit sgreinvestments.com or email him at investor@sgreinvements.com.
Real Estate Espresso Podcast:
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Y Street Capital:
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Our guest today is Marcin Drozdz who hails from Banff Alberta. He's been active in raising capital since 2007. On today's show we are talking about current market conditions for investment and how there continues to be a large gap between buyer and seller expectations.
To connect with Marcin, visit https://www.marcindrozdz.com/
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Some people ask me, Victor what does a typical day look like for you?
On today’s show we are talking about one of the daily flows of being a developer in today’s environment. I’m naturally involved in talking with investors, with leading parts of our organization, with negotiating contracts, and with reviewing project plans, performing due diligence. But today’s I’m going to focus on just one aspect of my weekly workflow. There is a certain strength that comes from repetition of an exercise. In the gym, you can lift heavier weights and do more repetitions. This is what breeds excellence.
In the world of development, that translates into examining the economic model for a project and truly testing the main variables on a continual basis.
So we don’t have the luxury of creating a financial model only once. The model will often go through dozens of revisions over the life of the project. On a major project it’s not uncommon for a financial model to have 20 or 30 versions. The biggest focus is on controlling the elements that you can control.
What you can control are the choices you make on how the project gets built so that you bring the unreasonable construction estimates that invariably are presented down to hopefully workable numbers. That means digging into hundreds of details on the construction and engaging in value engineering analysis.
This is where we are looking at the portions of the construction that have the biggest impact on the overall cost and looking for ways to save.
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On today’s show we are taking another look at artificial intelligence. So far when we think of AI, most people think of something like ChatGPT or Google Gemini. But this is the tip of the iceberg.
The real revolution is going to be the combination of AI and robotics. We are talking about a complete remake of virtually all physical products in existence. Think of autonomous vehicles, autonomous lawnmowers, autonomous aircraft, autonomous cooking tools, autonomous construction equipment.
The US administration seems focused on bringing manufacturing back to the US. But instead, the US should be focused on winning the factories of the future. These facilities will first need to manufacture the robots that will be used to manufacture the products. If we don’t take that first step then we will be doing some manufacturing in the US with Chinese robots. That virtually guarantees that our western economies will be relegated to a second tier economy.
Europe is a lost cause. They’ve erected so many regulatory barriers that Europe is has no chance to achieve leadership in AI.
So on today’s show I’m going to showcase one startup company, Bedrock Robotics.
Their focus is on excavators for heavy construction.
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On today’s show we are talking about what happens when there is an announcement about jobs moving.
It seems like a zero sum game in which there are winners and losers. Yesterday’s announcement from the White House had those characteristics.
If you’ve been following this show for a while, you know that my development firm Y Street Capital, together with a few partners owns a large parcel of land consisting of 1783 acres in Colorado Springs. The project is a large master planned community located on the eastern edge of Colorado Springs. The development of the city is constrained by the mountains on the west side. It has developed North and South. Denver is about an hour to the North. The city has also developed East which is where our property is located. Our immediate neighbour is Schreiver Space Force Base. There are numerous assets in Colorado Springs.
Colorado Springs is a major hub for U.S. military space and defense operations, and as a result, many of the assets located there are part of the newly formed U.S. Space Force, which was created from elements of the U.S. Air Force.
The move was widely anticipated. Our sources said that the announcement would happen before the end of August. (We were off by two days.) Our sources tell us the move is anticipated to affect about 750-1000 jobs. Schriever Space Force Base is not being moved, nor are the ground bases in Alaska or elsewhere around the world. While the move is negative for Colorado Springs, we anticipate that the Golden Dome announcement from earlier this year will require growth in both Colorado Springs and Huntsville in order to be realized. Much of the growth that was announced for Huntsville is linked to the Golden Dome program, and not the wholesale relocation of Space Force from Colorado to Huntsville. Therefore, we do not foresee a long term negative impact.
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On today’s show we are taking a look at a paper published in the past week by Stanford University.
But first, I’d like to let you know about an opportunity for one lucky individual to participate in the creation of the real estate espresso podcast. This is an unpaid internship position which will give you the opportunity to learn and to contribute to how guests for the podcast are selected. The work represents a couple of hours a week. If you, or someone you know might be a good fit for this position, we will be accepting applications to join our podcast team. Send an email to podcast@victorjm.com and let me know a little bit about yourself and how you think you might be a good fit. Again send an email to podcast@victorjm.com
On today’s show we are taking a look at a paper published in the past week by Stanford University.
There is a lot of news coverage about how AI is changing the world of software development. This is seen as a bellwether for what is to come elsewhere in the economy. Software is ideal for tools like AI in that it is a much more restricted language than natural language with a much smaller vocabulary. It’s at the intersection of math and language, so it’s much easier for a large language model to work on.
The Stanford paper was widely quoted in the media and it tells us a few things about the state of AI and how it is affecting hiring.
The first, and perhaps most striking fact is the substantial and measurable decline in employment for workers aged 22-25 in occupations deemed most exposed to generative AI. This group has experienced a 13% relative decline in employment since late 2022, a period that coincides with the widespread adoption of tools like ChatGPT.
For the most AI-exposed occupations, young workers experienced a 6% decline, while older workers saw an increase of 6-9%. This tells us that junior positions are being displaced, but the most experienced workers are using AI to augment their work and multiply their productivity.
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Y Street Capital:
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Our book this month is "The Four Obsessions of an Extraordinary Executive: A No-Nonsense Breakdown" by Patrick Lencioni.
It's not a new book. It was first published in 2000. The author is founder and president of The Table Group, a firm dedicated to helping leaders improve their organizations’ health since 1997.
Prior to founding The Table Group, Lencioni served on the executive team at Sybase, Inc. He started his career at Bain & Company and later worked at Oracle Corporation.
The core of the book are four obsessions that the author believe are core to a healthy organization.
Obsession #1: Build a Real Leadership Team, Not a Social Club
Obsession #2: Stop the Confusion and Get Clear
Obsession #3: Communicate Until You're Sick of Your Own Voice
Obsession #4: Put Clarity into the Company's DNA
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Y Street Capital:
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Galiano Tiramani is based in Las Vegas, Nevada where the factory for Boxable.com is located. The idea behind Boxable is optimizing the entire end to end construction process and creating an efficient shipping package that allows for cost effective transportation. By reducing as much of the site work to the bare minimum, it is possible to reduce the overall cost of construction.
To connect with Galiano or to learn more visit boxable.com
Real Estate Espresso Podcast:
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Adam Gower is based on the Central Coast of California. He has over 40 years experience in commercial real estate. On today's show we are talking about how to connect authentically using LinkedIn as a vehicle for building relationships.
To learn more, visit gowercrowd.com.
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Every year the Kansas City Fed hosts the Jackson Hole symposium. All eyes are on the opening speech from Jerome Powell which was widely covered by the news media. To me, the more interesting talks are the invited speakers who give talks on various elements of the economy. The theme this year at Jackson Hole is demographics and the impact on the labor market. So this week we will be doing a mini series summarizing the most noteworthy talks from Jackson Hole this year.
The paper we are examining is by Emi Nakamura from Berkeley University. In this paper the author is examing the Taylor Rule named after John Taylor who came up with the observation after six years at the Fed, specifically examining the Alan Greenspan years.
Emi Nakamura shows convincingly that the Taylor Rule rarely if ever applies in the real world, except for those six years.
Real Estate Espresso Podcast:
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LinkedIn: Victor Menasce
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
On today’s show we are talking about the global response to US negotiating tactics. The President is used to negotiating with a single party across the table. But he lacks experience negotiating with millions of people who are not party to the negotiation.
The current negotiating stance of the US administration is highly combative and employs methods designed to maximize US leverage in the negotiation. There are three possible responses to this approach
- Engage In Negotiations
- Give in to US demands
- Take steps to reduce or eliminate the US negotiating power
It’s that 3rd approach which is not getting very much attention. It also presumes that you know who you are negotiating with.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Every year the Kansas City Fed hosts the Jackson Hole symposium. All eyes are on the opening speech from Jerome Powell which was widely covered by the news media. To me, the more interesting talks are the invited speakers who give talks on various elements of the economy. The theme this year at Jackson Hole is demographics and the impact on the labor market. So this week we will be doing a mini series summarizing the most noteworthy talks from Jackson Hole this year.
Some of these talks are considered boring by the news media and they don’t get covered. But for those who seek to understand how the economy functions, these talks are very interesting.
On today's show we are examining a paper called "Interstate Labor Mobility and the US Economy". It has four authors, two from the University of Michigan and two from Europe.
Their paper discusses how Gross migration rates within the United States have undergone a subtle but significant transformation over the past five decades. While some sources, notably the Current Population Survey (CPS), paint a picture of a steep decline, plunging from over 3% to a mere 1.2% by the end of the sample period, a closer look at more robust data tells a different story. Using IRS data, the authors show that labor force mobility declined to 2.5% from 3% over that same time period.
They further break down the components of why people move. One factor that I believe was not adequately addressed is the rise of remote work. People don't have to move for work in many instances. That virtual mobility may in fact be by choice rather than necessity.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Every year the Kansas City Fed hosts the Jackson Hole symposium. All eyes are on the opening speech from Jerome Powell which was widely covered by the news media. To me, the more interesting talks are the invited speakers who give talks on various elements of the economy. The theme this year at Jackson Hole is demographics and the impact on the labor market. So this week we will be doing a mini series summarizing the most noteworthy talks from Jackson Hole this year.
Some of these talks are considered boring by the news media and they don’t get covered. But for those who seek to understand how the economy functions, these talks are very interesting. Our first one is focused on a talk by Claudia Goldin from Harvard University.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today's show I'm coming to you live from Anchorage Alaska. Based on the most recent data available, the rental vacancy rate in the Municipality of Anchorage was 4.6% in 2024. This indicates a relatively tight rental market, although it's a slight increase from some of the historically low rates seen in recent years.
The recent population decline can be linked to a long-running economic recession in Alaska, which began in 2015. This recession was largely a result of falling oil prices, which impacted state revenue and led to a slowdown in economic activity. As a result, Anchorage lost jobs and people, and its employment levels have yet to recover to pre-2015 peaks.
Real Estate Espresso Podcast:
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LinkedIn: Victor Menasce
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
Dave Shirkey is based in Michigan where today he specializes in mobile home park investing. On today's show we are talking about the darker side of investing which sometimes attracts bad actors. We're discussing how to avoid the possibility of being lured into a scam.
To connect with Dave, you can reach him on LinkedIn.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Kevin Bupp is based in Tampa, Florida where he invests in mobile home parks and structured parking assets. On today's show we are focusing on the investment mandate for parking lots and structured parking assets.
To connect with Kevin you can find him on LinkedIn or at https://sunrisecapitalinvestors.com/fund-4/
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are asking questions about property rights. Our team has been working on a development site in Utah. The property in question has a broad commercial zoning associated with it. The purpose of zoning is to restrict land use to specific uses that are in line with the city’s master plan. The intent is to ensure that developments of those properties is not in conflict with the stated goals of the city.
At this point we have presented three different site plans to the city that are consistent with the zoning. All were supported by the planning commission. The most recent site plan proposal was approved by the planning commission with a vote of 7-0. But then when it got to city council, it was denied.
Unlike in some other municipalities, this city has delegated the final decision-making authority to the Planning Commission for certain types of applications, including:
- Conditional Use Permits
- Commercial site plans
This means that for these specific applications, the Planning Commission's decision is final and does not require further approval from the City Council, unless it is appealed.
Since our property is zoned commercial, it is unclear that City council should have even played a role in the application according to the city’s own rules.
So the question eventually becomes one of property rights. At what point does the denial of construction on a property effectively become a condemnation of the property, without just compensation. We are truly starting to ask questions about the legitimacy of the repeated denials. Clearly these are risks that a developer takes. But my gosh this feels a bit extreme. On today’s show we are going to take a look at the case law surrounding excessive government interference. Now of course I’m not a lawyer and I don’t play one on a podcast.
As you can see, we’re a little frustrated with the city council and it’s looking like consulting a very experienced land use attorney might be the next step.
Real Estate Espresso Podcast: Spotify: The Real Estate Espresso Podcast iTunes: The Real Estate Espresso Podcast Website: www.victorjm.com LinkedIn: Victor Menasce YouTube: The Real Estate Espresso Podcast Facebook: www.facebook.com/realestateespresso Email: podcast@victorjm.com Y Street Capital: Website: www.ystreetcapital.com Facebook: www.facebook.com/YStreetCapital Instagram: @ystreetcapital
On today’s show we are doing another in the beginner series.
The Real Estate Espresso Podcast is unlike other podcasts in that most others are focused on a more entry level audience. Our listeners are sophisticated. Many of you own large portfolios of apartments. But you also have people in your life who are interested in learning more, but maybe don’t have access to high quality information. The idea of sending your spouse to a $199 weekend bootcamp for beginners where they are going to be abused by sleazy sales people sounds unthinkable. So where do they go. Look no further. We are going to dedicate a couple of shows a month to topics that will accelerate the learning for less experienced investors, and might give the most sophisticated investors a new way of explaining a concept that is otherwise complex to describe.
Today’s show is focused on underwriting where I’m reviewing the underwriting from a new investor who is looking at their first multi-family acquisition.
There are numerous pitfalls in underwriting which unless you have the experience, you don’t know what you don’t know.
This project is the first syndication for them and they don’t have experience having put together a compliant offering.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about whether Real estate investing as a career require more tech skills in the future? Will it require more finance skills? How do you find that person?
The advent of AI has changed the way that the real estate investing is done.
It’s a fundamental shift in the real estate investment landscape, moving the industry from a reliance on intuition, fragmented data, and manual processes to a new paradigm that is data-centric. AI is not merely an incremental technological advancement; it is redefining the competitive advantage.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
On today’s show we are talking about ways in which business people and regular citizens are being targeted for financial fraud. This was prompted by an attempt to get $9,000 from our company earlier this week. The attempt to defraud us failed, but it showed how much more sophisticated these attempts are becoming.
Real Estate Espresso Podcast:
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LinkedIn: Victor Menasce
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
The headlines on the Wall Street Journal have been marvelling at the lack of inflationary pressure as a result of tariffs. The latest CPI announcement had the annualized rate at 2.7% against the backdrop of a weakening labor market. This is converging on the Fed’s 2% target for inflation.
We are looking at inflation because the Fed’s interest rate policy is linked to balancing both price stability and maximizing employment. If inflation is too high, they raise rates in order to suppress demand. If unemployment is too high they lower rates to stimulate investment.
Of course we know it is not just the rates which affect the economy, it’s access to credit which is infinitely more important.
We know that tariffs have been making headlines for most of this year. Tariffs have been in effect on a wide range of goods for many countries since April 1. There have been several delays to the implementation of tariffs which were designed to incentivize new trade deals with the US. Some of these have concluded and others like Canada and China are still in process.
Last Friday the Producer Price Index was published and it showed that prices increase 0.9% for the month of July. That's a huge jump in a month. Is this all the result of tariffs? No. The services component of the PPI rose 1.1% and the goods component rose 0.7%. Tariffs are not the whole story.
When I consider that companies need to maintain profitability, there are several ways they can do this. For example, retailers might hold the line on prices for goods that have tariffs attached to them.
But I think the cost pressure from tariffs and the incentive to bring manufacturing to the US will have two effects.
- Any new manufacturing in the US will take time to implement. In the meantime, companies will have to find other ways to cut costs. If and when they do eventually bring new manufacturing to the US, it will be very highly automated to minimize the impact of higher wages in the US.
- With the advent of AI, manufacturers will be looking for ways to eliminate other positions in the company and reduce headcount to improve operating margins.
The drive to save costs will accelerate the adoption of AI in companies and speed up the elimination of jobs. Strangely, this will have the opposite effect that the White House is hoping for.
So if inflation ticks up as a result of tariffs, can the Fed do anything about it? The answer is a resounding NO. Raising interest rates won’t make the tariffs go away. Increasing costs for businesses won’t cause demand to fall enough to suppress prices. So the Fed would be rendered completely impotent to bring price stability from an artificial imposition of tariffs causing prices to increase. You see these economic models assume normal economic behaviour. But if the model doesn’t explain the real situation on the ground, then at a certain point you have to abandon the computer simulation and look out the window to see what’s happening.
Real Estate Espresso Podcast:
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LinkedIn: Victor Menasce
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Ryan Hawkins is based in St. Louis where he consults as a campaign manager for developers all across North America on the politics of land use. On today's show we are talking about the types of opposition that materialize and how to respond to them.
To connect with Ryan and to learn more, visit https://www.sabrepointpa.com/
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Luis Belmonte is based in San Francisco. He's been active in real estate development since the 1960's and has lived through 7 economic cycles in his career. On today's show we are talking about how to spot and survive these cycles.
To connect with Luis, visit 7hp.com. He has several books on Amazon including
- Real Estate 101
- Streetdog MBA
- Streetdog Manager
- Streetdog Negotiator
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today's show we are doing a walk-through of a new project that is hosting an open house tomorrow. This is a 253 unit housing project at Mont Tremblant in Quebec, an hour North of Montreal. Mont Tremblant, like many resort communities suffers from a shortage of housing for the employees of the resort. On today's show I'm sharing some of the attention to detail that is necessary to deliver a world class product.
Real Estate Espresso Podcast:
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LinkedIn: Victor Menasce
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about government involvement in the economy. Countries vary widely in terms of the extent to which government plays a role in the total economy.
At the extreme end of the spectrum there are the purely authoritarian states based on communism. Places like Cuba and the old Soviet Union where government was the economy.
But there are government initiatives within the US which frankly are worse.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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On today’s show we are taking a look at a relatively new product category. This is something that Y Street Capital has been active in for some time. But the industry and the investment community are waking up and taking notice.
A recent white paper from the folks at Green Street is entitled : "Industrial Outdoor Storage: A Beautiful Ugly Duckling." Research and data on the sector remain scarce, which frankly can create opportunities. That’s the opinion at Green Street, and it’s our opinion as well.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
On today’s show we are looking at the integrity of economic data. This has been making headlines with the President firing the head of the bureau of labor and statistics and installing a longtime critic of the BLS to head the agency.
The BLS has received a lot of questions and criticism for their data collection methods.
The world seems up in arms that the President is going to interfere with how economic data is collected and reported. On today’s show we are going to take a walk through history to look at how economic data and employment data is collected and reported and the numerous changes that have taken place under various administrations since the 1940’s.
The BLS and the BEA claim to have no political affiliation and therefore they are independent from the administration. Let’s look and see at what history tells us, and maybe you will agree with that sentiment, and maybe you won’t.
The collection and dissemination of these statistics are primarily the responsibility of two independent federal agencies: the Bureau of Labor Statistics (BLS) and the Bureau of Economic Analysis (BEA). The BLS, which was first established in 1884, is responsible for producing data on employment, prices, and productivity, while the BEA's mission is to provide a comprehensive picture of the U.S. economy through its national accounts, including Gross Domestic Product (GDP).
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Email: podcast@victorjm.com
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Capital tends to flow where it is treated the best. Well the state of Texas is considering a change to its constitution which will have no immediate impact on taxes. Currently the state of Texas has no state income tax for individuals or businesses. It also has no capital gains tax.
Texas is currently in the process of considering a constitutional amendment that would permanently prohibit a state-level capital gains tax. This is a significant development, especially since Texas already has no state income or capital gains tax. The proposed change isn't to add a tax, but to legally block one from ever being enacted in the future.
Texas voters will decide on Proposition2, a legislatively referred constitutional amendment, on November 4, 2025.
Of course any income earned in the state of Texas including capital gains is still subject to Federal income tax and capital gains tax.
So why is this significant? When a jurisdiction is seen as business friendly, it tends to attract investment. It attracts more than its fair share of jobs and prosperity. This is sending a message to the business community that Texas is open for business and is open for investment and residency. This might be considered a PR stunt since in the short term it really changes nothing.
But investment in a location starts with making a favourable first impression. It’s one step along the path of many steps that are ultimately required to get a company to locate there.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
Joel Landon is based in Salt Lake City where he helps investors administer their retirement savings. On today's show we are talking about how to use a Roth Conversion as a tax efficient method for investing in real estate. This is not a rookie move, and of course we are not providing tax advice on this show. Consult your own tax specialists who are familiar with your specific circumstance. To connect with Joel, visit https://heritageira.com/joel-landon/ or email him directly at joel@heritageira.com.
Real Estate Espresso Podcast:
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LinkedIn: Victor Menasce
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Mike Kron is based in Newport Beach California. His strategy has pivoted lately to focusing on retail credit tenant net leases. These are the national brand operators that provide corporate guarantees on the retail lease for businesses that are not vulnerable to e-commerce and shrinking retail footprints.
To connect with Mike visit https://guardiannetlease.com/ or email him directly at mike@guardian-advisory.com.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are looking at an echo from the Great Financial Crisis. There was collapse of a banking house of cards triggered a drop in lending liquidity which then precipitated a fall in real estate prices. There were several areas across the US that got caught up in that mess in a big way.
On today’s show we are looking at which areas of the country are currently experiencing negative equity and comparing them to counties that were similarly affected in the period from 2008-2012. In that time, the recovery only started in 2013. It took a full 8 years for prices to re-normalize in many of those areas.
Right now, there are a few areas in California, Florida, New York, Illinois, and Texas that are experiencing negative equity. Washington DC is also on the list, but in my opinion for different reasons.
Now I’m not here to tell you that we are experiencing a repeat of 2008. But I find it interesting that some of the same markets that experienced the most negative equity in 2008 are also the same ones experiencing negative equity today in 2025.
This is a time when you need to be particularly careful. There are people still quoting growth statistics for these areas that frankly in my estimation are no longer valid. Yes, there are national home builders planning large scale gated communities with thousands of homes in the future. But I can also tell you that these builders will not be building at the same pace in an environment where inventories are surging and equity is evaporating.
Real Estate Espresso Podcast:
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LinkedIn: Victor Menasce
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
As many of you know, I follow macro economics and from time to time I share perspectives on the implications of underlying aspects of industries that ultimately affect real estate or the economy in some way. On today’s show we are talking about oil. It’s been a while since we have looked at what’s happening in oil and gas.
To start with we have not seen any appreciable change in oil prices over the past two years. They’ve traded within a fairly narrow range between $70-$90 per barrel. There have been a few excursions outside that range. These days, prices are hovering between $60-$70 per barrel for most of this year.
This is an indication of fairly balanced supply and demand. The latest 50% tariff levelled against India as punishment for buying Russian oil is totally missing the point.
This has become a massive game of musical chairs. At the end of the day, supply and demand will always seek to find an equilibrium, just like gravity helps water find its equilibrium.
Real Estate Espresso Podcast:
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LinkedIn: Victor Menasce
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
On today’s show we are talking about the impact of data centres on nearby residents. You would think that a data centre is a large rectangular building filled with electronics and the high speed optical connections coming in and out of the data centre will connect the servers with the end users. Beyond the fact that the data centre is probably not the most beautiful building in the world, there should be no real lasting impact from the data centre on the community.
Well, as it turns out, that’s not the case. In fact, data centres can create a huge amount of noise and they use a massive amount of water.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
On today’s show we are looking at three clear signals that financial markets are sending us over the past three days.
There are three moves in the market that are noteworthy. We are going to unpack all three
- The US dollar has risen dramatically in the past week
- Short term rates dropped dramatically in the past two days
- We have a resignation on the Fed Board of Governors.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are looking at banking and how banks make decisions. Access to capital is one of the key pillars in real estate. Now let me be clear. I am not a banker. I’m not a mortgage broker in any jurisdiction and I’m not her to provide advice of any kind. I’m merely sharing what have been my own observations, which may be incomplete or downright incorrect.
Let’s look at how banks make money so that we can better understand how and why they might say yes to a loan request and when they are likely to say no.
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LinkedIn: Victor Menasce
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Email: podcast@victorjm.com
Y Street Capital:
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George Ross is a repeat guest on the podcast. On today's show we're talking about how to negotiate when there is a power imbalance between the parties.
Real Estate Espresso Podcast:
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LinkedIn: Victor Menasce
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
Jacob Sybrowsky is based in Provo Utah where he specializes in working with high net worth families on their investment mandates. On today's show we are talking about what ultra high net worth families are looking for when it comes to getting deals done.
To connect with Jacob, visit diversify.com or email his directly at jsybrowsky@diversify.com.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
If you have been following me for a while you will know that I come from an engineering and product design background. I view the world through the lens of product design where you are designing a specific product for a specific customer. If you buy a rental apartment building and decide you are going to lease it out to tenants, this is still a product designed with a specific customer in mind. It is human centred design. Our book this month is all about human centred design.
"The Design of Everyday Things” by Don Norman.
The Design of Everyday Things, is not merely a book about industrial design; it is a profound philosophical treatise on the relationship between humans and the objects that populate their world. First published in 1988 and revised in 2013, the book's core message remains as relevant and powerful today as it was over three decades ago. Norman argues that the fault for our daily struggles with technology—from fumbling with confusing remote controls to battling poorly designed doors—lies not with the user, but with the designer. This simple yet revolutionary premise forms the backbone of a text that has become essential reading for anyone involved in product design.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
On today’s show we are talking about the softening of the residential housing market that is underway across both the US and Canada.
The seasonally adjusted numbers are in for the month of June which now shows four months of steady decline compared with the previous months. Again, we need to remember that these are seasonally adjusted numbers. The June numbers are still about 2% higher than the same period in 2024.
This is true for the top 20 primary markets across the US as well as the national averages. The numbers are pretty consistent for both the Case Schiller report as well as the National Association of Realtors.
The national home builders are also experiencing falling demand. New single family home sales have fallen by 6.6% in the first six months of 2025.
Home builders have tried to adapt to the falling demand by building smaller and more affordable homes. But sales have fallen even with these adaptations to market demand.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
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Instagram: @ystreetcapital
On today’s show we are unpacking the shocking GDP announcement that was published at 8:30 on Wednesday morning July 30. The market expected a 2.3% growth rate and the actual published number blew past the expectation with a 3% annualized growth rate in the second quarter. This is in stark contrast to the negative 0.5% growth rate in the first quarter.
So the obvious question is how did the economy swing from economic contraction in the first quarter to 3% growth in the second quarter?
On today’s show we are going to look at the underlying components of the GDP calculation to get an understand what is happening.
There are only a handful of variables, five of them in fact that move the needle. There is consumption, investment, inventory, imports and exports.
Let’s look at each one of these factors and determine the impact of each one on the GDP calculation.
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Email: podcast@victorjm.com
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On yesterday’s show we talked about building perimeter access. This is part of an entire building system for your residential apartments.
The other main question is how to provide keys for your apartments. If you use a hotel key card system then you are sending an indirect message to your residents that you don’t expect them to stay for very long and that idea can get planted in a resident’s mind early in the process. They may not say anything about it, but there is a nagging idea in the back of their mind that they should not think of this apartment like their home. It’s more like a short term stay.
If your property truly is intended for a short term stay, then there is no problem with that idea. But if you expect people to stay for years and years, that’s probably not the idea you want to reinforce every time they enter their apartment.
In an ideal world you would want the same database that programs the building’s perimeter to also provide the access to the apartments.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
On today’s show we are looking at one of the most over-looked aspects of real estate product design. The problem is that the architects don’t get involved. The electrical engineer and electricians don’t get involved, and the general contractor doesn’t get involved. These systems often end up as an oversight or an afterthought.
Let’s start with building access. On today’s show we are going to only focus on securing the perimeter of your building and the common areas and amenities.
The way residents interact with your building is often a function of the technology decisions you make to incorporate systems within your building. The life cycle cost of operating and maintaining those systems is also a function of the choices you make.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Marc Koran is based in Montreal, Quebec which is the headquarters of Campus Habitations. The first of several projects is in Mont Tremblant, a ski resort just North of Montreal. On today's show we are talking about the benefits of renting apartments to corporate clients and not just individual tenants. To connect with Marc and to learn more, visit https://www.campushabitations.com/ or connect with him on LinkedIn at https://www.linkedin.com/in/marc-koran/
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
Patrick Grimes is based in Honolulu Hawaii where he is a principal at Passive Investing Mastery. On today's show we are talking about what true diversification looks like. As many of you know, our team develops senior housing and this coming week, I'll be part of a panel on senior housing. To connect with Patrick and to learn more about the panel discussion on Senior Housing, visit https://passiveinvestingmastery.com/.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about the conversion of office space.
The problem with most office buildings is that they are the wrong shape to build apartments. Many office buildings are square in shape and most apartment buildings are rectangular, or L shaped, or U shaped.
Apartment buildings need lots of windows. Living rooms need windows and bedrooms need windows. Offices do benefit from natural light, but in truth, a sunny south facing window creates so much glare that it makes it impossible to read the screen on your desk. Windows remain covered for much of the day.
We’re going to be using a case study of an office building that is part of the Kanata Research Park. The building is part of a very large office park and is located next to a four star hotel that is also located within the office park.
It’s no surprise that office vacancy has hit this location, just as it has impacted many offices during the pandemic and the slow return to office trend since the pandemic.
So the owner of the building made the decision to convert one of the half dozen buildings on this particular site to residential and move the remaining commercial tenants to other buildings within the same complex.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
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Instagram: @ystreetcapital
On today’s show we are looking at what might become another tectonic force in the world of real estate investing.
The White House provides a steady stream of topics that are worthy of discussing on any real estate podcast. This week is no exception. On Tuesday of this week, the President floated the idea that maybe houses will be exempted from capital gains tax. The thinking is that this would stimulate the real estate market.
A change like this to the tax code would require Congressional and Senate involvement. The final definition of what type of property would qualify to achieve the tax exempt status has not been articulated.
So on today’s show we are going to dive into the dangerous realm of speculation for what that might be the consequences of such a change.
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Email: podcast@victorjm.com
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On today’s show we are looking at the impact of data centres on the local economy where these are located. We are looking at the energy component, and the technology life cycle.
You have no doubt heard the statement that “energy is the economy.” It is true that for every unit of GDP there is an equivalent unit of energy consumed somewhere in the world.
But in this instance, energy is the lifeblood of the AI industry. In addition to the gold rush in AI, there is a recognition that the world is not generating enough electricity to satisfy the incremental demand from data centres.
What caught my attention this past week was not the plethora of announcements of new power generating capacity. Although that is impressive, there is something even more important that we will explore.
Let’s take a look at the aggregate power generation announcements in just the past month alone. Several of the announcement have been in the range of 2GW. We need to put this in perspective. 2GW of power generation is enough to power 1.5M homes. This is enough to power a city like Phoenix or San Diego or San Antonio. So when we measure the power consumption of a large data centre complex, we are comparing it to the GDP of an entire city of 1.5M homes, or about 3m people.
The primary driver of obsolescence is the relentless pace of Nvidia's (and other manufacturers') innovation cycle. New generations of AI chips are released frequently, every 12 to 18 months, bringing significant leaps in computational power, efficiency, and new features.
Meta's studies, for example, have shown significant GPU failures during the training of large models like Llama 3, with an estimated annualized failure rate of around 9%, potentially reaching 27% over three years for H100 GPUs. These chips consume a lot of power (700W for H100s, over 1000W for future chips) and generate intense heat, putting immense stress on the hardware.
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Email: podcast@victorjm.com
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Instagram: @ystreetcapital
On today’s show we are talking about changes in lending policies and how these are affecting commercial real estate loans.
But first. I’d like to give the listeners to the podcast the opportunity to be among the first to get visibility of an exciting new project that will form part of our industrial portfolio. The project is located on a 21 acre parcel in Bradenton Florida. This is an area that has an acute shortage of property that is even zoned for industrial uses. The project is not open yet for investment. This is an opportunity for interested parties to learn more about the project. If you are interested in learning more, send an email to victor@victorjm.com and put the word industrial in the subject line. We will get some information over to you shortly. That’s victor@victorjm.com. This is not a solicitation for investment, and any investment would be by prospectus only, limited to accredited investors residing in the US in compliance with SEC regulations.
On today’s show we are talking about changes in lending policies and how these are affecting commercial real estate loans.
When a lender or an agency issues and update to a lending policy, it is worth paying attention to the details of the new policy. Chances are, it will either make it easier to get the loan you need or perhaps make it impossible.
We have seen both situations in recent months. We’re going to give several examples on today’s show.
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On today’s show we are talking about math. Yes, I know, not everyone likes math. We are going to be talking about the concept behind the time value of money and the different measures that are used to describe the time value of money.
So when we are talking about time value of money, we can talk about the present value, the future value, and rates of return as all related by the same types of mathematical operations.
A lot of investors perform a very simple return on investment calculation. The math is easy, but it doesn’t take into account the time value of money. In that sense, it’s not the proper calculation to be performing. We use the internal rate of return calculation instead. That’s also true of pretty much all institutional investors as well. So on today’s show we are going to dissect the concept of time value of money calculations.
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Zach Westerfield is based in Forsyth Georgia where he specializes in renovating historic properties. The economics of these projects are impossible without the inclusion of either Federal or State tax credits that are confined to specific historic districts and properties that meet the historic designation criteria. This is a fascinating segment that is often overlooked. To connect with Zach, visit southvp.com
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
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Jace Graham is with Rising Phoenix Capital where he invests in oil and gas leases. This is the real estate end of the oil industry which is entirely based on royalties.
To learn more, visit https://www.laplatapeakfund.com/
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
I’d like to give the listeners to the podcast the opportunity to be among the first to get visibility of an exciting new project that will form part of our industrial portfolio. The project is located on a 21 acre parcel in Bradenton Florida. This is an area that has an acute shortage of property that is even zoned for industrial uses. The project is not open yet for investment. This is an opportunity for interested parties to learn more about the project. If you are interested in learning more, send an email to victor@victorjm.com and put the word industrial in the subject line. We will get some information over to you shortly. That’s victor@victorjm.com. This is not a solicitation for investment, and any investment would be by prospectus only, limited to accredited investors residing in the US in compliance with SEC regulations.
As always, I believe that the hyper local market situation always outweighs the macro market conditions. That doesn’t mean you should ignore the macro environment entirely. One of the principal effects of the macro environment is on the cost of capital.
On today’s show we are figuring out how to interpret the current market conditions, or at least we’re going to try.
I frequently have conversations with investors who are trying to forecast the future of interest rates and what that would mean for their investment thesis.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
On today’s show we are talking about how some trade measures make no sense whatsoever.
If you have children who grow into adults, you know that if those children become overly dependent on their parents, they ultimately fail to launch. These are the children in their 30’s and 40’s still living at home with their parents and having their parents subsidize their lifestyle. There is no incentive for them to figure out how to become an adult because they don’t have to.
When countries overly coddle their industries under the guise of protecting domestic jobs, they are doing the same thing as coddling an adult child and not sending them out into the world to prosper.
When an industry is protected, it’s the same as letting your teenager hang out in your basement for the next 20 years. They’re content with the status quo, but they’re not really achieving great things. This brings us to the walled gardens of protectionist economics. If you want to see what protectionism results in, look at the Ontario egg farmers and their quota system.
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Email: podcast@victorjm.com
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Instagram: @ystreetcapital
We keep hearing the refrain that there’s billions of dollars sitting on the sidelines for commercial real estate. Well if that’s true, then why is it so hard to raise capital in the current environment? Every investor and every developer I speak with is saying that investors are sitting on their wallets.
There is a substantial amount of dry powder available for commercial real estate investment across various firms, with London-based investment data company Preqin putting the number at more than $350 billion. Much of it is held by the largest private equity and alternative investment firms, including Blackstone, Brookfield Asset Management, Ares Management, KKR, Carlyle Group, Apollo Global Management, TPG Capital and Starwood Capital Group.
Much of the dry powder was raised three or more years ago and has been left unspent. Funds often have set periods during which they must spend money they've taken in from investors, and that deadline is approaching with many companies showing new signs of activity.
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Email: podcast@victorjm.com
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If you’ve been listening to this show for a while you will know that I’m a proponent of the law of supply and demand. To me, the law of supply and demand is a little like gravity. If you choose to try and fool gravity, you’re probably going to end up on the losing end of that bargain. It’s the same with supply and demand.
On today’s show we are looking at three forms of downward pressure being exerted in the student housing arena. I’m going to make the simplifying assumption that over the next year or two, the amount of supply of student housing is not going to change dramatically. The real issue is on the demand side.
This is a segment that quite frankly has been under pressure from simple demographics. Birth rates are down and the number of students enrolling is down.
There are a number of new borrowing limits that affect government sponsored student loans in the latest tax legislation that was signed on July 4.
During times of falling domestic demand for a university education, many schools try to make up the shortfall with foreign students. But here too we are seeing falling numbers of international students coming to the US for university.
This is another headwind for student housing. Layer on top of these headwinds the fact that some student housing providers had financed their properties at much lower interest rates than today’s market rates. These properties will face substantially higher debt service costs when it comes time to refinance their existing debt.
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Email: podcast@victorjm.com
Y Street Capital:
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On today’s show we are talking about access to US Federal low income housing tax credits. This is something that frankly has not made headlines.
The Low-Income Housing Tax Credit (LIHTC) program is the primary federal program for encouraging the development and preservation of affordable rental housing in the United States. Here's how bonding capacity links to LIHTC and how recent legislation has changed the requirements.
The Act permanently reduces the threshold for private activity bond financing from 50% to 25% of the aggregate basis of the building and land costs. They effectively doubled the impact of bonding capacity and therefore they doubled the low income housing tax credits that are possible for the same amount of bonding.
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Ross Slutsky is a commercial appraiser based in Orlando Florida. On today's show we are talking about valuation methods that can result in significant tax savings, particularly if there are future events that can make the realization of that value contingent on those events.
You can learn more by visiting pcecompanies.com or emailing Ross directly at rslutsky@pcecompanies.com.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
Cheri Kuhn is an implementor with EOS Worldwide and is based in Seattle Washington. EOS is the Entrepreneurial Operating System that is currently used by thousands of small businesses across North America. It's based on the work of Gino Wickman who wrote "Traction" and "Rocket Fuel" and numerous other books on how to run a business successfully. On today's show we are talking about a few insights from working together. To connect with Cheri, visit https://www.eosworldwide.com/cheri-kuhn
or email her directly at cheri.kuhn@eosworldwide.com
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
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On today’s show we are talking about a growing trend in the office market. This was reported last week in Urban Land Magazine.
It seems that U.S. Office Tenants Are Becoming Buyers. Deep discounts, favorable financing, and long-term benefits are turning users into owners.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Today’s show is another AMA episode (Ask Me Anything).
Marc asks, “We received a quote from a general contractor that is way above the expected averages for the actual square footage of the building. I’ve attached a copy of the quote and the drawings for the building. I’d love to get your thoughts on whether I need to readjust my expectations for what this project will cost to build.”
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
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Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
At Y Street Capital, we are specialists in storage and light industrial. If you are interested in getting exposure to a portfolio of storage projects including retail, industrial and boat & RV, our storage fund might be perfect for you. To learn more visit ystreetcapital.com
On today's show we are talking about how pension funds manage asset allocation and whether individual investors can learn anything from mirroring what the world’s most professional money managers do.
Pension funds are the bedrock of retirement security for millions worldwide. Their primary mission is to ensure that future liabilities the pension payments promised to retirees can be met. Achieving this delicate balance between growth and stability hinges critically on their asset allocation decisions.
So the obvious question for each of us as investors is, what is our ideal asset allocation? Do you think of it consciously?
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
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Today’s show is the second in a mini-series on the changing face of business. On Friday’s show we talked about how Google is keeping search traffic on the Google platform and is not sending organic search results to the source pages in the way it used to. Traffic to businesses is dramatically reduced. This will cause many businesses who relied largely upon organic search to either adapt to whatever will replace organic search, or they will face bankruptcy.
This is also going to affect every aspect of retail. So much has been written about the retail apocalypse. There is no question that the footprint of traditional retail is changing.
There is much less diversity in shopping experience today than when I was a teenager. In the US we had numerous department store chains including Bloomingdales, Macy’s Sears, Kmart, Bergdorf Goodman, Filenes, Lord & Taylor, Neiman Marcus, JC Penny, Walmart Target Montgomery Ward, Ames, and countless others. Today, only a small fraction of those remain.
We are all familiar with the e-commerce revolution and how Amazon and Walmart are increasingly dominating this space. Even major retailers including Home Depot and Best Buy have a larger online catalog with products that are only a couple of days away from your home.
But the new revolution is in a form of shopping called social shopping. This has been in existence in China for more than 8 years and is still in experimental stages in the US on a limited basis with specific platforms.
So what is social shopping? It is a method of e-commerce that integrates the social aspects of human interaction into the online shopping experience. It leverages social media platforms and online communities to facilitate the discovery, research, sharing, and purchasing of products and services. Think influencers. Think buying events.
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Jim Ross is based in Phoenix Arizona where he is a partner at the accounting firm Pro Vision. On today's show we are talking about the provisions of the latest US tax legislation that was signed into law on July 4. The focus of our conversation is the aspects that specifically affect real estate investors.
To connect with Jim, visit https://www.provisionwealth.com/
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Robby Butler is Managing Director and head of capital markets at Y Street Capital, our development company. On today's show we are talking about attacking complexity and simplifying business processes. To connect with Robby, he can be found on LinkedIn at https://www.linkedin.com/in/robby-butler/ or at Y Street Capital.
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On today’s show we are talking about the changing face of business. This is the first in a two part series that explores the connection between the online world and the offline world. We live in the offline world, even though it seems at time that we spend much of our time with a device in our hand.
I need to first start with a distinction between marketing and sales. On today’s show we are talking about marketing. On Monday’s show we are going to be talking about sales which is a different process.
10 years ago they would scrape 2 pages for every visitor they would send to your website. That’s a pretty good trade. You would share your content with Google and Bing and they would send you traffic in exchange. They would also advertise along side your organic links and would provide themselves with ad revenue as part of the implicit arrangement. That remained relatively constant over much of the past decade. The Google crawl rate has remained relatively consistent over that entire time period, up until 6 months ago.
We have seen it get harder to attract traffic over the past decade. It feels like it is about 3x harder and that in fact lines up with the data. Up until the end of 2024 Google was scraping 6 pages for every visitor it sent you. But in the past six months, Google which still represents about 58-60% of all search traffic is now scraping 18 pages for every visitor it sends you.
When you perform a search using AI, the AI tool gives you the link to its references at the end of each AI result. But how many people actually click on the little link icon. They don’t share an entire web address with a blue link, it’s an anonymous icon of two chain links. You don’t know where the link is going to take you unless you click on the link and almost nobody does. The ratio of content scraping to website visits has now risen to 1500 to 1. A decade ago we were at 2:1 then 6:1, then 18:1. Now we are at 1500 to 1.
Who is going to invest all of that time and effort to create content with a 1500 to 1 ratio?
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On today’s show we are looking at a divergence between lumber futures prices and current lumber composite prices.
These two graphs always tend to track each other, sometimes with a small delay. But the prices always follow the futures. However, this is a moment in time when the lumber futures are diverging.
The week-to-week framing lumber composite price fell by 0.5% on June 27, 2025, declining to $422 per 1,000 board feet. This was the 12th consecutive week of declines, and the lowest price since October 2024. The falling prices reflect falling demand for lumber as construction starts continue their steady decline. Production also fell in response to the fall in demand.
But the July Futures price is $615, September is $664 and November is $675. That's a 60% premium over the current spot price.
Holding physical lumber (spot price) incurs costs. This includes warehousing, insurance, and the cost of capital tied up in inventory. Futures prices reflect these "carrying costs" that would be avoided by buying a contract for future delivery rather than purchasing the physical commodity today and storing it. Storing that lumber incurs interest costs if the inventory is financed. So part of the difference in price is explained by the cost of carrying physical inventory.
There is anticipation of future increase in demand for new construction later this year and into next year. So the market is forecasting growth, even though the market is clearly experiencing a decline over the past 6 months.
Finally, the trade war is anticipating supply side constraints as we have already seen a 6% decline in lumber from Canada entering the US. This is further anticipated to amplify as the trade dispute continues.
This will make forecasting of construction costs more difficult for the foreseeable future in the US which will put downward pressure on new construction until the uncertainty is removed.
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On today’s show we are looking at what the Fed could do that would cause a major increase in demand for US Treasuries. If the demand for Treasuries were to increase, the prices would rise and the market rate for those bonds would fall.
The US Treasury would no longer be dependent on the interest rate guidance coming from the Federal Reserve. That could save hundreds of billions per year in interest costs for the US government.
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Genesis is a profound exploration of how artificial intelligence is reshaping the human experience—our cognition, ethics, politics, and even our sense of self.
Our book this month was co-authored by three people. Eric Schmidt who was the CEO of Google for nearly 20 years. In the last 15 years Eric Schmidt and Henry Kissinger developed a deep friendship which turned into several collaborations. Henry Kissinger was Secretary of State in the Nixon administration and he has continued to be influential and controversial on the world stage for most of his life. The third author is a computer scientist (Craig Mundie), the book blends historical insight, technological expertise, and philosophical inquiry. It offers a potential roadmap for navigating the AI era. It argues that AI is not merely a tool but also challenges the foundations of human knowledge and dignity.
This book was extremely important to Henry Kissinger who continued to make edits to the book during the last week of his life with Henry’s wife and Eric Schmidt by his bedside.
The book is divided into five main sections.
Part I: The Cognitive Revolution
Part II: Human Dignity and the Spirit
Part III: Politics, Security, and Global Order
Part IV: Economics and Society
Part V: A Roadmap for the Future
Genesis is not a technical manual or a utopian or even dystopian manifesto. It’s a deeply reflective, interdisciplinary meditation on what it means to be human in an age of intelligent machines.
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On today’s show we are taking a look at two different measurements of the exact same thing. Imagine for a moment that you wanted to cut a piece of wood. You take out your trusty tape measure and measure the distance you think you need. But then along comes an economist who says, “Oh no. You’re not going to use that simple tape measure are you? That will only give you a nominal measurement. There are a bunch of adjustments to be made in order to get the real measurement.”
This is a joke of course, but often jokes mirror reality.
The Case-Shiller real estate market index reports both nominal (non-seasonally adjusted) and seasonally adjusted data.
So when is it appropriate to use the seasonally adjusted number?
Seasonally Adjusted data is best for analyzing short-term trends, like month-over-month changes, because it removes the noise of seasonality.
Non Seasonally Adjusted data is better for year-over-year comparisons, since seasonal patterns occur in the same month each year.
For example, I would personally compare June of 2025 against June of 2024. That’s a valid comparison for the same point in the seasonal cycle on a year over year basis. For that measurement I would not use seasonally adjusted data. If I wanted to compare June to January which are at different points in the annual cycle, I might use the seasonally adjusted data. But because the seasonal variations are so large I personally would not even perform that comparison even with the seasonal adjustments. I don’t know what conclusions I would draw from the data.
I personally don’t like to mess around with adjustments at all. I would prefer to compare this January against January the year before, and then February against the same month the year before and so on. That way there is no seasonal adjustment required for the exact same period one year earlier. It’s a like for like comparison.
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Today's show is a talk that I gave last month at the Ottawa Real Estate Investors Organization on Small Bay Industrial. This is a segment that our firm is active in and one that we see as having structural shortages in many major markets across North America.
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Ashley Garner is based in Wilmington North Carolina where he runs a growing investment portfolio. He's recently made the jump from 30 unit properties to 200 unit properties and is scaling the business systems to match the new portfolio. Our discussion centers around investment mandate and scaling up. To connect with Ashley, visit https://www.abgmultifamily.com/
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On today’s show we are talking about distorted valuations. When you consider risk, I’m seeing what I can only describe as an atmospheric inversion in today’s markets.
Wall Street surged toward new record highs on Thursday, as the S&P 500 briefly topped its February 19 closing high of 6,144.15, extending a nearly $10 trillion rally from the brink of a bear market.
On today’s show I’m going to compare the risk free yield on US Treasuries as a baseline benchmark. In some ways, every other investment could be compared to that benchmark. I’m not going to get into the debate whether the US is going to default on its debt in the next decade or not. For the purpose of today’s discussion let’s take it as a given that the US will meet its debt obligations even if that means expanding the annual deficit and the global debt. We know that will eventually break down, but let’s accept the US Treasury as a foundation for now. The reason I’m proposing that is that the reference for all of these investment returns is the US dollar. If the dollar is in question, then the value of all the other investments that a dollar denominated could be called into question as well. That includes Nvidia, Amazon, Walmart, United Airlines and so on.
So let’s call the risk free rate of return the yield on the US 10 year treasury. Today the market opened at 4.25%, pretty much in lock step with the Fed Funds rate. So whether you buy a 30 T-bill or a 10 year bond, your risk free rate of return today is at 4.25%.
The argument is that if another investment is offering a lower yield, then it is somehow a better investment than the risk free rate of return.
Does that make sense that the S&P 500 index would be more expensive than the risk free rate of return?
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On today’s show we are reporting on a change to financing rules in the US that stand to improve the numbers for multi family apartment projects.
We are talking about the HUD financing. This is more difficult financing to get than agency debt like Fannie Mae or Freddie Mac. But it is superior financing. There are several different loan types. I’m going to focus on the HUD 223F loan, but everything I’m about to say also applies to the HUD 221D4 which is a construction loan combined with a permanent loan. The reason we are talking about it now is the result of a new policy change is part of a new announcement .
Under the existing rules you can save up to 0.35% on your annual MIP with the Green MIP Reduction program for HUD 223(f) loans. This also applies to new construction loans like the 221d4.
The policy change eliminates the distinction for Green loans and normalizes the mortgage insurance premium at 0.25% for all multi-family loans. This reduction in rate means that all other things being equal, you could borrow 4% more in loan principal for the same monthly loan payment.
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On today’s show we are looking at our human ability to forecast non linear effects and in particular how this relates to economic forecasts. We are accustomed to looking at the world in very linear ways. When we see a car approaching most people are pretty good at estimating whether they have enough time to cross the road as long as the car is travelling at constant speed. But if the car is accelerating, virtually all people have a very hard time assessing whether it is safe to cross the road.
That’s the difference between a linear and a non linear system. Non linear systems have some form of acceleration.
We see these types of systems all over the place. Over the short term, if the acceleration is small, people have a tendency to make linear approximations which are accurate enough over the short term.
The US government makes regular updates to the financial health of the social security system. It’s no secret that the math which funds the social security system is breaking down. When social security was first conceived there were 16 people in the workforce for every one person collecting benefits. Demographics have changed and today there are less than 3 people contributing for every person collecting. Another non-linear effect.
We know that for the economy to grow, the population needs to grow. Shrinking working population means shrinking economy. This is a non-linear effect.
The industrial revolution replaced a lot of manual labour with machinery. It didn’t eliminate manual labor for all tasks. For those repetitive tasks that can be easily programmed, machines have replaced humans.
The theory was that machines could replace manual labor, but not thinking. Humans would continue to be the brains behind the work performed. But we do know that some knowledge work has already been replaced by AI and that proportion is only going to increase. So what happens to the falling demand for employees that have been replaced by AI? What will become of our society? Can we truly forecast the economy that is being impacted by so many non-linear factors?
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The conventional wisdom is that when the value of a country'scurrency falls relative to its trading partners, its exports become more competitive in the global market. It's no secret that the Trump Administration is aiming to bring more manufacturing back to the United States.Global flows of capital have changed since the start of the year. While the administration wishes to bring increasing levels of capital investment to the United States many of the policies are in fact having the opposite effect. President Trump has stated publicly that he wishes the US dollar to fall compared with other currencies including the Japanese Yen, the Euro, the Chinese Yuan and the Canadian Dollar.An increasing number of investors are looking for a safe haven for their capital. The US dollar has fallen by 10% since the beginning of the year against most of the major currencies. Indications are that it is forecast to fall even further when measured against other major currencies.
We think that real estate investments in Canada represent a better risk adjusted proposition right now. This is based on the following observations:
1)The slowdown in new construction that we have seen across the US is also present in Canada. This means that labor rates in Canada for new construction have moderated and we are seeing extremely competitive bids for new work.
2)Immigration to the US is down significantly since the start of the year and demand for new housing will decline as a result. The US has pretty much closed the door refugee claimants. This includes countries like Afghanistan where many US allies are stranded and have no path to enter the US.
3)Immigration to Canada remains in extremely high demand. The Canadian government has reduced its immigration targets slightly, but the numbers remain extremely high especially when compared to the US as a percentage of the population.
4)Interest rates in Canada are much lower for borrowing. The 5 year Canada mortgage bond is trading around 3.1% which means that a new construction and permanent financing loan could price below 4%. Rates are not that low in the US.
5)Canada is not waging a trade war against the rest of the world. While prices for certain construction commodities like electrical equipment and air conditioners will certainly be impacted by tariffs in the US, we are not seeing the same impact in Canada. Many manufacturers have operations in North America including Mexico. These goods can flow into Canada free of any tariffs under USMCA.
6)Even with new apartment supply having entered the market, vacancy rates in most Canadian cities are far below comparable US markets.
7)If the US dollar falls further as we see the Trump administration wishing, then any investment outside the US goes up in value on a relative basis. Investing is not the same as speculating on foreign exchange rates. That alone should not be a reason for investing outside the US. It’s just one of many factors to consider when looking at aggregate probabilities.
When we put all of these factors together, we see a compelling case for investing in Canada, even for US investors.
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The long awaited pull back in pricing for apartments is here. These properties don’t need to necessarily be poorly performing. It’s the properties that were financed with bank debt from small local and regional banks. These smaller banks typically offered loans with a 20 year amortization period and if the loan was written five years ago, the 10 year Treasury yields were pretty low at 0.7%. The loan written five years ago would have been priced in the mid 4’s. Oh, and here’s the important part. It would have been written with a five year term. That means the loan would need to be renewed at current rates in five years and that five year period is up now.
The borrower has the option to renew with the lender at the current rate with a new loan. But at today’s higher rates, even if the property is performing well, the borrower is likely to be forced to bring additional cash to the table.
The situation can be improved by moving out of the local bank financing into agency debt with a longer amortization period. Instead of a 20 year loan, maybe a 25 or 30 year loan will reduce the loan payment enough to make the numbers a little more palatable.
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Brooke Kromer is a former sports broadcaster from Los Angeles. Today she makes the Florida Panhandle between Destin and Panama City her home. On today's show we are talking about the luxury segment along this stretch of beach.
To connect with Brooke visit https://www.compass.com/agents/brooke-kromer/?referrer=omnibox
You can also visit her Instagram at https://www.instagram.com/brookekromer/?hl=en
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David Becker is a principal with Time Equities based in NYC where his firm invests across 38 states and in Canada in multiple asset classes. Today's investment mandate has narrowed to focus more on opportunistic plays in industrial and multi-family.
To connect with David, visit Time Equities
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We are building a new apartment building in Ottawa Canada that is focused on meeting the housing needs in one of the hottest areas of Canada’s capital. Projects in Canada are largely insulated from the uncertainty associated with the current US trade war. There is a window to participate in this exciting investment opportunity for accredited investors. This includes investors who reside in the United States. This is not a solicitation for investment. Any investment would be by prospectus only and in compliance with securities regulations. To find out more, visit Y Street Capital where you can learn more about this investment opportunity along with other opportunities in our development pipeline. Click HERE to learn more. If you don't have an account, then register to gain access to the resources on all of our projects.
On today’s show we are looking at the development of LNG facilities and how this is impacting demand for real estate along the Gulf Coast of the US. We are going to look at two main areas on today’s show. We need to put these investments into perspective. Each of them measures in the 10’s of billions of dollars.
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Jeff Currie is the Chief Energy Officer at the Carlyle Group, one of the world’s leading private equity firms.
He is the former Global Head of Commodities Research at Goldman Sachs, where he helped to build their commodities business. During his nearly three decades at the firm, he became one of the leading commodity market analysts.
He authored a paper called "The New Joule Order" in March of this year. In that paper he asserts that decisions affecting energy investment are no longer being driven purely by cost or even environmental concerns. Rather, they are being driven by energy security considerations. This affects real estate investors that are making assumptions about energy investments that have regional impact on real estate in those area.
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On today’s show we are talking about a political setback for one of our projects. If you have been following this show for a while, then you know that we own a large property on the edge of Colorado Springs consisting of 1783 acres. We started developing the master plan for this project a couple of years ago.
The annexation was approved by city council by a vote of 7-2 in both the first and second reading in front of council at the end of January this year.
In April a petition was launched by another developer to oppose our project. The requisite number of signatures were collected on the petition and our annexation was put to a special election which closed yesterday on June 17. The special election resulted in overturning the city council decision to annex the property into the city. The vote was overwhelmingly against our project with more than 81% voting against.
The property is currently going back into the county as a result of this vote. There are a number of options for the project at this point.
I can tell you that we have a well developed plan B and plan C. We are not prepared to publicly announce those plans at this moment. We do have strong partners who see the long term vision for this project and they have the financial strength to see it through until the end. The land is owned free and clear with zero debt. So the holding cost for the land is minimal. This brings inherent safety to the project and the project can withstand a further delay as a result of the election.
The loss of the election is regrettable and disappointing. But it is not a fatal blow to our project, far from it.
On today’s show we are talking about commercial real estate and whether it is better to lease or to own your own building.
Deciding whether to own your commercial building or lease office space is a significant strategic choice for any business. Both options have distinct financial, operational, and flexibility trade-offs. There are certainly plenty of examples of both business models. The question is, which one should you pick?
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On today’s show we are talking about artificial intelligence and a few of the implications that are associated with it.
I’m hearing a lot of chatter about how the development of AI will mean losing control of our society and our business. On today’s show I’m going to make the case for maximizing the development of AI capability, but for constraining its use.
But before we can talk about these ideas in the context of AI, it would be useful to talk about these same issues in the real world.
The first issue surrounds the erosion of trust that is reaching epidemic proportions in our society. There was a time when you could believe what you see. With the capability of free AI tools, and for $20 a month you can generate images and videos that are nearly impossible to distinguish from reality. If you can no longer trust what you see, the circle of trust in each of our lives will become smaller and smaller. For some people it will disappear completely.
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Anton Mattli is based in Dallas Texas where he is active in the world of commercial lending, primarily for multi-family apartments. On today's show Anton shares his perspective on how the landscape for lending has changed in recent months.
To connect with Anton, visit peakfinancing.com
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Daniel Angel Mehia is based in Atlanta Georgia where he is active in the development of Build To Rent product in a scattered site context, sometimes called infill. The demand for detached rental housing is higher than apartment housing which is currently saturated in many markets.
To connect with Daniel, visit apexinvestments.us
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
We are doing a mini-series on AI tools in real estate. Some of these tools are the same ones we use in our development company Y. Street Capital. We use these tools in-house and on projects belonging to our consulting clients. If you want to learn more about how our consulting division could help you with your projects, send an email to victor@victorjm.com.
On yesterday’s show we spoke about land.id. This is a tool that has a ton of capability for evaluating land. On today’s show we’re going to start with another tool called paxiv.ai. This tool started with mapping the state of Utah first and since is mapping out the entire United States. It’s now boasting over 155M properties in its database.
This tool has an AI language model built into it. You can perform searches for example you can ask it to find all of the properties in a particular city that is zoned industrial with a minimum size of 10 acres. It will then give you a list of properties. You can then refine your search to say increase the minimum building height to 40 feet tall.
Once you find the property you are interested in, you can then turn on a whole bunch of layers including traffic counts on roads, soil types, building inventories, housing inventory, presence of fibre optics, water, mineral rights, building permits.; all kinds of different layers.
Predictiv AI has been actively pursuing strategic acquisitions to expand its capabilities. Notably, they've been involved in discussions to acquire Shift Technologies Canada Inc. (an AI-driven fleet management platform) and HouseStack Holdings Inc. (which includes real estate intelligence platforms).
HouseFax Appraiser Pro: Designed for appraisers to streamline the appraisal process with automated report generation and data analysis. (Currently in development).
HouseStack AI Brokerage: An AI-driven brokerage combining technology with "expert guidance" for clients buying, selling, and evaluating real estate transactions.
Propsize AI: A proprietary solution using advanced AI to provide precise property measurements and features for residential properties nationwide.
LiLA AI Assistant: A generative AI assistant providing instant answers on real estate, leveraging a massive 11+ million nationwide property dataset. (Currently in beta development).
Homeselling AI is primarily a tool for agents, enabling them to work more efficiently, provide data-backed insights to their clients, and focus on relationship-building and complex negotiations.
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
We are going to do a mini-series on some of the latest AI tools that are specifically tailored for real estate investors. So we will be doing two shows back to back to highlight what is emerging as a new software arms race in property due diligence.
On today’s show we are taking a look at Land.id (formerly MapRight).
This software consolidates data from multiple disparate data sources and allows for the plotting of more than 40 layers of information on top of satellite imagery. This includes survey data, soils reports, topography, zoning, to name just a few.
Real Estate Espresso Podcast:
- Spotify: The Real Estate Espresso Podcast
- Website: www.victorjm.com
- LinkedIn: Victor Menasce
- YouTube: The Real Estate Espresso Podcast
- Facebook: www.facebook.com/realestateespresso
- Email: podcast@victorjm.com
Y Street Capital:
- Website: www.ystreetcapital.com
- Facebook: www.facebook.com/YStreetCapital
Today's episode was originally posted in April of 2018. We are talking about the psychology of raising funds from investors.
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about how last week’s drone attack in Russia will forever change the way investments are made in military equipment and warfare in general.
The economy in the US is being bolstered by a significant amount of defence spending. Europe is about to increase its defence spending on a large scale. The same can be said for Canada.
Conventional warfare has been based on the premise that the biggest baddest army will overwhelm an enemy and crush any opposition. That notion got challenged in some of the most prominent writings including Sun Tzu who wrote “The Art of War” in the 6th Century BC. It was employed during the Byzantine Empire along its eastern front in the 8th and 10th centuries.
Sure you can shoot a $1000 drone out of the sky with a million dollar Patriot missile. But is that an efficient defence against these new threats?
Now this is a real estate show, not a military show. We’re here to talk about real estate. When we think of real estate investment one of the principles is that demand for real estate follows employment.
When we think of military industrial complex it conjures up images of companies like Lockheed Martin, Harris, Honeywell, Textron. These companies drive major employment.
But increasingly the military industry is seeing a lot of new entrants. One of my business partners runs a incubator that is focused on the defence industry in Colorado Springs. This facility is conducting some of the most advanced research and development on new military systems.
The speed and agility with which the Ukraine has modernized its underdog military is a lesson for countries looking to modernize their military.
Real Estate Espresso Podcast:
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iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
If you would like a copy of our Due Diligence Checklist, click HERE.
On today’s show I’m sharing the story from this past week of someone who is in our investor ecosystem. She owns several properties in a tertiary market about an hour outside Toronto. She is in her 70’s and her husband has several physical limitations. She is her husband’s principal care giver.
She has invested in several of our projects over the years and is someone who our team holds dear in our hearts. One of her properties is over 100 years old and was in need of some exterior brick repair.
She hired someone who was "in the area" performing masonry work. They had a business name that sounded big and impressive. They listed an address in Toronto and their website had plenty of testimonials and photos.
I got a call mid way through the week with an urgent request for help that the contractor was asking for a large up front payment. I made it clear that she should not every pay in advance and should only pay in tranches as work is completed.
There was no contract. The price changed part way through the job, and the demand for payment was a huge red flag.
By all accounts, the work was well done. This is one of those stories that has a relatively happy ending. But the entire engagement was built on a foundation of lies and it could have been a real problem.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Jeff Peterson is based in Cary, North Carolina. On today's show we are talking about the intersection of active business and real estate and the various twists in the road that make the journey take an unexpected route.
You can connect with Jeff at TurtleShellRentals.com.
You can also find his new book "Are We There Yet" on Amazon.
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are looking at the economy and trying to figure out if the global economy is growing or shrinking, and by extension how the economy will be affected in North America.
Thursday this week the ECB announced another 0.25% rate cut while at the same time signalling that they are nearing the end of their rate cutting.
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Jared Jones is based in Riverside California where he is taking advantage of the changing regulatory and zoning landscape to fill a unique need in the marketplace in ways that the national home builders are not positioned to capitalize on.
Zoning changes have made it easier to intensify existing properties without impact fees and utility expenses while saving considerably on the land cost.
You can connect with Jared on Instagram with the handle "MiddleHousingPartners". You will also find him active on LinkedIn.
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about new dangers in apartment buildings that have not been fully handled in the design of buildings or the building code.
Certain metals produce their own fuel once ignited. You probably have done the science experiment of lighting a piece of magnesium wire on fire. Once lit, you can put this piece of burning wire into a tub of water and it will keep burning.
The conventional wisdom in fire fighting is that if you have a fire, then the fastest way to put it out is to remove its source of oxygen. But what happens when the fire produces its own oxygen and the chemical reaction continues no matter what you do?
Have you ever wondered why fireworks don’t go out even if it’s raining? Once a firework is lit, it will continue to burn until all of the fuel is expended.
Now imagine if the fire is in the underground garage in your apartment building, or perhaps in the bicycle storage room next to the lobby of your building. Those electric bicycles are now a new type of fire hazard that didn’t exist a few years ago. The electric vehicles are a new type of fire hazard that didn’t exist a few years ago.
When I look at the risks in a building, I believe that the bicycle room represents an equal if not a greater fire risk than the garage. In many cases, charging is being retrofitted into buildings that were never designed to have electric vehicles. This is something that you as a building owner need to become educated about and take real steps to mitigate that risk.
Real Estate Espresso Podcast:
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iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are doing another in our monthly beginner series. The real estate espresso podcast is unlike other podcasts in that most others are focused on a more entry level audience.
Our listeners are sophisticated. Many of you own large portfolios of apartments. But you also have people in your life who are interested in learning more, but maybe don’t have access to high quality information. The idea of sending your spouse to a $199 weekend bootcamp for beginners where they are going to be abused by sleazy sales people sounds unthinkable. So where do they go. Look no further. We are going to dedicate a couple of shows a month to topics that will accelerate the learning for less experienced investors, and might give the most sophisticated investors a new way of explaining a concept that is otherwise complex to describe.
On today’s show we are talking about market cycles. Market cycles are the result of the delay between perception and reality.
The best analogy I can use is what happens when you drive a car. If the delay between turning the steering wheel and the car actually turning was not instant, you would have a tendency to oversteer. You would be continually wavering in your lane because of the delay between cause and effect.
The same situation exists in every market, including real estate. We see it in retail where retailers rush to build inventory in order to get ahead of possible tariffs. But then they are sitting on tons of excess inventory and the manufacturers witness a cycle of feast and famine. Huge orders and then the orders dry up. This pattern repeats itself in many places in the economy.
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are looking at the anxiety of missing a deal. Real estate investors are deal junkies. Let’s call it like it is. We’re going to look at a real life example.
We’re going to talk about creating value with land. There are two main methods for creating land value. One is to start with raw land and carve it up and get it zoned and serviced for development. The other is to take land that has already been carved up into tiny parcels and put it back together so you can do something more substantial with it.
Sellers are often of a mindset that they are the ones holding the cards. Their property is worth a gazillion dollars, especially if it has development potential. Some rich developer will come along and offer me so much more than the property is worth in its current condition to an owner occupant.
In a dense urban environment land is both scarce and abundant. It’s abundant in the sense that there are hundreds of properties for sale at any given time. Most of the land is not suitable for redevelopment in its current form.
A case in point is a small land assembly that has already been designed for a 66 unit mid rise building. 66 units is a bit small from a property management standpoint. Ideally a building should have more than 100 units in order to optimize the economics of staffing the project.
The proposed building is already compliant with the zoning requirements and can be built by right. There are constraints on the size of a building on this street because of utility capacity on the street. A larger building would require an upgrade to the water main which would add considerable cost and delays to the project. The main constraint is water volume for fire suppression. A larger building would require a larger water main pipe and possibly a booster pump if the pressure at the top of the building is not sufficient. So we know we are not going to get more density on that block regardless of the zoning.
The original land assembly consisted of two properties and along the way different scenarios of three and four properties were considered and negotiated.
In the end, while a larger project would have been possible, we opted for a smaller mid-sized project at only 66 units. This past week, two more properties came up for sale on the same street. Among those was a property that had previously been considered. It was being offered at 30% below the original asking price.
This is where sellers often get confused. You see there are realtors out there who will pick the most expensive comparable sale in the area and recommend that as the asking price for the sale. It’s as if there is a broad market for development land and the offers will start pouring in the second the land hits the market.
But when you are offering a property that will ultimately form part of a land assembly the market for buyers shrinks dramatically. You have two neighbours, one on the left and one on the right. There are only two possible buyers for your property as a development site.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about a new provision of the latest tax bill that passed the US Congress and is now before the Senate.
During the election campaign, President Trump said clearly that he did not favor a central bank digital currency. In fact he has made several statements in support of crypto currencies and his family is active in various crypto initiatives.
But it seems that the President may have accidentally created the underlying systems that in fact amount to a CBDC. Whether this is an accident or deliberate is hard to tell. But the effect on the long term freedom and privacy of the citizens of the US is the same.
The Federal Reserve Act explicitly prohibits ordinary citizens from having an account at the Fed. In order for a CBDC to be enacted in the US, it would require that aspect of the legislation to be modified. On today’s show I’m going to unveil the plumbing that is being created in the system that effectively amounts to a CBDC with direct government oversight.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Alex Freytag's "Stretch Not Snap" is a business fable that addresses a common challenge faced by entrepreneurial companies: how to transform the employee mindset into one of ownership, engagement, and shared vision, particularly through the strategic implementation of incentive plans.
The book builds upon the foundation laid in another business fable book by Gino Wickman and Mike Paton's "Get A Grip”. Freytag revisits the characters of Vic and Eileen, the leaders of Swan Services, as they navigate the next phase of their entrepreneurial journey.
The story opens with Vic and Eileen facing a growing frustration. While their company, Swan Services, has successfully implemented the Entrepreneurial Operating System (EOS) – gaining traction, clarity on priorities, and leadership team alignment – they observe a fundamental disconnect among their employees. Despite the company's progress and the leaders' dedication, a prevailing "me-first" or "entitlement" mentality has taken root. Employees seem to expect bonuses and rewards merely for showing up, rather than genuinely connecting their daily efforts to the company's overarching vision and financial health. This disengagement is stifling Swan Services' potential and preventing the full realization of its culture.
The core of "Stretch Not Snap" is the unfolding of the ProfitWorks Solution, a methodology designed to create a self-funded incentive plan that genuinely drives employee engagement and financial results. The fable illustrates this solution through the practical challenges and successes faced by Vic, Eileen, and their team. The essence of the ProfitWorks Solution revolves around six key principles:
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Financial Literacy and Transparency
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Identifying Key Performance Indicators (KPIs) and Leading Measures
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The Self-Funded Incentive Plan
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Ending the Entitlement Mentality
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Sharing the Vision and Building Ownership
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Continuous Learning and Adaptation
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
George Ross taught negotiation at the law school at NYU for over 20 years. He honed those skills over a career working with Goldman and DiLorenzo, his own law firm, and as Executive Vice President in The Trump Organization. Today we are talking about preparation for negotiation, a topic that he emphasizes in his book.
Real Estate Espresso Podcast:
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iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
At Y Street Capital, we have several projects across several states. We currently have two storage projects in construction and we have more in the pipeline. If you would like to learn more about our storage fund, click HERE find out more about our storage projects. If you don't have an account on our investor portal, you can register and we promise not to spam you with tons of email. These opportunities are only open to accredited investors residing in the United States and are in compliance with SEC regulations.
On today’s show we are talking about staffing projects with the best people possible. Yesterday I had an experience that quite frankly was humbling. I’ll come back to that later.
In the world of traditional HR, the emphasis is overwhelmingly on skills and experience. But when you hire for a key role you are always looking for a combination of both skills and attributes. Skills are those things that can be learned over a relatively short time period. Attributes are developed over a much longer period and reflect the makeup of the individual.
We look for a set of attributes across several dimensions including their sphere of influence, their planning horizon, their ability to handle complex multi dimensional problems, their financial acumen, their character.
The humbling part is at the end. Enjoy....
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about the tradeoff between security and convenience. Your phone is a device that has so much knowledge about you embedded within it.
How long before the very devices that we rely upon to act as our communication device, our camera, our entertainment screen, our wallet, and the key to unlock the entry door to our home becomes too much of a liability?
The epidemic of identity theft has been problematic for some time. It used to be the case that identity theft could allow someone to get a credit card in your name.
So the question is what do you as a real estate investor need to know to protect your properties? How do you prevent someone from entering a building who is not authorized to do so?
Smart building systems are extremely convenient. But are they secure? How do you perform the evaluation to know whether you are buying the right system?
These are more questions than answers. Even if you have an answer today, who knows whether the answer will still be correct in a year or a month or a week from now. The capability of AI systems is growing at an exponential rate.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Computer algorithms are great at processing vast amounts of data and then making either recommendations or decisions based on that data. AI is even better at that process. Yet somehow consumer groups feel like landlords have a disadvantage when it comes to data and therefore should not have the right to use that market data when it comes to setting rates for a rental property.
The latest legislation to pass through the US Congress has a Federal statute that aims to block the states and local governments from oversight of AI and automated decision systems for 10 years.
This won’t block claims of anti-competitive behaviour. If successfully passed, this would give companies like Yardi, RealPage, and numerous others a clearer path to use their algorithms for the benefit of making pricing decisions based on supply and demand.
If the data is being used for landlords to collude, then that would constitute a cartel which violates anti-trust laws. But the use of data for dynamic pricing, both up and down does not constitute collusion. The new legislation keeps the playing field favouring the development of technology to improve market efficiency. The states should not be blocking the use of technology.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
This is not a political podcast. It’s a real estate podcast. Now NYC is an important market for real estate. I personally don’t invest in NYC for reasons that many will understand.
Part of the affordability problem is that NYC’s population is made up of 25% low income families. As housing demand has increased, so too have rents. Affordable rents get pushed further and further away which increases commute times.
The race for Mayor in NYC is a hotly contested one with an incredible array of candidates. When I say incredible, it’s because each of these candidates can bring sweeping impacts to this city of 8.5M people. If people flock to NY, or if they leave NY, it affects other markets in a material way.
There are seven candidates on the democratic ticket for Mayor. The incumbent Mayor Adams who is under criminal investigation is running as an independent. There is one republican candidate. The Democratic primary is going to be held on June 24 which could reshape the election.
On today’s show we are going to look at the top 3 candidates according to the polling results and dissect their real estate platforms.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
The latest tax legislation winding its way through the Congress and the Senate is sunsetting a number of tax credits. These can have a material impact on your projects. So understanding them is important.
Real Estate Espresso Podcast:
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iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Dr. Tom Burns is based in Austin Texas where he invests and develops real estate. On today's show Tom and I are having a fireside chat about perspective on the current market conditions. Tom is one of my favorite people in the world. He maintains perspective and wisdom even during turbulent moments.
To connect with Tom and to learn more visit richdoctor.com or email him directly at tom@richdoctor.com
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Jack Martin is based in Scottsdale Arizona and invests in mobile home parks in business friendly states. On today's show we are talking about the investment mandate that is their focus. To connect with Jack and to learn more, visit 52ten.com
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
On today’s show we are talking about our project in Colorado Springs. If you’ve been listening to the show for a while then you will know that we are the developer of a master planned community on the edge of Colorado Springs. This 1800 acre project was successfully annexed into the city of Colorado Springs at the end of January this year.
The latest move has been the launch of a petition, which having a sufficient number of signatures would put the annexation of our property to a public special election. This is precisely what was done. The ballots in the special election were mailed out to Colorado Springs voters today.
There is a single large development inside the boundary of the city which comprises approximately 18,000 acres. This property was annexed into the city in the 1990’s. Over 85% of the city’s development land is owned by one party. They have been taking steps over the years that would stifle competition for new homes and make their development the only game in town.
The citizens of Colorado Springs need to know that this election is not about a small patch of land that is immediately adjacent to land that is owned by the city. It is about developer corruption and a monopoly for a single developer.
We could not have predicted this the trajectory of this development project. We did not expect to uncover the dirty underbelly of politics and influence peddling.
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On today’s show we are talking about the risk premium being attached to US sovereign debt and how this has the potential to destabilize real estate markets for all US investors.
We are accustomed to thinking that the Fed sets the interest rate. But the truth is that the Fed only sets one interest rate. That is the Fed Funds rate that banks use to lend to each other.
The downgrade of the US debt by Moody’s debt rating agency last Friday was a reflection of the government’s persistent failure to adopt measures that would “reverse the trend of large annual fiscal deficits and growing interest costs.” Moody’s was the third bond rating agency to downgrade the US sovereign debt after S&P and Fitch downgraded the US debt in August of 2023. It’s not the downgrade per se that is the problem. The market makes its own determination and does not just look at what the bond rating agencies have to say.
Spending is heading higher, regardless of who is in the White House. The demographic impact on entitlement programs is unavoidable. The population is aging and when the social security program was launched, there were 16.5 people in the workforce for every one person collecting benefits. Today there are 2.71 people in the workforce for every one person collecting benefits. By the mid 2030’s, that number is expected to fall to 2.3 people working for every one person collecting. The math doesn’t fund the liabilities.
The current White House was elected on the promise of the economy and of fiscal responsibility. The latest budget bill that had wound its way through the Congress shows an increase in spending and a widening budget deficit. Despite desires to cut government waste and abuse, the impact seems somewhat muted.
The bond market is clearly seeing significant risk to the ballooning US sovereign debt. This week’s auction in new US Treasuries did not go well. The appetite for new paper from the US government was muted and the price that was bid for the 30 year was so low that the yield on the 30 year is now above 5%. The 30 year Treasury is a long denomination bond and its yield moves very slowly. To have the price for that bond drop so sharply in a matter of days has definitely rattled markets.
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On today’s show we are talking about the elephant in the downtown. This is the property that was once a symbol of success that has now become a central embarrassment to the city. It seems that almost every city has one, and in some cases more than one.
In Houston it’s the One City Center Building with 600,000 SF that is 80% vacant. In Portland Oregon it’s the 45 story office tower affectionately called The Big Pink that is now 50% vacant and partly over-run with homeless people sleeping on vacant floors. That building just sold for $0.20 on the dollar.
In Chicago it’s the old post office. This colossal art deco building, one of the largest in Chicago, sat vacant and decaying for nearly two decades after the U.S. Postal Service moved out in the mid-1990s.
In Los Angeles there is Oceanwide Plaza
In Memphis it’s the Sterick Building.
There are quite a few across the nation.
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On today’s show we are taking a deeper look at AI. I realize that this is a real estate podcast. But real estate is a business like any other business.
AI has changed the world. It has democratized information in ways that we have not even begun to process.
I am increasingly finding myself asking more and more questions of AI that historically I would have asked myself.
Some people think that AI is over-hyped. I actually think it is under hyped. Most businesses have not even begun to think about how their organization will change as a result. They have not planned how roles and responsibilities get defined with the assumption that AI is going to assume much of the work that would have been delegated in the organization.
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Today's show is truly fascinating and an example of business ingenuity.
Johnathan Brooks is based in Scottsdale, Arizona where he is the CEO of Warehouse on Wheels. His company operates nationally along all 8 of the major transportation corridors providing 53 foot trailer rentals as a solution to warehousing and manufacturing temporary storage needs. The solution is 4x more cost effective than a physical warehouse.
To connect and to learn more, visit wowtrailers.com
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Brandt Stiles is based in St. Louis where he is co-CEO at Subtext Living. The company develops student housing nationwide. Their portfolio consists of over 10,000 beds and they are one of the top 3 developers of student housing across the US.
The world of education has changed, especially during the pandemic and that represents both risk and opportunity for universities and for student housing. On today's show we are talking about navigating those shifting market forces.
To connect with Brandt and to learn more, visit https://subtextliving.com/
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Today’s show is an unusual show in that we are quoting national statistics. As you know, I don’t love national numbers because they reflect averages and the average often doesn’t apply in specific areas.
When we look at demand for homes, and for rentals, there are historic norms that are based on demographics and employment that most market analysts use to predict demand for housing. This feeds into well understood models for household formation, the age at which people start having children, and the time when they purchase their first home.
Recent studies are showing that the high cost of housing, combined with higher interest rates rates are reducing the number of new homes being sold to first time buyers across the US.
The Mortgage Bankers Association published a new report earlier this week that outlines some startling statistics for single family home sales. We’re going to look at these numbers and then infer what the implications might be for property investors, specifically in the apartment space and in the built to rent segment.
Historically, first time home buyers have accounted for an average of 36% of home purchase transactions over the past 20 years. For 2024, this proportion fell to an all time low of 24% of purchases.
First homes are being purchased nearly a decade later than historic norms.
All of the major national home builders are reporting a slowdown in home sales and an acute slowdown in first time home buyers. Pulte homes, the nation’s third largest home builder reported an 11% decline in first time home sales.
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On today show we’re talking about what is happening in the world of energy. This is a Real Estate podcast. The only reason to be talking about energy is that energy is the economy. For every unit of economic output there is an equivalent unit of energy consume somewhere in the world. These two track one another with razor like Precision.
To start with we need to acknowledge that there is no universe in which you can have US energy dominance and low oil prices at the same time. These are mutually exclusive. The cost of shale oil production is so much higher than conventional oil and the capital markets are much more intelligent than they were back in 2009 at the start of the shale oil revolution.
There are a handful of oil analysts who I follow. They truly understand, energy markets. In my experience, the mainstream media take a very simplistic view and completely misreport if not outright misrepresent what’s happening in the world of energy.
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On today’s show we are talking about the tax reform that was tabled in the US Congress Ways and Means Committee.
This new tax bill, ambitiously titled the "One Big, Beautiful Bill" by House Republicans, is poised to introduce a cascade of changes that could reshape the landscape for real estate investors. While still navigating the legislative process, the bill's provisions target substantial tax alterations designed to invigorate various sectors, with real estate emerging as a notable beneficiary.
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On today’s show we are talking about small bay industrial. This is a segment that offers incredible flexibility. It doubles as office space, as a gym, as last mile inventory for e-commerce. It can even be used as a man-cave for exotic vehicle collections.
The past few years have seen a lot of large bay industrial capacity added to the market. In fact, I think there has been so much new supply added, that in some markets, there is excess supply. Amazon overbuilt by nearly 33M SF in 2022 alone. Of course they’re just one supply chain.
Adaptability is one of the primary advantages of small-bay facilities. It allows properties to be easily reconfigured to suit different operational needs, allowing landlords to benefit from higher occupancy rates, reduced downtime between tenants, and the ability to cater to shifting market demands. Low competition from new small-bay development enhances the landlord-friendly aspect of small-bay facilities and allows for consistent rent appreciation. We have seen rents in many major cities rise from $8 per SF NNN to over $14 per SF NNN. This represents a significant opportunity to buy existing properties and push rents higher.
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On today's show we are looking at China's global leadership in automotive. This is something that will ultimately affect US design an manufacturing, which in turn affects real estate.
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Kelley Brine is based in NYC where she is President of Rose Valley Management, managing a portfolio of more than 10,000 units. On today's show we are talking about the investment mandate and how it has changed.
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Kris Reid is based in Valencia in Spain from where he is active in US real estate investing. On today's show we are talking about how to use a podcast as a relationship building platform as a source for new business and referrals.
To connect with Kris, visit iconsofrealestate.com
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On today’s show we are talking about life changing new habits. I’m going to share how I am using artificial intelligence on a daily basis. I have an AI assistant perpetually open on my phone and on my computer’s desktop.
If you are like most people, you probably experience decision fatigue at a certain point. I know that I certainly do.
So one of the ways in which I use AI routinely today is to save mental calories. So if I want to come up with an idea, I will often ask an AI tool to brainstorm 10 ideas on a very specific topic. It takes less energy to review a list of 10 ideas snd use that to stimulate my own thinking than coming up with something from a blank page.
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I’m astounded at the frequency with which I see absolute fantasy in proposed commercial projects. The discussion involves the development of a luxury mid-rise building in a tertiary market.
Where these smaller tertiary markets have an advantage, is that they have less infrastructure at the municipal level. They won’t have a multi-billion dollar subway system to build and maintain. They don’t have a massive social assistance program. The extent of their utilities is much more contained and therefore the impact fees charged to developers are much lower. So that has the effect of lowering the land cost. Generally speaking, the land cost will be lower compared with the competitive environment of the big city.
This past week I looked at a project that has taken investor capital from some pretty savvy people. Yet somehow in a matter of about 3 minutes I was able to spot the flaws in the investment thesis by this so-called developer.
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On today’s show we are looking at an event in financial markets that could represent a tipping point. These events have occurred with regularity over the years. Think of the Greek Sovereign debt crisis in 2012 that threatened to topple the entire European banking system. Think of Lehman Brothers in 2008. There was the bank failures in the US in 2023. These events often expose the counter party risk that is inherent in our globally interconnected financial system.
The problem is showing up in the latest spike in US Treasury yields. It happened very rapidly between May 1 and May 2 of last week.
Now we have become accustomed to very high volatility in US Treasury yields. Most of that is routinely blamed on the unpredictable nature of the White House.
But this one was different. There was no news from the White House that fundamentally would affect Treasury yields. The threat to impose tariffs on foreign movies is not enough to move the needle. So who is dumping US Treasuries? What happened at the same time as the spike in US Treasury yields was a precipitous drop in the Taiwanese dollar against the US dollar.
So who in Taiwan is dumping Treasuries? It turns out that Taiwanese life insurance companies had loaded up on US Treasuries and failed to purchase a hedge against interest rate volatility.
Why did they not buy insurance? They thought the insurance was too expensive. The liberation day announcement from Donald Trump had been pending for weeks. It was making front page headlines around the world, and still the risk managers at these Taiwanese insurance companies thought that they would take the risk and not buy the insurance. The high price of the insurance was a reflection of the elevated risk.
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On Thursday evening, my development company will be hosting a webinar with an update on the second year of our storage fund. We have invested in 3 assets so far and have more in the pipeline.
To register for the webinar, visit: https://event.webinarjam.com/register/36/qq2o7h6p
Today's question come from Ramon who asks:
"Wondering your perspective on Warren Buffett’s recent assessment of real estate investing vs stock market investing (link below). Seems to me that he completely ignores the ability to add value / force equity in real estate which takes work but can generate massive returns. That is not possible to do in stock market investing unless you take very large positions that are beyond the reach of average investors or really anyone but the largest of investment/hedge funds. "
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On today’s show we are talking about the methods that major importers are using to delay or outright eliminate the impact of tariffs. Let me be clear, I’m not a global transportation expert, nor am I here to offer any legal advice on what you can and can’t do when it comes to importing good to the US or any other country for that matter. But I can point you in the direction of areas in which you might want to perform your own research.
Tariffs and duties have been making daily headlines for the past month. We have also seen a lot of volatility when it comes to the regulations that seem to change from one day to the next.
If you are importing goods to the US that might be already on a ship, you might be understandably upset to find that an order you placed months ago would face a steep tariff charge that you had not planned for, and then maybe a few weeks later discover that the tariff you paid might be changed, lowered, or maybe even eliminated.
As a business owner, what can you do to protect the value of your inventory?
To start with, you don’t need to pay the tariff the second the goods enter the country. Again, I’m not offering advice here. This is something you will want to check out for yourself with the consultation of experts. There is something called a customs bonded warehouse. The items in a customs bonded warehouse are physically in the US, but have not cleared US Customs. The duty only gets paid when the goods leave the warehouse.
So let’s say that you have several months of inventory in your supply chain. You maintain a steady flow of material entering the country and those deliveries are coming every 4 weeks. You have 3 months until you deplete your domestic inventory. So instead of paying the tariff when the container comes off a ship, how about putting those contents in a bonded warehouse instead?
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Jason Brick is based in Portland Oregon where he is a nation wide expert on safety and security. On today's show we are talking about the various approaches to security when looking at properties.
He is also the author of several books on safety and security which can be found on Amazon or on his website.
To connect with Jason visit https://www.safestfamilyontheblock.org/
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On today's show George and I are talking about how to delegate authority within a negotiation. We're drawing on George's history within the Trump Organization and discussing where and when George had the autonomy to negotiate without checking back with the boss.
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On today’s show we are talking about whether it makes sense to include solar energy as a component of your projects.
Solar power systems used to rely very heavily on subsidies because there was no way you could rationalize them on a financial basis without it. These days the cost of these systems have reduced to the point where they are much easier to justify.
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On the first day of each month we review the book of the month (BOM). Our book this month is "Buy Then Build: How Acquisition Entrepreneurs Outsmart the Startup Game”
The traditional narrative of entrepreneurship often conjures images of two guys tinkering over a prototype in a garage that has been converted into a lab. Think of sleepless nights, ramen noodle diets, and the daunting task of building a business from the ground up. It’s a path fraught with risk, where the vast majority of startups fail within the first few years. Walker Deibel’s "Buy Then Build: How Acquisition Entrepreneurs Outsmart the Startup Game" offers a compelling and meticulously argued alternative: he argues that you should bypass the perilous early stages by acquiring an existing, profitable business and then focus on growth from there.
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On today’s show we are taking another look at hyper local versus macro. Today we’re comparing Boston, Charlotte and Phoenix, three cities at almost polar opposite ends of the country.
But first, at my company Y Street Capital, we are building. A lot of investors got into trouble over the past few years because of irrational exuberance and a tendency to look only at the upside and ignore the downside. At Y Street Capital, we believe that underwriting is a skill that goes way beyond having a spreadsheet. It consists of a discipline of crafting market assumptions that result in a safe project. I see too many investors manipulating their spreadsheets in order to get numbers that work. This is a very dangerous practice and it requires a strong discipline in underwriting to avoid that temptation.
Our consulting division provides underwriting services to other investors and developers all over North America. If you find yourself tweaking numbers in your spreadsheets, you may want to consider engaging our consulting group to get an institutional quality underwriting completed for your projects. Reach out to me at victorm@ystreetcapital.com and our team of experts would be happy to help you with your underwriting.
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Yesterday Canada held its Federal election. While Canada has a number of political parties, it was really a 2 party race. Mark Carney running for prime minister is head of the liberal party and Pierre Poilievre is head of the conservative party.
When Justin Trudeau stepped aside a few months ago, the liberal party elected a new leader in Mark Carney. Mark Carney served as governor of the bank of Canada, and in an unusual step as governor of the bank of England. To have the bank of England select an outsider to head their central bank was an unusual step. But it was clear that Mark Carney had earned a considerable amount of trust globally as a solid central banker. He presided over the Bank of Canada through the GFC in 2008 and frankly Canada was largely unaffected by the crisis in the US, which did by the way spill over into Europe.
The one central figure in the election was not even a candidate. Donald Trump’s statements about trade, annexation, military spending, and border security became defining issues in the election.
The Canadian people have spoken and the country has elected a liberal minority government.
My assessment is that the conservative leader continued to use campaign slogans from 6-12 months ago. He failed to pivot to the reality on the ground which was the new candidate facing him in Mark Carney, and he failed to pivot in a way that will address the negotiation with Donald Trump. Mark Carney did a much more convincing job of demonstrating leadership throughout the campaign. Pierre Poilievre did not play the part of Prime Minister and I believe that he did not convince the electorate at large that he was up to the job. This election had extremely high voter turnout compared with previous elections.
As a developer who is active in both Canada and the US, I really would have been happy with either party winning the election. Both had pretty decent initiatives aimed at stimulating housing. The strong fundamentals combined with a removal of several barriers makes investment in some markets in Canada extremely attractive.
On today's show we are going through the real estate incentives in the liberal platform.
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On today’s show we are looking at the residential homes for sale inventory across several markets in Florida. We have been experiencing the so-called lock in effect with many owners holding onto very favourable loans at historically low interest rates.
Even if someone needs to move, they will often rent out their primary residence and then rent a home instead of buying rather than sell and be forced to pay a much higher interest rate when buying a new home.
There are signs that the lock-in effect is now starting to wane somewhat and the number of homes for sale is rising rapidly in several markets across the US.
The reason we want to look at this is because the residential market does contribute to rental stock. In the condo market in particular, we see a large proportion of condos being offered for rent by owners of single units or small portfolios. The conventional wisdom is that somewhere between 20-25% of the condo market will contribute to rental market inventory.
Markets that used to be hotspots like in Florida have seen a near meltdown in demand. The condo townhouse market in Florida is experiencing 9.7 months of supply. We often hear about the challenges in the coastal markets. But Orlando’s inventory in April 2025 is about 30–40% higher than April 2024, reflecting a substantial increase in available homes. The market has shifted to a buyer’s market, with a 7.73-month supply in January 2025, driven by high new listings and slower sales
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Cris Zimmerman is currently based in Spain, but his family is from Frankfurt where he own hundreds of assets including apartments, hotels, and various other commercial properties.
On today's show we are talking about the unique elements of investing in Germany.
Cris also hosts events for high net worth families across Europe and North America. To connect with Cris, visit medicilegacy.com
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Layla Kunimoto is based in Seattle Washington where she invests on a full-time basis. She also is the publisher of the weekly newsletter AccreditedInsight.com. On Monday, April 28 at noon CDT, Layla will be on LinkedIn Live with Robby Butler from the Y Street Capital team talking about the use of AI for underwriting and due diligence. To attend that live event, here is the link for the live stream - https://lnkd.in/eitNBS7n
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On today’s show we are taking a look at whether it makes sense to copying a proven formula or blaze a trail and deliver a new product type in a geographic area.
But first, if you’ve been wondering where to place your capital that will be safe in today’s turbulent environment, you may want to consider participating in a high quality project managed by industry experts. At Y Street Capital, we have several projects underway in our pipeline and we have a limited number of investment opportunities. These opportunities are only available to accredited investors residing in the US and are in compliance with US SEC regulations. If you’d like to learn more about what we have going on at Y Street Capital, visit YStreetCapital.com and register for our investor portal https://ystreetcapital.invportal.com/login.
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On today’s show we are talking about how to model a project. I often hear people advocating for a simple spreadsheet to perform quick calculations. There was a time when I used these simple tools to make fast decisions.
There is a trade-off in any project where speed is a component of a quality outcome.
However, as time has progressed, I’m less inclined to rely on quick math for anything. The reason is that when bank leverage is involved, which it often is, the analysis becomes increasingly sensitive to small changes. A small change can cause a project to flip from attractive to upside down.
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On today’s show we are talking about the movement of goods entering our country and how this might affect industrial real estate and jobs.
The mainstream media have been widely reporting that shipping imports to the US are down by 64% in the first weeks of April. This is an example of how statistics can be used to sensationalize a narrative. Compared with the last week of March, it is true, shipments are down 64% from the week earlier. It’s also true, but not widely reported that shippers were rushing to complete imports to the US ahead of the April 2 tariff deadline. When you look at the long term averages, the number of ships leaving port for the US in early April is down about 10%. This is pretty consistent across the major carriers including MSC, Ocean Alliance, Gemini Cooperation and Premier Alliance. Gemini had the fewest cancellations at about 2% of their sailings cancelled and Premier Alliance had 18% of their sailings cancelled. So the thing to remember is that the pull back is based on a massive inventory build in the US ahead of the tariff implementation. Even if the tariffs had not been as dramatic as the April 2 announcement, the inventory build had already been done preemptively and we would have seen a drop in sailings anyway in the second quarter.
Last week the US unveiled its new Maritime policy which is intended to remove China’s dominance of the global merchant marine fleet. The US produces less than 1% of the new ships each year and China about half of the world’s ships. China is manufacturing 50x more ships than the US. The thinking is that the US and indeed all countries will be dependent on China for delivery of essential goods into the country and therefore such dependence could be a major national security risk for the country. The US is struggling to manufacture new ships for its navy. Part of the struggle is based on the fact that you’re not going to be great at building navy ships if you’re not making any commercial ships and lack the skills to build commercial vessels.
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I’m sharing what I’ve learned about managing change and how it might explain what we are seeing and experiencing in our daily lives. Early on in my career as a leader in the tech industry I took a bunch of courses on leadership.
One of the course in my management training was on change management. The idea was that leaders need to become skilled at leading people through change and that change doesn’t just magically happen. There is a psychology to managing change and if you ignore it you are likely to fail at implementing change.
You can divide people into four waves when it comes to embracing change.
There are the Mavericks. These are the first to make a change, or to adopt a new technology. They represent maybe 5-10% of the population, depending on the nature of the change. Next are the early adopters. Then come the “show me” who represent the silent majority and finally the laggards who will only embrace the change kicking and screaming when there is no alternative.
Any change will require engaging each of these audiences in that order. The early adopters won’t jump until the Mavericks have proven the feasibility, and the show me types will only jump in after the early adopters are sufficient in number to create the social proof. Finally, there are people who will resist the change kicking and screaming.
The fact is, there tend to be people from all four of these groups at all levels in our society. Some are business owners. Some are factory floor workers. There are people from all four of these groups at all levels. Not surprisingly, leaders tend to be more represented in the Maverick and early adopter group, but that is not a hard and fast rule.
The second thing to know about change is that change can reach a saturation point.
I went through an experiential exercise in a class where each person in the class was asked to perform an exercise.
We were asked to change one thing about our appearance. So some people would remove their jacket or take off their glasses. Then we were asked to change one more thing about our appearance, and then one more, and one more, and one more.....
Many people reached a point where the change was emotionally too much for them to carry on changing more and more. They surmised that the changes would keep coming and they would be pushed beyond their comfort zone. Many people stopped participating long before hitting that threshold.
This exercise taught me some powerful lessons about change management.
- The first few changes could be made easily with very little resistance. These first few changes are almost free and will be met with almost no opposition.
- Changes become more expensive emotionally.
- People will grumble before they hit the brakes.
- Saturation happens suddenly and the early warning signs should be paid attention to
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On today’s show we are looking back in history for the lessons of failed conquests.
Napoleon attempted to economically cripple Great Britain by closing European ports to British goods. He believed this would destroy Britain's trade and force its surrender.
Britain's powerful navy and widespread smuggling operations undermined the blockade. The system hurt the economies of France and its allies, leading to resentment and a desire to trade with Britain.
Napoleon sometimes underestimated the resolve and capabilities of his opponents, particularly the Spanish resistance and the Russian winter.
When a nation takes aim at a single adversary, it can trigger a cascade of alliances which the aggressor didn’t foresee.
The current trade actions by the White House are accelerating the drive to form new alliances. If doing business with the US is more difficult, then countries that are dependent on exports will aim to find new customers and business elsewhere. It’s not as if the US is the only customer in the world for products.
The liberation day announcement which called out more than 180 countries as enemies of the United States likely has the unintended consequence of stimulating countries that have been staunch supporters of the United States into forging new alliances. Whether these new alliances will merely augment their relationship with the US and act as a plan B contingency, or whether they will outright replace the US as an ally remains to be seen.
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Hubert Johnson is a tax lawyer based in Tucson Arizona. His company Guardian Tax Law specializes in all aspects of tax compliance. On today's show we are talking about how to handle property that has an IRS lien attached to it. This could be a residential property, a commercial property, and includes properties with multiple ownership. To connect with Hubert visit https://guardiantaxlaw.com/ or call 520-526-9850
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Tim Edwards is based in Chico California from where he owns a large multi-state portfolio of apartments. On today's show we are talking about the lessons of prior real estate cycles and how those lessons apply to today's environment. To connect and to learn more, visit https://multifamilyassetadvisors.com/
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On today’s show we are talking about whether it’s better to be better, or better to be simple. Today’s episode is an embarrassing story that I’m going to share with you so that you can learn from our mistake.
One of the consequences of working with really smart people is that you can often get caught up in the elegance of an ideal solution.
There is something to be said for consistency. If you want to reduce the possibility of errors, then it makes sense to eliminate or at least reduce the number of choices. Each decision represents an opportunity for error, or for misunderstanding. Today's story was an attempt at driving consistency that had unintended consequences.
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On today’s show we are talking about how to gain additional control over the expenses in your commercial buildings. Some buildings were designed with a single electric meter and a single water meter.
This makes it difficult for a landlord to recoup the costs associated with these variable expenses. Some buildings use a RUBS method. RUBS is an acronym which stands for Ratio Utility Billing System.
Instead of each unit having its own meter to measure individual consumption, the total cost of the utility for the entire property is divided among the tenants based on a predetermined formula.
The problem with all of these methods is that the tenant is left wondering if they are paying more than their fair share of the utilities. If the landlord is watering the grass, then they wonder if the tenant is paying for excessive watering rather than their own direct utilization. It ends up being an irritant to tenants who never fully trust the monthly billing as being accurate.
The other approach is to sub-meter. The building owner still gets a single bill for water, and for electricity. But by sub metering, the actual usage for each unit can be determined.
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Today is another AMA episode (Ask Me Anything). Today's question comes from Emanuel who writes:
"How should new investors approach development of multifamily properties when construction costs are high but demand for rentals is steady?"
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On today’s show we are talking about a property that we placed an offer on, which is failing in due diligence.
Failing in due diligence is one of two ideal outcomes. Of course we would prefer if a project met all of the criteria for investment, we would buy it at a substantial discount to the market value, and we would have lots of upside potential.
Anything less and we would rather pass on the opportunity.
The property itself has the potential to be a good investment opportunity. The artificial process that is being forced by the auction environment that the seller is trying to create is causing compounding the risks for the buyer. It’s that process which is compressing the timeframes and making proper due diligence impossible.
I’m not at all worried about whether we could diligence the property and scope the remaining improvements. The property would need to be entirely rebranded and launched as a new offering in the market. The artificial constraints being imposed by the auction environment are disqualifying the property for us. Maybe said another way a cash buyer might have the appetite for the added risk, and perhaps in that sense, the auction process is disqualifying us as a buyer because we simply require more due diligence.
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On today’s show I want to share some guidance that I gave you on the podcast only a few days ago. I’m not here to trumpet anything or take a victory lap or anything like that. I’ve experienced a phenomenon whereby I will make a prediction or an observation on the podcast, and then behold a few days or a few weeks later, we’re reading about it in the Wall Street Journal.
The purpose is to help you see what I’m seeing so that you can see it too.
The unpredictability of the White House announcements over the past week has caused massive swings in the futures market which caused the basis trades to go against the hedge funds. This has caused hedge funds to dump bonds in order to cover their bank debt. They don't want to sell. They have to sell. The real risk is systemic risk to the banking system. If we see the Fed step in to protect the banking system in the coming days, we will know that the situation was severe enough to threaten the solvency of the banking system.
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Seth Ferguson is based in Toronto where he is the founder and promoter of the PowerHouse Conference. This conference started out as the Multi-Family Conference with a focus on apartment investing. This year, the focus has been broadened to include a wider set of entrepreneurial activities and investments. The conference this year includes Kevin O'Leary, Alex Rodruguez, Michelle Romanow, Michael Hyatt and many others. On today's show we are talking about the risks associated with putting on these types of large events.
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Dana Samuelson is the owner of American Gold Exchange, based in Austin Texas. They are dealers of physical gold across the US. On today's show we are talking about the various forces that are pushing debt yields, dumping stocks, dumping bonds, and dumping dollars. One of the main beneficiaries is gold. To connect with Dana and to learn more, visit amergold.com, email them directly at info@amergold.com or call at 800-613-9323.
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On today’s show we are looking at recent history. We know that history doesn’t repeat itself, but it often rhymes.
We are going to look and see what we can learn from recent protectionist sentiments that were supposed to help.
The trade war of the 1930’s resulted in a 60% reduction in global trade. The impact was much more confined because international trade made up a small percentage of each country’s GDP compared with today.
No we have a much more meaningful comparison. Let’s look at Brexit which was the UK’s attempt to regain control over their national agenda leading up to the 2016 referendum.
These arguments collectively painted a picture of a UK potentially more independent, prosperous, and secure outside the European Union framework.
So the question for you is whether any of this sounds similar to what we are hearing from the White House? Let me be clear, I have no stake in this agenda. I’m neither supporting not opposing the current White House initiatives. I’m simply seeing parallels at two different points in history.
Brexit is a play on words, the combination of Britain and Exit. Of Course Britain was a founding member of the European Union and a strong proponent of the benefits of a single market with freedom of movement. The EU formed part of the globalization trend that
The World Trade Organization was a structure created in part by the US in which the rules of international trade were established that made it fair for countries that formed part of the WTO.
But now the US seems intent on breaking apart the WTO and negotiating individual trade deals with each nation based on criteria defined by the current White House. The US is also clearly trying to secure its borders.
These goals sounds incredibly similar to the Brexit arguments. In the years since Brexit, the UK has demonstrably suffered as a nation. The British pound lost value. The UK lost a lot of jobs and manufacturing. The UK has been isolated politically and economically.
Today’s question comes from Michael who writes:
Long term listener of the podcast. It is great!
With geothermal being so efficient, why is it rarely used on new single families or retrofitted with existing homes?
Thx
———————-
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Toby Lutke is the CEO of Shopify. Shopify is the world leader in creating platforms and tools for e-commerce merchants. In the last few days, Toby sent a memo to the organization. This memo has been reported on widely in the mainstream media. When Toby realized that the memo had been leaked, he posted it in it entirety on his twitter feed. When news reporters report on a story, they’re adding their own narrative and interpretation. I want you to hear Toby’s words directly, without interpretation.
The memo speaks to Shopify's adoption of AI in all of their systems and work flows. It's a wake up call to all businesses.
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People are used to walking on firm ground. If you have ever experienced an earthquake, it’s an unsettling feeling. Most people don’t know what to do. You will often see people running in all directions. Some of them are taking action which will improve their own personal safety, and others are actually running into harms way.
Global financial and stock markets are experiencing an earthquake of sorts and people seem to be running in all directions.
I’ve been saying for a while that we have nothing to worry about. At this point, I’m willing to admit that I may have been wrong about the scope of the tariff impacts. The NASDAQ stock index is down 19%. We will see disruptions and volatility. Will we see the cost of new construction increase? Maybe a little. But it’s too soon to tell.
To prevail over this chaos, you need to be thinking clearly at a time when many investors—and policymakers—are an emotional mess. It takes a level head to think clearly.
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Today's question comes from Juanita.
I follow your podcast and am a US Citizen. During the volatility being caused by tariffs, I am examining ways reduce my consumer exposure to trade war. I am think of buying into a farming co-op. I am feeling the global prices rise in my grocery bill and trying to find creative ways to get out.
1) Do you think farming co-op is a good temporary shield to current trade war?
2) How would you evaluate a real estate co-op purchase into a farming co-op to see if it economically makes sense versus riding out the trade war?
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Stephen Salvigsen is based in Northern New Jersey where he specializes in medical retail and retail strip centers. On today's show we are talking about market selection and tenant selection in growth markets.
To connect with Stephen, you can find him on LinkedIn at https://www.linkedin.com/in/stephensalvigsen/ or at his company https://sagesquarecapital.com/
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Jennifer Brener Seay is an art consultant based in Austin Texas. She works with developers nation wide in curating and selecting art for their development projects. On today's show we are talking about the role of art in designing your real estate projects.
To connect with Jennifer, visit artplusartisans.com or connect with her on LinkedIn.
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Back in the 1970’s there was a very popular graphic of a Lincoln US one cent coin. The original coin on the back has the words engraved “In God we Trust”. The coin had been altered to say, in Oil we trust.
At the time, that meme rang true as people were lining up at gas stations around the block and oil prices spiked.
The economic turmoil of those days was the result of the OPEC oil embargo. Global trade was disrupted and a new word was coined. The economists rule book was broken and we had simultaneous price inflation and economic contraction. The term stagflation was born and remains as a textbook condition which can happen whenever there is an artificial constraint on economic activity.
On Thursday, one day after President Trump’s liberation day, OPEC Plus came out with their production targets for the next few months. The timing is coincidental. No doubt it appears that President Trump is going to get his wish for lower oil prices. Oil prices have dropped by 10% in 2 days.
So now with the spectre of reciprocal tariffs, economic slowdown, and falling prices at the gasoline pump, some people are cheering that it will cost less to fill the tank in your car. But if you are a shale oil producer, you probably have a flashback to 2014 when OPEC killed the US Shale industry by dropping the world price of oil to below the economic break-even for shale oil production.
I believe that the spike in oil production at a time of declining demand is a deliberate move to crash prices and crater the US oil industry. This was not just an action aimed at Iraq. This is one of those times when it is difficult to make sense out of what is happening in global markets. Quite frankly, some of it makes no sense.
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If there is one thing that has dominated conversations over the past few weeks in the world of new construction and development, it has been the impact of tariffs and global trade on new construction projects.
Yesterday the President outlined his administration’s plan for tariffs by country, along with some special provisions for the automotive industry.
We also don’t know what the international response will be from China, Germany, Japan, Korea Vietnam and many others.
There were a few countries that have been making headlines over the past two months, specifically Canada and Mexico. Yet these two countries were noticeably absent from the countries subject to the newly announced tariffs from the Rose Garden address on April 2.
That isn’t to say that Canada and Mexico are fully off the hook when it comes to tariffs. The automotive, steel and aluminum tariffs are still in place. The White House fact sheet says that tariffs affecting Canada and Mexico will not be stacked on top of existing tariffs. As you can imagine, this is a fluid situation and we might see further clarifications in the coming days and weeks. But that is what we know right now.
As I’ve been saying for some time, the biggest impact on real estate investors will be the flow of capital in the bond market which directly affects the cost of borrowing for real estate investors. Retaliation from trading partners that impacts treasury yields will have a larger impact than any tariffs. So far since the start of the week, we have seen treasury yields on the 10 year bond fall from 4.36% to 4.07%. In addition to monitor pricing due to tariffs, I'll be paying attention to the bond market.
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On today’s show we are talking about a very real risk that is affecting real estate developers and property owners alike.
It’s always been a risk that a contractor might go out of business. Sometimes contractors allow themselves to get upside down financially. This can happen for a variety of reasons. Sometimes it’s the result of a client not paying them in a timely manner which causes a cash flow problem. Sometimes it’s the result of poor financial management. The contractor keeps trying to get new business to keep the lights on. By the time they realize that they’re out of cash, they start robbing from one project to pay another and the downward spiral begins.
The problems are not confined to contractors. In fact, we are currently seeing problems at subcontractors more frequently. In the past day, I’ve heard of several subcontractors who are in financial difficulty. Fortunately, none of our projects have been impacted or affected. But the risk is always there.
When a subcontractor is in the throes of going bust, they will often ask for advance payments to procure materials. You will also see unexpected delays in supply of labor and materials arriving onsite.
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Our book this month is "The Great Game of Business," written by Jack Stack and Bo Burlingham. It presents a novel approach to business management centered on open-book management, employee empowerment, shared financial responsibility, and what I would describe as the gamification of business. It argues that by treating employees as partners and educating them about the company's financials, businesses can foster a culture of ownership, improve performance, and achieve remarkable results.
The book chronicles Stack's journey transforming Springfield ReManufacturing Corporation (SRC), a struggling division of International Harvester, into a thriving employee-owned company. Faced with a factory closure, Stack and his team embarked on a radical experiment: To buy the plant from International Harvester with a tiny downpayment and massive amount of debt. They needed to turn these assets into a revenue generating business or go broke.
Rather than use the management methods from their prior career at IH, they opened up the company's books, shared financial information with all employees, and taught them how to understand and influence the numbers. This became the foundation of "The Great Game of Business."
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On today's show we are in the middle of due diligence on a property that recently experienced a fire. Performing due diligence is more complex because there are more risks that are difficult to quantify. We have not made a decision on this particular property. But we are sharing the thought process that is present during this phase of project.
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Today's show is a recording from a talk I gave earlier this year in New York City. In this talk I am making the assertion that all real estate is the result of designing a product with a specific customer in mind. It's viewing the finished property through the lens of product design with a specific customer in mind.
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Jason Hartman is well known as a speaker and podcast host in the world of real estate investing. On today's show Jason and I are speaking about market selection and asset price inflation as a hedge against devaluation of the currency.
To connect with Jason, visit jasonhartman.com or find him by name on most social media platforms.
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On today’s show we are talking about some of the innovations in tenant screening that hold the promise of saving time and increasing the quality of tenant screening.
The processes are evolving driven by advancements in technology, changing legal landscapes, and growing market demands. Whether you’re a landlord, property manager, or a tenant screening service provider, staying ahead of these trends is crucial for optimizing tenant selection processes and ensuring compliance with fair housing laws. On today’s show, we’ll explore five emerging trends shaping the tenant screening industry.
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I often get questions from investors about how and when to form a family office. This is particularly urgent when there is a generational cascade of wealth from parents to kids, and eventually grandchildren.
In fact the most frequent question I get is how much net worth is required to form a family office. When I think about this, the size of the assets determines the scope of solution. But the problems that persist are independent of the amount of wealth we are talking about.
I learned about all of this when I was 18 years old. My mother unfortunately died when I turned 18 and my father didn’t have the understanding or the inclination to manage the family portfolio. That task fell to me from the time I was 18 years old. My mother set things up as a testamentary trust with my father as the income beneficiary of her estate and with my sister and I as the capital beneficiaries of her estate. We had a lawyer and an accountant who fulfilled an important role in helping to guide a set of decisions that were right for our family. Fortunately my sister and I got along well and we didn’t have issues. But I’ve seen it in many families.
form irrespective of the parental guidance. Those differences get amplified when it comes to money and individual beliefs about money.
You see money is just fuel and whatever beliefs you have about money are simply accelerated based on the amount of money in play. If your belief is that money is something to be used to buy income producing assets, then you will buy more income producing assets. If your belief is that money is for buying luxuries, then you will buy more luxuries. If you believe that money is for philanthropy and solving social problems, then you will vector your investments in that direction.
It all starts with bringing clarity to the goals, not just for one individual, but for the family as a whole. I call this part of the family governance and that's the number one thing that a family office will do for you is bring your family together around how the family's money is to be managed.
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Today is another AMA episode (Ask Me Anything). Today's question comes from Emanuel who asks:
"Are short-term rentals still a profitable niche, or should investors pivot to long-term leases given regulatory changes?"
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The predictions about the current initiatives from the White House range wildly from a Ronald Reagan type outcome where the short term disruption results in a leaner more efficient government with better fiscal balance and a period of renewed economic prosperity. The other predictions point to a Jimmy Carter style disruption that results in stagflation. The arguments for each can be convincing. On today’s show we are looking at the negative implications of retaliations in the trade war that the White House has initiated.
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On today’s show we are looking at some simple AI automations that can save you time and increase the quality of your systems within your business. Specifically, the AI based note-takers can allows you to gain a whole lot of insight in your meetings. You can also link your meeting notes with your customer relationship manager software to automate the notes from your conversations with customers. Finally, you can connect your meeting notes with your task manager and automate action tracking from your meetings.
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Stephen Petasky is based in San Diego where he runs Luxus Vacation Properties. His company is delivering Four Seasons Residences properties across multiple markets in the US and internationally. On today's show we are talking about the various business models for luxury vacation properties and the merits of one versus the other.
To connect with Stephen, visit: luxusvp.com or connect with him on LinkedIn at https://www.linkedin.com/in/stephen-petasky-86437711/
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On today's show George and I are discussing the very public negotiations that are happening surrounding tariffs, defence spending, among many others. George taught negotiation at the law school at NYU for over 20 years. He was also Executive Vice President in the Trump Organization. I think you will find his insights helpful in understanding what we are observing in the news headlines.
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We are going to start a new feature on the podcast called Vic’s Picks. Vic’s Picks are predictions that I will be making quarterly. There will be a few predictions coming over the next couple of weeks for the second quarter.
On today’s show we are talking about the implications of the 25% tariff on steel and aluminum imports, and I'm making a prediction that these tariffs will be short lived.
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On today's show we are putting the fear of uncertainty into context of the bigger picture. There is not shortage of uncertainty. But even with uncertainty, there is underlying predictability.
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On today’s show we are talking about why the Fed is so disconnected from the other central banks around the world.
Only a few short months ago, you would regularly hear that the historically low interest rates of the 2010’s were a thing of the past and we can’t expect to see them again in our lifetime.
Well, we are not far from those rates again, except in the good old US of A.
The Federal Open Market Committee is meeting this week and we can expect the rate announcement this afternoon. The central bank is widely expected to hold rates constant at this week’s meeting with the market having priced in a 96% chance of no rate change at all.
Many of the other central banks around the world are trending to historically low rates again. Is the Fed out of touch?
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Today’s show is another in our beginner series. We have people in our lives who are still in the learning phase. The audience for the Real Estate Espresso podcast is a sophisticated audience. Many of you own large portfolios of properties. But you probably have people in your life who are less experienced. Where do they go for information? So many of the information sources that are focused on the rookie investor in my opinion leave a bad taste in my mouth. So these few shows a month focused in the beginner series are designed to help investors who are still learning.
On today’s show we are going to be looking into the so-called wave of distressed properties that are supposed to be hitting the market. Where are they? It seems like they are nowhere to be found. If you do find them, what is the seller looking for in a buyer? In order to answer this question, let’s break down the properties that are coming on the market today into a few different categories. To be clear, I speak regularly with commercial brokers across numerous markets. So what I’m discussing today is not just my opinion, but observations from commercial brokers in large markets. For the purpose of this discussion, I’m going to focus on multi-family apartment projects.
Property sale listings are falling into four distinct categories:
- Some apartment complexes are owned by investment funds that have a specific mandate. For example, they may have been purchased with a five year horizon. That means the fund is looking to start divesting of those assets.
- There are those who are upside down and don’t have a path to permanent financing that makes any sense.
- There are the tired landlords that have been holding a property for a long time and have no succession plan with a family member to take over the business.
- There are some owners with a portfolio who will choose to sell an asset in order to raise cash to solve a problem on another asset.
Each of these sellers has a different criteria for selling, and therefore is looking for something different in a buyer.
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On today’s show we are looking ahead a few decades and thinking about what changing demographics means for real estate investors.
But first, if you believe that there is more to real estate than residential, then you may want to look at the Y Street Capital Storage fund. At Y Street Capital, we believe there is a significant opportunity in the storage industry. But it’s not the traditional view of storage. We look for the gaps in the market. Storage is saturated in many major markets across the US. But the opportunity is now in specific segments like boat and RV storage, industrial storage, climate controlled and what we call the Swiss Cheese opportunities where there are some areas that are simply underserved for no particular reason. If you’d like to learn more about our storage opportunities, visit ystreet capital and register for our investor portal. Investment opportunities are open to accredited investors residing in the US, by prospectus only and in compliance with securities regulations. Visit YStreetCapital.com and register for our investor portal at https://ystreetcapital.invportal.com/login
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Scott Langham is with Whitestone Wealth Management, based in San Antonio Texas. On today's show we are talking about the different tax deferral strategies that are possible under the US Tax code. The 721 is a variant or derivative of the 1031 exchange that offers some unique advantages. Scott explains some of the nuances that could play a role in effective tax and estate planning.
To connect with Scott, call 210-341-1515 or visit whitestonewm.com.
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Joseph Root is based in Chicago where he is a principal at East Superior Real Estate Partners. This multi-generational family business invests in Chicago an other markets in the midwest. On today's show we are talking about the dynamics and merits of midwestern markets along with the complexity of vintage buildings.
To connect with Joseph you can find him on LinkedIn at https://www.linkedin.com/in/rootjoseph/ or at his company at esrepartners.com.
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Y Street Capital:
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Today is another AMA episode (Ask Me Anything). Our question comes from Steve who asks: " What is the next potential technology that could dramatically change or revolutionize construction?"
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Email: podcast@victorjm.com
Y Street Capital:
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On today’s show we are talking about the evolution of digital marketing. The problem is the digital marketing has changed dramatically in the past 12 months and chances are if you are a business owner and you are still in business you are probably still marketing the same way that you did 12 months ago perhaps 24 months ago maybe even five years ago.
Google has changed the way that it presents search results. It used to be the case that organic search was the name of the game when it comes to search. Appearing at the top of the list on the first page of Google search results would virtually guarantee you a dominant market position. That was later push lower down in the priority sequence behind paid advertising.
Today the top of the first page of search results consist of what is called a snippet. A snippet is a summary that is often an AI generated from the top search results. If you were one of the businesses that ranked pretty well in the past, chances are you have now been pushed down onto page 2 or page 3, perhaps even further down in the search results. You’re probably spending more money on Google Ads and getting inferior results. As if that was not bad enough many users are increasingly relying on AI chat bots for their search results and no longer even using Google for search altogether. For example, there is a new copilot plug-in to the Google Chrome browser that will effectively make Microsoft copilot your default search engine. Google's Gemini suffers from the same problems by the way.
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On today's show we are examining a hypothesis as to why long bond rates are falling, with the corresponding benefit to interest rates for investors.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Instagram: @ystreetcapital
To learn more, visit https://ystreetcapital.com or visit our investor portal at https://ystreetcapital.invportal.com/login
On today’s show we are talking about how the active adult segment is one of the most important new segments in residential real estate. When we think about residential real estate, we need to think about demographics. All people tend to go through a housing life cycle. They start out living at home with their parents. Then they get their first place on their when they move out for the first time. This is usually a rental apartment, maybe student housing, maybe with a roommate. This is the start of the expansion phase. It’s more space than just the childhood bedroom. Then eventually they may buy a house if and when they start a family. Then maybe a larger house to accommodate a growing family.
The empty nesters will live in a big house for a while with a lot of empty rooms and eventually realize that it’s too much house and too much property. It’s time to downsize. This can take the shape of several different decisions, depending on when they make that decision. They might choose a smaller home. Downsizing involves several steps as well. This might culminate in a senior home, or moving in with adult children. But the intermediate steps, before senior housing are particularly important for real estate investors to understand.
At some point people may choose something that is lower maintenance. That could take the form of a condo, or a rental apartment. The process of downsizing involves getting rid of a few decades of accumulated belongings. It’s a process that involves a sense of loss. But the problem with all these choices is that these moves disrupt the social fabric, especially if the move involves a change of city.
Adult children have moved out and are launching their own lives. The parents feel an acute sense of loneliness. The contact with their children is vastly diminished. Contact with friends is reduced, especially if they move city.
Our western society faces a crisis of loneliness and this is even more acute for people in their middle aged years.
Nobody aspires to move into an old folks home. So senior housing is seen as a necessity more than a choice. Moreover, senior housing is extremely expensive compared with any other form of housing.
This is where a relatively new category of product comes into play, called active adult. This is an age restricted product with an emphasis on class A finishes, an amenities rich offering, and a strong sense of community. The community has an activities director who organizes all of the social activities, whether it is a fitness class in the indoor swimming pool, or a pickleball tournament, evening social events, all manner of activities which emphasize an active lifestyle but also cement social connections. Active adult is positioned in between a market rate apartment and independent living.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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On today's show we are quantifying the impact of lumber tariffs on new construction. The fact is, the market has already priced in the cost of the tariffs. We're breaking down the contribution of lumber, the tariff, as a percentage of the overall construction. As a result, I expect the impact to be at most 4%, and in fact much less. This assumes that lumber prices rise across the board to match the price of the tariff burdened lumber which only accounts for 25-30% of US lumber supply.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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Adiel Gorel is based in Northern California where he is focused on investing across the sun belt of the US. On today's show we are talking about long term investment strategy that is resilient in the face of economic cycles.
To connect with Adiel, visit icgre.com where you will find numerous resources.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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On today's show we are live from the Pearl Islands in Panama where we are inspecting a 2000 acre property with 3 miles of beach front. This is largely a fact finding mission to see if and how this property could be developed. Join us on this tour of Isla Del Rey.
Real Estate Espresso Podcast:
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Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
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On today’s show we are talking about the impact of tariffs on real estate investors and on global events. I believe we need to listen to what the President says, but also more importantly observe what he does. These don’t always line up perfectly.
As real estate investors we should prepared to adapt our supply chains for new construction and for construction materials as they pertain to improving existing properties or building from scratch.
There is no question in my mind that the tariffs are not being imposed for the sake of tariffs. They are a chess piece in a larger game. But the problem facing most participants is that they don’t know the objective of the game, much less the rules of the game.
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On today’s show we are talking about how to buy surplus real estate from the US government. But first, if you believe that high quality real estate with strong operators and developers is still a good long term investment, irrespective of any executive order in the past 24 hours, then check out our projects at Y Street Capital. Register for our investor portal where you will get to see the numerous projects we have underway across multiple states in the US and in two provinces in Canada. We promise we won’t be spamming you with tons of email. Goto YStreetcapital.com and the link to register for our investor portal is here.
On today’s show we are talking about how to buy surplus real estate from the US government.
The US General Services Administration is the US Government’s landlord. They own, operate and sell the real estate assets of the US Federal Government.
After what seems like a false start, the GSA had listed a number of properties for sale in recent days. Then the number of properties was cut back and then removed almost entirely. General Services Administration removed from its website about 440 federal buildings representing nearly 80 million square feet of space that only hours earlier it had listed for sale.
There is no question that the US government is going to be getting rid of a lot of property in the coming weeks and months. We got a preview of some of those properties, but can’t really speculate which ones will be re-offered for sale.
Properties listed for sale on the GSA website are generally managed as an online auction.
As of now the GSA website is listing only a handful of properties. I’m going to summarize the information on one building that I’m actually somewhat familiar with.
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On today’s show we are looking at the evolving cost of capital for real estate investors.
There seem to be 3 main variables that affect short term interest rates.
The first is the inflation metrics which quite frankly are showing themselves to be quite sticky. Tariffs and trade wars could also increase consumer prices.
The second factor is employment and the third factor is the economy overall.
Long term interest rates seem to be determined by a combination of supply and demand, combined with a sentiment of economic outlook. If the economy seems strong, then the feeling is that there will be less pressure on interest rates. The current tariff regime affecting Canada, Mexico, China, and soon some European countries, could have economic backlash within the US. That could lead to economic contraction which in turn could cause the Fed to lower short term rates. The lowering of rates would likely cascade to the longer duration bonds. There are plenty of signs of economic weakness in the private sector. In fact, with the exception of artificial intelligence and AI related investment, I can’t see any sector of the economy that is growing right now.
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On today's show we are live on location in Houston Texas. I'm sharing some insights on the Houston market that are only possible with a direct boots on the ground perspective.
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On today’s show we are talking about security for your real estate projects. But first, we have several opportunities for investment within the Y Street Capital portfolio. Our storage fund continues to make investments in some great projects across the US. To learn more about our storage projects, visit
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On today’s show we are talking about security for your real estate projects. There is a conventional wisdom that security cameras offer very little protection. Even if an event of interest is captured, the image resolution or lighting is often insufficient to really capture enough detail to identify prosecute and convict. But this is changing.
There are numerous optimizations that can be made when recording security video.
Most cameras today are using a wide angle lens and capturing a very wide area. But that means a large percentage of the image is not going to contain information of interest. For example, if the upper half of the image is pointing at the sky, you are unlikely to find many security events in that upper half of the image.
AI is increasingly sophisticated in its ability to distinguish between transient and persistent events in security camera footage. This capability is crucial for reducing false alarms and focusing security efforts on genuine threats. Here's how AI achieves this:
- AI algorithms can analyze the movement patterns of objects. A car driving by exhibits a consistent, linear motion over a short period, which AI can recognize as a transient event.
- Conversely, someone loitering, repeatedly returning to a specific area, or leaving an object behind displays persistent behavior that AI can flag as potentially suspicious.
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Lisen Kaci is the lead developer of Discrepancy AI, a suite of tools that provide financial document analysis and verification. On today's show we are talking about the state of the art in using AI tools to streamline the financial document due diligence process. To learn more, visit discrepancyai.com.
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On the first day of each month we review the book of the month. Our book this month is "The Mountain is You - Transforming Self-Sabotage Into Self-Mastery" by Brianna Wiest.
Coexisting but conflicting needs create self-sabotaging behaviors. This is why we resist efforts to change, often until they feel completely futile. But by extracting crucial insight from our most damaging habits, building emotional intelligence by better understanding our brains and bodies, releasing past experiences at a cellular level, and learning to act as our highest potential future selves, we can step out of our own way and into our potential.
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On today’s show we are taking another look at the changing landscape of hospitality. AirBnb disrupted the hotel world with the gig economy’s answer to a short term stay. Legions of property owners saw the potential for higher income and went all-in on the rental win-fall.
The hotel industry has relied on Online Travel Agents to bring them a lot of traffic. Pricing in the hotel industry tends to follow dynamic supply and demand principles. Those who are coming to town for a large convention and properties are full can expect to pay more. Coming during low season when hotels are empty and you’re likely to find a bargain. But who wants to spend a lot of time browsing through dozens of hotels in order to save a few bucks? This is where the OTA’s can add a lot of value to customers. In my personal experience, I have often booked higher quality hotels using an online travel agent at prices that are lower than you can find on the hotel’s own website. I know they say this should not be possible. I’ve just lived that experience too many times to call it a coincidence.
The online travel agents responded to the threat of short term rentals by offering to list short term rentals on their sites as well. This offers customers the option of seeing branded hotel listings in the same search results as a short term rental.
Companies like Expedia and booking.com are now carrying private listings in addition to hotels. But these online travel agents offer none of the safeguards of the Airbnb platform. Even if the same property is listed on both AirBnb and Expedia, the terms of those two contracts are vastly different.
The hotels are definitely fighting back. The biggest drawback of Airbnb is the wide variation in quality. We have probably all experienced that really bad property that frankly should have its occupancy permit revoked, let alone be removed from any short term listing site.
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On today’s show we are taking a look at what I see in Panama after having spent three weeks here touring the country. There are some lovely aspects to the country. The climate is amazing. The people are warm and inviting. The country has amazing beaches.
The country has properties for sale everywhere. I mean everywhere. We are here during high season. This is the dry part of the year when expats spend the most amount of time here.
Panama is known for its favourable tax regime and for its rules which allow for foreigners to gain residency in exchange for investment in the country. This has given rise to a lot of new properties being built. The current government in Panama is very business friendly.
There are a few communities that I would consider to be well developed. Incomes here are pretty low by US and Canadian standards. Properties that are built for expats are generally higher quality. But these too are not up to North American standards. Even in high end condo buildings, the windows are single glazed windows for example.
If there is one word that summarizes real estate in Panama, it would be “oversupplied”.
Real estate in Panama is unlike real estate in the US or Canada. Some properties are not titled. That is to say, there is something called the “right of possession”. This gives the owner of the right of possession, that is the right to purchase the title from the state. But they don’t actually own the property until they purchase the title. This is an administrative process that can take a long time. More on that later.
Panama has no centralized MLS like the US and Canada. As such, some properties are listed on their own brokerage websites. realtor.com is one of the larger multi-brokerage websites and you will find a lot of listings there. But this too is not an MLS system.
There are lots of privately marketed properties. Sometimes this is nothing more than a handwritten roadside sign with a phone number. Many of these privately marketed properties are listed in the online classified ads in places like Encuentra24.
Since there is no MLS system, it is possible to find the same property listed on multiple websites at different prices. It is possible therefore that the agent promoting the listing is not the actual listing agent.
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Today is another episode that is tracking the initiatives coming from the White House. There is a lot to report on. In fact way more than we can cover in a single episode. Even the mainstream media is struggling to keep up and quite frankly, the reports I’m reading in the media are extremely superficial.
On today’s show we are looking at the end of an investment vehicle that brought about $9B in new investment funds annually to many real estate investors. I’m talking about the EB-5 investor visa. This program has been plagued with problems over the past few years. The idea behind the EB5 program is that an investment in an EB5 fund that generates 10 jobs for every $900,000 in investment would fast track an individual and their family to landed immigrant status in the US in six months or less.
However, during the pandemic, the backlog of EB5 applications grew to such a degree that the wait times were similar to other visa programs. The is an annual quota of 10,000 visas under the EB5 program. Since each investment requires spending a minimum of $900,000 and in some areas $1.8M and the guarantee that the investment creates a minimum of 10 jobs which must be audited at the 2 year mark and the 5 year mark in the investment. These EB-5 investments were not particularly useful for real estate development projects because they didn’t drive enough employment at the 2 year and 5 year audit points in the program. Where these programs did see fairly strong adoption was for investments in thing like hotels that hire a lot of staff. Now you can wonder about the quality of jobs created by a hotel. But a hotel does create jobs. We also saw a lot of EB-5 funds going into gas stations that also have a McDonalds counter, or a Dunkin Donuts counter. A single gas station with a fast food counter could employ easily between 15-20 people. The metric for the ROI on the visa was job creation.
Now the White House is talking about ending the EB5 program. What replaces it will go directly into government coffers.
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Today's question comes from Eddie who asks: Out of a 50/50 split how much should be allocated to "bringing investors, bringing property or bringing deal know-how"?
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Today is another AMA episode (Ask Me Anything). Today’s question comes from Joseph who asks:
This is kind of a real estate question as well as tech question, that may be up your alley. Electricity delivered to a house/business; is currently monopolized by a single company in whatever territory it located. I’m sure there are some government regulations, they still seem to do whatever they want. (e.g. every time I upgraded my solar on my house; I lost incentives; that made it less profitable for me recoup the install cost.) Allowing someone to pick who delivers their electricity would make it competitive with pricing; though would that even be possible with the deliver method being somewhat analog?
Appreciate your wisdom and insight.
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Dr. Travis Fox is based in Henderson Nevada where he is focused on development of Structured Insulated Panels for new home construction. Love this conversation about how to apply new technologies to accelerate home construction.
To connect with Travis and to learn more, visit buildyourfortress.com
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On today's show I'm coming to you live on location at the entrance to the Panama Canal with guest Melissa Darnay. We're talking about what's happening in real estate in Panama. Melissa is a real estate broker here in Panama and she hosts The Panama Podcast on Youtube which can be found at https://www.youtube.com/@choosepanama. You can also download a free e-book at her website choosepanama.com.
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On today's show we are talking about the benefits and drawbacks of investing in a fund. We are also looking at the first year in our fund where we have made three investments.
To find out more about our opportunities, visit https://ystreetcapital.invportal.com/login
There you will have access to information about all of our projects. These offerings are by prospectus only and are open to accredited investors only in compliance with SEC regulations.
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The people at Feedspot just published a list of the 100 Best Real Estate podcasts for 2025. I am honoured to be on #13 on that list of 100 best podcasts. If you are loving what you’re hearing on the podcast, then go out and tell two friends today. Show them how easy it is to subscribe to the show. I’m amazed that some very sophisticated real estate investors still don’t know how to find podcast on Apple Podcasts or on Spotify, or any of the other twenty podcast platforms out there which carry the show. Why keep all this goodness to yourself. Spread the love around and tell two friends today. To access the Top 100 Best Podcast list, visit: https://podcast.feedspot.com/real_estate_podcasts/
On today’s show we are talking about benchmarking your organization against the best in class in your industry.
When you are looking to develop and mature as a company, it is often helpful to examine how the industry’s best companies conduct their affairs and to use them as a benchmark.
If you are a specialist in value add apartments, you might use Greystar or the MC companies as a benchmark. If you are in the world of residential assisted living, you might use The Sage Oak as a benchmark. If you are in construction of single family homes, then you might consider Pulte Homes or Lennar. If you are in storage, then you might examine public storage and so on.
Well we are a development company, and many of our projects involve land development. So then who would we hold up as an example of a company that does it well?
A few companies come to mind. There is the Irvine Corporation which developed Irvine Ranch into the modern day city of Irvine. But this was essentially one giant 90,000 acre project that became expert at working in a single regulatory environment. Our company is active in 9 states across the US and two provinces in Canada. We would want to look at companies that are active across multiple jurisdictions.
The Howard Hughes Holdings company is one such example.
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On today’s show we are looking at the changing environment for government incentives, specifically for green energy.
We’re going to look at the incentives for solar power and what has changed under the new administration and more importantly what has not changed.
President Trump’s executive order during the first week of the administration rolled back many of the provisions of the inflation reduction act which affects clean energy programs.
There are some key elements that remain unaffected and it's important to distinguish what remains from what's been cancelled.
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The US banking system could face some big changes if the Fed is subjected to a full audit. Right now, the Fed receives regular audits from the Government Accountability Office (GAO), but its foreign transactions are exempt from audit. If so, what could be the fall-out? Could the banking system face major reforms? How would that period of transition and uncertainty affect real estate investors?
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Today’s question comes from Steve who writes:
"I’ve heard that public companies don’t like holding land on their balance sheet. Is this true, and if so, why is that?"
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On today's show I'm coming to you live from Panama in a small beachside town called Bocas Del Toro. We are here performing due diligence on a potential development with a client that owns 145 acres on an island with waterfront on both sides.
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Dennis Henson wrote the book Real Impact. These are inspirational stories from thought leaders and successful people. Developing that muscle forms part of the mind-set of being successful in your own right. To get a copy of the book, you can get a copy. of the e-book at realimpactbook.com. If you scroll to the bottom and get a copy as a podcast guest.
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As real estate investors we are highly attuned to what is happening in the bond market. The key benchmark figure for us is the yield on the 10 year Treasury. If the yield goes up, then the cost of capital goes up.
I’m going to draw your attention to some policy work that was made public by folks that are now closely connected with the new administration in Washington.
The negotiations with NATO members is heating up with the US President making it clear that he expects them to step up and meet their requisite commitments of 2% of GDP under the NATO treaty. So far the US has been spending far in excess of their share and has not been demanding payment from the other NATO members.
I believe the new administration will find ways to fund the military expenditures of the US with external funding. There won’t be direct payments to the US for protection.
What If the US negotiates continued protection for those countries who don't meet their NATO commitments, but purchase US bonds at zero interest instead? This would have the effect of lowering the cost of borrowing for the US Government. But it would also mean that demand for Treasuries in the private market would be fighting for a smaller pool of interest bearing instruments, which in turn would lower the yield. The net effect could be the lowering of borrowing costs for real estate investors.
You definitely want to be tracking developments in this arena.
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On today’s show we are taking a short walk through the history books. As some of you know, I’ve been building apartment buildings in Philadelphia for much of the 2010’s. We assembled numerous properties over the span of several years. Many of these homes in North Philadelphia were built in the early 1900’s. These homes were very traditional townhouses that were made of structural brick. The party walls were supporting walls for the homes on either side of the walls.
If I compare construction of similar vintage in other cities, the method of construction was vastly different in Philadelphia, and other cities.
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On today’s show we are talking about closing a transaction. States have different methods for recording a transaction on title. Some states use lawyers to close transactions. These are most commonly referred to as attorney closing states where a lawyer is required in addition to the title company. There are a total of 18 states that require attorneys to close. The remaining states can close transactions strictly with title companies. Some provinces in Canada that used to be exclusively lawyer close provinces also offer the option of closing with title companies. But these are less common, simply because that has not been the traditional practice.
Simple residential transactions involve a buyer, a seller, a price and are usually based on standard real estate board contract. Everything looks familiar to the title agent and it’s a paint by numbers exercise. Drafting the closing statement is very standard and the title agent is following a prescribed formula for completing the transaction.
In order to make things simple and repeatable many title companies create rule books for their title agents to follow. This restricted path is meant to eliminate possibility for errors and is designed to enhance the overall quality of the customer experience.
But these rule books don’t contemplate the more complex structures associated with a commercial transaction and the complexity of a multi-party transaction with many moving parts and then further involving one or more qualified intermediaries who are also imposing their requirements on the closing process.
You will often hear that what is being requested cannot be done. It violates the rule book at the title company. Of course the client is not going to be able to convince the tile agent that they need to change their process.
In that instance, the only viable solution in our experience is to get your real estate lawyer, who hopefully is well versed in the complexity of the transaction to provide the direction to the title agent on how to conduct the transaction. The lawyer will tell them exactly the same thing that you did. But the title company will listen to the lawyer, when they won’t listen to you. This is one of those cases where there are so many people involved in closing the transaction that the most important role for you is to assign a quarterback for the entire transaction. That person’s role is to get people communicating who don’t think they need to talk to each other. Everyone is sitting in their corner with their rule book waiting for everyone else to meet the criterial stipulated in their rule book and nothing moves.
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On today's show we are examining the best way to ask a question for maximum benefit. This is a real life first hand example.
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On today's show we are speculating on the impact of the shrinking Federal Government. What will it mean? The superficial headlines are overlooking the real changes that I believe are coming. Do your financial models take any of this into account?
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Waikiki is NYC based where he specializes in helping family offices with making institutional quality investments in projects around the US. On today's show we are talking about how investor appetites and investor mandates have changed in the past 24 months. What is in demand today?
To connect with Waikiki, visithttps://creconstructionpartners.com/ or reach out to him on LinkedIn.
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John Caldwell is a digital marketing expert who practices his craft from multiple locations around the world. On today's show we are talking about how marketing has changed in the new era of artificial intelligence.
Our firm is working directly with Jon as a strategist with our own in-house implementation team (full disclosure).
To connect with Jon and to learn more, visithttps://www.3victor.io/
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On today’s show we are talking about buying the dip. This is when the market is inefficient and people over-react to a piece of news.
These events are clear when they happen, and yet they still do occur regardless.
These market over-reactions happen with striking regularity. We see it also in foreign currency exchange.
The Canadian dollar fell to a 22 year low only a few weeks ago based on the assumption that tariffs imposed by the White House would crush the Canadian economy. The Canadian dollar has recovered about 2 cents in the last few days, but is still 4 cents below where it was in the fall.
We know that there is opportunity in many real estate markets. But if you can find a 4%, or a 6% discount on the buy side by speculating on the added leverage of the foreign exchange, this can be an opportunity to make an outsized return on your investment.
We have Canadian investors who invest in our US projects and we have US investors who invest in our Canadian projects. Foreign exchange doesn’t really enter into the thesis for any of these investments.
To be clear, there is a difference between investing and speculating. When you make an investment in a new apartment building, you’re probably basing your investment on the fundamentals of the local submarket, the product being delivered to meet a market need, and the strength of the team operating the project.
Foreign exchange in the future is unknown. It could result in a foreign exchange gain or a foreign exchange loss 5 or 7 years down the road when you might be planning to exit the investment. But if you have the dollar drop 5% in a very short time period, and the investment thesis was making sense, the risk just tipped in favor of the investor. The investment is now 5% cheaper, all other things being equal when you take the change in exchange rate into account.
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On today’s show we are talking about water sustainability. This is one of those topics that often gets misunderstood. In particular, it’s a source of a lot of misinformation.
We’re developing a project in Colorado Springs and at the city council meeting, several members of the public stood up in opposition to the project and were using the argument that somehow our project would be depriving people downstream of our project from water in the lower Arkansas River.
Cities like Colorado Springs which lives in a fairly arid location relies on water that comes from the rocky mountains. Some of the water comes from the Colorado River, and some from the Arkansas River as well as various other assets. In some cases, the city has engaged in water exchanges. These are purchases of water assets in one location and then trading those assets for use upstream.
In the city council meeting, one citizen after another spoke in opposition to the project using water as the argument.
As someone who is developing the project, it was painful to listen to people who are so misinformed and are clearly passionate about what they believe.
After the council meeting was over, I spoke with one of the citizens who had several minutes at the microphone in front of council.
I asked him if he knew about the various water utilities that exist in the area. He said that he did not. I asked him if he knew where Shriever Air Force Base got their water. He said, no.
I asked him if he knew what waste water recovery was all about. He said no.
This is where water beliefs are encumbered with the history of abuse of fresh water. Back in the day when there was seemingly endless water, there was no thought to conservation of a scarce resource. It only became an issue when the shortages appeared.
On today’s show we’re going to talk about the cost of creating pure drinking water out of waste water. It sounds gross, and it sounds like it should not work. But the same technology that is used to generate drinking water from ocean salt water can be used in a waste water treatment plant.
On today’s show we are taking a look at the near-shoring trend and how it has maybe been upended in the past couple of weeks since the inauguration of the new President.
On the minds of most business leaders in manufacturing are some important questions.
If the global landscape has changed, where should you establish manufacturing capacity geographically?
The globalization of the past few decades has proven to be a geopolitical failure. The assumption was that if economies were sufficiently intertwined, that it would be a protracted period of world peace and collaboration. We now have fractured geopolitical alliances.
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On today’s show we are taking a look at what might be one of the most significant counter punches in the effort to dominate the global economy.
There are many ways in which countries make foreign investments. The US having the privilege of maintaining the world reserve currency has seen much of the world’s debt denominated in US dollars. But the US has rarely been an investor in foreign companies, nor in foreign countries.
This stands in stark contrast to other countries like Saudi Arabia, China, Norway, UAE, Kuwait, and dozens of other countries that have sovereign wealth funds.
The US does deliver substantial foreign aid in the form of grants. But the US is rarely an investor in foreign projects. On the other hand, China has carved out substantial foreign influence by funding foreign infrastructure projects.
Today the US announced a new sovereign wealth fund that will be designed to compete with the like of China when it comes to foreign investment.
The fact is that when $900B dollars are going to be allocated and invested over a period of time, that represents a massive opportunity for savvy investors who are paying attention to ride the coat tails of that investment.
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On today’s show it we are examining what the implications of a full scale trade war will mean.
The White House executive order that was issued this past weekend has a structure that I find very familiar. It falls under the classic structure of an argument within a married couple. This is of the form when one spouse says to the other, “ if you loved me, you would take out the trash.” And then they spend the rest of the time arguing about the trash instead of the core issue which is that one member of the marriage is feeling unloved. Linking together two unrelated items is a very primitive but well known negotiating technique. I’m going to manipulate you into taking out the garbage by putting the relationship and whether you love me on the line.
This is precisely my assessment of the executive order.
The fact is, the tariff is not about trade. It’s about border security. President Trump’s election promise was to secure the national borders. The US can’t do it alone in any reasonable timeframe. Enlisting the cooperation of both Canada and Mexico is key to accomplishing his objective quickly.
I personally don’t believe that the result will be a protracted trade war, even though the outward appearance is precisely that. The media has and will latch onto the devastating economic impact that a protracted trade war would have on the Canadian economy. That level of publicity will bring immense pressure to the Canadian government to make the necessary changes at the border at a time when Canada’s government is completely in disarray. There is arguably nobody in charge at this moment.
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Sean Graham has two businesses. He is based in Detroit where he invests in self storage across the midwest. In addition, he runs a cost segregation practice. Today's episode brings these two worlds together with an interesting twist at the end of the episode.
To connect with Sean, email him at sean@mavencostseg.com.
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On the first day of each month we review the book of the month. In order for a book to be worthy of book of the month it has to meet a very simple criteria. It has to be impactful enough to change your life, or your perspective on the world.
Our book this month was written by BJ Fogg who teaches at Stanford University. He emphasizes that making big changes is incredibly difficult and virtually proned to failure. But small, minute changes, made deliberately can be stacked in a cumulative way to create larger changes.
This book is a compelling read and quite frankly, I'm recommending it to the accountability group we formed to help participants in our 2025 Goal Setting Retreat achieve their goals.
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On today’s show we are looking at the latest Fed announcement. But what is more interesting is to look at the divergence between the Fed and the Bank of Canada and the European Central Bank and what it means for the economy.
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When a bubble gets burst, the pin usually gets the blame. But it's not the pin's fault. How do bubbles form? What is the definition of a bubble? Bubbles form when three things come together:
- A massive amount of capital injected into a segment
- A story which supports the unlimited upside potential which is fuelling the frenzy
- The income from the market is not enough to support the investment.
On today's show we dissect the optimizations that Deepseek made to undercut the entire AI industry. These shortcuts are obvious in hindsight.
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On today's show I am live on location at our major 1783 acre development project in Colorado Springs.
This is a two part episode. The first part was recorded live on location just after sunrise and prior to the city council meeting and the second part was recorded after the city council meeting late in the afternoon just as the sun was setting.
Enjoy...
On today’s show we are looking at the impact of the announcements over the past week emanating from the White House to understand the impact on real estate investors.
First of all, I think you need to take President Trump seriously, but not necessarily literally.
We tend to look at various initiatives and evaluate them through a lens that is not necessarilythe same lens that the administration sees. When that happens, you are likely to have a reaction that the initiative makes no sense.
It’s not that it doesn’t make sense. It’s that you don’t understand the rationale or the end objective.
In the past few days we have seen so many counter-current changes in the economy. We have seen the first moves by the White House. But so far we have not seen any counter punches. We have not seen a response from China, or Canada or Mexico or the European Union. We don’t know what legal challenges might cause an overnight injunction to some of the initiatives. We don’t know if an injunction will stop an initiative, or merely delay it until the Congress enacts legislation to implement the President’s agenda.
We live in an interconnected world now more than ever, even if it's currently pivoting around Donald Trump, but other people will respond to what he's planning to do, and that will create massive volatility.
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On today’s show we are taking a look at the changing landscape in retail real estate. This is the third in a series of episodes focused on the retail landscape.
Last week we looked at the impact of e-commerce on bricks and mortar retail. We also looked at the global supply demand dynamics in the US market. On today’s show we are focusing on experiential retail. This is based on the thesis that customers will come into your store if you give them another reason to come into the store other than just to buy something.
As it turns out, when people come to a store, they tend to buy anyway. Sometimes it’s an impulse buy unrelated to the event. At other times, the event that brought you into the store stimulates the purchase.
It used to be the case that stores would turn over their inventory only a few times a year. The large department stores would turn over their fashion lines every 90 days with the changing of the seasons. That meant there was only 4 reasons to come into the store in a year. Companies like The Limited revolutionized the industry by changing their inventory monthly.
The more reasons you can give people to set foot in your store, the higher the chance they will buy something. Once a customer buys something, then there are more opportunities to upsell on something else.
On today’s show we’re going to look at some examples of what some retailers are doing to create a sticky customer experience. By offering more than just products, retailers create an emotional connection with customers, making the shopping experience memorable and enjoyable.
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Dave Dubeau is based in Kamloops, British Columbia. He is focused on helping other investors and syndicators develop relationships with potential partners by inviting them as a guest on a podcast.
He's written a book on the process and is passionate about educating people on the process. To connect with Dave and to learn more, visit https://20accreditedinvestorsbook.com/bonus. The coupon code "espresso" will give you access to more resources.
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George Ross is famous for his role as Executive Vice President in the Trump Organization and as Donald's advisor since his very first deal at age 27. In today's conversation George shares his thoughts on the opportunities that are opening up for real estate investors in the coming months.
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Today’s show is the second in a mini-series on retail real estate. Yesterday we touched on the changing landscape of retail. On today’s show we are going to look at the overall macro picture for retail real estate from a supply and demand perspective. We’re going to highlight five markets across the US that are showing signs of tight supply.
On today’s show we are looking at the findings from the most recent retail real estate report published by CBRE.
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Today’s show is the first in a mini-series on the changing landscape of retail.
We’ve been hearing about the death of retail for more than five years now. There is no question that retail is changing. Perhaps the biggest effect is the blurry line between online and offline.
It used to be the case that customers would drive to their favourite shop and see what they had in stock. Customers would browse the aisles and make their buying decision based on what was in the store.
That was rarely a perfect shopping experience and most customers would walk out empty handed. Shopping malls reduced the frustration factor because there would be another potential supplier a few doors down in the same mall.
But the mega shopping mall with 400 stores can take 20 minutes to get in and out of by the time you park the car, walk to the mall entrance, find the store you’re looking for and walk the entire length of the mall only to find out that they don’t carry what you’re looking for.
Prior to the pandemic, online accounted for about 8% of retail sales, a continuation of steady increases in the percentage of retail sales taking place online. Along came the pandemic and online sales virtually doubled to more than 16% of all retail.
Then as the world emerged from the pandemic, online sales fell to about 14% of all retail before rebounding to about 16% in 2024.
But not all in-store sales are truly in-store sales. An unknown percentage are "Clicks to Bricks" sales where the browsing happens online and the transaction happens at the cash register. This is still about the immediacy of the purchase which the ecommerce world has improved, but not solved.
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On today’s show we are looking at the flurry of executive orders that was signed by the incoming administration in Washington. There were a lot of them covering a wide range of issues. The ones that are getting the most attention and making headlines are those that affect the most divisive issues like deportations and international trade.
There have been no less than 35 executive orders in two days.
But this is a real estate podcast. On today’s show we are going to dissect a few of the executive orders from this week and highlight those that in particular could have an impact on real estate investors.
So today, I’m going to focus on only two of these executive orders. We will focus on others in the coming days as we are able to dissect them.
1 Promoting Beautiful Federal Civic Architecture
#2 Delivering Emergency Price Relief for American Families and Defeating the Cost-of-Living Crisis
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On today's show we are talking about the recently announced changes to the HUD lending programs for apartments in the United States. The HUD programs are direct competitors to the agency loans that you might get from Fannie Mae or Freddie Mac.
The possible loan proceeds have been increased by relaxing the debt coverage requirements and increasing the loan to value and loan to cost limits. This is a significant improvement and can make the difference for a lot of investors.
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On today’s show we are comparing two different types of construction contracts, the cost plus contract and the fixed price contract. We will describe the major differences between the two and outline the major gaping hole that exists in both from which there is almost no protection.
As the names imply, a fixed price contract, sometimes called a guaranteed maximum price contract is supposed to guarantee the most that you would ever pay to get a project completed.
A cost plus contract adds up the cost of the work performed by the subcontractors and then adds a percentage on top of that total price to pay the general contractor or the construction manager. You might negotiate an attractive percentage for the general contractor.
Generally speaking, the construction manager will build in a substantial contingency into the guaranteed maximum price contract in order to protect their profit margin in the event of a cost overrun. On paper it looks like the guaranteed maximum price is higher than the cost plus contract. When you are getting quotes from subcontractors and you compare these two numbers, the cost plus contract will almost always appear to be less expensive.
But there are 3 loopholes that exist for the guaranteed maximum price contract that don't protect the owner. On today's show we outline these risks.
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Sam Sells is based in Austin Texas where he specializes in impact investing across multiple markets. Municipalities are playing a role in providing the incentives to solve the affordable housing crisis with specific populations in mind. This includes criminal rehabilitation, veterans, asylum seekers, to name just a few. On today's show we are talking about the economic model that makes impact projects viable in the current environment. To connect with Sam and to learn more, visit impactgrowthcap.com or learn more about his fund at impactgrowthfund.com.
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Brandon Barnum is a principal at HOA.com where their software products include an entire suite of HOA management tools. The latest is an AI agent which interacts with residents and answers their most pressing questions. It also acts as a platform to connect with trusted suppliers.
To connect with Brandon, visit HOA.com or visit his personal website at brandonbarnum.com
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On today’s show we are talking about whether mixed use projects are worth the complexity.
This is one of those cases where the product design is designed for specific customers. A mixed use project has the benefit of animating a property and bringing additional amenities to the property at a community level.
When we’re talking about mixed use, we’re talking about a residential building with a ground floor commercial. Whether this is a plus or a minus depends on your perspective. The goals of the resident and the goals of the building owner might not be perfectly aligned.
A mixed use building is rarely the product of choice for a building owner. It adds complexity. The lender looks at the building like two distinct properties. There is a residential property that follows one set of underwriting guidelines and a second property that follows a different set of financial metrics. The property management for a NNN commercial space is going to be different from residential property management.
So why would you do it? In many cases, it’s a requirement of the zoning which requires ground floor commercial on arterial main streets. Cities need to maintain a balance between commercial and residential and there is a growing desire to return to the old world walkable city living that you find in virtually every European city or town. In Europe, very few people drive to a big box store to get their groceries.
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On today’s show we are talking about the legacy of the latest California wildfires. Wildfires are not new to California. We’ve seen them in the North and in Southern California. There was the Camp Fire in Northern California in 2018. There was the Cedar fire in 2003. There was the 2020 fire season in which more than 4 million acres burned throughout California.
The unusual Santa Ana winds that come off the mountains are often hurricane force winds that make the spread of fire difficult to contain. Flying embers are virtually impossible to contain. Unless we start building entirely out of non-combustible structures and cladding, the spread of these fires is inevitable.
The devastation in a dense urban area is hard to fathom. This type of thing is not supposed to happen in places where there is a fire hydrant on every street corner.
When we look at real estate after a major disaster, there are several effects.
People need a place to live. There is an immediate acute shortage of places to live. Those who had a waterfront home on the beach in Malibu, often own a second home somewhere else. They’re probably not homeless. So the demand for housing in the immediate are shoots up against a limited supply. Pricing shoots up in response to that local supply demand dynamic Some people will leave the area. They may go to other parts of California, or they may leave the state altogether. There have been more than 12,000 structures destroyed and rising. That’s a huge number, but still a relatively small percentage when looked at the size of LA County. If they leave California, the most likely destinations are the traditional ones of Arizona, Nevada, Idaho, Colorado and Texas. Some will seek a location that has a lower incidence of natural disasters. No more fires, hurricanes, earthquakes or snow storms please. It’s going to take time to rebuild. Some people had their insurance coverage cancelled in the last 30 days by insurance companies that had a crystal ball indicating higher risk. Reports I’ve seen in the media suggest that over 70,000 properties in the area had their insurance policies cancelled by insurance companies very recently. If there was a state component to the insurance plan, some policies had a limit of $3M in coverage. One beachfront property made headlines where there will be only $3M in insurance to cover more than $20M in recent improvements. There will be a shortage of trades in the local area to rebuild that number of properties. As a result we may see a jump in labor pricing and we may also see a surge of construction workers coming into the area looking to help with the rebuilding process. There were thousands of properties destroyed. But there are over 2.5M properties in LA county. I’m not an insurance expert. But I would expect the remainder of these 2.5M properties to be experiencing a surge in fire insurance premiums. In fact, anywhere in the western states that is in an area of elevated fire risk could see their premiums skyrocket.
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I am pleased to report that the annexation petition for our Karman Line project was heard in front of Colorado Springs city council last night. Our project consists of 1783 acres that at one time formed part of the Norris Ranch. Mr. Norris was the Marlboro Man in the cigarette commercials. We bought the last remaining remnant of the Norris Ranch from Steve Norris, the son of the Marlboro man.
The annexation petition passed the first reading in front of city Council late last night with a vote of 7 to 2.
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On today's show we are talking about an emerging trend in last mile logistics for e-commerce. The industry seems to be shifting to include an increasing number of well integrated third party logistics solutions that are well situated close to the end customers.
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On today’s show we are talking about the process of budget tracking for construction. The problem with most budgeting tools is that they track two numbers, plan and actual. But the needs of the project extend far beyond these two numbers.
Let’s talk about the various views that are necessary to properly track a construction budget.
- Plan of record. We sometimes call this the anchor budget. This number is set at the start of the project and never changes. It’s the reference point. It is the budget that is approved by the lender in the sworn statement of construction. It’s also the budget that the cost consultant who works with the lender is using as their point of reference.
- There is the forecast. The forecast in an ideal world would match the anchor budget. In an ideal world there would be no problems or surprises and none of the contingency funds in the budget ever get spent. But in reality, there are likely to be additional costs that dip into the contingency and this is where you track the actual running forecast to completion. Once a change is accepted by the lender or the cost consultant, you can think of this revised budget as the current budget.
- Along the way you may have subcontractors propose changes to their line items. There is a period of time where these changes are not officially accepted. In fact, there could be several days or weeks where you explore alternatives to what the subcontractor is proposing. These changes might be accepted, or outright rejected, or maybe there could be a third alternative that gets proposed. At the moment, these budget items have to be treated as a risk and not as an officially accepted part of the plan. You will want to track these unofficial numbers and you need a separate budget summary to track these. The use of this column is temporary and should only last for a few days at a time.
- The last line you will want to track is the actual. But because of all the complexities associated with the holdbacks and potential tax rebates, the actual will only be useful at the very end of the project when everything is tallied up and the last bill gets paid. Until then, the actual will not add up.
- So in addition to the budget actual, you will need another way to track your spending against the budget that includes the adjustments and calculations for holdbacks and tax rebates. Unless you take this step, none of your budget reconciliation will work.
So instead of the simplistic two columns that most budgeting tools use consisting of plan and actual, a proper industrial strength tool actually needs 5 columns.
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Today's show is an impromptu presentation at last week's Scaling Up With Syndication conference in NYC.
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Robby Butler holds a key role within Y Street Capital. He chairs our weekly, quarterly and annual planning meetings. On today's show we are talking about our most recent two day annual planning cycle and how we use the Entrepreneurial Operating System (EOS) to manage our business. EOS was described in the book "Traction" by Gino Wickman and has been adopted by countless businesses large and small.
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On today's show we are talking about the impact of the rising US dollar. Why is it rising? Who is hurt by it? Who benefits?
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On today's show we are summarizing the findings from the latest multi-family apartment research reports from Marcus and Millichap. We're looking at Dallas, Houston, Austin and San Antonio.
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Every year in early January there is the Consumer Electronics Show in Vegas. This multi-day event showcases the latest in technology. Many tech companies showcase products that are still at the experimental stage and not necessarily available for purchase at your local electronics store.
This year I would say that the defining word for CES is AI. You will often find a theme prevalent at CES in any given year. In past years, the defining themes were things like Web 2.0, which nobody even talks about anymore. Some things seem to endure past CES, and then others fade into oblivion.
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On today’s show we are talking about the elements that distinguish an active adult apartment complex from a generic market rate apartment.
There is a progression in housing options as adults get older. There is a high proportion of older adults who are single and these people lack a sense of community and lack connection. This is one of the biggest social problems in our western culture. The amount of time being spent online has served to further amplify that isolation.
Most of senior housing has focused on physical and medical needs starting with independent living, assisted living, memory care and skilled nursing.
When people downsize from a detached single family home, they usually move into something that is lower maintenance. That means an apartment or a condo where the building maintenance is professionally managed.
Just moving into a well appointed apartment doesn’t meet the needs. So there’s a gap and that gap is being filled by a category of apartment which the industry calls “active adult”. The very first active adult communities consisted of age restricted single family home communities with communal amenities. More recently, that has evolved to incorporate purpose built apartments for this market segment. There’s not much of it. There are only about 73,000 units of active adult in the entire USA. That’s a drop in the bucket.
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Back in January of 2022 I reported on the growth of virtual real estate. Facebook has changed its name to Meta only a few months earlier. Metaverse technologies were capturing headlines. But strangely I heard no talk of virtual reality at the street level.
In the past few months, several companies have written down their investments in virtual reality. This includes Exp Realty, Microsoft, Disney and yes, Meta.
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George Ross was Executive Vice President in the Trump Organization where he was responsible for some of the largest projects undertaken. On today's show George is sharing his perspective on the upcoming second term with his former boss. Enjoy my conversation with George Ross.
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Mark Faris is based in Naples Florida and he invests in value added multi-family apartment projects. His approach is more conservative than most and is grounded in solid principles. On today's show Mark describes an unconventional approach that is clearly differentiated in the market. To connect with Mark and to learn more, visit fariscapitalpartners.com or email him directly at mark@fariscapitalpartners.com.
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On today’s show we are looking at what might be the economic drivers for the construction of new data centres.
Data centres are a very capital intensive business. They consume a lot of land, electricity, water, and of course the hardware software and climate control equipment. They burden the local electric utility with a lot of demand and they don’t contribute very much to a city’s vibrancy. Nobody goes on a Sunday afternoon drive to look at the data center.
Apart from the fact that you have access to artificial intelligence applications from OpenAI and Google and Amazon and countless others, the data center doesn’t contribute to the community in a visible way. These applications are in the cloud and therefore their location is largely invisible.
A data center owner is looking for a few key elements.
- excellent optical fibre connectivity with redundant networks and multiple physical paths. This way a network outage does not represent a single point of failure.
- Adequate land and zoning at a reasonable price with a favourable property tax rate
- Plentiful and inexpensive electricity where the electric grid has redundant pathways which will make the data center more tolerant to local power outages.
- Access to a skilled talent pool or operate and maintain the data center.
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On today’s show we are taking a look at a construction technology that could revolutionize the way concrete buildings and light gauge steel structures are built. The technology is called Hambro and we are using right now for the construction of six buildings.
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Our book this month is absolutely worthy of back of the month. It is called “Daytrading Attention“ by Gary Vaynerchuk Gary Vaynerchuk has built a global following in the world of marketing and has grown Vayner Media, into one of the most respected new media marketing agencies.
This book is approximately one year old, and the world of marketing is changing very rapidly. I am seeing changes in the type of content that is gaining attention on social media on a monthly basis. But still, the book is very relevant.
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On today show we are looking forward to this upcoming year 2025. Last month, our team took an entire week offsite on a cruise ship for our annual goal setting retreat.
The process of goal setting starts with gaining clarity on your values, and then bringing your goals into alignment with those values. If your goals are not in alignment with your values, you will experience a profound dissonance in your life.
One of the things I personally struggle with is finding the balance between planning versus doing. Some days it feels like there is so much to do that. There is no time left to plan.
Some days, no, many days, I experience what feels like a personal battle with the clock. It seems like there are never enough hours in the day to complete what I want to get done. So much so that it felt like the end of the year and the entire month of December was a sprint to the finish line to complete our goals for the year.
A goal without a plan is merely a hope. I hope without a plan is a recipe for failure. So after the champagne is on ice for tonight‘s new year celebration, I will be spending the bulk of the day translating those goals that are lacking a plan Into something far more concrete.
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On today’s show we are taking a look at the year that was 2024. Of course this is a real estate show, so we’re going to focus on those things that have influenced the world of real estate investing.
On today’s show we are going to take a retrospective look at valuation. It doesn’t matter what the asset is, the mantra of buy low, sell high applies to virtually any asset.
When you’re in a bubble, it feels really good. You might be tempted to think that you’re really brilliant to have foreseen such amazing market conditions. When you buy at the top of the market, you have to be thinking that the market has a lot of room to grow. It's a dangerous place to be.
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Joe Downs is based in Philadelphia, but invests in storage assets nation wide. On today's show we are talking about the evolving state of the storage industry. To connect with Joe, visit belrosestoragegroup.com.
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Ivan Barratt is based in Indianapolis, where he invests across the midwest. So far he has amassed about 9,000 units and has launched their fifth fund. On today's show we are talking about his strategy at Bam Capital. To connect with Ivan and to learn more, visit bamcapital.com
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On today’s show we are talking about the implications of “drill baby drill” on real estate across the United States.
The US has an abundance of energy, thanks to the fracking revolution. The oil produced in the United States is mostly a light sweet crude. There is a surplus of this crude oil and the US exports a bunch of it. The US imports heavy oil which is then combined with the light oil in order to produce the spectrum of products that an oil refinery is designed to separate from the crude oil.
The US has a lot of associated natural gas coming from its oil wells. This gas is either captured into a pipeline network or flared off at the well head. Some have installed small electric generators next to the well head and are producing low cost electricity.
Natural gas is the preferred fuel source for generating electricity. It is the cleanest of all fossil fuels. But it is also the most inconvenient to transport. By super cooling it and compressing it, the gas can be liquified and transported by ship.
The US exports about 10% of its natural gas production. That is the limit of the liquefaction capacity in the country today. Most of these LNG plants are located along the gulf coast in Louisiana and Texas. Each one of these LNG plants costs a few billion dollars to build. Natural gas is incredibly cheap in the US compared with the rest of the world. The US price is currently hovering around $2.87 per million BTU. In Europe and Asia, the current price is about $35 per million BTU. That is a huge price disparity. The best way to address the problem is to build more LNG capacity in the US.
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On today’s show we are looking at the potential for a global trade war and what it could mean for real estate investors in the US and Canada.
President Trump has not yet taken office and he is rattling markets all over the world with the threat of tariffs.
In order to understand the threat, we need to look deeper beneath the surface. We can look at the use of tariffs during the first Trump administration and look at the latest statements from the president to better understand where this is all headed.
In the days following the US federal election, president elect Trump put out a tweet on the X platform saying that he would impose a tariff of 25% on all goods imported from Mexico and Canada.
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On today’s show we are talking about different types of cash flow investments. A few days ago on the podcast we talked about the four investment buckets.
- There is the safety bucket
- The cash flow bucket
- The growth bucket
- The speculative risk bucket
All investors should be thinking about the allocation of assets into each of these four categories.
On today’s show we are going to zero in exclusively on the cash flow bucket.
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On today’s show we are talking about a specific category of lawyer who tends to work on contingency. That means the client does not shell out any cash up front. All of the compensation is paid at the back end with a split of the proceeds from the litigation. These lawyers approach the condo boards, usually unsolicited, and offer to get them a settlement from the builder for any defects. If they can prove that the builder tried to knowingly hide a defect, they could extract triple punitive damages.
These types of cases can often be seen as legalized extortion.
Construction defect attorneys can sometimes be seen as predators by developers due to the nature of their work, which often involves identifying and pursuing claims against developers for alleged construction defects.
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On today’s show we are taking a look at a major step forward in generative AI.
The latest release is O3, which is the premier model, and then O3 Mini, which is faster and more efficient and costs less money.
How good is it? What's the difference? The first release O1 was announced three months ago.
Now three months later, they're already doing the next one, which is O3. Technically they couldn't name it O2. Sam Altman said it should have been named O2, but there's a company called O2, a telecom company in the UK.
So they didn't want to infringe on the trademark. So, they're naming it O3, but it is essentially the next model. It's the next version after O1.
A recent interview last week with Satya Nadella, the CEO of Microsoft highlights where AI is heading when it comes to revolutionizing software development and software applications as we know them.
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Brian Decker is based in Scottsdale Arizona where he is developing AI solutions for home services businesses. On today's show we are talking about the changes affecting the entire industry. To learn more and to connect with Brian, visit Instagram at "thebriandecker".
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Cindy Hook is based in Arizona where she invests in mobile home parks in about a dozen states across the US. On today's show we are talking about the strategy for acquiring and repositioning mobile home parks. To connect with Cindy and to learn more, visit sonoscapital.com, or you can email her directly at cindy@sonoscapital.com
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On today's show we're talking about asset allocation. Theinspiration for today's show came from the dramatic volatility in the stock market that we've experienced over the last few days. This is nothing new of course. I was in my early 20s and managing my family's assets when black Monday happened in October of 1987. That lesson has repeated itself a few times since then. When I was in the tech industry I had a very large percentage of my assets tied up in shares of technology companies through the 1990s until the balloon burst in the year 2000.
I believe that all investors should be dividing their assets into one of four buckets and doing so consciously.
All investors should divide their portfolio into
-
a safety bucket
-
A cash flow bucket
-
A growth bucket
-
A more speculative risk bucket
Nothing controversial so far. This is all motherhood andapple pie. The big challenge for many investors is to determine which category to place any of their investments.
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Instagram: @ystreetcapital
On today’s show we are looking closely at yesterday’s Fed interest rate announcement. The Fed cut the benchmark lending rate by 0.25% as widely predicted and as I predicted only a few days ago on this show. As real estate investors we care deeply about what happens to interest rates. The cost of capital is one of the most significant variables when it comes to owning real estate assets.
This week’s rate announcement was about as confusing as ever with numerous mixed messages. The outlook for future rate setting policy could not be more unclear. It’s as if the narrative and the data are disconnected.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
As 2024 draws rapidly to a close, we’re going to be running a retrospective on the year. This is where we want to hear from you the listener to the show. Tell me about your year in review. What went well? What problems did you face? Were you able to overcome them? How did you overcome them? I want to hear from you at victor@victorjm.com
General Reflection
- What were your key achievements of 2024?
- What major challenges did you face, and how were they addressed?
-
How does 2024 compare to previous years in terms of progress and growth?
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Goals and Objectives
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Did you meet the goals set at the beginning of the year? Why or why not?
- Were your objectives aligned with your long-term vision and strategy?
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Which initiatives were most effective in driving results?
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Successes
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What strategies or actions led to your successes this year?
- Which projects or initiatives exceeded expectations, and why?
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What can you learn from what went well to replicate success in the future?
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Challenges and Lessons Learned
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What were the most significant obstacles encountered?
- How effective were you in adapting to unforeseen circumstances?
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What lessons did you learn that can improve future planning or execution?
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Collaboration and Communication
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How well did teams collaborate across departments?
- Were communication channels effective in ensuring alignment and efficiency?
- What could be improved to foster better teamwork and information flow?
On today’s show we are taking a look at gifts for Christmas. You might be wondering which books would make a great gift for someone with an entrepreneurial spirit. So on today’s show I’m going to share 10 books from my reading list that I think would make for a gift this holiday season.
Real Estate Espresso Podcast:
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iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Today is another AMA episode (Ask Me Anything). Today’s question comes from Ramon who writes:
"Your podcast continues to be informative and entertaining all these years later. Thanks for all you do to for the real estate community. I have another AMA for you. It’s not the exactly real estate related, so I completely understand if it’s not appropriate for the show.
Here goes, in your journey in becoming a business focused media influencer, how have you thought about building your company’s brand vs your personal brand? For instance, if you are on a podcast or at a conference and asked “how people can find out more information about you”, how do you make the decision whether to give your personal website versus business website versus both?"
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Ladislas Maurice is traveling the world, continually. On today's show we are talking about how he invests globally as he travels. You can connect with him at thewanderinginvestor.com
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Whitney Sewell is based in Virginia. He's one of the few hosts of a daily podcast with over 2,000 episodes. He is also a principal with Life Bridge Capital where he invests in multi family apartments. His projects are concentrated in Idaho and in Colorado Springs, two locations where our company has a major presence. We're discussing investment thesis and keeping it predictable (and boring). To connect with Whitney visit whitneysewell.com or lifebridgecapital.com
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are doing another in our monthly beginner series. The real estate espresso podcast is unlike other podcasts in that most others are focused on a more entry level audience.
Our listeners are sophisticated. Many of you own large portfolios of apartments. But you also have people in your life who are interested in learning more, but maybe don’t have access to high quality information. The idea of sending your spouse to a $199 weekend bootcamp for beginners where they are going to be abused by sleazy sales people sounds unthinkable. So where do they go. Look no further. We are going to dedicate a couple of shows a month to topics that will accelerate the learning for less experienced investors, and might give the most sophisticated investors a new way of explaining a concept that is otherwise complex to describe.
On today’s show we are talking about where to buy properties. When investors are just starting out, one of the constraints is usually access to capital. They want to get in a deal so badly that they will invest in the wrong deal, because that’s all they can afford. They don’t have the capital to buy what they really want, so they buy what’s cheap.
As Benjamin Franklin wisely said, The bitterness of poor quality remains long after the sweetness of low price is forgotten. It’s tempting to think that an inexpensive property is a better deal. After all, the ratio of rent to purchase price is better than a more expensive property.
We’re talking about what we can learn from the Boy Scouts and Girl Scouts when it comes to real estate.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
In 2022 we acquired the last remaining piece of the Norris Ranch from Steve Norris, the son of Mr. Norris. The project was called Norris Ranch when we acquired it. But it turns out that there were numerous properties called Norris Ranch and it was becoming difficult to distinguish them. The city asked us to come up with a new name. I’ll have more to say about that later in today’s show.
Yesterday our project came before the city’s planning commission. I’ll give you the punch line up front. The project was approved at planning commission and recommended for first reading next month in front of city council. The application is for a concept plan which includes a zoning overlay across the property which designates the future zoning. These areas will still need to be further developed with individual site plans.
We're excited to get this project started!
Real Estate Espresso Podcast:
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iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today's show we are looking at whether using a referendum to block real estate development is actually democratic.
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show, we are looking at the state of the global economy and how I believe it will impact interest rates over the next 90 days. I’m going to do something that is risky and that is to predict the future.
We keep hearing narratives in the mainstream media. The US economy is resilient and strong. However, I’m going to construct a case that I believe will demonstrate convincingly that the global economy is actually very weak, and that interest rates will in fact continue to fall over the next 90 days.
Of course, when I speak about interest rates, I’m not just talking about Central bank rates. I am talking about the interest rates that really matter which are those experienced by Real Estate Investors at the street level.
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today show we’re talking about how to handle what seems like conflicting data into your financial model when you are faced with a continuous supply of incoming data.
Real Estate Espresso Podcast:
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iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Eric Burns is based in Cincinnati. He is active in the Phoenix market investing in multi-family apartments. On today's show we're talking about navigating the macro market dynamics and some of the Phoenix specific issues.
To connect with Eric, visit flowerscapital.com.
Real Estate Espresso Podcast:
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iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Bryant Dawson is based in Kansas City where he is active in flipping on a large scale and increasingly is flipping medium sized apartment buildings. On today's show we are talking about some of the distinctions that enabled him to scale to 220 flips in a single year at the peak. To connect with Bryant, visit him on Linkedin at https://www.linkedin.com/in/bryant-dawson-72a838b8/
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today's show we are taking a deep dive into asbestos and the problems associated with remediating it. It's a huge issue that frankly is being underestimated by many real estate investors.
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about our development company Y Street Capital. Several of you have asked a bit about our business. So on today’s show I’m going to give you an overview of the types of projects that are underway at Y Street Capital.
Real Estate Espresso Podcast:
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iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Today’s episode is a listener question from Joseph who writes:
I have someone I know who is bullish on this crypto called XRP. There is conversation this will become the new way of doing business and that getting vested in this soon will be a no brainer. What say you sir? My opinion of crypto has been more like a hedge similar to holding physical precious metal. If things go really sideways it will be good to have some. I have watched Crypto through the pandemic and it seems almost like a get quick rich scheme, one version gets hyped up and then falls until the next new one comes up.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
As 2024 draws to a close, many people are training their sights on 2025. On today’s show we are looking at what we predict will be the most popular asset classes and why? I’m going to highlight one of the plays that I believe will attractive in the near future.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
I predict the next Fed meeting will result in a rate cut. Why is that? Well, because the employment numbers are heavily skewed. In fact, they are also incredibly weak. We previously saw only 12,000 jobs created in the month of October. When you subtract the 40,000 government jobs created, that means the private sector actually lost 28,000 jobs. Not only that, those 40,000 jobs could have been largely associated with the US election which concluded on Nov 5. The work to certify the election continued of course beyond Nov 5. But the election is an event that has a surge in hiring.
In total there are somewhere between 700,000 and 900,000 people involved in the election process at both the federal and the state level. Now that the election is over, those jobs are gone at least for another 2 years. So the strength in the employment market in the past two months, which was not that strong at all is actually much weaker than it seems when you back the government hiring out of the equation and the election related hiring out of the equation.
We are seeing a large number of executive changes across multiple industries. There have been over 216 CEO changes announced at public companies across the US in the last short while. In times of stress the new incoming CEO will likely make their mark by conducting a strategic review. That process usually results in trimming fat in the organization. All of these companies are going to be shrinking into greatness in the short term. That means layoffs.
Companies bloated with hiring during the pandemic as prices rose and the revenue associated with those higher prices enabled businesses to afford the extra staff. Those days are long gone. Most major businesses have a hiring freeze and of course the layoff announcements continue. Cargill is laying off 5% of its staff or about 8,200 workers. Tyson meats is laying off 800. All of these layoffs are indicative of the population at large struggling to make ends meet. If the two largest suppliers of animal protein are seeing falling revenue, it’s because people can’t afford to buy meat as much as they might have in the past. I don’t think they’ve all suddenly become vegetarian.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
I first read the Tipping Point maybe 15 years ago. Malcolm Gladwell was making a name for himself with that book. I’ve read every other book he as written ever since. These include Outliers, What The Dog Saw, David and Goliath, and Blink. There’s a reason why he has sold 23M books. He is an extraordinary writer.
He combines amazing story telling with original research on social science. He illuminates what is not obvious. But once you see it, you can’t un-see it.
His latest book “Revenge of the Tipping Point” is a sequel to his first book “The Tipping Point. Gladwell traces the rise of a new and troubling form of social engineering.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Tyler Vinson is based in Spokane Washington. He is a pioneer in the tokenization of real estate for syndication. On today's show we are talking about the interplay between tokens and the underlying securities regulations. To connect with Tyler and to learn more, send an email to info@retokens. com
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are looking at a court case that stands to upend the way tax liens are handled in the US. We’re actually going to look at two cases.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
We often hear daily quotes, especially in the news media about what has happened to a particular commodity price. The price of oil is up 2%. The stock market is down 1.5%. But all of this is in reference to what? Are we talking in the past day, in the past hour, in the past month? While the news reporters have to pick some point of reference, none of these measurements are actually meaningful to a single individual. It’s like when you speak to everyone, you’re actually speaking to nobody. The problem with speaking to nobody is that it creates a narrative which for those who lack critical thinking will latch onto.
If I bought gold a long time ago at $300 an ounce and today it’s trading at $2,600 an ounce, who cares that it went up or down by $30 in the past day? What decision would I make with that information?
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about the importance of conservative underwriting.
Lenders are not business people. They are not real estate developers. They don’t know how to manage risk in a complete sense.
Then the lender changed the rules. The impact to our projects was negligible. What did we do that insulated us from the impact? We were more conservative. But just saying more conservative doesn't provide much insight. What did we do specifically?
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
I’ve heard that a particular community needs more housing because there’s a new factory coming to town. There’s a new EV plant, a new battery plant, production is shifting for a new model car or truck at an existing plant.
On today’s show we are looking at the early days and the modern day history of the auto industry.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are looking at the latest economic data. The labor department issued new data last week which showed that the private sector payroll job creation was overstated from the period of June 2023 to June 2024 by more than 1.25M jobs. It basically cuts the private sector job creation in half compared to what was originally reported.
It sure makes you wonder that the headline job creation seems to be stellar and resilient each and every month. With few exceptions, the number is quietly revised downward the next month. An then we had a major downward revision in August of 818,000 jobs for the 12 month period ending in March 2024. This latest revision shows what main street has been experiencing for some time. Job growth in the private sector is weak.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Matthew Bragg is based in the Finger Lakes region of upstate New York. He is running a third generation commercial "Design/Build" construction company with projects across upstate New York. On today's show we are talking about the challenges of building in smaller markets.
To connect with Matthew visit https://www.chrisanntha.com/.
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Austin Hair is based in Orlando and is active in medical and dental real estate across multiple locations. On today's show we are talking about the dynamics of this segment. To connect with Austin, the best way is on LinkedIn at https://www.linkedin.com/in/austin-hair/
Real Estate Espresso Podcast:
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iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about the changing office environment. The Covid era created a lot of distortions. People got paid to stay home. The requirement to social distance meant that most things done elsewhere were performed at home.
School was virtual. Gym classes were virtual. Meetings were virtual. Court hearings were virtual. Work was virtual.
Sure it was more fun to sit in a zoom meeting in your pyjamas. But when effective office work requires team collaboration, virtual environments deliver an inferior result.
Of course I can’t predict the future. Nobody can. But I’m going to go out on a limb and predict that we are somewhere near the bottom of the office market when it comes to vacancy. I believe we will see a rebound in demand for office space starting on January 20. This is going to act as a catalyst for more business owners to mandate a return to the office environment.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Today is another AMA episode (Ask Me Anything).
Steve in Utah asks - “What are the benefits of a development agreement instead of special zoning code when it comes to getting your project entitled?”
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about the city that people love to hate. It’s the grittiest great city in the world. Of course I’m talking about NYC. The density of NY brings a lot of advantages. I love the fact that so much is at your fingertips. My family lived in Manhattan for many years. Then my parents decided that it was not a good place to raise a family and they left NY when my mother was still pregnant with me. Although I’ve never lived full-time in NY, it still feels like home. I can find my way around the city like a native NYer and have mastered many of the shortcuts. But there are a lot of problems with NY.
The inconveniences are everywhere.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are taking a look at the dirty underbelly of municipal politics. It’s an open secret that some council members have in some cases demanded, and in other cases accepted financial compensation in exchange for political support.
The running joke is that many city council members seem to have very nicely renovated kitchens and baths in their homes, more than usual for the population at large.
Now let me be completely clear, our firm has never engaged in this type of activity and if asked, we would refuse.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Today's episode is another AMA episode (Ask Me Anything). Our question comes from Robert who asks:
"How do you know when you are pushing innovation too far and you're out running marketplace demand?"
Real Estate Espresso Podcast:
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iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
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Erica Schwartz is a Tony award winning producer. She has been involved with major Broadway productions like Moulin Rouge, Wicked and Hamilton. On today's show we are talking about the economics of broadway shows. To connect with Erica and to learn more visit avalonroad.net or email her directly at eschwartz@avalonroad.net.
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Jonah Bamberger is based in NY and Tel Aviv. He started in the NY area and continued to acquire up and down the eastern seaboard and then into the midwest. His most recent projects are located in Porto Portugal, and a new hospitality project in NYC.
To connect with Jonah, visit aulder.com.
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On today’s show we are looking at what we can expect during President Trump’s presidency. We will start with cabinet appointments. Many of these positions will require Senate confirmation. But there is one appointment that is actually the most interesting to me that is not getting any airplay in the mainstream media.
We can also predict what might happen to the price of oil in the short term.
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We are coming to you live from the 2025 Y Street Capital Goals Retreat on board the Norwegian Cruise Line. We’re on shore in Bermuda after spending two days at sea, holed up in one of the night clubs with pen in hand, working hard on getting clear on our values.
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On today’s show we are talking about a new housing initiative that was just launched in Mexico by the newly elected President of Mexico. A key component of the initiative is a zero-interest mortgage scheme, offering low-income households a path to homeownership with favorable terms.
Some reports put Mexico’s housing shortage of 8.5 million units. Not all of these families need a new home.
It’s not within the Mexican culture to renovate homes the way you do in the US and Canada.
The program includes a substantial financial commitment, with the Mexican government allocating approximately MX$600 billion ($30.8 billion USD) to support housing development.
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On today's show we are looking at a story of a property that was the site of aboriginal significance and what it might mean to a property owner.
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On today’s show we are going to look at what might be a rush for the exits.
When someone is deported from the US, they are barred from entering the US, even as a visitor for 10 years. So getting deported could be a big deterrent, something to be avoided.
Some people who enter the US are true refugees under the Geneva Convention’s definition of conventional refugees. These are people who are fleeing persecution on the basis of race, religion, sexual orientation, freedom of speech, and so on.
There are also many people migrating around the world for economic reasons. These do not meet the definition of refugee and they need to enter the country through the proper immigration channels.
As we know and has been widely reported in the news, the new White House administration aims to reverse the past four years of open borders by imposing a mass deportation of up to a million people.
I’m not here to comment on the merits of the proposed action. This is not a political show. It’s a real estate show. I’m here to predict at least one of the consequences of this proposed action.
Andy McMullen is based in San Diego California, but he is building rental communities through-out the sunbelt in secondary and tertiary markets. On today's show we are talking about meeting market demand and how the election is influencing investment decisions.
To connect with Andy, visit legacyacquisitions.com
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Celia Cortes is a partner in Atlanta based Draco Group providing security training and services to worldwide clients. Their clients include military & Law Enforcement, high profile individuals, corporate entities, and community organizations.
To connect with Celia, you can email her directly at celia@thedracogroup.com or visit https://thedracogroup.com
Real Estate Espresso Podcast: Spotify: The Real Estate Espresso Podcast iTunes: The Real Estate Espresso Podcast Website: www.victorjm.com LinkedIn: Victor Menasce YouTube: The Real Estate Espresso Podcast Facebook: www.facebook.com/realestateespresso Email: podcast@victorjm.com Y Street Capital: Website: www.ystreetcapital.com Facebook: www.facebook.com/YStreetCapital Instagram: @ystreetcapital
Th City of Philadelphia just passed a new ordinance with a vote of 17-0 banning the use of algorithmic pricing for properties in the city. San Francisco was the first city to enact such a ban. Philadelphia is the second and it is expected that others across the nation will follow suit.
The city bill references an anti-trust motion brought by the department of justice.
The Justice Department alleges that RealPage's pricing software has features that are anticompetitive and therefore violate the Sherman Antitrust Act, a law passed more than a century ago.
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On today’s show we are looking at a new multi-family research report published two weeks ago by the folks at Fannie Mae. Dr. Doug Duncan is the chief economist at Fannie Mae where he leads a team of economists. This group has consistently achieved accolades for having some of the best research in the business. This particular report was authored by Nathaniel Decker who is a Lead associate in the research department.
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On today’s show we are taking a look at the state of affairs, the morning after the election.
Thankfully, the election result is clear. The last thing the US needs is months of conflict over the validity of the election.
Let me be clear, I don’t think either candidate is the best choice for the US. But then, I don’t really get to have a voice. I’m not even able to vote in the US election. Some of Donald’s policies are effective, others not. Donald’s personal character is a deal breaker for too many people. That’s the number one reason, I believe, why he has been so divisive.
This morning we have a bunch of people rejoicing and breathing a sigh of relief. There are an equal number of people fearful and apprehensive about the next four years.
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On today’s show we are talking about getting a project through the approval process in city council. Every city’s municipal government is tasked with managing the city’s resources along with planning the city’s land use.
Getting a project approved doesn’t happen by accident. It requires a lot of hard work. In every community there are people who will come out of the woodwork to oppose your project. These are people who you have never met, who are not negatively affected by the existence of your project, but merely have an agenda to oppose development. They have a narrative in their mind that all developers are rich people who are exploiting the poor for the sole purpose of enriching themselves further. Developers have no sense of environmental responsibility and that building new structures is simply pushing poor people out of the community. Unless the developer creates a strong case for their project, the only voice in the wilderness will be the voice of opposition.
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On today’s show we are taking a look at what the US might look like post election. The race is probably too close to call. The left leaning media are predicting a Harris victory and the right leaning media are predicting a Trump victory. Anyone who says they know definitively can’t possibly know. Voter turnout will have a major impact in the swing states. In those ridings where the vote is close, a larger turnout for one group versus another could be enough to make the difference, regardless of what the polls say.
We are currently living in two economies. Those who have assets, and those who have a job. Those who have assets are not feeling the pain of inflation, whereas the hidden tax of inflation is really hurting those whose incomes are not keeping pace with rising prices.
In both cases, we will see government debt balloon. At the current rate, we can expect the national debt to reach 50T by 2030, and that’s if we don’t have any wars or any recession between now and then. At some point, someone in the world is going to purchase all those bonds. If the supply of that debt exceeds the demand, you can expect the cost of that debt to go up. That means higher long term interest rates. The only way that the US will maintain low interest rates is if it retains its global reserve currency status. Otherwise they will be relegated to the same demand as bonds from Italy, or maybe worse like Argentina or Ecuador.
I keep hearing from investors that they’re waiting to see who is going to win the election before making any new investments. I ask them to imagine that the election is over and you now know who is going to be sitting in the oval office, what would they do differently in terms of investments based on that knowledge? All too often, they have no answer.
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Jim Manning runs a volume flipping and lease option business in St. Louis. On today's show we are talking about finding fulfillment in growing a business. To connect with Jim and to learn more visit passivewealthshow.com.
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Michelle Jeong is based in San Francisco where she runs FIRE Capital (Financial Independence Through Real Estate). On today's show we are talking about acquisition strategy in the current market conditions. To connect with Michelle visit investingwithfire.com
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Ou book this month is “Profit First” by Michael Michalowicz. You’ve no doubt heard the advice from financial advisors called “Pay yourself first”.
This book sounds like the same advice, only it’s quite different. It breaks down the human behaviours that result in a money management cycles that ultimately can become a trap.
Most businesses focus on growing revenue to generate cash and stay ahead of expenses. The problem with this approach is that the additional revenue attracts hidden expenses which erode the benefit of the added revenue. Some businesses can grow themselves into the ground. As a minimum, the relentless focus on adding revenue removes the focus on the primary motive which is profit for the owners.
Profitability is a decision that happens first. But most businesses treat profitability as a consequence of all the other decisions. Profit is the left-over. Many business owners end up “reinvesting” their income to grow the business and in so doing, end up working for free, or at least for far less than they’re worth.
What Michael Michalowicz teaches is how to establish new money management governance within your business that becomes a new set of habits. These habits eventually become muscle memory and they become normal.
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On today’s show we are talking about solving the needs of aging population.
As parents age, some families resort to independent living, maybe assisted living, professionally managed institutions. These are quite expensive and not everyone can afford this. In fact, there is a huge percentage of the population who can’t afford senior housing.
For many, that means family takes on the burden of caregiving. As older adults become more reduced in their mobility, the family home might no longer be suitable. Navigating stairs to enter the home, or navigating stairs to get to the bedroom level in a two story or three story home becomes a problem. Moving out of the family home into a single level ranch style house is not an option for many families.
We have talked about the so-called lock-in effect that is well established in the current market. Those owners who locked in a 30 year mortgage at 2.5% interest rate don’t ever want to sell their home and face a more expensive proposition with a new home at a higher interest rate.
The cheapest option, by far, is to modify the existing home to install the mobility features required to accommodate an aging adult.
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Yes, you read that correctly. Today’s show is a deep dive into a due diligence item that we often don’t think about.
I’m going to read a few extracts from an engineering letter we received as part of an information package on a property.
The project in question is a residential subdivision with a large rock outcropping in the middle of the property. The top of the hill consists of large boulders and the residential area below is surrounding the rock outcropping. The residential homes would be situated on more level ground.
The possibility of a rock fall can only be mitigated in a few ways.
- Move the dwellings far enough away that the risk is minimized
- Actively stabilize the structure
- Introduce barriers to create a layer of protection in case something does fall
All of these solutions come at a cost. Retaining walls can cost more than $1,000 per linear foot depending on the height. You can end up spending hundreds of thousands, or perhaps even millions if you have a large scale site with vast unstable structures.
This type of situation can be further amplified by destabilizing events. In this particular instance, there is a known seismic surface fault within 150 feet of the subject property. There is a second engineering report governing the potential for seismic activity with the fault. An earthquake in the immediate area may not be enough to damage the buildings in the planned subdivision. But they could easily be enough to destabilize the large boulders that sit on top of granular and silty material that could easily liquify when subject to seismic activity. This could increase the probability of rolling boulders.
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On today’s show we are breaking down the different types of construction contracts that you can sign. Now let me be clear, I’m not here to offer any type of legal advice. I’m merely sharing our experience when it comes to undertaking different types of construction projects.
The first thing you need to get clear on is whether you are hiring a general contractor or a construction manager. This is a distinct choice. In either case, there will be subcontractors involved for the specific work items. You might have different subs for framing, mechanical electrical, plumbing, concrete, finishing and so on. There could be up to 20 distinct subcontractors on a typical build project. The main distinction between the general contractor and the construction manager is who hires the subcontractors? You might hire the subcontractors directly and pay them directly. The subs work under the direction of the construction manager. The bids, the schedule, and all of the practical elements of the project are handled by the construction manager. But the contractural relationship is different. There is no markup being charged on the subcontractor’s work. You pay the construction manager a fixed fee.
Let’s assume that you decide you want to hire a general contractor and you are going to pay only the general contractor. The GC is responsible for all aspects of the project.
In construction projects, the contract type is crucial for defining cost control, risk allocation, and payment structures. Here’s a comparison of the three main types:
1) Cost Plus
2) Lump Sum (Fixed Price)
3) Guaranteed Maximum Price
The biggest item to figure out with each of these models is who is going to carry the contingency fund. There is always going to be some variability in construction. The question is who is going to carry that risk and where is the money going to come from to pay for those costs if and when they do arise.
Whichever model you choose, there are pros and cons. Whatever you do, make sure you hire a lawyer who specializes in construction contracts. This is an area of specialty in the law just like real estate .
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On today’s show we are looking at the demand for construction materials and labor. The number of housing starts is way down nationally. This is true for single family homes and for multi-family apartments. So it stands to reason that there should be plenty of labor available for your projects if you decide you want to undertake a project in this current environment.
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On today's show I'm asking George about how he used to attract business before the days of digital marketing. Love his answer.
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On today’s show we are looking at the national average numbers for residential real estate.
The statistics seem to be conflicting and it seems like the numbers are not adding up. On today’s show we are going to unwind the apparent contradiction to make sense of what is truly going on.
The national association of realtors reported that sales volume in September fell to the lowest level since October of 2010 with an annualized rate of 3.84M homes being sold. This is a 3.5% decline from the same period last year.
Inventory of homes for sale increased to a 4.3 month supply of homes.
Finally, the median price of a home increased 3% in September compared with the same period last year to a price of $404,500.
Normally you would think that falling sales volume combined with rising inventory of homes for sale would translate into falling prices. If demand is falling and supply is rising, then you would expect prices to fall. So what is up with the 3% rise in the median sale price?
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The Bank of Canada took a victory lap yesterday as they cut interest rates by 0.5%. This is the fourth consecutive rate cut since June. The rationale given was that inflation in September hit 1.6% down from 2.2% in August.
The fact is, Canada’s economy is extremely weak right now. The drop in rates is needed to maybe stimulate growth.
For real estate investors, the rise in interest rates over the past few years has created a glut of condo’s for sale in the market. About 25% of new condo’s appear in the rental market. These are typically the smaller units in a high rise building that are purchased by amateur investors. These units are rarely purchased by owner occupants. Owners tend to want a larger floor area. Those who are willing to rent will often accept a smaller apartment.
When the bank of Canada dropped its rate on Wednesday this week, all of the major banks also dropped their prime lending rate in tandem.
The picture in the Toronto condo market is not pretty. The sold to new listing ratio is around 30%. The percentage of condos in the rental market that are experiencing negative cash flow is 81%. That’s up from about 40% only a couple of years ago.
The pre construction market is currently absorbing about 300 units a month against a backdrop of over 17,000 units of pre-construction units for sale. In the current market conditions I predict that none of these buildings will achieve the 70% sales threshold needed to qualify for construction financing. The only path for some of these condo projects will be to convert their offering to apartments. But if they’ve already taken deposits, they will need to recapitalize the projects in order to convert them to apartments. The appetite among lenders may be
In the last 7 days in the Toronto market we saw over 1350 new listings and more than 600 conditional transactions terminated.
On today’s show I’ve focused on the Toronto market. The picture is similar for condos in other markets across Canada. I would characterize the Vancouver market as being most similar to Toronto. But there is very little activity in new condos in Calgary, Ottawa and Montreal. The name of the game in Canada right now for apartment living is purpose built apartments.
For that asset class the drop in interest rates translates into long term improvement in the outlook for that sector.
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On today’s show we are talking about a service business that used to be on top of its segment in the market.
The company we’re talking about is Starbucks.
So it’s no surprise to me that today Starbucks CEO Brian Niccol announced a major drop in both earnings and revenue. They also suspended financial guidance for the upcoming quarters.
Once a brand loses loyalty to the brand, it’s hard to get it back. Same store sales are down 6%. Attempts to win back customers with various promotions have failed.
Starbucks, like many other premium retail locations is often connected to prime real estate. I predict that the averages obscure the extremities. Some locations will continue to perform very strongly. Still others will dramatically underperform. Unless the turnaround happens quickly, some of these poorly performing locations will close.
If Starbucks saw enough good data in the metrics to open a location, then chances are good that the location is still good, even though Starbucks revenue has fallen at that location and that location is now losing money and will close. The problem is not the location, but rather that Starbucks lost its way and alienated its customers.
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On today’s show we are wondering if governments and central banks in particular have any effect on the repairing the economy.
It’s a simple question really. If central banks can truly influence the economy, inflation and the unemployment rate, then why are central banks all behaving the same way at approximately the same time?
Why is the bank of Canada going to lower interest rates later this week? Why did the ECB lower rates last week? Why did the Federal Reserve lower rates by half a point a month ago? Why did China’s central bank lower its benchmark rate by 25 basis points yesterday?
I mean seriously, have you ever wondered why all of these central banks are setting their interest rate policy in virtual lock step?
If the currency is being devalued at 2% per year, within the life of a 30 year Treasury, the value of that bond is reduced to 55.5% of the original face value of the bond within that 30 year period. This is a silent tax on consumers, on savers, and most importantly on the debt. The government needs that debt to be depreciated away. There is no magic behind the 2% number. It seems that 2% is large enough a number to have the debt whither away, but not so large as to cause a revolt among the population.
When consumer prices are rising at 9-15% as we saw in the wake of the pandemic, it’s enough to cause social unrest and for governments to get voted out of power.
But it’s curious that all of these disparate economies with vastly different governments are all experiencing falling consumer price indices. It’s not outright deflation, but is squarely in disinflationary territory. Can governments take the credit, or should they take the blame for printing money like drunken sailors?
On today’s show we are talking about how to evaluate a bid from a subcontractor.
If you follow the procurement method used by most government departments, in the US and in Canada, the process makes sense.
Everyone needs to meet the minimum requirements. For all those who meet the minimum requirements, the purchaser will select the lowest bidder.
Intuitively this makes sense. But it puts the burden on the purchaser to specify every aspect that matters to the buyer.
My mentor Dr. Nido Qubein says that when the value is unclear, the discussion always degenerates to price. All other things being equal, then price would be the only remaining differentiator.
But some things are subjective and not just functional. When an architect designs a building for you, there is a complete set of drawings. These drawings are then supplemented by another document which details the specifications. In most of our projects, this spec document is somewhere between 600-800 pages in length. Even then, it doesn’t capture everything that we would want in the products used in our finished buildings.
The specifications fall into several categories. First there are those specifications that are required by the building code. Two of the most difficult items to specify are the product longevity and the product quality.
If you are specifying a paint, the paint can have different qualities of durability. What is the solid content of the paint?
What is the durability of a product? How many years will a wood floor finish last in a high traffic area?
Some products feel cheap, or look cheap even if they’re not. How do you specify that you don’t want the ceramic tile to look cheap?
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Hunter Webb is in Lisbon Portugal, where he is a principal at DeepRent.ai. On today's show we are talking about how artificial intelligence can automate the management of a portfolio of storage facilities. To connect with Hunter and to learn more, visit deeprent.ai
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Eddie Lack is originally from Sweden. He moved to North America to play professional hockey with the Vancouver Canucks, the Carolina Hurricanes, the Calgary Flames and the New Jersey Devils. Today Eddie is based in Scottsdale Arizona where he is building luxury homes. Not the typical career path into development. Eddie has built his skills methodically over time. To connect with Eddie visit eddielack.com
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On today’s show we are taking a look at a couple of global companies. I’m reading front page articles in the WSJ and others suggesting that economists are thinking that the chance of recession in the foreseeable future is vanishing.
The world seems to have embraced a new form of double speak.
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On today’s show we are continuing our series on international outlook. There are many jurisdictions that position themselves as great retirement destinations. If you’re visiting, then you can usually stay in some places up to 90 days on a visitor visa before you need to leave. Some places allow up to six months. But if you’re looking for a location for a winter residence and want to stay longer than 90 or 180 days then you will likely need a residency visa.
Some countries offer a lengthy process for a residency visa. But if you’re willing to make an investment in the country, there is often an accelerated process.
Choosing a destination involves a number of considerations.
- What is the climate?
- What is the culture?
- Are you going to be welcome in the country and is it safe?
- Is the legal system going to be familiar with first world norms with fee simple title?
One of the interesting locations is Panama. Panama has a Qualified Investor Visa program that grants you Panama permanent residency by investment.
The Panamanian government has relaxed certain measures for foreign investors. First, it extended the availability of a reduced minimum investment amount of USD 300,000 for foreign nationals by another two years.
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On today’s show we are taking another look overseas. We are accustomed to places where there is growth. We don’t really know how to invest in places where population is shrinking.
Today’s show is the story of Nadia. My wife and I met Nadia when we were on vacation in Mexico a few years ago. Nadia was born in Germany and she has lived in Ireland and the US. She married an Irishman who was in investment banking and moved to the US. The marriage didn’t last and Nadia found herself on her own. She has a few close friends and a few years ago she decided that she wanted to travel the world. But she didn’t have the funds to do it all. She figured that if she found a place in Europe that was inexpensive, she would have enough funds left over to travel as much as she wanted.
After all, destinations in Europe are very close and flights on discount carriers can be real bargains. Often the taxi ride to the airport is more expensive than the flight. Carriers like Easyjet and Ryan Air pioneered the discount carrier model in Europe. Today Air Berlin, Blu Express and many others offer amazing deals.
So Nadia moved to Bulgaria an bought a home for 8,000 Euros. She put a few nickels into fixing it up and her total investment was around $20,000 Euros.
Today Nadia has a new boyfriend. He’s an Englishman and they spend their savings on traveling around Europe mostly. Next year they’re planning to visit Machu Pichu in Peru.
Now just in case you’re wondering if this is an outlier, I did some additional research. I searched for properties under $30,000 across Bulgaria and I found hundreds.
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On today’s show we are talking about why Germany’s economy seems to be stuck in reverse. We keep hearing about how Germany, which has traditionally considered the economic engine of Europe is struggling. The German government recently downgraded their economic outlook and are forecasting contraction well into next year. The ECB is forecast to drop rates this week in order to further stimulate the economy. But I believe Germany’s issues are structural.
Here are the factors that in my opinion represent significant structural headwinds for the German economy. These headwinds are not isolated to Germany. We are just seeing them align together all at once in a single location.
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On today’s show we are talking about demographics and migration. This is a topic you’re going to hear a lot more about in the coming weeks and months. Demographics is like a law of physics when it comes to real estate investing. It’s like gravity. It’s no surprise that fertility rates are well below the rate required to maintain population constant.
If you want to examine at what declining population looks like, you only need to look at Japan. Japan’s fertility rate has been below the minimum 2.1 required to maintain population constant for a long time. Japan’s population has been declining sharply for the past 15 years. There are now 11M empty, vacant homes in Japan.
So when we look at our future, we need to look at those places in the world where people have walked before us. Now some people are quick to dismiss the comparison. After all, Japan is nothing like North America.
We tend to buy into the narratives that promote investing. We need to be very mindful of oversupply. When oversupply happens in a market, and when demand drops, bad things happen.
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Robby Butler is Director of Capital Markets at Y Street Capital. On today's show we are discussing some of the nuances of conversations with potential investors. How does a conversation become a consultative process versus a sales process?
To connect with Robby you can find him on LinkedIn or at Y Street Capital www.ystreetcapital.com or email him directly at robby.butler@ystreetcapital.com.
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Clayton Young was one of two long distance runners who enabled the US to qualify for the Olympic Marathon in Paris. On today's show we're discussing Clayton's 9th place finish in the Paris Marathon and the entire experience from the preparation, the aftermath and now the preparation for the New York City Marathon in early November.
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On today’s show I’m going deep into a planning rationale that was presented to an information session at Colorado Springs City Council earlier this week.
Whenever you are presenting a concept to the city, you are asking for them to vote in favor of your project. In order to make an effective presentation you have to put yourself into the shoes of the person sitting in the council chamber who is tasked with listening to your proposal and then at some point in the process voting in favor or against your project.
You can see the entire segment of the meeting in front of Council here --> https://youtu.be/3Lan3yvHcvQ
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On today’s show we are talking about quarterly goal setting.
Our company uses a system that has become very popular among companies both large and small. We use the EOS based on the book Traction by Gino Wickman. EOS stands for the Entrepreneurial Operating System. We review our results against the goals we set for the past quarter and we set the business imperatives for the quarter. A business imperative is called a ROCK. This is something that we treat as a top priority. It is something that is tracked on a weekly basis. So on today’s show I’m going to outline one of the Rocks for the quarter.
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I had dinner last night with a commercial lender from Cleveland, Ohio. The lender had their Lead underwriter with them. We had an extensive discussion about all of the ways that borrowers are lying to themselves.
We see this type of problem whenever we are conducting due diligence on opportunities that are presented to us. We see all kinds of underwriting errors. So on today’s show we are going to cover the top ways in which investors lie to themselves.
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A few weeks ago I did an episode on hurricane preparation. Great ideas for storm preparation are fantastic until reality sets in.
Hurricane Milton is scheduled to make landfall in Florida on Thursday. The storm will weaken as it makes landfall. However the size of the storm is such that traversing the land of the state of Florida will not take that much energy out of the storm by the time it reaches the Atlantic coast. Properties along the Gulf coast definitely need to expect a severe storm. But central Florida which is inland also needs to be prepared.
This hurricane is so intense that our team had to make a priority decision between evacuation or additional storm preparations. Naturally, and quite correctly they chose to evacuate. The number of people clogging highways heading North and out of the state has already created massive delays. Friends of mine as far south as Fort Myers are evacuating.
Unfortunately we have a few shipping containers on site. They are not weighted down, nor are they anchored in the ground. With the right wind conditions, they will likely be destroyed even though we are nearly 70 miles inland from the coast. Again we had to make the decision to prioritize evacuation of people over protection of property.
We verified our builders risk policy coverage and we believe we have ample insurance coverage. Now we can only wait for the aftermath when we can survey the damage.
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Today’s show is another in our beginner series. Our listeners are sophisticated. Many of you own large portfolios of apartments. But you also have people in your life who are interested in learning more, but maybe don’t have access to high quality information. The idea of sending your spouse to a $199 weekend bootcamp for beginners where they are going to be abused by sleazy sales people sounds unthinkable. So where do they go. Look no further. We are going to dedicate a couple of shows a month to topics that will accelerate the learning for less experienced investors, and might give the most sophisticated investors a new way of explaining a concept that is otherwise complex to describe.
On today’s show we are talking about flipping. I’m hearing a lot of investors who are currently advocating shifting focus to house flipping at the moment. I’m really wondering what is behind that.
Market conditions that favor house flipping include:
- The ability to purchase distressed properties at a deep discount to the market.
- A shortage of supply for finished homes in great areas
- Availability of construction labor and materials at low enough prices to make the numbers work.
- Fairly fast movement of properties on the open market.
When pressed about why flipping is the strategy for right now, the answer invariably is the desire for short term projects where you can turn a profit in a short timeframe.
It is true that flips can be short term projects. But as in all real estate related projects you need clarity on the source of income.
Income can come in one of three ways
- Earned income
- Residual income
- Capital gains.
These are the only three. Those engage in flipping activity are absolutely in that first category, earned income. You need to be doing transactions on a continual basis. If you stop doing deals, then the income stops. It is active earned income.
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Today's show is a talk that I gave recently to a live audience on how we transformed a project from merely OK to much stronger by repositioning the product design.
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George Ross is famous for his previous role as Executive Vice President in the Trump Organization. Today George is an advisor to our firm. On today's show George is discussing the merits of a potentially hazardous dual relationship. The party could be a supplier to a development project and an investor. George is advising on the safeguards to protect the project.
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On today’s show we are talking about a new program in Philadelphia. Philadelphia is a city that I know well. I’ve been developing in Philadelphia since 2011. Our last new construction project we started in Philly was in 2017. Several communities across the United States have experiments with a new form of mandated settlement called diversion.
After a trial period, the city in June made it a permanent requirement for landlords to go through out-of-court negotiations with tenants before they can sue to remove them.
If the two sides can’t reach an agreement, the landlord can move forward through the typical eviction process. Just over half of all cases eventually end up in court, according to one 2023 study.
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We're inviting you to participate in our annual Goals Retreat in mid-November. For the last five remaining tickets, we're offering a 2 for 1 special. You can bring a business partner or spouse for the same price as a single full ticket. To find out more, send an email to goals@victorjm.com.
On today's show we are looking at some new research published in Nature Magazine earlier this year. It found that frack water in the Marcellus shale in Pennsylvania had high concentrations of lithium. The original paper can be found here.
The research found that the concentrations of lithium in Pennsylvania shale frac water might be able to meet up to 40% of the US domestic demand for lithium. This is a huge and unexpected finding.
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On today’s show we are talking about the aftermath of major weather events.
Many of you know what a flood zone is. That’s a low lying area that is prone to flooding and is not suitable for building.
What you may not know is how an area becomes designated as a flood zone. What happens if you have a property and it gets buried by a few feet of water in a weather event? Precisely who gets to say that your property is a flood zone?
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“Be the Unicorn: 12 Data-Driven Habits that Separate the Best Leaders from the Rest” by William Vanderbloemen is a compelling guide for anyone looking to elevate their leadership skills in today’s fast-paced and ever-evolving business landscape.
The book is the result of collating research in that vast body of experience to identify what sets those high performing leaders apart from the rest of the pack.
Some people think that leaders are born, others are molded.
The good news is that the 12 traits are not just character based. Character can’t be quickly developed. It’s part of the makeup of the human being. Some people have strong character and others just don’t. The 12 differentiators are habits and habits can be taught.
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On today’s show we are taking a look at the inland port.
North America is about to experience a labor disruption of epic proportions. If we look beyond the immediate, there is a lot going on in shipping behind the scenes that most people are largely unaware of.
But first we need to be aware of the impact that the disruption of the ports can have not just on imports that we are accustomed to enjoying. Much of the products we purchase in a retail store enter the US and Canada via shipping container. Most major retailers have been building inventory over the past six months in order to mitigate the risk of a work shutdown on October 1.
But on today’s show I’m looking beyond the strike. This is after all a real estate podcast. So we are going to focus on the real estate and logistics of shipping.
Many of you might remember the congestion at the port of Los Angeles and the port of Long Beach in California during the pandemic. The solution to this logistics problem is to move the port to a new location where there is more land available. Now the port of Long beach is not exactly small. It consists of 3200 acres. There are 10 piers and space for up to 80 ships at a time. It’s a huge port, but not large enough.
The new seaport is located miles from the ocean in the state of Utah. There are in fact five locations in the state of Utah that form the inland port. The largest is 16,000 acres.
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Otis Odell is a principal at HED, a national architecture and design firm where he is the sector leader responsible for multi-family, senior housing, and hospitality to name just a few. On today's show we are talking about some of the trends in new construction and the thesis for building affordable housing. To connect with Otis, visit hed.design.
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Anthony Scavo is based in Westchester NY where he runs Basis Industrial, specializing in value-add and development of small bay industrial projects. On today's show we are talking about what Anthony is seeing in the segment of the market. To connect with Anthony, visit basisindustrial.com or email him directly at anthony@basisindustrial.com
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On today’s show we are talking about two words. These two words are so simple. We hear them in everyday language. But their meaning can have profound financial implications for you on your projects.
The two words are "substantial completion".
The American Institute of Architects defines substantial completion as,”the stage in the progress of the Work when the Work or designated portion thereof is sufficiently complete in accordance with the Contract Documents so that the Owner can occupy or utilize the Work for its intended use.”
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On today’s show we are talking about pharmacies. It used to be the case that pharmacies were considered AAA tenants when it comes to retail. There was an entire industry of land owners who had developed tax sheltered land offerings for investors seeking safe investments that would defer capital gains tax.
On today’s show we are looking at the pressure facing large pharmacy chains and why they are closing locations by the thousands as well as the impact on those communities, the retail landscape.
Why are they dying and what will replace them?
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On today’s show I’m sharing what I’m learning at a conference. This is a small exclusive conference being held in a boutique hotel in Asheville NC. The conference is hosted by a large institutional lender and the attendees are mostly developers and investors in the lenders fund. There are about 80 attendees in the room. It’s a small intimate event where we have the opportunity to truly connect and learn from one another.
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On today’s show we are talking about how to secure a construction site. In any construction site there is a trade-off between efficiency and security.
When we are talking about security, there are three main aspects we are most concerned with. The first is for the safety of people who are prone to wandering onto the site outside of construction hours. The second relates to loss of valuable equipment and materials. The third layer is protecting the environment.
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On today’s show we are addressing a diversity of opinion on how valuation is determined for land in residential subdivisions. We recently had a builder assert that our pricing was too high for residential lots in a subdivision.
At the same time, we have also been successful in developing residential lots and selling them in the marketplace to builders across multiple markets.
When we price our land, we always perform residual land value analysis as part of our due diligence.
We put ourselves into the shoes of the home builder and reverse engineer their cost structure.
So if we are talking about a single family home subdivision, we subtract the builders profit from the retail price, then we subtract the hard cost of construction, the soft costs like permit fees and insurance, interest reserves, the builders general conditions. What’s left over is the price that the builder can pay for the land and still have a profitable business.
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Amy Johnson is based in Salt Lake City where she is a partner at Y Street Capital. On today's show we're talking about how she went from high school teacher to developer. To connect with Amy, visit ystreetcapital.com
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Alec Denney is based in Denver Colorado, but is a global nomad at heart. Through his journeys with partner Krista Fettke, they have built an international business focused in helping US citizens buy properties in Europe, Mexico, and Panama. In some cases the golden visa programs can provide a pathway to residency or citizenship for those seeking a second home.
To connect with Alec, visit gatewayinvestors.com or reach out to him directly at Alec@gatewayinvestors.com.
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Today’s question comes from Ramon who writes:
"Many thanks once again for providing such great information and insightful perspectives on so many important topics.
Writing to ask about something I heard from one source, but cant find much information to support (or refute). We all know insurance premiums have been increasing across the board. The common narrative is that insurance claim payouts for various events (eg, fires, hurricanes, etc) have increased substantially as more of those events have occurred in recent years. While that may be one of the reasons, I heard some information that suggested that a bigger cause is insurance company losses (or anticipated losses) in their CRE portfolios (eg, increase in loan defaults, office building vacancies, etc). Wondering if you have heard anything about this. "
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On today's show we're dissecting yesterday's Fed rate cut announcement and what it means for us as real estate investors. The most meaningful part of the press conference was during the Q&A period when Chair Powell said that members of the FOMC shared their view in an informal poll. 17 out of 19 members said that they thought three more rate cuts would be appropriate in the next 12 months and that 10 out of 19 said that four more rate cuts would be appropriate in the next 12 months.Of course this informal poll of the members doesn’t identify which 12 members are the actual voting members at the time. Nor is it a commitment on a position in the future. Chair Powell was careful to say that they are making data driven decisions on a meeting by meeting basis.
There is an interesting paper published by the Fed which links rate announcements to bank rates for certificates of deposit. Here is the link to the paper
https://www.federalreserve.gov/econres/feds/files/2014108r1pap.pdf
The announcement is extremely helpful when it comes to investor psychology. It’s much more credible to have the Chair of the Federal Reserve
Saying that rates are falling than say the host of the Real Estate Espresso podcast predicting a fall in rates. None of us have a crystal ball, not even Chair Powell. But if Chair Powell is saying that Fed officials are predicting 3-4 more rate cuts in the next 12 months, we can include that in our investor communications. That doesn’t mean our borrowing rates will fall in reality. But the direction is at least somewhat clear.
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On today’s show we are talking about shingle chasers. These are the door to door sales teams that point out a problem on your roof and try to sell you on a new roof with zero out of pocket cost to you.
The scam works like this: Contractors knock on doors offering to inspect homeowners’ roofs for storm damage. They say they can help get a roof replacement covered by insurance, and they persuade the homeowners to sign away their rights to file the claims themselves. At that point the homeowner loses control over the claim and the contractor can sue the insurance company. But it's still the homeowner's insurance. The resulting settlement might be even higher than the original claim. But the first claim was fraudulent.
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I
On today’s show we are taking a look at an impending risk. We have talked about this on the show in recent weeks.
There have been several news reports in the mainstream media about an impending labour strike by US Longshoremen on October 1. There are reports in Reuters, Bloomberg, CNBC and others.
The international longshoremen’s association held a two day meeting on September 4-5 with their wage scale delegates. At the end of two days, the delegates voted last week unanimously to strike on October 1 if a new contract is not negotiated by Sept 30. The longshoremen are looking for a 77% increase in their wages over the life of the contract. They are also looking for assurances that jobs won’t be lost to automation. By comparison, their West coast counterparts received a 32% wage increase in their most recent contract negotiations.
Nearly 10 days later and no discussions have taken place between the ports and the union.
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On today’s show we are talking about a new paper published last Friday by Brent Johnson and Michael Peregrine of Santiago Capital. Brent Johnson is famous for his dollar milkshake theory.
This 44 page article is a deep dive into the Japanese carry trade. Many of you might remember a banking crisis that erupted in Japan last month as a result of the implosion of widespread carry trade activity.
While the Yen is likely to rise in the short term when the carry trade truly blows up, it is probably going to fall after that. As I said, the BOJ can protect the bond market or the currency, but not both.
So why do we care about this? If Japan dumps a trillion dollars worth of US Treasuries in a short time period, we could see the supply of US Treasuries exceed demand. That means a sharp and unexpected rise in the yield for US Treasuries which will impact the cost of borrowing for real estate investors. Just because the Fed is in a lowering cycle for the Fed Funds rate, doesn’t mean that the cost of borrowing for real estate investors will follow suit.
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Kevin Amolsch is a principal at Pine Financial, based in Denver Colorado. His firm lends locally in Colorado, Minnesota, Wisconsin and DC. On today's show we are talking about the criteria for lending and what makes sense for their business in the current environment.
To connect with Kevin, visit https://pinefinancialgroup.com/
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On today’s show we are talking about how to find good data.
Last night I hosted an event and invited the Keynote Speaker from Costar to present to our audience. It was a great presentation and the speaker had lots of relevant statistics that would be of interest to anyone in my local market. There were numbers on multi-family apartments, on office, industrial.
During the informal part of the evening we got into a debate about the best sources of data. Every company that specializes in analytics seems to have their own special sauce for how they gather and validate their data.
Some property management companies like Yardi and Realpage also have data analytics products. Both companies are leaders in property management and they can rely on the vast quantity of data that is hosted in their system to provide an accurate picture of the market, but only for the properties they have viability of.
Companies like Costar and ALN use a more old school approach. They have legions of analysts who will monitor the market and pick up the phone and call property owners when a transaction takes place on a commercial property. They will call the property managers at a property and interview them. It’s hard to know whether the property managers are being fully honest in the interview process.
One of the reasons why the reports differ has to do with the methodology.
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On today’s show, we are looking at what global commodities prices are telling us very clearly about the global economy. You can manipulate inflation numbers. You can adjust GDP numbers. You can even fudge the unemployment rate.
But what thing we know beyond a shadow of a doubt is that when demand exceeds supply prices rise, and when supply exceeds demand, prices fall. When we think of pricing, some prices only fluctuate in one direction. Salaries go up and they rarely go down.
But for commodities, prices have no real ceiling, nor any real floor. So looking at commodity prices can tell you more about the general economy on a global basis than any report from any one government.
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On today’s show we are talking about storm preparations. Hurricane Francine is making landfall along the Gulf coast as we speak. Our team owns and operates multiples properties along the Gulf coast. When a tropical system starts to form in the Gulf of Mexico we take notice and pay attention to the storm track several times a day.
Preparation involves communicating with residents to be ready for any eventuality. That means the possibility of an evacuation. If an evacuation is imminent, what will be the route? Will you be heading to safety or into the path of the storm?
On today's show we are sharing our experience on how best to prepare.
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We’ve all heard the rhetoric. The US has the best health care in the world. That’s true for some who can afford to pay for it. But on average, that’s not true.
On today’s show we are going to look at a report published by the Commonwealth Fund a little over a year ago. It was also reported in the American Journal of Managed Care earlier this year.
Now you might wonder why we would focus on this on a real estate podcast. Well, it’s because anywhere there are problems, there is a solution waiting to be implemented. Often, any large scale solution has a real estate component to it.
According to the Commonwealth Fund report, United States experiences the worst health outcomes overall of any high-income nation.
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On today's show we are talking about a globally synchronized economic slowdown.
Canada reported its employment numbers late last week and the Canadian unemployment rate rose to 6.6%, the highest level in 7 years. We reported last week that the
We got the latest employment report for the US on Friday. The BLS reported numbers for the month of August. But at the same time that they reported August, they revised the numbers for June and July.
The change in total nonfarm payroll employment for June was revised down by 61,000, from +179,000 to +118,000, and the change for July was revised down by 25,000, from +114,000 to +89,000. With these revisions, employment in June and July combined is 86,000 lower than previously reported.
The bureau also reported that the unemployment rate fell to 4.2% in August from 4.3% in July. This reversal in the unemployment rate could affect the size of interest rate cut that is expected to be announced on September 18 when the Federal Open Market Committee meet on the 17th and 18th of this month.
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Tony Lopes is based in New Hampshire, but invests in the sunbelt of the US. On today's show we are talking about the macro trends that will affect demand for rental housing in the next decade. To connect with Tony, email him directly at tony@dirtybootscapital.com or visit his website at https://dirtybootscapital.com/
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Chris Lento is based in Boston, and his firm is investing in multi-family assets in the Southeast. On today's show we are looking at his assessment of the market conditions.
You can connect with Chris at his firm EM Capital Group at emcapitalgroup.com
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On today’s show we are talking about invasive species of plants that can play a role in your due diligence when purchasing property.
The first one I’m going to cover today is Wild Parsnip. Wild Parsnip is an invasive plant native to Europe and Asia.
Like giant hogweed and other members of the carrot family, it produces sap containing chemicals that can cause human skin to react to sunlight, resulting in intense burns, rashes or blisters.
The second invasive species is one that has also been around for a long time. But I was only introduced to it this past weekend. My wife and I were traveling on the Labor Day weekend on Long Island and it was everywhere. The banks of most rivers and canals were covered in it. The plant is Japanese Knotweed. Its stalks can grow up to 3 feet in a week. It is invasive and it is relentless.
Both plants can take years to eradicate from your property.
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On today’s show we are seeing another central bank drop their benchmark lending rate. The Bank of Canada dropped its benchmark interest rate for the third time in a row, leaving the rate at 4.25%. This is in stark contrast to the US Fed Funds rate which remains at 5.25%-5.5%.
Each country seems to behave like they are economic islands. But we have a globally interconnected economy and no country is an island unto itself.
We are not insulated from what is happening in Europe, or in China. We have a globally synchronized economic cycle that is being influenced by factors that are well outside the control of central bankers. Nevertheless ew have central bankers acting as if they can pull one lever with the left hand and slow down the economy, and gently pull another monetary policy lever with the right hand and accelerate the economy.
There is no question that we are seeing sustained economic slowdown in the US, in Europe, in Canada.
This is one of those good news bad news stories. Central bankers don’t aggressively lower rates unless they see a problem in the economy. Lowering rates is good news for borrowers, but it is really a reflection of bad news, This time it is being coupled with a good news narrative. We should be wary of the story that says this time is different.
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On today’s show we are taking a closer look at a new and emerging trend in building construction. This is a newer segment which fills a gap in the definition of building types.
At one end of the spectrum for senior housing you have a simple market rate apartment which offers no services and will usually include basic amenities. As adults age, they might progress through various offerings starting with independent living, assisted living, memory care and then skilled nursing. Each of these product offerings are distinct in the market and have pretty well accepted definitions of which services are included at each level of care.
There is a new report out from the National Investment Center for senior Housing and Care which focuses on the Active Adult Segment. We are very interested in this segment because it fills a sizeable gap between the market rate apartment and the independent living product.
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On Thursday evening I passed by New York’s leaning tower. We’ve all heard of the Leaning Tower of Pisa. The modern day equivalent of that is the Millennium Tower in San Francisco. That building is leaning nearly 60cm, a little over 2 feet. Several attempts have been made to stabilize the Millennium Tower by underpinning the foundation and have actually destabilized the building even further.
New York’s leaning tower is right on the East River and I was speaking on a yacht full of investors while taking a tour of NY Harbor. I got a close up first hand view of the building. We passed my so many iconic landmarks from the water including Rikers Island, Ellis Island, Lady Liberty, the Battery, the new Freedom Tower. I was even able to get a photograph of one of my mother’s buildings from the water. She was an architect in Manhattan at one of New York’s premiere architecture firms.
The building in question has been fully erected, all 60 stories of poured concrete. It's all happening over at One Seaport or 161 Maiden Lane: 60 storeys of prime real estate on Manhattan’s East River waterfront. At first glance it may look like any other construction project downtown. But look a lot closer, and you’ll find it’s actually leaning 8 centimetres, or three inches, to the north. The North side of the building consists of a sheer wall made of solid concrete. It’s an incredibly narrow building. From the water it seems pencil thin.
Manhattan island is ideal for building tall buildings. Most of it sits on solid bedrock which is made mostly of slate. But a building which is directly on the East River will have brackish salt water do contend with at the foundation level which will make the soil underneath the tower more fluid.
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This question also comes from Chris who is asking a follow-on question from last week’s question on apartment turnover. Last week Chris was asking about how long to budget for making a unit rent ready. So here is his question.
“If the average apartment turn requiring cleaning and “light repair” is around $2,000 shouldn’t the tenant security deposit collected at lease signing be no less than this? Or am I thinking about this wrong and one has nothing to do with the other? I’m simply approaching this with a mindset that you want to try and avoid being in the red for apartment turns coming out out of your pocket.”
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Nate Silver's The Signal and the Noise: Why So Many Predictions Fail—But Some Don’t is a fascinating exploration of the art and science of prediction. In a world flooded with data and overwhelmed by uncertainty, Silver’s work sheds light on why so many forecasts go wrong and how we can improve our ability to make accurate predictions.
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Mark Livingston is based in Houston Texas. On today's show we are talking about storage in Houston and a collaboration between Mark and our development firm Y Street Capital. We will be hosting a webinar this coming Wednesday at 6PM CDT, 7PM EDT to share more details about this upcoming project.
To register for the webinar, visit
https://event.webinarjam.com/register/34/ooq9xuwg
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Today’s episode is another AMA episode. Today’s question comes from Chris who asks:
What is an acceptable apartment-turn timeframe (how many days should it take to fix and be ready for next tenant) and how much should those make-ready costs look like between tenants?
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At Y Street Capital we bring in young professionals from time to time to work as interns on a part time basis to learn more about real estate investing and development. These unpaid internship positions foster a win-win relationship that can often accelerate the learning for a young adult. At Y Street Capital we are looking for a research assistant to work for a few hours a week on special projects. Some of that work will also include the background research that could ultimately result in episodes of the podcast. If you have a few hours a week to spare and are a candidate, or perhaps you have a young adult in your life with a high level of curiosity. Send an email to podcast@victorjm.com and put the word research in the subject line.
On today’s show we are looking at how to create leasing incentives that preserve the value of your building.
Most building valuations are based on the income method which involves taking the gross rent, minus the operating expenses to get the net operating income. You then divide that amount by the market capitalization rate to get the value.
Let’s say that you want to offer a bunch of incentives for new tenants to move into your building. You could offer a discount on rent which would result in a reduction in rent and therefore a reduction in the value of your building. If you offer the tenant something that costs you money to provide, then your expenses increase and you have the same effect of lowering the value of your building.
In a brand new building you will want to pre-lease as much of the building as possible. Many developers I know have 30% pre-leasing as a target to achieve by the time the building is ready to open. But in order to achieve that, tenants need to plan on moving when the building is completed, not necessarily in 30 days or 60 days when it might be otherwise convenient for them. It’s a longer sales cycle.
From an accounting standpoint, investments in the building assets are associate with the balance sheet and not the income statement. For example the materials that go into the building like paint and gypsum board and bricks are all part of the capital improvements. A capital investment is amortized over the depreciated life of the asset. Some startup costs can be capitalized. For example if you have marketing expenses that are associated with the initial lease-up of the building, it would be legitimate to capitalize those costs instead of expensing them since they are a one-time cost and not a recurring cost.
So let’s imagine that you offer a free large format television as part of a move-in special. The cost of that TV can be capitalized. While it appears as an incentive to the tenant, it doesn’t get treated as an operating expense to the business and therefore the cost of the TV doesn’t reduce the value of the building when looking at multiples of net income.
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On today’s show we are talking about air rights.
Air rights refer to the legal ability to control, lease, or sell the space above a property. Traditionally, property rights included not only the land and any buildings on it but also the air above and the ground below. The concept of air rights date back centuries and are ingrained in common law. The biggest change to air rights came with commercial aviation which put the ownership of the atomosphere in the public domain while preserving private ownership of the air immediately above a property for the enjoyment of the property owner. Exactly where private property rights transition to the public domain varies by location and by jurisdiction.
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For the past several months I’ve been predicting that the Fed will need to pivot on their interest rate policy.
As recently as Thursday of last week I predicted that the Fed would have no choice but to drop interest rates based on labor market weakness. I also predicted that we would hear some meaningful update at the Jackson Hole conference in Chair Powell’s remarks on Friday morning.
I don’t have a crystal ball, although I expect to some that it might seem like I do. On Friday morning Chair Powell did indeed announce a major change in monetary policy. There were a few things that Chair Powell said in his remarks that were significant.
He declared a bit of a victory lap on the inflation fight, even though the disinflationary progress has been gradual over the past year.
The real story behind the Fed pivot is unemployment is rising sharply.
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Hubert Johnson is a tax lawyer with Guardian Tax Law based in Tucson Arizona. On today's show we are talking about resolving problems with properties that have tax liens filed against them. You can reach out to Hubert at 520-526-9850 or visit their website at guardiantaxlaw.com
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George Ross was executive vice president in the Trump Organization for many years. On today's show George shares his perspective on the current election.
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On today’s show we are talking oil and gas investing. I recently had an investor ask about investing in oil and gas. So on today’s show I’m going to tell you the story of my foray into the world of drilling oil wells in the back woods of Kentucky.
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If you’re been listening to this show for a while, then you will know that I’ve been saying consistently that the jobs data being reported by the Bureau of Labor and Statistics in the United States cannot be correct.
Now think about it, here is a real estate developer who happens to live in Canada stating pretty boldly that the US government is reporting data incorrectly. How crazy is that.
Well some might have been surprised that the BLS issued a revision to the past year’s numbers and disclosed that the number of new jobs reported was actually 818,000 lower that what had been previously reported.
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I'd like to invite you to be my guest for a sunset cruise in NYC on August 29 from 4PM to 8PM. We will depart from the East River and tour the Hudson River with stunning views of the NY skyline. There will be great conversation, fine cuisine, and a few presentations on alternative investments. If you're interested in learning more, send an email to podcast@victorjm.com and put "Hudson" in the subject line.
On today’s show we are looking at a new rental market report published by Zillow for the month of July.
A cooler rental market is prompting more property managers to offer concessions in a bid to attract new tenants. Though rent growth is only slightly softer than last year, far more property managers are offering short-term perks. On today's show we are going to try and make sense out of what this report could be telling us.
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I'd like to invite you to be my guest on board a tour of the Hudson River in NYC on Aug 29 from 4-8PM. We will depart from the East River in Lower Manhattan. This exclusive event is for accredited investors only. There will be great conversation, fine cuisine, an incredible view of the NY skyline and a few presentations on alternative investments. To learn more send an email to podcast@victorjm.com and put the word "Hudson" in the subject line.
On today's show we are talking about the 2024 revision of the IECC energy code which was just published last week. The National Association of Home Builders published a summary of the changes in this six page document.
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Today’s show is another in our beginner series. On today’s show we are talking about what makes a site suitable for development.
A location might seem perfect in terms of proximity to amenities, demand for housing in the area, good schools,
When I look at a site I’m considering the density that would be desirable in that location and the density allowed under the zoning. Some people look at density allowed in the zoning and think that’s the only determining factor.
This is not the whole story. If you are going to achieve a particular density, then all of the requirement to achieve that density need to be met.
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Nic DeAngelo is based in Southern California where he invests in multiple asset classes. On today's show we are focused on his favorite segment - Industrial.
To connect with Nic and to get access to their studies, visit https://saintinvestment.com/resources/
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Brandon Burns has completed more than 4000 Section 1031 transactions so far in his career. On today's show we are talking about some of the pitfalls associated with the 1031 as well as techniques to build additional safety into 1031 transactions.
To connect with Brandon you can call the office directly at 858-331-0131 or email him at brandon@vanguard1031x.com
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On today’s show we are looking at the new NAR rules that take effect on August 17 as a result of the class action lawsuit affecting real estate brokerages in the US.
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On today’s show, we are taking a look at the latest consumer price index reading for the month of July in the United States. July was the fourth straight month of declines in the consumer price index with a month over month increase of 0.2% an annual rate of 2.9%.
As real estate investors, we pay attention to this because of the influence it might have on setting interest-rate policy. The most recent federal reserve announcement which held the short term fed funds rate steady, was looking for continued progress in the fight against inflation in order to gain the necessary confidence to lower interest rates.
Many of the analysts I follow her predicting a September rate cut of something in the range of half a percentage point.
However, for real estate investors, our interest rate is determined by the yield on the US tenure treasury and for investors it is indexed to either the five year or 10 year Canadian mortgage bond.
So who sets the yield on the 10 year treasury? It’s price is determined by the laws of supply demand for those bonds.
Today’s show is covering a story that is coming out of the UK. It’s a warning to all real estate investors. While the story has not hit the US or Canada yet, I personally think it is only a matter of time.
I’ve done a bit of research on the technology. Promoters of the technology rave about the high insulation value, the excellent performance with a complete vapour barrier. The application is fast and the coverage is complete if applied properly.
These spray polyurethane foams cure through a chemical reaction that produces isocyanate vapors and aerosols. Even once the surface is dry and hard, it can take a long time for these gases to escape to the surface. Some manufacturers recommend a 24 hour waiting period and then ventilating the area until the all of the gases are out of the enclosed space.
There are some applications where quite frankly the closed cell foam is hands down the best product. The edge of the floor joists at the perimeter of a home is one such example. The traditional approach of using batt insulation and plastic vapour barrier is simply ineffective in those areas. The geometry is too difficult to seal properly.
According to a report issued in February of this year by Building Safety Regulator in the UK, there is a concern that foam insulation applied to timber sloped roofs in existing dwellings creates a moisture risk. This 76 page report outlines the research and findings.
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This question comes from Michael who writes:
One that I struggle with is as follows. Since my non qualified investments are mostly in index funds and mutual funds, my ability to deploy them for investing is limited. I can of course sell for liquidity, but incur an enormous capital gain tax (Remember for those of us in high tax states like NJ- and even worse in CA- there is a state tax on the Cap gain that be as onerous as the Federal Tax) as we have out of ignorance in the past. So there are other options- a securities backed line of credit, opportunity zones, creative use of trusts, tax advantaged investments such as oil/gas, or REP status and/or the Short term rental "loophole". I have looked at all of these. None is particularly appealing- SBLOC is likely the best, but difficult with high interest rates and finding the best lender for this purpose. So ways to address this problem and use numbers to figure out the best approaches would seem like an interesting topic to me.
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On today’s show we are looking at something that is happening in the world of global commerce that is not making headlines and explains a lot of what we are seeing in economic reports.
We have rising unemployment, and falling corporate revenues and earnings. But at the same time GDP looks to be incredibly robust, almost unbelievably robust. Are they lying at the Bureau of Labor and Statistics, or is there something else happening?
Well on today’s show I think I have found the smoking gun that is causing the confusion.
When economic weakness is upon us, you would expect retailers to reduce inventory. That’s the logical conclusion. That’s what has happened in previous economic cycles. But not now. We have retailers increasing inventory. We are seeing global shipping costs increasing and we are experiencing congestion at sea ports again.
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Patrick Grimes is based in Hawaii. On today's show we are talking about an alternative investment which consists of funding lawsuits. This is a fascinating investment instrument which I had not heard of before. As always, perform your own due diligence. To learn more, visit passiveinvestingmastery.com and also get a copy of the compilation book in which Patrick wrote a chapter by visiting passiveinvestingmastery.com/book
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Michael Vandi is based in San Francisco where he is a principal at fintech startup Addy. On today's show we are talking about how to use AI tools to accelerate the loan qualification process.
To learn more or to connect with Michael visit addy.so
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Today is another AMA episode (Ask Me Anything). Today’s question comes from Chris who asks:
“I found myself having a hard time saying no to a project that is in a great location and the seller was offering very attractive terms to the purchase. The way the purchase was being structured by the seller, they would be assuming most of the risk. However, there are still some deal breaker issues with the property. I’m still finding it hard to say no. How do you overcome that emotional hurdle, or do you even experience that kind of emotional attachment?”
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On today’s show we are talking about land assemblies.
There are basically two ways to make money with land. You can talk raw land and carve it up into smaller pieces. Or you can take subdivided land and put it back together.
The value of a parcel of land is linked to what you can do with it. If you have an acre of land that is agricultural or rural, it might be valued at a few thousand dollars per acre. If it’s suitable for a residential subdivision, then it might be a few hundred thousand per acre. If you could put a 40 story building on it, then it could be in the millions per acre. Of course there has to be demand for density in that location. You’re not going put a 40 story building out in the middle of a corn field, even if the city were to give you the zoning approval to do so. It wooden’t make any sense.
The key is to become well versed in reading the zoning bylaws so that you can identify the size and shape of property that is going to yield an increase in value when assembled together. For example, some multi-family apartment zones have minimum frontage requirements that a single tiny property won’t meet. If you can combine 2-3 of these together, all of a sudden a much bigger building becomes possible.
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On today’s show we are looking at how cities finance projects. We tend to think of funding decisions as being political. The truth is that cities do face real constraints on how they can spend money. This puts a real constraint on growth of a city as well.
There are many different types of financing that are possible at the municipal level. Certain types of debt are only suitable for some uses or project types and not for others. Today’s show is a deep dive into a few of the sources of funding cities use most often to finance improvements and growth. These types of financings are primarily located in the US. But they also exist in other locations as well.
On today’s show we are talking about some of the changes underway in energy that could have major impacts on global energy consumption and global demand for certain types of fuel.
We tend to think that the US is the world leader in technology. In many areas it is. The conventional wisdom has been that the West has the great ideas, and countries in Asia copy those ideas and reproduce them cheaper due to lower priced labour.
On today’s show we are going to challenge that conventional thinking.
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On today’s show we are taking a look at the way in which France changed the real estate component of the Paris Olympics. Over the past 50 years, and arguably even longer, hosting the Olympic Games meant constructing permanent structures that quite frankly are going to be used for only a month for the Olympics and the Paralympics which follow immediately after the Olympic Games.
The economic benefits have been short lived and hard to quantify.
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Gino Barbaro is based in St. Augustine Florida where he forms half of the Jake and Gino pairing. On today's show we are talking about the current market conditions and what to look out for. To connect with Gino, visit JakeandGino.com and listen to the Jake and Gino podcast.
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Jon Howard heads up the science lab specialty at the architecture firm of HED. He is based in Chicago, but designs these buildings nationwide. This is an interesting segment that is less dependent on economic cycles.
To connect with Jon, visit hed.design
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On today’s show we are taking another look at interest rates. We’re taking a walk through history. In Wednesday’s Federal Reserve press conference, Chair Jerome Powell suggested that there could be a quarter point cut in interest rates in September if conditions warrant. He said that rate decisions would be data dependent and taken on a meeting by meeting basis.
But I want to take you through history. We’re going to look at the Federal Reserve’s own data dating back to 1954. We would go back even further, but that’s as far back as the data series on the Federal Reserve Bank of St. Louis contains.
When we look through history we see a consistent trend. Whenever the Fed cuts rates, they don’t do it gradually. The cuts are much faster than the increases.
The graph looks a bit like a saw tooth with a gradual ramp upwards and followed by a sharp decline. We have had 12 periods of rate cuts since 1954. All of the rate cuts were steep and swift. Of the 12 rate cuts, 10 of them were associated with a recession.
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On today’s show we’re dissecting the latest Fed rate announcement. While the power of the Fed is often overstated, they do still influence market sentiment in ways that are difficult to fully dissect.
Chair Powell said in his opening remarks that the Fed was making excellent progress against their dual mandate of maximizing employment and maintaining price stability. In meetings over the past two years, the Fed Chairman has emphasized inflation to the point of sounding like a broken record.
But in some sense, none of that matters. After all, the FOMC sets one interest rate. They set the Federal Funds rate which is the rate the Fed charges its member banks at the discount window. It’s also the rate closely associated with the shortest term T bills.
The bond market determines the yield of the paper issued by the US government, and every other publicly traded bonds whether it’s British Gilts, EBC, Bank of Canada, Swiss Central Bank and so on.
In the minutes and hours following the Fed announcement, we saw bond yields drop significantly. On today's show we are talking about who wields the power when it comes to setting interest rates.
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On today’s show we are looking at the industrial segment. Warehouses and manufacturing space were the darlings of commercial real estate over the past couple of years. This segment is also showing signs of being overheated.
We have nearly 4 times the amount of new product hitting the market as we have space being absorbed.
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Today’s show is a case study in due diligence. Last week our company put a property under contract for an industrial storage facility in Jacksonville Florida. We asked the seller for the usual list of due diligence deliverables. But the seller said they were only willing to send the due diligence items after the property was put under contract.
They provided a complete due diligence file which included a phase 1 environmental study and a phase 2 on-site test results of soil samples and groundwater. The subject property has a history as an auto parts salvage yard. In 2017 a fire broke out which caused many of the vehicles, tires and petrochemicals to catch fire.
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On today’s show we are taking a look at an economic indicator. This indicator is suggesting that it’s time for the Fed to recognize the economic weakness and start cutting rates.
While rate cuts are positive for real estate investors, we have to remember that a rate cut is a sign of economic bad news. All of this despite this week’s unexpectedly high GDP measure for Q2 which was at 2.8% on an annual basis.
We are going to look at the automotive industry. There is a major shift happening in the automotive industry and it’s not making headlines.
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Mark Natale is based in Atlanta where he helps real estate developers create a brand for their properties on a nationwide basis. This was a great conversation and Mark is clearly an expert in this domain.
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Howard Lorey is based in Beverly Hills where he is the Executive Vice President and Brokerage Manager for the Beverly Hills office at Nourmand and Associates. On today's show we are talking about the changing face of brokerage and how it's impacting the luxury segment. To connect with Howard visit: https://nourmand.com/agent/howard-lorey
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A few weeks ago we spoke about the surge in residential real estate in parts of Florida. Inventories are up in several markets. But we are also seeing a surge in condos appearing on the market in South Florida. In fact, the condo sale inventory is up 90% in South Florida and the volume of transactions has fallen through the floor. The number of sale transactions was the lowest it has been since 2012 which was at the bottom of the GFC.
We now have 8 months of inventory for condos as compared with last year and the sales statistics for 2024 to date are even lower than 2023.
Naples Florida has 12.5 months of supply in the condo market compared with 3.8 months at the same time last year. Active inventory is up 204%.
Sarasota has 3,600 condos for sale, an increase of 87% compared with the same time last year. Tampa has a 6100 condos for sale. These numbers were not seen since 2011.
The redneck Riviera is also seeing a surge in inventory. Pensacola’s inventory is up 148%. Destin has 11.7 months of inventory.
We’re talking strictly the condo market.
But Florida has a unique situation. If you remember the Surfside condo building that collapsed three years ago killing 98 people, the state of Florida implemented two new sets of regulations aimed at improving the safety of condo buildings. The first regulation instituted mandatory engineering inspections of condo buildings on a prescribed schedule.
The second regulation implements a strict set of guidelines for the condo corporation’s reserve fund.
These two factors are causing condo fees to increase, on top of the rising expenses associated with insurance. This is resulting in special assessments of in many cases tens of thousands.
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On today’s show we are talking about what in some locations is a scarce resource. The headlines decry shortages of fresh water. Certain water sheds have been abused over the past century. The Colorado River is one example of those powerful rivers that seemed limitless. It flows through 7 states and 2 states in Mexico. So many communities along its path would not exist if it were not for the water supplied by the Colorado River. The Colorado river has been so exploited that it no longer reaches the Pacific Ocean.
But the truth is that the planet is covered by 70% water. We are not going to run out of water any time soon. I know what you’re thinking. The oceans are salt water and we need fresh water.
Fresh water is basically ocean water that has been distilled through the process of evaporation and then being deposited in the form of rainfall. Some areas are blessed with more rainfall than others.
We often hear about problems with wastewater sustainability.
The fact is, water is incredibly cheap to turn into drinking water. We tend to think of it as expensive. But in truth, it is very inexpensive. Reverse osmosis technology has been around for a long time. What we are really talking about is the amount of energy required to purify the water.
Let’s put this into the context of a domestic water bill. If you are starting with a fresh water supply and then the city puts the water in reservoirs, purifies and treats the water, distributes it in pipes to all the homes, and then collects all the wastewater and treats the wastewater.
In the city of NY, this comes to 1.7 cents per gallon to supply the water and then to collect and treat the wastewater.
The energy required to produce a gallon of water through reverse osmosis is 0.4 cents per gallon. So if we had to treat the water and the wastewater the same as today and then insert a reverse osmosis system to purify sea water, we would be talking about increasing the cost of producing fresh water from 1.7 cents per gallon to 2.1 cents per gallon. This is hardly the crisis of the century that threatens the very existence of the human race.
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On today’s show we are taking a look at the most recent announcement from the Bank of Canada. Today the Bank of Canada lowered its benchmark rate by 0.25% to 4.5%. That means the US and Canada have a full percentage point difference between the benchmark lending rates of the two central banks.
This makes for two back to back rate cuts in Canada. The Bank of Canada cut its key lending rate by 0.25 back in June.
The message from the Governor of the Bank of Canada was that lower rates were appropriate in order to stimulate economic growth. The economy is generally weak. Debt levels are nearing record levels and higher interest rates are making housing increasingly unaffordable.
Inflation fell in June after a small bump in May. In June the inflation rate was at 2.7% on an annual basis. It’s still above the central bank’s 2% target, but the falling demand in market seems to be having a disinflationary impact on a broad set of goods.
This means that real estate investors are starting to see some relief. The yield on the commercial mortgage bond has been dropping steadily over the past month. As of today, the 5 year CMB is yielding 3.54%. The best commercial financing available in Canada is priced 0.35% higher which would put the interest rate at 3.89%. That’s a very good rate and is considerably better than rates that most US investors are getting from agencies like Fannie Mae and Freddy Mac which today are pricing at 5.82%.
That’s nearly a 2% spread between commercial mortgage rates in Canada versus the US.
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On today’s show we are talking about cognitive dissonance. Cognitive dissonance is the discomfort a person feels when someone's behaviour does not align with their values or beliefs. Cognitive dissonance occurs when a person holds two contradictory thoughts at the same time.
Here’s an example. Ice cream is bad for me. I want some chocolate ice cream. These two thoughts are seemingly at odds with each other.
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On today’s show we are talking about mission critical systems and the design principles that sit at the core of these systems. We keep hearing about catastrophic outages of key infrastructure.
A few weeks ago the city of Calgary was facing a severe water outage.
Over the past month, the network of Chrysler auto dealerships was facing a system wide outage that persisted for several days.
This past week, the vulnerability was punctuated by the flawed software update rolled out by cyber security firm Crowdstrike.
The Crowdstrike update affected airlines, banks, retailers, and countless other businesses. Thousands of flights were canceled over the past three days and the airline industry has still not recovered.
In order to create a system that is tolerant of failures, there are two main principles that must be followed.
- there can be no single point of failure
- No single point of repair
No single point of failure means that you have to design redundancy into your system. If your internet service comes from a single provider, then you have a single point of failure. Maybe you should have more than one internet service provider so that if one goes down, the other should still be in service. But if the optical fibre for both carriers travels through the same conduit, then that single conduit could become your single point of failure.
Resilience is the result of a way of thinking that starts with identifying those single points of failure.
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On today's show we are talking about why many people fail to achieve their goals. There is a distinct process that results in a better track record for achieving goals.
You're invited to our annual goal setting retreat coming up on November 10. This intensive workshop requires focus and hard work in order to set great goals.
To learn more, send an email to podcast@victorjm.com and put the word Goals in the subject line.
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John David is based in Miami Florida where he assists developers with public relations on a nation wide basis. On today's show we are talking about the strategies that are most effective when dealing with community opposition to projects. To connect with John, visit davidpr.com
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On today's show we are talking about how the US Federal Government manages and disposes of about 1/4 of the entire land mass of the United States. There is a handy report published by the Congressional Research Service which summarizes all of this. The report can be found at
https://crsreports.congress.gov
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On today’s show we are taking a look at what the bond market might be signalling when it comes to the US economy and the global economy.
We have known that the yield curve has been inverted for a record period of time, more than 2 years as of now. An inverted yield curve happens when the short term interest rates are higher than long term interest rates. The classic metric has compared the yield between the 2 year and the 10 year treasury bond. Today the 2 year and the 10 year bond are still inverted. We still have an inverted yield curve against that definition. However, the yield spread between the 2 year and the 30 year has actually normalized and is no longer inverted. Of course that might change again in the next day, or even in the next hour and re-invert. But for now we have a short term rate below a long term rate. Yields for the 2 year have fallen, and for the 10 year and even for the 30 year. All of these rates have fallen. The only one that has stayed the same is the Fed Funds rate set by the Federal Reserve in the range of 5.25%-5.5%.
It’s not natural for long term interest rates to be lower than short term rates. You can’t see as clearly far into the future. That risk and uncertainty associated with the longer timeframe suggests that a risk premium would be warranted.
The memory of 2008 has faded for many. Most remember it today as a real estate crisis, confined to subprime mortgages. But the tentacles of 2008 were much wider. There were millions of job losses, large scale bankruptcies, bank failures, stock market declines. The wealth destruction that occurred during that period was a global financial earthquake. Too many people are pushing forward today as if there are no risks in the market.
We will see lower interest rates in our future, and higher interest rates at the same time. The rates for the safest investments will come down. But those perceived to carry a risk premium will face even more expensive money, even as interest rates fall. This is the fallacy associated with looking to a single rate as a determinant of our financial future.
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On today’s show we are talking about underwriting of residential apartment properties. I look at financial models from other developers on a regular basis. I tend to see the same mistakes over and over again.
On today’s show we’re going to cover the top 7 omissions that I see in financial models. When these assumptions are incorrect, then there is very little the property owner can do to recover from these mistakes. The reality will be different from the financial model and the owner will be forever stuck with explaining to investors why the cash flow from the property is not meeting expectations.
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Building a business is difficult. That’s true of all businesses, regardless of the industry. It takes hard work to build a team and to figure out what works and what doesn’t work. There will be mistakes along the way and corrective action and if not then the business will probably fail.
Then there are those people who look for a misguided shortcut. Working with experienced people is the key to compressing timeframes and accelerating learning. Hopefully you make fewer mistakes.
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On today’s show we are talking about one more headwind that is facing the multifamily apartment market across the US.
2023 was a record year for new apartment completions. There were a total of 440,000 apartment completions in 2023 according to RealPage. Some other estimates put the number as high as 510,000 units.
There are several markets that are oversupplied as a result of this surge in building. Demand dropped once the pandemic was over and we have seen the mobility in the US drop significantly.
There are numerous hot markets that are experiencing a glut in new apartments.
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Billy Brown is based in Nashville Tennessee where he works as a commercial mortgage broker. On today's show we are talking about the types of deals that are getting done, and where deals are struggling. To connect with Billy, visit billybrown.me
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Jonathan Miller is based in Denver Colorado where he is part of the leadership team of a national wealth management practice called Parsonex. On today's show we are talking about what wealth management clients are looking for in terms of alternative investments. To connect with Jonathan visit parsonex.com
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What drove the Fed to change their tune? In the most recent testimony in front of a congressional committee, chair Powell spoke about getting closer to their stated 2% target. But clearly the numbers are still elevated. The restrictive monetary policy is serving to bring demand and supply into better balance and to put downward pressure on inflation.
He said that moving too soon or too much could stall or even reverse the progress we have seen against inflation.
In spite of this, Chair Powell said that there is a risk of reducing policy restrain too late or too little could unduly weaken economic activity and employment. For now they’re going to continue to monitor the data on a meeting by meeting basis and make decisions on a meeting by meeting basis.
So why did the Fed change their stance? This is a very different posture from what we have heard over the past two years.
This is one of those questions that seems to be eluding the mainstream media.
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Today’s show is an observation based on years of a particular pattern repeating itself. When that pattern of progress is disrupted, people become dissatisfied and we start to experience fragmentation and chaos.
There is an expectation that every year someone wants to get ahead. Even in an inflationary environment, people need to see their income increasing. We know that there is widespread discontent, not just in the United States. We see it in the United Kingdom, in France, in Canada, in Italy in China, and countless others.
This kind of discontent leads to a fracturing of society and increase social turmoil.
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Today’s question comes from Raffaele who asks:
I have a project that is about to go into construction. The city is requiring me to pay a parkland dedication fee equivalent to 7% of the land value that the city can use in the future to build and maintain new parklands. We know what we paid for the land several years ago. That value has probably changed over time and will require a new appraisal to be determined. The value of land is often affected by the cost to get the land into a shovel ready state. What things do you think I can realistically ask the appraiser to take into account when determining the value of the land?
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Today’s show is the second in our beginner series. Our listeners are sophisticated. Many of you own large portfolios of apartments. But you also have people in your life who are interested in learning more, but maybe don’t have access to high quality information. The idea of sending your spouse to a $199 weekend bootcamp for beginners where they are going to be abused by sleazy sales people sounds unthinkable. So where do they go. Look no further. We are going to dedicate a couple of shows a month to topics that will accelerate the learning for less experienced investors, and might give the most sophisticated investors a new way of explaining a concept that is otherwise complex to describe.
So here we go. On today’s show we are talking about scale of investment, and why you might want to participate in a larger project versus going out and buying a single small investment by yourself.
Real Estate investing is a game of big numbers. Everyone always runs out of money, I don’t care how much money you have, you’re going to run out at some point and you will need to borrow funds, or raise capital, or stay small. There are not enough hours in a lifetime to save your hourly wage to wealth. You are going to need to work with others in order to get leverage.
If you’re already a billionaire, then congratulations. But for everyone else, you’re going to need to use other people’s money.
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The Real Estate Espresso Podcast is a show that speaks to sophisticated investors. Many of our listeners have large portfolios of apartments. They are investors in storage, industrial, land. We have lenders, economists, developers, project managers for the major national commercial builders all amongst our listening audience. This is a sophisticated audience. You know what cap rate is, what yield is, what an interest rate inversion.
But chances are, you the listener have a family member who is a stakeholder in your business, but maybe not an active participant in your business. We have been receiving feedback that from time to time, it would be great to provide some content that would accelerate the understanding for some of our less experienced audience members. Starting today, we are going to include two evergreen shows per month that include topics that are geared more towards the beginner audience.
On today’s show we are going to talk about adding value to an apartment. We are often lead to believe that value is determined by the market. When you sell an asset like a single family home in the open market, the sale price is more like an auction than a scientific formula.
In the world of multi-family investing, the most common measurement of value is the cap rate, or in other words the multiple of net income.
But if the profit generated by the property goes up, then the value of the property would go up too in order to keep the value of the building constant at 5%. There are numerous ways the profit can increase. You can increase the base rent. You can reduce the vacancy which adds to the income. You can reduce expenses. You can add features to the property that can add revenue. For example, you might have a tenant rent a parking space from you in addition to their apartment. They might rent a storage locker. They might choose the building’s internet access instead of paying a monthly fee to AT&T.
If the building has been improved, then you might be able to command higher rent. If the building was modernized with a new exterior facade, and new kitchens, new bathrooms, new flooring you might get an extra $200 a month in rent. If you got rid of the coin operated laundry in the basement and put laundry machines in each unit, you might get an extra $50 a month in rent.
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Jeff is based in Austin Texas where he runs Visio Lending, a national lender that specializes in portfolio loans for single family investment properties. To connect with Jeff, visit visiolending.com
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Richard Wilson is the founder and CEO of the Family Office Club. The organization caters to high net worth families and deal makers. On today's show we are talking about the purpose of a family office and the benefits to a high net worth family. To connect with Richard, visit any of the following links:
familyoffices.com
richard@investorclub.com
Check out nearly 1,000 videos on their Youtube channel.
https://www.youtube.com/@FamilyOfficeClub
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On today’s show we are looking at the residential real estate market in select areas of Florida. Many local brokers are sounding the alarm that rising inventory of homes for sale is causing prices to fall. These markets are experiencing multiple headwinds at the same time.
Some of the shifts are reminiscent of 2008.
For example in Cape Coral, homes for sale inventory is up nearly 1000%. There are currently over 800 homes for sale in Cape Coral as compared with 80 homes for sale two years ago. Now some would say that this is not a fair comparison. We need to look at other metrics like the long term average inventory and how does the current inventory compare against the long term average.
Today’s inventory level appears to be on par with what it was in 2018 and 2019. Nobody was sounding the alarm back in 2019. So why is it a problem now if that same inventory level was not a problem then?
The difference comes down to affordability. Prices are 50-60% higher today than they were in 2019. That means that homes are simply more costly to own.
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On today’s show we are conducting an experiment in artificial intelligence. Of course AI is supposed to revolutionize our lives for better and for worse. I conduct these experiments from time to time to assess the state of natural language models and how they are maturing. Now you are probably wondering whether I have been using artificial intelligence in the production of the real estate espresso podcast. The answer is no. You are getting 100% me and my team when it comes to the creation of the show. The only instance where we have used AI is to brainstorm ideas for future topics that I would feature on the show. Even then, we have never taken the topics verbatim.
What I’ve discovered is that the quality of output from an AI tool is highly influenced by the way you ask a question. Some ways of prompting the tool result in a very poor quality response and others give a much higher quality response.
I found that asking the AI bot for more ideas is a fairly effective way of getting a broader range of ideas than you might have imagined on your own. So on today’s show I’m going to review the question that I asked the Microsoft copilot and it’s responses and then provide my commentary on the entire process.
I have an 8 acre parcel of land across the street from a high school that is zoned commercial. on the other side is a residential neighborhood . I'm thinking it would be a good location for a restaurant and maybe some neighborhood amenities such as a coffee shop. how would you suggest to subdivide the 8 acres and what types of businesses would you propose for that location?
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Today's question comes from Steve who asks:
"What is the purpose of a city having a general plan? Does the law require it and what benefits and disadvantages does it provide the city and developers."
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On today’s show we are talking about the wave of protectionism that seems to be sweeping several of the world’s major economies. The question is, “What does it mean and what are the long term implications?”
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Transforming the Irvine Ranch is the story of a 93,000 acre ranch into the city of Irvine California. It is one of the most studied master plans in university courses related to urban planning.
On Saturday’s show my guest was Michael Stockstill, one of the authors of the book. On today’s show we’re going deeper into the book itself. The reason the book is so impactful, at least for me, is that virtually every complexity that could impact a development project is chronicled in the history of Irvine Ranch.
I personally like the biography genre of book. But in this case, this isn’t the biography of a famous person. It’s the biography of a ranch that became a city.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Kevin Bupp is based in Tampa Florida, but invests in mobile home parks and parking lots nation wide. On today's show we are talking about the similarities between mobile home park investing, how the market has changed in the past 24 months and the criteria for investing in parking assets.
To connect with Kevin you can find him on most social media just by search for his name, or visit investwithsunrise.com
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Michael Stockstill was the public relations manager and then the government relations manager for the Irvine Corporation. He's also the author of the recently published book "Transforming The Irvine Ranch". On today's show we are talking about the challenges associated with building a new city. It's the story of the transformation of 93,000 acres of ranch into what is now modern day Irvine California.
To connect with Michael and to learn more, visit https://thebigplanbook.com/
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about the dangers of speculating and making purchases that are significantly above market. Some markets like Vancouver and Seattle have long experienced a significant influx of foreign buyers who have created upward pressure in the market over a sustained period.
Some luxury condo towers in Vancouver were offering pre construction units in luxury buildings at stratospheric prices of $2,600 to $3,000 per square foot at a time when comparable units that were one or two years old across the street were selling for $1,500 per square foot. The condo developers were still able to sell enough units to get their construction financing at these high prices.
Of course nobody can possibly predict the future. The chances of all the planets aligning and delivering the required value increase are so slim that you had better be buying the property all cash. If you’re intending to finance the purchase, chances are high that the property will appraise well below the purchase price when it comes time to close. No lender is going to rate lock and approve a loan that is taking place 3-4 years in the future.
The developer was irresponsible for proposing those high sales prices and the construction lender was irresponsible for lending against a project that had such a high premium to the market.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today's show we are looking at a verdict issued by the US Supreme Court in the case of Moore vs the United States. When the court rules unanimously then you can have reasonable confidence that the court’s interpretation of the law is consistent. But when you have dissenting opinions by judges who are supposed to be the most learned of legal scholars, it leaves major questions about the fairness of the legal system. In this case it was ruled by a vote of 7-2.
The case leaves the door open for further attribution of income that was not received by taxpayers and is deemed to be taxable even though the funds were never received.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Today's question comes from Matthew in upstate NY who writes:
Hi Victor, I own a commercial construction firm and the City and Town of Canandaigua , NY. Officials have asked me, a residential contractor and developer to come speak on current struggles developers and contractors are seeing in this market. I feel like a broken record. I listen to you all the time with regards to codes, zoning, utility, and building permit process, all of these come at a cost of TIME and Money. I feel most boards don’t have any construction or business education and decide to make comments just for the sake of commenting. If you have/were presenting, what guidance would you provide to an official to streamline process the best government logically could?
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about the global perspective on investing. At the heart of all investing is the law of supply and demand.
In real estate that’s a combination of factors.
- Demographics. Is population growing or shrinking based on birth rate? That variable has a slow but profound impact on demand for housing. We will come back to that later.
- Immigration. Is population rising or falling based on migration of people from around the world?
- Jobs. Does the area experience employment growth and does the local economy mean rising or falling prosperity for the population at large?
Most developed economies have shrinking population due to declining birth rates. People are not having as many babies as they once did. That’s true throughout Western Europe, Russia, the United States, Canada, Japan, China, South Korea, Brazil and countless others.
This means that in the absence of immigration, demand for housing is going to fall in the long term. We see this in Japan where there are more than 11M vacant homes. This is a dramatic about face from the situation in the 1980’s when it seemed that Japan’s economy was unstoppable.
Population is growing in the US and Canada through immigration, and to a lesser extent migration.
We talk about all of the problems in our respective countries. But many countries are not attracting immigration.
I don’t know of millions of people moving to China, or Russia, or Japan. The population in the US is growing at 0.4% per year, largely through immigration. The population in Canada is growing at 1.8% per year, almost entirely as a result of immigration. It’s that growth that makes these destinations attractive for foreign investment when you layer it on top of the global alternatives.
On today's show we are talking about international investing. Real estate investing is a hyper local business. But that doesn’t mean you have to live near your investments. Live where you want to live and invest where the numbers make sense.
There are many people who live in the North East of the US and only invest in Texas or Florida for example. In our company we are active in several states across the US and we are also active in Canada.
We build what we think is the right product for a given location based on supply and demand and the financial metrics for that specific location. These are almost always special situations. These are special situations in the sense that it is a unique combination of circumstances that creates the inefficiency in the market and leaves behind what we believe is a glaring opportunity.
Now I need to be clear, we are not scouring the market for opportunities. With very few exceptions, these have all come to us unsolicited.
It doesn’t matter if the project is in Colorado or Florida or Utah or Canada.
I’d like to invite you to attend an upcoming webinar on Tuesday evening to learn more about a new project in Ottawa Canada.
Today’s episode is not a solicitation for investment. The opportunity is open to accredited investors residing in the US and will be by prospectus only in compliance with US securities regulations.
Here is the Link to Register for the Webinar. If you can't make the exact time of the webinar, register anyway and we will send you the recording.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
I’d like to invite you to a webinar that we are holding this coming Tuesday. This is an investment opportunity that is open to accredited investors only for a new apartment project located in Ottawa Canada. The link to register for the webinar is HERE
Our guest today is Alessandro Chesser from the San Francisco Bay area. His company is removing the friction associated with protecting property in living trusts. This is a fascinating innovation in the industry. To connect and to learn more, visit https://www.getdynasty.com/
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Dr. Ryan Smolarz is a surgeon based in the US Virgin Islands where he specializes in storage assets across the US.
On today's show we are talking about managing the emotional side of investing.
To connect with Ryan, visit Stor Partners or text them directly at 602-641-4109.
Our development firm, Y Street Capital is hosting a webinar this coming Tuesday June 25 to discuss a 134 unit mid-rise apartment development project. To register for the webinar, use the following webinar link.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are going to look at something that has been making financial headlines all over the world over the past two days. The purpose of discussing it on this show is that even the major financial media like the Wall Street Journal and Bloomberg have been misreporting the story. The headline is that another Bank, this time a Japanese bank is running into trouble. The assumption is that the problem has to do with the inversion of the yield curve and investment in long term treasuries is the reason for the bank’s problems. Some of the problems which cause the failure of Silicon Valley Bank, First Republic Bank and Signature Bank last year stemmed from the need to raise additional cash, and in so doing, those banks were forced to sell US Treasuries at a loss. If those banks had the luxury of holding those bonds to maturity, then there would have been no losses. What we will discuss today is that the symptoms look similar, but that the root cause of the actual problem is quite different. ------------Real Estate Espresso Podcast: Spotify: The Real Estate Espresso Podcast iTunes: The Real Estate Espresso Podcast Website: www.victorjm.com LinkedIn: Victor Menasce YouTube: The Real Estate Espresso Podcast Facebook: www.facebook.com/realestateespresso Email: podcast@victorjm.com Y Street Capital: Website: www.ystreetcapital.com Facebook: www.facebook.com/YStreetCapital Instagram: @ystreetcapital
On today’s show we are talking about investing fundamentals. What is an investment worth? If you watch the TV show Shark Tank you will see the contestant say that they are seeking $X in exchange for y% of the company. The sharks then do some quick math to determine the enterprise value and then compare the income as a percentage of the valuation. They are trying to get a sense of the current value of the company based on multiples of net income. That’s how companies should be valued.
We now have a stock market index that is dominated by five companies which are Nvidia, Microsoft, Apple, Meta and Amazon.
All of this is being driven by the anticipation of the impact that AI will have on the industry.
We need to ask ourselves questions as to whether what is happening in the stock market makes sense or not.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about a new class of apartment living that is starting to make headway in several markets. We too are exploring this product offering for some of our new construction projects.
When we talk about the continuum of care for aging adults there are several new product types being defined and accepted in the market.
It used to be the case that the only type of senior housing was a nursing home, which today we call skilled nursing. Some simply called them old folks homes.
Since then, there are more specialized forms of care like memory care, Parkinson’s care, independent living and assisted living.
Well there is one more category of housing which is starting to establish market share in many communities. Still on a national level, the penetration of this product type is still tiny compared with other housing types.
This is what we internally call a concierge apartment, or what many in the industry call an active lifestyle apartment.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about the right way to build a paper airplane.
When I first graduated university and was a new hire at Bell Northern Research in the microprocessor development team, I attended a company training course that was an entire week long.
One of our first assignments during that week was a design exercise. The assignment was to design a paper airplane. We were given two sheets of paper. One sheet of paper was to build the actual prototype of our amazing paper airplane. The second sheet of paper was to write the manufacturing instructions for someone else to build the airplane. The paper airplane had to fly the width of the conference room which was not that large.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are exploring why so many cities have recently embraced the notion of intensification.
Through the last several decades cities have continued their relentless sprawl out into the suburbs. You have some extremely low density cities that have no natural boundaries and continue to sprawl. Dallas may only stop gobbling up land when it reaches the Oklahoma border. Phoenix may eventually become one with Flagstaff. You can literally drive for hours in Phoenix and the surrounding suburbs and I swear you would think that you have seen this street before. The houses look the same and the strip malls look the same, but you have not made a single turn.
Let’s look at the budget for development of single family homes. We’re going to zero in on the infrastructure for services for a single family home.
These days the cost of building a fully serviced road with 7 utilities is averaging about $1200 per linear foot of road.
If you have to install deep utilities for storm water management or if you have to blast through bedrock, or maybe you need a sewer lift station then those costs can multiply.
If you compare the cost of servicing 200 homes In a subdivision with a 200 unit high rise apartment building, the apartment building is going to cost a lot less in the short term and in the long term.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
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Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Jon Weiskopf is based in Sturgeon Bay Wisconsin. His specialty is impact investing. On today's show we are discussing what that means and some of the constraints that are implicit in impact investing.
Real Estate Espresso Podcast:
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iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Brian Davis is based in Lima Peru and is in his 9th year of living the expat lifestyle as an investor. On today's show we are talking about what it's like working remotely and seeing the world at the same time.
To connect or to learn more Brian can be reached at SparkRental.com
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about how our consulting division advised a client which had the effect of turning a good project into a great project, while avoiding a zoning variance at the same time.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Today’s question comes from Paul who writes: I often hear about working on the business versus working in the business. What does that mean to you, and can you give me some examples of what that looks like?
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about a new product that we are increasingly incorporating into our new development projects. When we undertake a development project we are starting with raw land. It’s a blank canvas. It could be whatever the mind can imagine when completed.
The traditional approach has been to build mid-rise apartment complexes. But thee apartments are increasingly saturating the market. They are among the highest density in the market and are generally constrained by parking.
Then you find the build to rent communities that are cropping up all over the country. This sounds like a new concept. But they existed back in the late 1960’s and early 1970’s.
But since these communities have been built in so long, what’s old is new again. The beauty of a build to rent community is that people prefer to live in a low density environment such as detached single family homes or townhouses.
Back in the 1960’s, building standards were not as high as they are today. The sound isolation between townhouses and apartments was not as good as it is today.
Our solution to this is a particular type of townhouse that we call Live Work Play.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are talking about the positioning of a real estate investor in the marketplace.
Let me be clear, on today’s show I may offend a few listeners. But I’m not here to offend. I’m here to reflect back what many investors marketing is saying. There is nothing wrong with being new. Everyone started at the beginning. But be aware that wherever you are in your journey, you are sending a message.
Real Estate Espresso Podcast:
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Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
On today’s show we are taking a closer look at the employment statistics that were released last Friday. The headline in the Wall Street Journal read “Hiring and Wages are Up, Reinforcing the Economy’s Resilience”. The subtitle to the article then reads: “The U.S. posted surprisingly large gains in both jobs and pay, even though the unemployment rate ticked up to 4%”CNBC said “U.S. adds a much-better-than-expected 272,000 jobs in May, but unemployment rate edges up to 4%.”Each month there are two surveys conducted. The establishment survey queries employers about how many people they have hired in the past month. The household survey queries families about their income and employment situation.
The bottom line of all the articles I read was that the establishment survey being this strong would signal to the Fed that the jobs market is still very robust and that they will have no choice but to maintain rates higher for longer.
Frankly this is a narrative that is supported by half truths at best. The economists at the Fed know how to read the household survey and draw a reasonable conclusion.
Stay connected and discover more about my work in real estate and by visiting and following me on various platforms:
Real Estate Espresso Podcast:
Spotify: The Real Estate Espresso Podcast
iTunes: The Real Estate Espresso Podcast
Website: www.victorjm.com
LinkedIn: Victor Menasce
YouTube: The Real Estate Espresso Podcast
Facebook: www.facebook.com/realestateespresso
Email: podcast@victorjm.com
Y Street Capital:
Website: www.ystreetcapital.com
Facebook: www.facebook.com/YStreetCapital
Instagram: @ystreetcapital
Josh Pardue is based in Tampa Florida. Josh is a repeat guest on the show. But this was actually the first episode recorded and accidentally published out of order. Josh was also a guest on May 11. On today's show we are talking about how to underwrite the risk of single tenant commercial properties.
To connect with Josh, he is available on most social media including Facebook. https://www.facebook.com/joshua.pardue
Host: Victor Menasce
email: podcast@victorjm.com
Michele Fischbein is based in southern California where she works as a tax and asset protection attorney with the firm Tresp Day.
On today's show we are talking about asset protection structures that were pioneered in part by some of the partners in her firm.
A few weeks ago we also hosted a webinar with Michele which included a deeper dive into the principles we discuss on today's show. The link to the webinar recording is HERE in the show notes.
To learn more and to connect with Michele, visit trespday.com or email her directly at info@trespday.com
Host: Victor Menasce
email: podcast@victorjm.com
Later today we will be hosting a Facebook Live and a LinkedIn Live session with our Partner Amy Johnson.
Join us live to ask Amy Johnson how she gets deals done. Around the United States, Amy owns self-storage, multifamily, and develops land as a partner with Y Street Capital. She has a 15-person brokerage, has developed 500 acres of land and 500,000 square feet of self-storage, and renovated several hundred apartment units over her time as an investor. Bring your questions and join us live Friday, June 7 at 3 PM Mountain Time, 5PM EDT.
https://www.linkedin.com/events/deal-making-askamyjohnsonanythi7199448061411041281/theater/
https://www.facebook.com/share/TDH2xPXf9wckjdSo/
On today's show we are taking a look at a land development query that came from a potential consulting client. Many of these projects are simply not possible. But then there are a few.
Stay connected and discover more about my work in real estate and by visiting and following me on various platforms:
Real Estate Espresso Podcast:
- 🎧 Spotify: The Real Estate Espresso Podcast
- 🌐 Website: www.victorjm.com
- 💼 LinkedIn: Victor Menasce
- 📺 YouTube: The Real Estate Espresso Podcast
- 📘 Facebook: www.facebook.com/realestateespresso
- 📧 Email: podcast@victorjm.com
Y Street Capital:
- 🌐 Website: www.ystreetcapital.com
- 📘 Facebook: www.facebook.com/YStreetCapital
- 📸 Instagram: @ystreetcapital
This coming Friday we will be hosting a FaceBook Live and a LinkedIn Live session with our Partner Amy Johnson.
Join us live to ask Amy Johnson how she gets deals done. Around the United States, Amy owns self-storage, multifamily, and develops land as a partner with Y Street Capital. She has a 15-person brokerage, has developed 500 acres of land and 500,000 square feet of self-storage, and renovated several hundred apartment units over her time as an investor.Bring your questions and join us live Friday, June 7 at 3 PM Mountain Time, 5PM EDT.
https://www.linkedin.com/events/deal-making-askamyjohnsonanythi7199448061411041281/theater/
https://www.facebook.com/share/TDH2xPXf9wckjdSo/
On today's show we are talking about interest rates. Canada dropped its key lending rate 0.25% on Wednesday and the European Central Bank cut its lending rate 0.25% on Thursday. Sweden cut its rate a month ago and Switzerland cut its rate in March. What does this mean for Fed policy?
Host: Victor Menasce
email: podcast@victorjm.com
This coming Friday we will be hosting a FaceBook Live and a LinkedIn Live session with our Partner Amy Johnson.
Join us live to ask Amy Johnson how she gets deals done. Around the United States, Amy owns self-storage, multifamily, and develops land as a partner with Y Street Capital. She has a 15-person brokerage, has developed 500 acres of land and 500,000 square feet of self-storage, and renovated several hundred apartment units over her time as an investor.Bring your questions and join us live Friday, June 7 at 3 PM Mountain Time, 5PM EDT.
https://www.linkedin.com/events/deal-making-askamyjohnsonanythi7199448061411041281/theater/
https://www.facebook.com/share/TDH2xPXf9wckjdSo/
On today’s show we are taking a twist on a familiar saying. You’ve no doubt heard or read the disclaimer sentence that says past performance is not indicative of future performance. You will see that in the fine print of virtually every mutual fund, exchange traded fund, publicly traded stock and even private investment offering.
That’s kind of an obvious statement. None of us have a crystal ball and we can’t predict the future.
But on today’s show we are saying that "Past performance is not indicative of past performance."
On today’s show we are talking about a question that came to me on a phone call yesterday morning. The person asking the question was seeking to help another investor who has run into financial difficulty.
The question was whether a standby letter of credit could be used to help a real estate investment firm that was seeking to refinance their bridge debt into a lower interest rate permanent financing.
Given that the person asking the question wasn’t clear, I thought it would be helpful to share the question and the answer live on the show.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about a project of ours that recently completed the zoning approval process.
This is a 20 acre site in a suburb of Salt Lake City called Brigham City. The property itself is situated next to one of the two highway interchanges from Interstate 15 into Brigham City. Immediately across the street is a new Walmart Super Center.
The total site plan consists of the Marriott Town Place Suites hotel, 120 apartments, 50 townhomes, and several buildings of flex multi tenant industrial. All of these products have to have the requisite amount of parking. It is the surface parking that ultimately determines the density that can be achieved. At one point in the design process we had proposed a larger number of apartments. But this has to be scaled back to meet the parking ratios required for a viable project.
Throughout the process, the economic outlook in the area accelerated. One of the main contributors is the newly announced Inland port.
It took a few months longer than we expected, but we have an amazing project that we expect to create a lot of value for our investors. To be clear, we are not soliciting for investment and just sharing our story about this project. This project was funded over a year ago.
Mauricio Rauld is the founder of the Premier Law Group and specializes in securities law. On today's show we are talking about the forecast changes to securities regulations in the US. Mauricio's team performs all of our US securities work at Y Street Capital. He also wrote a new book called "Legal Strategies for Everyone" and you can connect with him through his website at https://legalstrategiesforeveryone.com/
He also has hundreds of education videos on his youtube channel.
Host: Victor Menasce
email: podcast@victorjm.com
Our book this month is called Day Trading Attention: How to actually build brand and sales in the new social media world by Gary Vaynerchuck, the CEO of Vayner Media. Gary is well known as a keynote speaker in the world of marketing. His YouTube and social media following is massive.
Gary’s thesis is that in order for your marketing message to be received, you need to be using channels that are in your customers field of view. If your customer is not looking in the direction of your message, then there is no way for your message to be received.
All of the various channels have different costs associated with them. Some are going to be overpriced and may still reach the target audience. But then there are avenues that are underpriced.
It used to be that business was local and that your zip code mattered. But today what matters more is your browser history as a reflection of what interests you.
The world of social media was centred around who you connected with and today social media algorithms are increasingly giving weight to what interests you.
Today’s question comes from Dan who asks.
I’m currently evaluating an investment in a multi-family apartment project. I’ve heard so many horror stories lately about investments going bad in the past year that I’m struggling to figure out how to perform due diligence. If you were looking to make a passive investment in someone else’s deal, how would you conduct the due diligence?
Host: Victor Menasce
email: podcast@victorjm.com
You have probably seen the pitch on social media. I’m approached almost daily on LinkedIn. These companies and individuals are frequently offering any amount of funding from $500,000 up to $500M. Some are offering to partner with you on projects. Some are offering both debt and equity.
Offers of funding can sound enticing to those who are seeking additional capital to cover a shortfall in their business.
As always you need to do your due diligence on any kind of funding source. You need to know that they can deliver what they are promising.
Think about the potential risk that exists for any borrower who provides tremendous volumes of data to a lender including details about your real estate holdings, tax returns, a complete statement of assets and liabilities.
What if that person who is posing as a lender is not really a lender at all, but someone who is seeking to steal your identity? Have you armed them with the necessary information to make identity theft incredibly easy? Sometimes an identity theft can occur with just one or two critical pieces of information. But in this case you have given them everything.
Host: Victor Menasce
email: podcast@victorjm.com
As many of you know, in addition to being the host of the Real Estate Espresso Podcast, by day I’m the senior partner at Y Street Capital. Our firm is active across 9 states in the US and also in Canada where I reside.
It sounds strange to say this, but Canada has a much more acute housing crisis than the US. Our population has grown through immigration much faster than the US. Many Canadian cities are facing a crisis of availability at any price and it’s no longer even a question of affordability.
Unless governments are going to take over housing and socialize housing like you might in a communist country, the only free market way to address the housing crisis is create the incentives for additional supply to enter the market.
Just like in the US, Canadian cities get their power from the next level of government. US cities get their power from the state in which they reside and Canadian cities get their power from the province in which they reside.
In addition to the steps taken over the past couple of years at the provincial level, the Ontario government has a new bill called bill 185 which is aimed at Cutting Red Tape to Build More Homes. One of the obstacles to creating more supply is the red tape and bureaucracy that exists in the planning system.
Most of our listening audience is outside of Canada. In fact 81% of our listeners are in the US. I’m going over this in some detail because I believe you can influence the political process and create improvements in the development process that will benefit developers and ultimately the people who are going to live in those newly created homes.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s question comes from Daniel who asks:
I’m a busy professional and have several friends that also have money to invest. I am considering inviting my friends to invest along with me but am conflicted. If there are problems with the investment, I don’t want to damage the friendships. At the same time if these are good investments, it would seem disloyal not to invite my friends along the same journey. What are your thoughts on co-investing with friends and how one might structure such a venture?
Host: Victor Menasce
email: podcast@victorjm.com
There are numerous misconceptions about the oil market. As a result, we have many people including the mainstream media drawing incorrect conclusions about the economy. On today’s show I’m gong to go deep on a few of these items.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show George and I are talking about the current market cycle and what signs to look for when seeking inflection points in the cycle. George was very clear. Get to the specifics and stay away from the macro discussion. But the appraisers who determine valuations don't always see it the same way. Listen to my conversation with George Ross.
Host: Victor Menasce
email: podcast@victorjm.com
Brian Boyd is based in Nashville Tennessee where he is practicing tax law. On today's show we are talking about some of the proposed changes to the US Tax Code and how real estate investors could adapt to those changes if they come to fruition.
To connect with Brian visit briantboyd.com.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re going to take you through thought experiment. I’m going to give you two distinct sales pitches. I’m going to bet that most people will choose the lifestyle investment.
The first is a luxury condo located in paradise. When you are not staying in your condo, it goes into the hotel's pool of rooms and you share in the hotel revenue. Hotel guests will pay for your vacation property.
The second sales pitch is for a two acre parcel of land in the downtown core that may have future development potential. For now, it’s a parking lot for 200 vehicles. The parking lot has daily and hourly rates, and a discounted rate for evenings and weekends. Parking is expensive at $24 per day or six dollars an hour for the first four hours, after which you pay the full day rate. The parking lot is often full each day. The land is expensive at $8M. If you finance a large percentage of the purchase, you are facing a debt service amount of about $56,000 a month.
The parking lot is not very sexy. It’s parking, surrounded by high rise office towers in the downtown core.
One of these will appeal to the true analytic investor, and the other will appeal to the lifestyle investor.
How many of the lifestyle investors will decline to even consider the parking lot?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at a report that was published by Fannie Mae’s research team on Monday of this week. Fannie Mae’s research team is under the direction of Chief Economist Dr. Doug Duncan who is a past guest on this show. We are accustomed to getting overall market updates from Fannie Mae. This one was very different in that it was very narrowly focused on the insurance. I don’t ever recall seeing a report like this from Fannie Mae focused on a single expense line item.
It contains a pretty detailed and comprehensive explanation of what has happened over the past two years in insurance and how it has impacted multi-family investors.
Here's a link to the full report.
https://www.fanniemae.com/media/51396/display
On today’s show we are looking at the special considerations associated with developing a waterfront property.
There are some special risks associated with waterfront that might not exist in other more central locations.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at market inefficiency and why it occurs.
When I say inefficiency, we see markets oscillating between being vastly under supplied to over supplied and back.
The signs of inefficiency are everywhere if you choose to look. But why is it happening?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the biggest things I look for when it comes to building on a new site.
If you know the product that you are looking to build, then the hard cost of construction is fairly easy to estimate with pretty good accuracy.
The largest variable is the site related costs. These can quickly spiral out of control. These risks are so severe that they can represent an existential threat to your project.
The risks break down into three main categories:
- servicing of utilities and access
- Storm water management
- Structural and Geotechnical
Host: Victor Menasce
email: podcast@victorjm.com
Chris Eymann is based in Arizona where he does a high volume of house flips. He is also a lender. On today's show we are talking about the state of the market from the perspective of a lender. He can be reached on Instagram at chris_eymann or visit his property website at sellwholesalehouses.com.
Host: Victor Menasce
email: podcast@victorjm.com
Adam Goldman is a specialist in placing franchises with owners. Some commercial spaces struggle to find a tenant and a franchise can often be a solution to that problem. To connect with Adam visit franchisecoach.net or book a consultation with him directly at franchiseadam.com will get you a link to book a meeting time with him.
Host: Victor Menasce
email: podcast@victorjm.com
Have you ever wondered how the mapping software on your phone can alert you to a traffic jam?
It doesn’t matter if you are using an android phone or an iPhone, the mapping software uses the same basic technique for determining what is happening in traffic. If your phone has location tracking turned on, then the operating system services will report back to Google or to Apple Maps the moving speed estimation of your phone and all of the other phones that are currently travelling along that stretch of highway.
By collecting the aggregate information, they can determine the average speed that phones are travelling along that stretch of freeway. Since most of those phones are located with their owners inside a vehicle, we can infer that the cars and trucks are traveling at the same speed as the phones. If the speed limit on that stretch of road is 60, and the average speed is 30, they will probably color code that section of freeway in yellow and if the average speed is 10, they will probably color code that section of freeway in red to denote a severe traffic jam.
Now you might be wondering why I’m telling you this on a real estate podcast. What the heck does this have to do with real estate?
Well, this same technology can be applied to other types of analysis that are extremely useful to real estate investors. Let’s imagine for a moment that you want to invest in retail real estate, maybe a shopping center. In this case you don’t care how fast the phone is traveling, you want to know where all the phones are going. Where are they stopping?
What if you could use this location information in a much more granular way. Let’s say that you wanted to open a shoe store in a particular mall, it might be useful to assess the foot traffic to the mall, to other shoe stores and other clothing stores in the area. This same technology can be used to tabulate the movement of cell phones according to location.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at a white paper that has been published on the White House website late last year. The document is called “COMMERCIAL TO RESIDENTIAL CONVERSIONS: A GUIDEBOOK TO AVAILABLE FEDERAL RESOURCES”
This 54 page document outlines all of the programs that are available to at the Federal level to assist in these types of conversions. In addition to the Federal programs there are a number of local and state programs that are aiming to help facilitate these conversions.
https://www.whitehouse.gov/wp-content/uploads/2023/10/Commercial-to-Residential-Conversions-Guidebook.pdf
Host: Victor Menasce
email: podcast@victorjm.com
Marc writes:
I'm a real estate asset manager and developer with operations across Alberta, Quebec, and Ontario. I’m contemplating centralizing our legal operations to not only streamline communication but also consolidate all our legal documents into a single internal database, instead of having them scattered across different legal teams. I'm thinking of employing an internal paralegal to work with external lawyers, similar to our model of using internal bookkeepers with external accountants. What advantages or complications could arise from such a centralized approach? How might this affect the efficiency and quality of legal services we receive? Any thoughts in general?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the merits of having a high speed charging station on your property. A charger is an income producing asset, or at least it might be depending on the contractual arrangement.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the non headline revisions to economic data.
I’m here to tell you beyond a shadow of a doubt that the US economy is in recession.
What I’m sharing today is the good work that is done by Danielle DiMartino Booth. She is the CEO and chief strategist at QI Research. Previously Danielle was at the Federal Reserve Bank of Dallas for nine years working under Richard Fisher.
This past FOMC meeting marked a significant departure from previous meetings where Fed chairman Jerome Powell described a change in Fed posture. This was not part of the initial remarks or the press release, but rather a response during the question period.
He said that the Fed was shifting posture from fighting inflation to a return to its dual mandate to both maximize and maintain price stability. That means that the Fed is seeing something in the employment data that is concerning. On this show I’ve been reporting inconsistencies in the employment data for many months.
Well now we have one more data point that categorically shows what is really happening in the jobs market.
Every month the BLS puts out the payroll establishment survey and they publish the GDP for the nation.
In addition to the payroll survey, the census bureau also conducts their own survey once a quarter. The data from the Census Bureau is much more comprehensive than the BLS survey. We also experience frequent revisions to the payroll survey.
What the census data shows is that in the third quarter of 2023 instead of having 640,000 jobs created during that three month period, the economy actually lost 190,000 jobs in that time period. This is not a small difference. The narrative in the mainstream media is that the economy is strong and the consumer is resilient and the jobs market is strong. If the true data was being reported, I think it would be much more difficult to propagate that story.
Max Hansen has been practicing law for more than 40 years and is a true expert in tax sheltering with section 1031 of the US tax code. On today's show we are talking about some of the common pitfalls of using the 1031 exchange. Coming up on May 21 at 8PM EDT, 6PM MDT, we are going to be hosting an educational webinar where Max will be available to answer your questions live on sheltering capital gains. The best way to understand the process is with your own specific questions.
To register for the webinar, click on the link below.
https://event.webinarjam.com/register/25/n0n36u77
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we are talking about land development in Florida, about buying at the right time, and the elongated timelines associated with land development.
To connect with Josh, search for Joshua Pardue on all of the major social media platforms.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the kinds of questions that are helpful when determining the scope of a project.
We are often given estimates by contractors for work to be performed. Those elements that have the largest variability continually seem to be related to site work.
I often experience sticker shock with these estimates.
The key to getting an optimized cost starts with determining the proper scope of work. If you’re simply negotiating with a contractor to lower their price, that’s a pretty blunt instrument. The contractor is going to feel squeezed and they are simply seeing their margin being eroded.
But if you approach the conversation from the perspective of making sure the contractor gets fairly paid for their work. You just want to make sure that we have a common understanding of the scope of work, that context usually changes the nature of the conversation. The bottom line number may actually increase in the event that the estimate is low.
In order to have a meaningful conversation about the scope of work, you need to be prepared to go deep with the contractor on the assumptions behind the estimate.
Host: Victor Menasce
email: podcast@victorjm.com
Back in the 1960’s the first disposable diapers were introduced by Proctor and Gamble under the Pampers brand name. Cloth diapers had been the staple up until then and these new wonders were supposed to buy back time for new mothers who were previously saddled with massive amounts of laundry.
By the mid 1970’s, Kimberly-Clark, the makes of Kleenex introduced the Huggies brand of diapers. This alternative to Pampers started to gain market share. In the meantime, Proctor and Gamble also introduced another brand of diapers called Luvs.
Throughout the years there were numerous innovations in diaper technology including different fasteners, better form fitting around the legs, increased gel content and so on. With each new innovation, the manufacturers had a choice as to where to introduce those innovations. Pampers had been the dominant brand. They owned the market. They were the world reserve currency of disposable diapers.
Huggies was there in the background with a distant second in market share.
Host: Victor Menasce
email: podcast@victorjm.com
Virtually every apartment project is going to be constrained by parking. That one factor will determine the density that is going to be possible.
In rental apartments, charging for parking is going to very from one area to another.
For example in a dense urban area like NYC or Boston, it’s fairly routine to charge for parking. In fact, in cities like NY, I consider a car to be more of a liability than an asset. Those areas have very effective public transit and finding parking at your destination is going to take so much time that you would spend less time and less money if you simply took an Uber or a Taxi to your destination.
In less dense areas and in places where public transit is not deeply ingrained into the culture like in Texas or Arizona, a car is a must. The distances are too large and public transit simply is not an option. Except in the rarest of instances, parking is free. So when you are designing your apartment project, how much land should you allocate to parking? Well, you’ll be surprised to hear that it’s about the same as your floor area ratio.
By the time you factor in visitor parking and accessible parking, the parking ratio is going to be pretty close to 2 parking spaces for every apartment. Some projects are not going to be viable with less than a parking ratio of less than 1.75. I’m seeing cities create incentives to reduce the parking ratio below 1.0. In some cases I’m seeing ratios of 0.7 and 0.5. In places where there is public transit within walking distance, I’m seeing buildings approved with zero parking. I personally don’t think that the market will support those buildings in the long term. If someone wants to own a car at some point, they need to move. If they get into a relationship with someone who owns a car, that person faces the choice of parking or their new found relationship. Chances are they will have to move. This translates into higher tenant turnover.
Parking is a loss leader from the perspective of a developer. It is not a source of revenue, and is simply a necessary cost.
On today show we are looking at whether increasing interest rates is effective at combatting inflation.
The theory is that when interest rates rise, people are encouraged to save money and benefit from the income that is available from those higher interest rates. This is particularly true if interest rates are higher than the rate of inflation, so that you get a real positive rate of return on interest-bearing instruments.
When I think back to the early 1980s, I can remember conversations with my mother about putting my savings into high-yield bonds that were government-backed. I did not truly understand the math behind nominal interest rates versus real interest rates at the time I was particularly impressed when in that one year, I earned 18% interest on a $10,000 bond. For a teenager that $1800 in interest was a lot of money.
In the late 1970’s the personal savings rate was around 9% and then in jumped in the early 1980’s to around 13%. These were the days when Pauli Volcker pushed Fed interest rates all the way up to 19%.
That steadily declined until it hit a low in 2005 of 1.4% and then another low again in 2007 of 1.9%.
We witnessed a bit of a recovery in personal savings through the 2010’s to about 8.5% in 2019. Then with all of the stimulus money during the pandemic, personal savings jumped to 32% in 2020, before falling down to 12%, and then spiked again to 26% in the second wave of the pandemic.
Personal savings rates are now down to 3.2% after nearly two years of rising interest rates. The increase in interest rates is not having the desired effect. People are not saving more. Not only that, credit card balances are through the roof. Revolving consumer credit increased to nearly $1.1T in the first quarter, up from $727B in April of 2021. This supposedly strong economy is being funded by credit card debt. People are running out of credit.
Host: Victor Menasce
email: podcast@victorjm.com
Dr. Noah has written 25 books on the topic of helping entrepreneurs achieve breakthroughs. On today's show we're talking about what holds people back from achieving those breakthroughs.
To connect with Noah, visit http://breakthroughwithnoah.com. He also has a new book out at http://sevenfigureexpertbook.com. The book is free if you cover the cost of shipping.
Host: Victor Menasce
email: podcast@victorjm.com
Today's show is an extract of yesterday's livestream where I'm making some predictions for the upcoming period and answering listener questions live.
Host: Victor Menasce
email: podcast@victorjm.com
Coming up later today at 5PM EDT, 4PM CDT, 3PM MDT, I'm going to be live on LinkedIn and Facebook giving my predictions for the upcoming period and opening up to live questions from the audience. To register and attend, visit
https://www.linkedin.com/events/predictions-askmeanything7191469079046639616/about/
On todays show we are doing a dive into why sheltering from capital gains tax is not as simple as it sounds. There is nuance to the process and it can be more difficult unless you plan carefully.
Let's be clear, I'm not offering tax advice. Talk to your CPA. I'm merely sharing my observations based on what I'm seeing in the market.
Host: Victor Menasce
email: podcast@victorjm.com
Coming up on Friday May 3 at 5PM EDT, 4PM CDT, 3PM MDT, I'm hosting a live stream on LinkedIn Live. I'm going to be sharing my predictions for the upcoming period and then opening up to questions from the audience on any topic. To connect to the live stream, join me at 5PM EDT here:
https://www.linkedin.com/events/predictions-askmeanything7191469079046639616/
On today's show we're talking about the FTC's recent ban on non-compete clauses in employment contracts. What does it mean for employers and for employees?
Host: Victor Menasce
email: podcast@victorjm.com
Coming up on Friday May 3, 2024 at 5PM EDT, 2PM PDT, I'm hosting a LinkedIn Live. I'm going to be sharing my economic predictions and opening up the session to questions from the audience. A great way to unwind at the end of the week. Here's the link to join the live
https://www.linkedin.com/events/predictions-askmeanything7191469079046639616/
On today's show we're reviewing the book of the month. Our book this month was written in 49 AD by Seneca. It's an essay on the shortness of life, written to his father in law. It contains the wisdom of the ages and continues to be talked about, translated and interpreted nearly two thousand years later.
Host: Victor Menasce
email: podcast@victorjm.com
I’m going to warn you in advance that today show is completely a conspiracy theory. Whether this conspiracy theory resonates with you or not, I leave entirely up to you. I’m here to convince you or anyone of anything. I am merely observing what I see in the marketplace, and trying to make sense out of it.
Debasement of currency has been going on for centuries. During the Roman Empire, the metal in coins whether it was gold or silver in the Roman denarius was whittled away by progressive emperors. This was essentially a form of theft. Shaving the edges of the coins also became common practice. Modern day version of printing money simply involves the addition of a ledger entry in a database.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about one of our banks being forcibly closed and sold to another bank in Philadelphia in an FDIC auction this past week. The bank is known as Republic Bank and is legally named republic first bank, not be confused with the very similar sounding and much larger bank called First Republic which failed last year.
Republic Bank was a local Philadelphia bank with about 20 branches in Pennsylvania and New Jersey. It relatively new having been founded in 1988. In 2008 the bank switched from being a purely commercial bank to include retail banking.
Our experience with Republic bank was a good one. They wrote construction and permanent loans on several of our buildings in Philadelphia.
Host: Victor Menasce
email: podcast@victorjm.com
Andrew Hellinger has been developing landmark projects for a number of years. His most recent signature project is called River Landing and is located on the Miami River. On today's show we are talking about community building and designing of the community as an amenity. To connect with Andrew and to learn more, visit https://www.riverlandingmiami.com
Host: Victor Menasce
email: podcast@victorjm.com
On today's show I'm speaking with George about the financing of 40 Wall Street, a 75 story building located diagonally across from the NY Stock Exchange. George was responsible for the redevelopment of this iconic building in lower Manhattan when he was working for Donald.
Host: Victor Menasce
email: podcast@victorjm.com
Join us for an insightful Ask Me Anything (AMA) session focused on tax-efficient investment strategies in real estate development and investing. Victor dives into listener questions, addressing scenarios like inheriting property, navigating renovation costs, and optimizing tax benefits. While this episode offers valuable insights, it's important to note that it's not intended as tax advice. For personalized guidance, always seek the expertise of a qualified tax professional. Tune in to learn how to maximize returns and minimize tax burdens on your real estate journey
Welcome to the Real Estate Expresso Podcast, your go-to source for the latest insights in real estate investing. Join Victor Menasce as he explores the ongoing shortage of electrical components, delving into the factors driving this phenomenon two years after the initial supply chain disruptions of the pandemic. Discover why electric utilities and other sectors are grappling with sourcing challenges, and how the surge in demand for electrical infrastructure is reshaping the industry landscape. From the impact of weather events on transformer demand to the growing needs of electric vehicle charging stations, data centers, and solar power generation, Victor unpacks the complexities driving the shortage. Gain valuable insights into the dynamics behind the scenes, including the concentration of manufacturers, distribution channels, and the ripple effects of increased demand across multiple sectors. Tune in to stay informed and navigate the evolving landscape of electrical equipment availability
Host: Victor Menasce
email: podcast@victorjm.com
Join us on the Real Estate Espresso Podcast as we dive deep into the latest employment statistics, unraveling the complexities and revealing the true narrative behind the numbers. Host Victor Minasce scrutinizes the unemployment rate, shedding light on how government definitions and economic shifts shape our understanding of workforce dynamics. From the gig economy to high-paying tech jobs, explore the factors influencing employment trends and gain invaluable insights into the evolving job market landscape. Tune in for a comprehensive analysis that challenges conventional wisdom and illuminates the reality of today's employment landscape.
Host: Victor Menasce
email: podcast@victorjm.com
Explore a landmark US Supreme Court ruling safeguarding property rights on today's episode. Discover how this unanimous 9-0 decision, authored by Justice Barrett, reinforces constitutional protections under the 5th and 14th amendments. Join us as we delve into the crucial role of the court in interpreting and upholding the law, and contemplate the global implications of such legal precedents.----------
Host: Victor Menasce
email: podcast@victorjm.com
Discover cost-saving techniques for construction projects on the Real Estate Espresso Podcast. Join Victor J. Menasce as he delves deep into three aspects of interior finishes, revealing how to cut costs without sacrificing quality. Learn from real-world examples at Turkey's national Builder Expo and explore practical insights to enhance your construction budget. Tune in for expert guidance on value engineering and maximizing savings in today's challenging construction landscape
Host: Victor Menasce
email: podcast@victorjm.com
Join us for a special weekend edition of the Real Estate Espresso Podcast, broadcasting live from the TurkeyBuild Expo in Istanbul. Host Victor Menasce takes you on a captivating walking tour through the exhibition halls, uncovering groundbreaking innovations in interior finishes and construction materials. From revolutionary facade systems to cost-effective flooring solutions, discover firsthand how value engineering can transform your projects. Tune in for exclusive insights and actionable strategies to optimize your construction budget and enhance project quality.
Host: Victor Menasce
email: podcast@victorjm.com
Aaron Letzeiser is based in Chicago Illinois where he specializes in helping rental property owners secure the right kind of insurance coverage. On today's show we are talking about a few strategies that can help reduce the ballooning cost of insurance.
To connect with Aaron, visit obieinsurance.com
Host: Victor Menasce
email: podcast@victorjm.com
I’m currently in Istanbul Turkey for their annual builder expo. This is a massive show with over 10 exhibition halls and they report that more than 52,000 people will attend the expo. I’ll do a separate show later this week specifically on the expo.
On today’s show I’m sharing my observations about Turkey. I have visited several cities in Turkey over the years including Izmir, Istanbul, Anatolia, Kusadasi, and Effesus.
It’s been about 5 years since I was here last and maybe 10 years since I spent any considerable time here. The first time I visited Istanbul I was 12 years old. I’ve seen the city grow up so to speak.
Today, Istanbul is a very modern city. It is also a very populated city with over 15M people.
I’ll have more to report in the coming days about the builder Expo.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s show is another example of out of control government spending.
Italy's government said on Tuesday fiscal incentives for home renovations had had a "devastating" impact on public finances over the last four years and were to blame for the expected rise in the country's massive public debt through 2026.
The plan offered to pay homeowners 110% of the cost of energy saving renovations. Another project promised to cover 90% of the cost of improving the facade of a building.
The government underestimated the scheme's appeal, but also made a number of other errors.
With such generous handouts, homeowners had no reason to negotiate with builders over costs. On the contrary, since the rebate exceeded the actual cost, higher costs meant more money was left for the homeowners in their pocket.
This effect was so predictable that you could see it coming from miles away.
Asked why they got their forecasts so wrong, officials involved in the budgetary planning have said they had no precedent to draw on as no one outside Italy had ever offered to refund more than the costs of the renovations. I’m sorry this is just plain stupid.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about how to determine the structure of an investment offering.
We often hear about the so-called 2 & 20 formula that is popular among fund managers. When we say 2 & 20, that refers to a 2% asset management fee measured on the value of the fund, plus a 20% carried interest in the ownership of the fund. For many funds, that 2% fee is an annual fee. Over a 10 year life of a fund, that fee can amount to 20% of the original investment. That means the investors get 80% of the profits in the fund. Naturally, for that formula to work, the fund needs to generate enough returns for the investors to more than make up for the fees being charged by the fund manager. In publicly listed funds that are considered liquid, fund managers sometimes charge a 7% up front fee. Investors can sell at any time after the first year, but clearly they are going to pay a penalty for selling early.
That’s in the world of mutual funds. The fund managers are merely placing money in operating businesses. They perform their due diligence on the investments and they sprinkle their funds across a number of investments. The fund manager doesn’t do any of the heavy lifting associated with running the active businesses.
In the world of real estate investments, sometimes that can be a fund which will invest in several projects.
More often, the investment is in a single asset. It might be an apartment complex or a storage facility or a land development, or an industrial building. This requires active management of the businesses. I sometimes see the same 2 & 20 being applied to single asset investments.
But in truth there is no real industry standard. Whatever structure you can imagine and investors will embrace can work, of course as long as it is compliant with securities regulations. On today’s show we are going to talk through the thought process that goes into determining how to design an investment offering.
On today’s show we are talking about how to scrutinize a quote for construction.
Earlier this week we received a budgetary estimate for a new construction project. Needless to say, the price was high relative to what we were expecting. So now that you have an estimate, how do you dig in and scrutinize where it is off base?
This falls into a category called “know your numbers”. That means knowing your numbers at a detailed level for specific line items.
I’m going to take you through a few specific line items, not to get lost in the details of this particular project, but rather to understand the thought process inherent in this kind of work.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about aluminum wiring in apartment complexes. This was common from the 1960's to the mid 1970's. About 2 million housing units are estimated to still have aluminum wiring. Some insurance companies will decline to insure your building if you have aluminum wiring and those that remain will charge extra. But there are a couple of remedial solutions.
Host: Victor Menasce
email: podcast@victorjm.com
Grant Reaves is based in the deep south where he invests in Flex Multi-Tenant Industrial. On today's show we are talking about his strategy for adding value to these types of buildings. To connect with Grant and to learn more, visit Stoic Equity Partners at stoicep.com or email him directly at greaves@stoicep.com
Dan French is based in Austin Texas where he has amassed a portfolio in excess of 17,000 units investing in multi-family apartments throughout the South and Southeast. He divested of the majority in 2019 when it appeared that market was overheated and has been sitting on the sidelines ever since. On today's show we are talking about the market cycle and how being patient has proven to be a virtue. To connect with Dan and to learn more, visit atxacquisitions.com or call him directly at 845-629-1808.
Host: Victor Menasce
email: podcast@victorjm.com
Real Estate Investors are gritting their teeth at the moment. The benchmark SOFR remains steady, but the 10 year treasury which is the benchmark for permanent financing has risen sharply in the past week and hit a high of 4.65% yesterday.
Many are wondering what is causing the bond yield on the 10 year Treasury to continue to rise.
We are also seeing oil prices rising at a time when major parts of the world are experiencing economic slowdown. We also have gold reaching record highs.
The obvious questions are “Why?” And what does this mean?
On today’s show we are taking a look at the Macro economy. The bureau of Labor and Statistics published the latest CPI data which came in a bit hotter than expected. This is implying that the Fed will need to keep interest rates higher for longer to combat inflation. The Fed keeps saying that rates needs to be maintained higher for longer so that aggregate demand is reduced to stamp out inflation.
At least, if you read the mainstream media, that’s what they would have you believe.
The narrative is that the economy is still strong and that the GDP growth is high and unemployment is low.
In order to understand what is real in the economy we have to look closely at what is driving the economy.
When you look at all of the growth that has happened in the economy in the past year, it’s been as a result of increases in government spending. It's artificial growth, an illusion.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the EB5 Investor Visa and whether these sources of investment funds have the potential for being useful for real estate projects.
The goal of the EB-5 program is to enable immigrants to get an accelerated permanent residency permit through an investment in a qualified EB5 investment.
Host: Victor Menasce
email: Victor@victorjm.com
Today’s question comes from Paul who asks.
I’m putting together my plan for conferences for the remainder of this year. I’m curious how you determine how much time to spend out of the office attending conferences? How do you decide which events to attend?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at data sources when it comes to understanding the market.
We know there is a gap between asking rents and contracted rents on average. Sometimes you will see a listing as a tenant and the landlord has listed the rent. Some tenants will treat the rent as a fixed number and either pay the asking rent or look elsewhere.
But then a subset of tenants will make a rental offer which might be different than the asking rent. The result is a negotiation.
The rental price might not change in that negotiation. The savvy landlord wants to preserve the value. They don’t want to change the monthly rent. So if they give a discount, they would prefer to offer a rent concession in virtually any other form.
It could be a month of free rent, as in 13 months for the price of 12. They’re still signing a 12 month lease and maybe offering the second or third month of the lease term as the free month. That way, when they compile their numbers for the end of the year, the monthly numbers look stronger even in the presence of a rent concession.
If you’re looking to make an investment, where do you go for a reliable source of rental comp numbers?
The asking rents that are publicly listed are just that, asking rents. That’s not indicative of the actual contracted rent.
We can find all kinds of market data on the internet. But before you look at that data for a particular area you need to ask yourself some important questions.
Host: Victor Menasce
email: podcast@victorjm.com
Dennis Cisterna is based in Las Vegas where he invests in institutional quality office and retail on a nationwide basis. On today's show we are talking about the opportunities that are evident when you're willing to go counter-current. To connect with Dennis and to learn more visit sentineloppfund.com.
Host: Victor Menasce
email: podcast@victorjm.com
Randy Langenderfer is based in Houston Texas where he invests in multiple markets. Over the past decade he has invested in about 1,600 units. On today's show we are talking about finding the right partners in remote cities. To connect with Randy visit invest-ark.com
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the shortage of construction workers that has been widely reported.
From our vantage point, we are seeing a number of contradictory facts. There is a shortage of workers in many of the trades. At the same time, we know of workers who are sitting at home right now, looking for work. We know this because we are being continually solicited for work by subtrades.
We also know of architects and consulting engineers who are being laid off because of a lack of work in some markets.
It’s a strange dichotomy. There is no question that theindustry has experienced a slowdown of new projects after a few years of elevated investment. However, we believe this situation is temporary. The problem is demographics. People are retiring out of the construction trades, faster than new young people are entering the trades.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at a study that was authored by three researchers at Purdue University, The College of William and Mary, and The Chinese University of Hong Kong.
The purpose of the study was to examine the impact of short term rental bans on the long term rental market.
There are many different type of ordinances affecting short term rentals. But the truth is, most municipalities do not enforce these ordinances. The end result most of the rules are ignored by landlords.
This particular study zeroed in on Irvine California which is one of a few communities that actually does enforce its ban on short term rentals in properties that have residential zoning. If you’ve spent any time in southern California, you know that the entire area is essentially one continuous city. The only way you know that you’re now in another city is because there is a sign welcoming you to the new city. Otherwise, there is no obvious boundary. If you work in Irvine, you would happily drive from Costa Mesa, or Newport Beach, or Laguna Beach, or any of a number of communities in the area if you can find a place to rent at a respectable price.
The study found that the actual contracted rental prices reflect the supply demand equilibrium whereas the asking rents are generally higher than the actual contracted rent.
The study found that in the case of Irvine, the number of Airbnb listings declined by 27% within two years of the ban.
The study also examined short term rental activities in the neighbouring cities where there was no short term rental ban in effect.
The study found that within three years of the ban, enough new supply had been brought back into the market that there was an observed decline of contracted rental pricing of 3% or the equivalent of $114 per unit across the entire market.
The academic paper is about 32 pages in length, and no doubt will be cited by numerous advocacy groups around the nation as a quality piece of research.
The authors of the paper were very focused on reduction of short term rentals as the primary source of supply entering the market. As developers, we know that construction is another source of supply entering the market.
It is possible that maybe Irvine had more rental housing constructed during that time period compared with the surrounding cities which contributed additional supply to the market. We just don’t know because the researcher failed to consider that aspect. We know that rental pricing follows the laws of supply and demand. If you’re going to look at the supply side and assess the impact of the STR ban, then you need to look at all sources of supply entering the market, not just STR to LTR conversions.
Unfortunately, the paper made no reference to new supply.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the importance of hiring a surveyor for every step of the building process.
The first case study is of a property located in Hawaii on the island of Puna.
A construction company has reportedly built a half-million-dollar house on the wrong property.
The second example is a public road that was built 20 feet off center and is encroaching on the neighbor's property.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at what I consider to be a double standard. There is one set of rules for the average person and another set of rules for the government.
We know that using funds from new sources of funding to pay off existing investors is the very textbook definition of a Ponzi scheme. These are highly illegal and the likes of Bernie Madoff should rot in jail for stealing from people.
But there is another form of the same thing which involves investors and is sanctioned by the SEC.
Have you ever heard of a Naked Short Sale?
On today’s show I’m going to be quoting directly from the SEC regulations.
Host: Victor Menasce
email: podcast@victorjm.com
Our book this month is “Radically Condensed Instructions for Being Just as You Are” by Jennifer Matthews.
Host: Victor Menasce
email: podcast@victorm.com
Ben Spiegel is based in Greenwich, Connecticut where he specializes in design and construction of luxury RV Parks. This is an asset class that is often overlooked. To connect with Ben, visit redwoodcapitaladvisors.com
Host: Victor Menasce
email: podcast@victorjm.com
Hayden Crabtree is a storage developer based in Atlanta, Georgia. On today's show we are talking about a project in Fort Myers that went sideways in the approval process. This is a powerful story packed full of lessons.
To connect with Hayden, he is @haydencrabtree on Instagram. His book "Skip The Flip" is available on Amazon and his cost segregation business is at remotecostseg.com
Host: Victor Menasce
email: podcast@victorjm.com
While the US Federal Reserve has made very few signals about what is happening in the economy, there are many more alarms being sounded by central banks elsewhere in the world. On today’s show we are looking at what those other central banks are saying and some of the policy changes that have already occurred.
The most visible signal we are accustomed to seeing in a recession is job losses. So far, while job losses have increased, most would not consider recent job loss data to be an economic calamity.
But the signs of economic slowdown are not limited to the economies in North America.
There are numerous Countries in recession right now. Germany, Italy, France, the UK Japan are all in recession.
Today’s question comes from Chandler who writes:
I was turned onto your podcast a little over a year ago and have received tremendous value from your insights ever since. Thank you for your consistent efforts to deliver information about the nuts and bolts of the real estate world.
A little over a year ago, I purchased my first storage facility. After completing a fairly substantial facelift on the property and aggressively managing the rates, I've been able to double my gross revenue from the time of purchase. However, even with the increased rates, the demand for my units continues to outpace my supply. I have no previous experience in construction, so the idea of an expansion project overwhelms me, but I don't plan to let that stop me.
The property adjacent to mine is a large tract of vacant land. I'd like to approach the owner about purchasing the property from him, but I don't want the potential price or terms of the deal to be influenced by the fact that I own the storage next door. Is there a way I can find out how much he wants for the land and make an offer on the property without disclosing my identity? Would this strategy even be appropriate, or am I overthinking the whole thing?
Thanks again for all of your help!
Host: Victor Menasce
email: podcast@victorjm.com
Today’s question comes from Jonathan who asks.
Your recent episode on the NAR lawsuit settlement left me with a question. From what I understand, NAR recently settled the class action lawsuit and buyer’s will be required to hire and pay their own buyer agents. You mentioned in that episode that the practice is now matching what was already the practice in commercial real estate. So when you are buying commercial real estate, do you actually hire buyer representation? As a commercial investor, should I pay for buyer representation?
Host: Victor Menasce
email: podcast@victorjm.com
Where is the line between break and enter, theft, and a tenant being evicted unlawfully?
Well, that is now being finally clarified in a couple of states. If someone breaks into your house and starts stealing your stuff, then you would do the natural thing and call the police to have the crooks arrested. But when the police show up, if those people claim to be a tenant, the police will probably tell the owner to have them evicted through civil litigation in the court system. In many states, this process can take upwards of years.
The state of Florida just passed legislation that restores property rights to property owners.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about flooding. When it rains you have to think about where the water is going to go.
We’ve all heard the advice about how to always pitch your tent in a high location and to avoid the low spots where water will flow in the event of a rainstorm.
The same advice applies to construction. Except the construction itself can be a source of problems when it comes to storm water management.
Storm water management is governed by a set of principles, that is to say the laws of physics and often further constrained by regulations from multiple jurisdictions.
The basic principle behind most of the regulations is that Mother Nature was perfect in her design of our planet and that it is the alterations caused by humans that are responsible for messing things up.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we are jumping into the realm of Artificial Intelligence and George is answer a question that was composed by an AI bot.
Host: Victor Menasce
email: podcast@victorjm.com
Today's show is an extract from a longer talk given by Dr. Chris Martenson at the Ottawa Real Estate Investors Organization on March 13. Chris is the founder of Peak Prosperity. You will find lots of amazing content on a wide spectrum of topics at the Peak Prosperity website. To learn more and to connect with Chris visit peakprosperity.com
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about how education is changing, and in particular what that means for owners of student housing.
When you make an investment in student housing you are making a few fundamental assumptions.
- The enrolment in the institution will grow or at least remain constant.
- Students will still need to come to campus to attend classes.
- Foreign students entering the country will generally need more student housing than local students who might be able to live at home with parents.
- The demand for student housing will grow over time, or at least remain constant. If the demand drops, then you can expect vacancy to increase in the local market and for rental rates to drop. Students will make housing decisions based on lowest price.
When you make an investment in student housing you want these assumptions to hold true for longer than your forecast holding period for your investment.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are making sense out of the latest results from the Federal Open Market Committee’s two day meeting which concluded on Wednesday of this week with J Powell’s press conference on Wednesday afternoon. I watched the press conference in its entirety.
Chair Powell didn’t field too many difficult questions.
There were a couple of things in the press conference that I thought were noteworthy. The mainstream media keep talking about 3 rate cuts this year. But I didn’t hear that in his talk. What I did pay attention to was his target for interest rates in the next month, and by the end of the year.
Earlier this week, the National Association of Realtors announced a settlement agreement to the class action lawsuit that was widely publicized late last year. On today's show we are talking about the implications of the settlement. Sadly, the likely result is that it will harm the very people the lawsuit was designed to help. For commercial transactions, there is no impact. The practices in residential real estate are being brought into line with what is already the practice in the world of commercial. Commercial real estate puts the burden of risk on the buyer and this is understood.
On today's show we are looking at what investors are predicting for the coming year. Data from Colliers and CBRE form the basis of today's show. The CBRE investor sentiment survey indicates what investors think will happen this coming year.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about market fundamentals. Our listeners are real estate investors. But that means they’re investors first. The investor mindset is based on fundamentals.
When we assign value to a corporation, that translates into a share price if that stock is publicly traded. All other things being equal, the stock will trade at a multiple of net earnings.
The conventional wisdom is that in times of economic boom, net earnings tend to swell and the share price of the company will increase to reflect the higher earnings of the company.
In times of recession, revenues fall, and earnings usually take an even bigger hit. The share price of those publicly traded companies get punished accordingly.
So we have a strange situation going on in Japan at the moment. The economy is clearly in recession, and has been for some time.
We have a Japanese stock market index that is up by 30% over the past six months during a time when the economy is limping along.
There’s nothing like a good old Wall Street style share buyback to wallpaper over weak corporate earnings.
Host: Victor Menasce
email: podcast@victorjm.com
Jon and Kevin Ratner form part of the Forest City legacy and are currently leading a new venture called The Max Collaborative. They've taken their decades of experience running a public real estate development company and translated into unique product offerings with energy efficiency, design and sustainability as underpinning qualities.
To connect with Jon and Kevin, visit themaxcollaborative.com
Host: Victor Menasce
email: podcast@victorjm.com
Erik Oliver is based in Salt Lake City where he specializes in Cost Segregation. On today's show we are talking about how to handle the uncertainty of changing legislation in the realm of depreciation. To connect with Erik and to learn more visit costsegauthority.com
You can also reach out the team directly at Cost Segregation Authority
Scott Santiago
Phone Number: 385-853-7011
ssantiago@costsegauthority.com
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we are talking about some news items on short term rentals.
1 ) New policy at AirBnb governing the use of security cameras
2) European Union passes new rules for data sharing between the platforms and regulatory bodies
3) Some interesting short term rental stats from the European Union
Host: Victor Menasce
email: podcast@victorjm.com
This question comes from Marc who writes:
I’m not sure how I feel about corporately owned single family homes. Part of me thinks that ultimately this will destroy the fabric of a community if too much of the country’s single family housing stock is owned by large corporations. Maybe I’m not seeing it, but how in your mind does corporate ownership of single family homes benefit communities?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the power of a platform. Amazon is one of the most widely used sites on the internet. In fact, they also have 1.5M employees. We will come back to that later.
Jeff Bezos and Marc Benioff recently entered the real estate game in a big way.
Marc Benioff is well known for being a founder at salesforce.com and he has a personal net worth of about 10.5B. Together, Bezos and Benioff seeded Arrived Investments with funding.
Arrived invests in single family homes and in short term vacation rentals.
The company has avoided some of the hottest primary markets like Atlanta, Nashville, Austin. Instead they have focused on up and coming markets like Augusta Georgia, Savannah Georgia and Knoxville Tennessee.
To date, they count over 551,000 registered investors totalling $128M in real estate and so far have paid out $4.5M in dividends to investors. They have raised $135M and have purchased 368 properties and counting. Clearly they’ve designed an organization with the intention of scaling much larger. Their website shows a pretty complete team with about 20 people and the role descriptions I would expect for a company of this type.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at the most cost effective ways to value engineer a new build and still comply with the increasingly stringent energy codes that are permeating the building code across North America.
These building codes are local. That is to say, they can vary from one place to the next.
When it comes to energy codes, there are two approaches that are used.
- The prescriptive method
- Comprehensive energy model
Under the prescriptive method, the building department says that if you use this type of construction, with this specific insulation in the wall and attic cavity, and continuous insulation on the outside, and heat pumps having these specs, and these types of windows having no more than a prescribed percentage of window area, then you will comply with the code.
It should come as no surprise that this kind of paint by numbers approach is going to give you an energy efficient building. But it’s also going to cost you a lot more than it needs to.
The second method is using a comprehensive energy model.
This is where the energy consulting engineer will create a thermal model for your building based on your local climate. It will take into account the temperature averages throughout the year and determine how much heating is going to be required in the winter and how much cooling is going to be required in the summer.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at pricing practices in the storage industry. Storage is a product that is fairly sticky.
That is to say, moving a lot of personal belongings into a storage locker is time intensive. It often involves renting a truck and taking a Saturday afternoon to make a few trips. The decision to rent a storage unit is often event driven. The storage company might even have a truck that they will rent you for “Free” to move your belongings on the way in.
But renting a truck is a hassle. It’s more expensive than renting a car. Even U-Haul has an inexpensive daily rate, but a high mileage rate. So while you might rent the truck for $29, you’re looking at a few hundred dollars when you take all of the extras into account.
Moving belongings has friction. The more friction, the more people will delay moving their belongings out of the storage.
Host: Victor Menasce
email: podcast@victorjm.com
Matias Daroch is based in Miami Florida where he specializes in both design and development of luxury spec homes. On today's show we are talking about some of the design considerations in that part of the world. To learn more and to connect with Matias, visit http://mikarchitecture.com
Host: Victor Menasce
email: podcast@victorjm.com
Marc is a very "active" passive investor in the sense that he performs deep due diligence on potential investments. But deep due diligence is often beyond the capacity of a single investor. On today's show we are talking about a unique approach to due diligence. To connect with Marc, visit PartTimeInvestors.com or email him directly at Marc@PartTimeInvestors.com
Host: Victor Menasce
email: podcast@victorjm.com
Today's question comes from Rob who asks:
What is the economic difference, and the difference in investment thesis, between the different types of RV parks?
Host: Victor Menasce
email: podcast@victorjm.com
The statistics are clear. Inventory is rising. But what does it mean? On today's show we are looking past the numbers alone.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the danger of reading headlines and making decisions based on those headlines.
A few months ago I reported on the podcast about the Corporate Transparency Act. This is that new regulation that requires millions of companies across the USA to disclose additional beneficial ownership information to the government.
In a new ruling from last week, the Corporate Transparency Act was ruled unconstitutional. But the ruling was very narrow and only applies to the plaintiff who brought the case, and the roughly 60,000 members of the National Small Business Association.
It would be a mistake to think you don't need to comply with the Act, just because a narrow decision deemed the Act to be unconstitutional.
I'm not here to offer any form of legal advice. You need to ask good questions of your own legal counsel.
Host: Victor Menasce
email: podcast@victorjm.com
A number of high profile commentators have demonstrated that very few professionally managed equity funds have outperformed the market average. Fund managers are active investors. They analyze each company. The interview the CFO and the management team. They perform due diligence on the company and determine whether shares in that company fit within the fund mandate and they then make an investment decision for the fund’s investors. This is what is considered the active component of the stock market.
The second form of investing is what is called passive investing. This is where you put funds into an index fund and there is absolutely no intelligence being applied to the purchase. The index is computed according to a formula and if there are 500 companies in the index as in the case of the S&P 500, you’re buying a tiny sliver of 500 companies simply by investing in the index fund.
There’s a lot of evidence that passive index funds have outperformed the active over the longer term. Now passive funds have not been around that long, but over the history passive funds have outperformed active funds.
So if that’s true, then why take the risk, pay the premium fees associated with a stock mutual fund, and the still end up with inferior performance.
Host: Victor Menasce
email: podcast@victorjm.com
There is no doubt that the lock in effect has reduced the amount of mobility in most forms of real estate. The higher interest rate environment has dramatically reduced the number of people who are willing to give up their low interest rate mortgage and move to another property where their cost of borrowing is going to be much higher.
Some have chosen to move and put the house that they own on the rental market and in turn to rent at their new location. In these cases people are often moving for work and the decision to move is entirely based on financial considerations.
So we know that fewer people are selling. But what about in the rental market? Is absorption and mobility up or down in the past year?
Well all of the data that I have seen suggests that rental moves are down as well in most markets.
For landlords of existing stabilized properties, the lower unit turnover can translate into higher profit margins. While rents are not increasing as they did in 2021 and 2022 and to a lesser extent in 2023, the lower turnover means lower turnover costs.
Host: Victor Menasce
email: podcast@victorjm.com
Zach Jensen owns an acountng firm in San Diego, Califrnia. On today's show we're talking about the beneifts of being classified as a real estate professional and what it takes to qualify for this.
To connect with Zach and his firm, visit taxwisecorp.com
Host: Victor Menasce
email: podcast@victorjm.com
Pasha Esfandiary is based in Los Angeles where he established himself as a professional poker player. Despite being successful at poker, he pivoted into the world of real estate investing and has applied the lessons of poker in his new career. On today's show we are exploring those lessons.
To connect with Pasha, visit https://www.evokecapital.net/
Host: Victor Menasce
email: podcast@victorjm.com
Our book this month is called Scary Smart by. Mo Gawdat. Mo was the Chief Business Officer at Google where he was responsible for much of Google’s global expansion, country specific localization and the introduction of translation and voice recognition all over the world. He’s a super smart guy and he has been an insider when it comes to Google’s AI projects. Prior to Google, Mo was at Microsoft. When I heard a podcast where he was speaking on his perspectives on AI, I knew I needed to read this book.
Computing has accelerated according to Moore’s Law which predicted a doubling of the density of circuits on a chip every 18 months. That held true for a long time. We keep thinking that we are reaching the fundamental limits of circuit density. Merely shrinking the feature size of the transistors is starting to approach fundamental limits like the number of atoms needed to make up a circuit.
The advent of accelerated computing in the form of graphics processing engines of the type that Nvidia and AMD create has enabled the backbone of the AI revolution.
Machine learning is the second dimension of acceleration. The pace with which machines are able to learn is also accelerating.
Think of AI like fuel that will amplify and accelerate virtually every aspect of life.
The super rich will get richer. The lazy will get lazier. The security system and law enforcement will become more vigilant. The weapons systems will become more ruthless. Marketing will become more targeted and more sophisticated. Loopholes in the tax code will become easier to find. The list of accelerated aspects of our lives is extensive.
Host: Victor Menasce
email: podcast@victorjm.com
Storage is an industry segment that has been growing rapidly for the last few decades. But this has been impacted by the recent decline in the residential real estate market in the past 24 months.
Across the United States there has been a decline in storage occupancy and operators have been offering increased incentives for their retail storage offerings.
So the question is why the sudden drop in prices? Is the industry over supplied? Are the traditional metrics for storage space as a function of population density no longer valid?
Host: Victor Menasce
email: podcast@victorjm.com
On yesterday’s show we looked at a couple of the hedonic adjustments that the BLS makes when computing GDP and the consumer price index. On today’s show we are going to take a look at the real estate component of the CPI. Part of the contribution to elevated inflation over the past couple of years has been the nearly white hot acceleration of real estate prices. That’s partly a function of purchase price. But the BLS doesn’t factor that into the cost of housing. Instead, the treat the entire real estate marketplace as if it consisted of landlords and tenants, despite the fact that home ownership represents about 66% of households across the nation.
What I will reveal on today's show would be funny if it wasn't so tragic.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a closer look at the various components of the consumer price index and how it is calculated. Today's show will probably shock you.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s question comes from Marc in Montreal.
I recently got an as-built appraisal report that I wish to use for financing for a new apartment complex in a semi-rural location with lots of industry and extremely low vacancy. The appraiser is quoting a higher CAP Rate than I was expecting, citing the following. First, he is using comparables a couple of hundred miles away, in the same province. Second, he is stating that the Bank of Canada has not lowered interest rates, when multifamily lends on a more floating bond rate. Third, his only comparable in the same market appears to be an inferior product with less amenities. Fourth, he is saying that the site is not serviced, but I can tell you that the municipal government has stated that servicing will come in time for the construction. What kind of arguments can I make to gently push the appraiser to a more favourable CAP Rate?"
Host: Victor Menasce
email: podcast@victorjm.com
Brock Holliman is based in Sarasota Florida where he develops build to rent communities in an infill context. Today's conversation is filled with powerful market insights. To connect with Brock, visit hollimancapital.com or connect with Brock at @follow.brock on various social media such as Instagram, Facebook, Youtube, etc.
Host: Victor Menasce
email: podcast@victorjm.com
Michael Flight specializes in shopping centers. He was our guest last weekend where we talked about the state of retail. Michael is also a pioneer in the world of applying crypto technology to real estate and how real estate can become tradable using blockchain technology. I've had numerous conversations with proponents of this technology and today's talk was the first one that actually made sense to me. This is one you definitely want to pay attention to. To connect with Michael and to download his white paper on tokenization, visit http://investonmain.com
Host: Victor Menasce
email: podcast@victorjm.com
The allure of hunting for that perfect deal can be intoxicating. I hear of many investors often spend countless hours scouring listings, attending networking events, and analyzing market trends. But what if I told you that there’s an alternative approach—one that doesn’t involve the relentless pursuit of deals? Welcome to the all-you-can-eat buffet of CRE investing.
Host: Victor Menasce
email: podcast@victorjm.com
Commercial brokerage JLL just published their retail real estate report for 4Q2023. The report contains a number of interesting insights.
Today’s show complements the interview we had with Michael Flight last weekend on shopping centres. Michael has been investing in shopping centres for decades and he is a real expert in the space.
The JLL report highlights that the majority of the growth is in the southern states.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are focusing on a change that is looming in the world of real estate marketing.
It’s well established that the average person has a hard time visualizing what their new home or perhaps their rental apartment will look like when fully furnished. Some furniture businesses have been investing heavily in the technology to help you visualize what their furniture would look like if placed in your home.
That is very useful and can really help potential customers in making a buying decision on that new sofa or coffee table.
When a developer shows renderings of a future project these images or animations are helpful in visualizing the future project.
But there is little doubt that what we are seeing is an artists rendition. Nobody is fooled into thinking that they are seeing a real image. The images and videos are helpful, but not misleading.
Enter the world of generative artificial intelligence.
The next version of Chat GPT is version 5 which has not been released. Some of the industry analysts that I follow are saying that version 5 has not been released because it is actually too realistic.
From a text description, it is possible to generate a photorealistic video that matches the text directive. The problem is not that an animation can be created from a text description. That’s cool and frankly even desirable for a number of applications.
The problem is that if an AI generated video is indistinguishable from a real video, the brain has a problem consuming any content in the future. We have no moral, ethical or psychological dilemma when viewing an animation.
Host: Victor Menasce
email: podcast@victorjm.com
What type of organization do you want to work with? Are bigger organizations necessarily better?
We’ve all heard of the Pareto Principle, this is sometimes called the 80/20 rule. 80% of the revenue comes from 20% of the customers. 80% of the complaints come from 20% of the customers. 80% of the wear on a carpet happens on 20% of the surface area. There are countless examples.
It’s not a rule, or even a law, but something that occurs with enough frequency that it’s got to be more than coincidence.
A less known rule is called Price’s Law. This speaks to the productivity in an organization. It says that 50% of the work is done by the square root of the total number of people in the group.
So if you have four people in the group, then 50% of the work will be done by two people. Seems pretty efficient so far.
If you have 100 people in the group, then only 10 people in the group will be responsible for 50% of the output, and the remaining 90% will contribute to the remaining 50% of the output. Now either the 90% are really awful, or the other 10% are extraordinary.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about what’s wrong with today’s internet.
You might be wondering why we are talking about technology on a real estate podcast. It’s because the internet is the primary source of information for real estate investors and developers. We’ve come to rely on it. If the document you seek is not accessible online, then it’s as if it doesn’t exist. If it is online, but you can’t find it, then the effect is the same.
Today’s internet has not adapted to the introduction of AI.
Search algorithms rank the search results based on popularity. That’s why Amazon ranks higher than the independent corner bookstore that’s across the street from the University in your home town selling used books. Intuitively that makes sense. In an orderly world where natural organic traffic forms the majority of traffic, this approach makes sense.
Of course there are numerous other criteria that Google and other search engines like Bing use to determine when to present a result.
Google has become pretty good at distinguishing between legitimate and spam content. The search algorithms have become progressively smarter at staying ahead of attempts to fool the algorithm. But in recent months, there has been a degradation.
Host: Victor Menasce
email: podcast@victorjm.com
Chris Miles comes from the world of life insurance sales. On today's show we're piercing the veil on some of the practices that are rampant in that industry that everyone needs to know about. To connect with Chris, visit moneyripples.com or check out his Money Ripples youtube channel.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we're talking with Michael Flight. He's been investing retail since the early 1980's. We're talking today about the pressure points in retail. To connect with Michael or to learn more visit libertyfund.io. There are numerous resources on the website.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about some of the structures out there, pooling of funds in a blind fund, or investing in an individual project. There are so many ways to invest. The question is, what are the pros and cons of one approach versus the other.
It really starts with getting educated on the type of investment that is going to fit for you. Investments run the full gamut, from buying existing stabilized assets at one end of the spectrum to undertaking large scale development at the other end of the spectrum. These are vastly different in terms of the rates of return that are possible, as well as the timeline and the risks associated with each of the asset types.
In general, Greenfield development projects have the greatest value creation potential but take the longest to bring to fruition. Fully stabilized projects deliver cash flow from day one, but have limited short term upside. Growth in value will come through rent growth over the longer term.
When evaluating any investment, we always look at three major factors
- the team
- The specific sub market
- The deal itself.
Due diligence on all three of these elements takes a lot of effort to do it thoroughly.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about government taking land from you with what appears to be no compensation.
The concept of eminent domain is well entrenched in real estate law. It says that government can demand your land in exchange for just compensation if the taking of that land is in the public interest.
For example, if the public good is served by building a new freeway or an airport, the only way to assemble the land would be by undertaking a claim under eminent domain.
But there is another way to get the needed land, slowly over time. Increasingly cities are using this other method to get what they need without paying a single penny to get it.
They will ask you to donate the land.
Where we see this most often is when the property fronts on a major arterial or collector road.
As density increases those streets need to widen to handle more traffic. Along the way some enterprising developer realizes that this would be a good location for an apartment building and requests a zoning change.
In exchange for the increase in density, the city may ask you to donate a strip of land to the city in order to enable future widening of the road when the time comes.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about making sense of the conflicting economic data that is being reported by different government departments.
Let’s start with GDP and then we will look at employment numbers, and finally we will look at inflation versus real earnings.
Host: Victor Menasce
email: podcast@victorjm.com
I’m a real estate developer. I’m pro-development. I’ve had projects denied by city council as a result of community opposition. In every case, I’ve been shocked by the intensity of community opposition and truly felt that our project was designed to enhance the community, and not detract from it.
Some community opposition has been based on absolutely made up stories that are not at all connected with reality. That’s a polite way of saying that residents in some cases will tell a lie to further their objective of keeping growth away from their community.
Last week I joined a community opposition group. The experience has been a fantastic learning. So much so, that I thought it would be worth sharing the experience with you.
On today’s show I’m sharing my personal experience being part of a community opposition group. This was a Facebook group that surfaced around a proposed suburban development project that local residents think is too big, and out of place with the suburb at the far extremity of the urban boundary. Th project consists of 431 apartments, including a 25 story tower. The original proposal for the site was three 9 story buildings, which already would be a stretch for the community.
The group is barely a week old and has 618 members. The target is a public hearing involving the local city councillor that is scheduled for two weeks from the date the group was formed.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about the immigration, migration, deportation, and human lives. Earlier this week I had a conversation with Juan. He’s Mexican and lived in Austin Texas from the age of 5 until the age of 27 when he was deported back to Mexico. Juan entered the US illegally with his family at the age of five. Clearly he didn’t have the capacity to make that decision for himself. He speaks perfect English. He had a job in Austin and he was a full contributing member of the community. He had both family and friends in Austin. One day he was driving on the highway and got pulled over by a police officer for an aggressive lane change. He lacked the proper documentation. That started a chain of events that resulted in three nights in a prison cell before being deported back to Mexico.
Juan is barred from re-entering the US for 10 years. He can apply to come into the country properly, but only after that waiting period.
The number of people traversing the US southern border is averaging between 5-6 thousand per day. That’s a huge number. They’re coming from all over the world, not just Mexico or Central America as was previously the norm.
Those who are seeking asylum from persecution should be able to find sanctuary somewhere in the world. That’s basic human rights.
My family escaped WW2 and came into the USA through Ellis Island. Millions, including my grandparents were not so lucky.
Most western nations need immigration just to maintain population. Maintaining population is essential for economic growth. Shrinking population causes systemic economic recession.
The fact is that the entire debate has become so intensely partisan that it’s become virtually impossible to get the truth about what is happening.
Juan says he’s committed to coming back to the US the right way. He has friends that have offered to help him get back into the country and have offered him accommodations. But he has refused that offer. He wants the respect the law. He has four years remaining before he can apply. He has lived the majority of his life in Austin and is culturally American in every way. I hope he gets back in.
Juan’s story is one of millions. He’s a statistic, but he’s also a real person with real dreams and aspirations.
Host: Victor Menasce
email: podcast@victorjm.com
Bronson Hill is based in Los Angeles California. On today's show we're talking about the shift that has taken place in the market over the past six months. To connect with Bronson, visit bronsonequity.com.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we're talking with George about some of the current events in the news and how this will affect real estate investors.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about major international events and the impact on real estate from those events. Major cities have sought to host events like the Olympics, the World Expo, The world Cup of Soccer, The PanAm Games, the Commonwealth Games and so on.
Each of these events brings with it the need to build the appropriate event space, accommodations for the visitors during the events themselves, and of course a tremendous amount of infrastructure.
On today’s show we are looking at the legacy of major events, a decade after the event is over.
Host: Victor Menasce
email: podcast@victorjm.com
Today's question comes from Greg in Virginia who writes:
Love the show. I am constantly amazed at your depth of knowledge.
My AMA is: I’ve heard you and others state many commercial office buildings are not suited for conversion to apartments and would likely need to be demolished and rebuilt for apartment living. Understood, however, if the office buildings are vacant, meaning no jobs, is there even demand for these additional apartments? Common sense says invest and build where net in migration occurs, not where people are leaving. If the offices are empty, the assumption is people are leaving.
I look forward to your wisdom.
Host: Victor Menasce
On today’s show we are talking about inclusionary zoning. This is a new initiative in many communities aimed at creating affordable housing.
The actual goal of inclusionary zoning varies from one community to another. In some locations there is a narrative that single family detached homes create an economic divide and therefore widen racial segregation that is implicit with economically segregated neighbourhoods. You won’t find an affordable home in the middle of a neighborhood surrounded by luxury homes.
In other communities, the definition of inclusionary zoning is aimed at creating affordable housing by effectively taxing developers with burden of building a number of affordable units in exchange for the right to build a number of market rate homes. The theory is that by sprinkling affordable housing throughout the city as part of new development projects, you prevent the ghetto effect of lower income areas separated from the more affluent areas.
Inclusionary zoning programs vary widely in their implementation. In some cases, developers may also have the option of building affordable units in other locations within a city, or they may be able to pay cash instead of developing affordable units.
Host: Victor Menasce
US Federal politics might be appropriately described as legislative gridlock.
You can’t seem to get a single piece of legislation through the house and the senate on its own merits. These omnibus bills seem to get loaded up with dozens and sometimes hundreds of provisions, each one designed to amass the number of votes needed to get a majority vote in the House and the Senate.
The move to restore 100 percent depreciation took a step forward with the U.S. House's approval of the Tax Relief for American Families and Workers Act of 2024 last Friday.
For real estate investors, what the bill essentially says is that the 100% bonus depreciation is extended. Under the 2017 tax code, the bonus depreciation would have been calculated as 100% bonus depreciation in 2022, 80% in 2023, 60% in 2024 and so on down to zero.
Under the amendment, the 100% depreciation is extended until 2027. Not only that, the bonus depreciation is retroactively calculated at 100% for the year 2023 which just ended.
I recently did an interview with CPA Mike Pine from Pine & Co in Dallas. It’s an incredibly useful session on how to effectively use depreciation as part of your investment strategy. I’ve included a link to the video replay of that session with CPA Mike Pine HERE. So if you want to save a bucket load on your taxes, using the benefits of depreciation this particular session should help make the power of this tool pretty clear.
This piece of legislation is something that almost all real estate investors are going to want to follow closely over the next 30 days or so.
Host: Victor Menasce
email: podcast@victorjm.com
A Shun of the bank is not the same as a run on the bank. But the effect can sometimes be the same.
The latest bank to suffer from the banking crisis that erupted last year is a name that most people might not remember. NY Community Bancorp announced their year end financial results and their 4th quarter results.
The bank was the winning bidder in the auction to take over the assets of Signature Bank when it failed in the Spring of 2023. Signature was the second bank to fail after Silicon Valley Bank.
NY Community Bancorp completed two acquisitions in less than a year. They bought Flagstar Bank in December of 2022 and Signature in the Spring of 23.
They took on nearly 40 branches that belonged to Signature Bank and $38B in Assets from the FDIC. At the time they trumpeted how good a deal they got on the assets. Well, they made a surprise announcement last week as part of their Q4 financials.
Host: Victor Menasce
email: podcast@victorjm.com
Paul Moore is the principal at Wellings Capital who are now on their sixth fund. Their latest fund is focused on preferred equity and on today's show we're talking about one company's take on how to use preferred equity effectively in deals. To connect with Paul, visit wellingscapital.com where they have some useful resources on their resource page.
Host: Victor Menasce
email: podcast@victorjm.com
Dave Foster is a specialist in tax deferred exchanges. You can connect with him at https://the1031investor.com. On today's show we are taking about where is the fuzzy line between capital gains treatment and ordinary business income treatment when in comes to land investing.
Host: Victor Menasce
email: podcast@victorjm.com
We often get questions from clients and even listeners to the podcast about the merits of a legal case. To be clear, we are not lawyers and the purpose of today’s show is not to provide legal advice in any way.
The purpose of today’s show is to illustrate the uncertainty of the legal process. I’m going to report on a case of a commercial lease in the province of Ontario. Commercial leases really are fully described by the contract and are usually not subject to being torn apart by a tenant board in the way that a residential lease might be. The interpretation is going to rely largely on the wording of the lease and much less on outside legislation that might trump the lease.
Host: Victor Menasce
email: podcast@victorjm.com
Our book this month is a brand new book that was just released two weeks ago called “How to Make a few Billion Dollars “ by Brad Jacobs.
Brad is a serial entrepreneur at the highest level having built multiple multi-billion dollar companies in succession. When I heard his story it became obvious that he had something to teach me.
Throughout the book he takes the reader through his thought process. He talks about how he had to rewire his brain to reject the social conditioning.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s question comes from Ramon who writes:
Dropping a quick note to thank you again for all that you do to make the RE Espresso amazing. I can’t imagine how much work it must be for you to consistently create such high-quality content. I hope you know how much value I and many others get from it. Specifically, your recent mini-series on business planning has been phenomenal, amazing insight into how to keep an organization aligned in working towards the right goals. Wondering if you would have any interest in doing a similar mini-series (or even single episode) on how you built Y Street Capital in the early days. How did you balance the financial commitment of expanding the team, building-out office space, etc, given the difficulty for a RE developer to accurately forecast the timing to generate revenue/liquidity events - especially in the early days before you had a solid base of cash flow from existing stabilized projects and consulting clients - vs the need for high quality help to sheppard projects and evaluate new opportunities? I think many people struggle with this chicken and egg problem and would be interested to hear how you approached it.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about commercial real estate and office in particular.
The main stream media remain fixated on reporting the averages. They are focused on the bigger macro picture.
For example last week the Wall Street Journal published a story all about the commercial debt that is scheduled to mature over the next few years.
More than $2.2 trillion in debt is maturing before 2028, and much of that will have to be refinanced at higher rates.
But it’s actually missing the larger underlying problem. When you layer the two problems together, its hard to see a path to success for most office buildings.
Last week I was in NYC and met with some senior folks from JLL.
NYC has now over 100M square feet of vacant office space.
There are only 7 cities in the US having more than 100M square feet of office. NYC has more than 100M SF of vacant office space.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking another look at the world of energy and some of the disruptions that could result in major economic and geopolitical disruption far beyond the turbulence our world is currently facing.
Today’s show is about unintended consequences.
Host: Victor Menasce
email: podcast@victorjm.com
Peter Roisman is based in Puerto Rico where he is the principal at revmlc.com. The company specializes in rating leasing performance for multi-family properties and then training property managers to improve their performance when it comes to leasing. Most property managers don't treat leasing as a core excellence. The scores across most multi-family properties confirm this. To connect and to learn more, visit revmlc.com.
Host: Victor Menasce
email: podcast@victorjm.com
Eric Rice is based in Dallas Texas where he is in a business development role at King Operating. On today's show we are taking a look at various facets of oil and gas exploration. This is perhaps the highest risk end of the spectrum when it comes to oil and gas investing and I'm saying this from personal experience.
To connect with Eric and to learn more, visit kingoperating.com
Host: Victor Menasce
email: podcast@victorjm.com
Today’s show is the final segment in our mini-series on business planning. Earlier this week we talked about the company mission, the ten year and three year plan, the one year plan and the quarterly plan. We then talked about how we then translate the quarterly plan into weekly execution of our goals and objectives.
If this sounds like a lot of work, it really is.
Underpinning all of this is attracting the right people into the right roles in the organization. When a company is small, and even in situations in large companies, we often see people performing tasks that are not leveraging their inherent strengths. In some cases, people are playing way out of position and performing tasks that they really are not well suited to.
It’s always possible for people to grow within a role. But at best you will turn a weakness into a competency.
To make sure we match people’s strengths and engaging their energy and motivation, we really need to look at what people are doing in their roles and adjust the resource allocation of work. This exercise identifies the gaps in the organization and plans our next hires.
We use a four quadrant classification called elevate and delegate.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are covering the fourth segment in our mini-series on business planning. On Monday’s show we talked about the company mission. We then spoke about the ten year and the three year plan. On yesterday’s show we spoke about the one year plan. Today we’re talking about the plan for the coming quarter.
This is where the rubber meets the road between the plan and the execution. Underpinning our process is the business planning process from several business books. The Book Traction by Gino Wickman. We use the Entrepreneurial Operating System (EOS), which is a set of practical tools and concepts outlined in Wickman's book to help businesses achieve their vision and goals.
The second book is the Four Disciplines of Execution, written by Steven Covey’s son Sean Covey.
Today and all this week we are talking about business planning. Within our company we have a regular heartbeat for business planning. We meet annually, quarterly and weekly to work on the business plan. The annual meeting is two full days. The quarterly meeting is a single day and our weekly meeting is held on a Friday afternoon and usually last 90 minutes. That’s separate and apart from our daily staff meeting where we review projects and action items.
In the annual plan we construct the revenue plan for the year. This is made up of the same three elements that form the 3 year and the 10 year plan.
Host: Victor Menasce
email: podcast@victorjm.com
On today show this is the second in our series on business planning. Yesterday we spoke about our company’s mission and how we review and reaffirm the company mission every year when we undertake our annual planning cycle. From the company mission, we established the three-year and 10 year goals for the company.
This is the long range outlook for the company’s revenue, profitability, cash flow, assets under management and net worth. This is an essential part of the planning process.
As a real estate development company, we make money by doing taking projects through their life cycle. I’m often asked how we find our deals. The truth is, I have no idea how to hunt for deals. We don’t hunt for deals and we never have. All of our deals have come to us. It’s a matter of positioning ourselves appropriately in the market so that deals come to us. Part of that involves having the business structure that attracts opportunity.
When we plan for the long term, it’s about considering the various sources of income for the sustainability of the business.
Money is generated in three different ways. There is earned income, residual income, and then capital gains. In the context of real estate, earned income comes in the form of fees earned by the consulting division of the company, and development fees from our own in-house projects. These fees don’t exists to create wealth for us as partners, they exist to create consistency and sustainability for the business.
The second form of income is residual income. This is usually cash flow from operations and from rental properties whether they are residential or commercial. Residual income is fairly predictable once a project is stabilized and running on auto-pilot with permanent financing. Even then, the cash flow represents the knife edge of the profit margin. If the investors have a preferred return, the profit to the sponsors can be variable depending on how rents, vacancies and expenses unfold in the future.
The third form of income is capital gains and results from transactions. The timing of these transactions is difficult to predict. The financial results are usually great when these transactions occur and the company and investors both get to reap the benefits when these large paydays happen. But if you have employees who expect to be paid every month, then it is difficult to make payroll if a transaction gets delayed. These delays are often the result of changes by the buyer. Sometimes these transactions are delayed by administrative delays at the city. Whatever the reason, a sustainable business needs to have enough of the first two forms of revenue in order to maintain stability.
Host: Victor Menasce
Today and every day this week we are going to talk about the business planning process. Every year, every quarter and every week the leadership team works on the plan and the execution of the plan for the business.
It starts with an annual meeting that is usually held in the 4th quarter of the calendar year to prepare for the upcoming year. This year for a variety of scheduling reasons we held this part of the process in the first week of January.
The annual planning cycle is used to reaffirm the goals for the year in the context of the three year plan and the ten year plan for the business.
We revisit the mission of the business and either reaffirm the mission or change it. So far we have not changed it. Our mission is create communities that people feel compelled to call home.
Beyond a bunch of flowery language, the mission is really about helping guide which projects we want to undertake, and more importantly, how we want to undertake them.
We have so many opportunities to fulfill that mission. When we are designing a residential subdivision, we have a choice. We can simply cram in as many units as the zoning will allow, maximize density and move on to the next. Or we can be thoughtful in the design of the subdivision and remember that people will choose to live here.
Justin Greenleaf is the principal at Greenleaf Architects based in New Orleans, Louisiana. His firm is active in designs across the South from Texas to Florida.
On today's show we are talking about designing in the face of changing energy codes. To connect with Justin, visit greenleafarchitects.com
Host: Victor Menasce
email: podcast@victorjm.com
Steve Suh is a practicing ophthalmologist in the Columbus Ohio market. He is also a principal at Left Field Investors, an investment club that helps educate passive investors on what makes for a good investment. He is also the author of a book: "Avoiding Rookie Errors As A Left Field Investor: 20 Lessons Learned From 14 Years Of PassIve Investing In Private Syndications".
You can connect with Steve at LeftFieldInvestors.com
Host: Victor Menasce
email: podcast@victorjm.com
This week we are doing a mini series on value engineering, this is the process of saving money in a project, without necessarily degrading the project in terms of quality or functionality.
On yesterday’s show we talked about one value engineering optimization. We spoke about how to save money in the construction of floor systems in wood frame construction.
On today’s show we are examining one example of an additional cost that is being driven by new energy codes that are permeating the building code across North America.
There is no doubt that improvements in insulation will reduce energy consumption in a building.
The energy code in many jurisdictions is also looking to accomplish greater insulation. But in some cases, the code is prescriptive in the manner which this is accomplished. The code is prescribing continuous rigid foam board insulation be attached outside the sheathing. Typically this extra 1” of insulation will give an extra R5, or 2” of insulation contributes an addition R10 of insulation on top of the insulation that is within the wall cavity.
The rigid continuous insulation adds nearly $2.80 per SF to the exterior cost of the building. Can you accomplish the same performance more efficiently? Listen and find out.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about value engineering. This episode came from a conversation that we were having internally on one of our projects. The thought process comes down to evaluating multiple ways of accomplishing the same outcome before you know which optimizations make the most sense.
Host: Victor Menasce
email: podcast@victorjm.com
Monday was the opening day of the World Economic Forum in Davos Switzerland. This annual five day event hosts many of the world’s leaders and business elite.
The WEF has earned a bit of a reputation for being somewhat prescriptive with the idea that somehow these global elites have some special right to say what is good for you and I. But if you’re willing to put that and some of the political narratives aside, there are some interesting insights to be gleaned from the WEF.
The content on the WEF website is curated in a highly sanitized way. It’s very polished and packaged. Nevertheless, there may be some insights to be gained in understanding our global economy.
The global outlook for jobs varies widely between developed economies and developing economies. In South Africa, for example, the formal unemployment rate has climbed to 30%, five percentage points higher than it was pre-pandemic.
One talk focused on the global outlook for jobs specifically related to the disruption from AI.
There is an expectation of 23% churn in the global job market as a result of AI in the next four years. 44% of core skills are going to be affected as a result of AI even in those jobs that are not displaced by AI.
As real estate investors, we need to understand the impact of these shifts.
Host: Victor Menasce
email: podcast@victorjm.com
Every year the Consumer Electronics Show happens in Las Vegas in early January. I used to attend this show every year when I was in the tech industry. Today, I don’t attend in person, but I do follow some of the innovations that are showcased at CES.
This show is not real estate per se. But it provides a glimpse into what is happening in our world from a perspective that is not necessarily being reported in the mainstream media. Some of the sessions from CES are actually available in video format to view online from the comfort of your living room. Back when I was attending CES, none of the sessions were live streamed on the internet.
There are a few themes that are noteworthy from this year's show.
Some technologies have extreme power, and with that extreme power comes extreme risk.
AI is one of those technologies. Almost all of the booths at CES this year had those two letters AI somewhere in their booth graphics.
For real estate investors, CES is a pilgrimage through the world of smart home automation and smart building systems. This is where you will get to see
For real estate investors, there are some cost saving technologies that can bring some real convenience. There are new smart locks with palm reading technology. Simply present the palm of your hand to the lock and if it matches, voila, the door is unlocked. Some of the new locks also include facial recognition technology.
Headlining some of the announcements is the notion that Home Depot is about to become a major player in smart home automation. They already have a catalog of over 150 smart home products. But they are now also coming out with their own line of smart home hub, and integrations with many of the major manufacturers, along with their own products.
On today’s show we are taking a look at something that has been happening in the bond market during the holiday period while much of the western world has been distracted and not paying attention. Of course the mainstream media is fixated on the instability in the Middle East and rightly so. The situation in Israel, Gaza, Syria, Lebanon, Yemen, Saudi Arabia, and Iran is carries a very real risk of a larger and very serious regional conflict.
While all of this is happening, the yield curve which has been steeply inverted for much of the past two years is on the verge of becoming uninverted. When the yield curve is normal, long term rates are higher than short term rates. Intuitively, it makes sense that long term rates should be higher. The farther you look out into the future there is more uncertainty and therefore you should expect to pay a premium for that uncertainty.
Economic conditions and market conditions should be more predictable in the short term and subject to less fluctuations and therefore the interest rate you pay for money should be lower due to the lower uncertainty.
That is the normal situation. Yield curve inversions are a little bit like atmospheric inversions. They can and do occur, but they are not very stable and don’t stay inverted for very long.
When you have an interest rate inversion there are only two ways for the curve to uninvert. Either the long term rates rise above the short term rates, or the short term rates fall below the long term rates, or some combination of these two factors.
Today's show is a live talk held in Ottawa in mid November. We're talking about how to invest in a high interest rate environment.
Host: Victor Menasce
email: podcast@victorjm.com
Pasquale (Pat) Zingarella is based in Clinton Connecticut where he is a principal at Invest Clearly. The company specializes in providing verified reviews of real estate sponsors from verified investors. To connect and to learn more visit https://goinvestclearly.com/
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about anti-development movements that are becoming increasingly organized in communities across North America.
The objection of these groups seems centred around the additional noise, traffic, and congestion that can result from additional people moving into an area.
Some have become so militant that they use all legal means available to object to development applications and even building permits.
That’s right, in some jurisdictions it is possible to object to a project that is fully compliant with zoning at the time of building permit.
We were made aware of one such case this past week where community groups are monitoring the submittal of building applications and then launching an appeal of the building permit on the last day that an appeal is legally permissible under the statute. This is a tactic that is designed to inflict maximum pain on a property owner who has spent 100% of the funds required to invest in the pre-construction phase. The goal of the appeal is not necessarily to cause the project to be disqualified on the merits of the actual development proposal. The goal is to use the legal process to frustrate the developer and inflict financial pain on the developer with the hopes that they will voluntarily abandon the project as a result of the delays.
The hypocrisy of these objections should be clear. The very people who enjoy living currently in a community, send their kids to school, shop at the grocery store, exercise at the local gym and ride their bike in the park are only able to do so as a result of many developers taking considerable financial risk to bring these amenities to the community.
You might have read headlines in the past couple of days that the Federal Reserve is planning to wind down its bank term funding program when it expires on March 11, literally two months away. Michael Barr is the Fed’s vice chairman for bank supervision and he signalled that the program would not be extended.
The purpose of the bank term funding program was to provide emergency liquidity to banks that needed cash by pledging collateral with the Fed at face value for up to a year. This program was implemented in the wake of the failure of silicon valley bank as a way for banks that were experiencing liquidity issues to access cash without having to sell assets that are in the “held to maturity” category. The Fed would hold these as collateral on the balance sheet at their face value.
So why is the use of this project growing rapidly at a time when the program is about to expire?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the recently introduced piece of legislation in the US Congress dated December 5. There is a corresponding bill that was introduced in the Senate by Democratic members of both the house and the senate.
The Congressional Bill is called the “End Hedge Fund Control of American Homes Act”.
The second bill is a Senate Bill called the American Neighborhoods Protection act.
The Senate version of the bill would limit ownership to 75 single family homes. Those owners who continue to hold these properties shall be subject to an annual tax of $10,000 per unit for each year that they hold the property. The taxes collected by the IRS shall go into a newly established fund that is designed to help create and subsidize affordable housing.
Single family homes in some markets are experiencing a large number of transactions being purchased by large corporate buyers. But still they represent a tiny fraction of the transactions in the market.
The stories being reported widely across the internet of large corporate buys purchasing a dominant share of homes in the market is simply false. Are big Wall Street investors really buying 44% of homes this year? The answer is no — not even close.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about how to size your business into the future.
Some people think that profitability in a business is something that happens. Profit is what is left over after you subtract expenses from your income. Yes, that is the math for calculating what your profit will be.
But that doesn’t mean you don’t have control over your revenue or your expenses.
What should you do when you are experiencing a downturn in business?
There are three ways to grow your business.
- You can acquire more customers
- You can raise your prices
- You can sell additional products to your existing customers
But then there is another tactic. Some businesses lower their prices in the hopes of stimulating more sales.
There is one more way to grow, and that is by growing inorganically. That could involve the purchase of another company, a production, a division, even a customer list. Growth through acquisition is a legitimate way to add top line revenue, and even bottom line contribution. It represents an opportunity for operational savings. You might be able to rationalize and reduce core admin functions like HR. Finance, maybe some marketing overhead and so on.
It often seems counterintuitive. In moments of stress, the natural instinct is to tap the brakes. But you know that if your car starts to skid, applying the brakes will cause you to spin out. Sometimes the proper corrective action is to hit the gas in order to get the car moving along the right trajectory.
So it is with a business.
Host: Victor Menasce
On today’s show we are talking about property taxes.
We have experienced dramatic increases in costs for owners of multi family apartment properties over the past couple of years. The biggest contributors have been the cost of capital as a result of rising interest rates and the rising cost of insurance.
In some areas of the southern United States, insurance costs are up by 500%-700%. Insurance increases of 30%-50% are routinely being reported by property owners that I speak with.
The cost of providing government services naturally has increased as well. Local governments derive the majority of their revenue from property taxes and to a lesser degree from development impact fees.
From time to time the jurisdictions can also alter the formula they use to determine property value. For example in the wake of the 2008 crisis, property values fell widely across many parts of the United States. The net result was that the assessed value for tax purposes also fell. Many property owners appealed their tax assessments and were successful in having their property taxes reduced significantly.
Of course the cities in which the values fell did not have a corresponding fall in operating expenses. They still needed to pick up the trash, cut the grass, pay the school teachers, provide police and fire service and so on.
In response, some cities changed the formula by which the property values were assessed.
The housing market surged during the pandemic sending the value of the typical U.S. home 37% higher than in February 2020 prior to the crisis.
Cities and counties typically reassess property values every year or two, although some regions have gaps of several years between reassessments. That means homeowners are just now seeing the real estate boom reflected in their tax bills.
Host: Victor Menasce
email: podcast@victorjm.com
Ken Brown is based in Washington DC where he is a principal at Lion Chase Holdings. On today's show we are looking at the outlook for the coming year. To connect with Ken visit https://lionchase.com
Host: Victor Menasce
email: podcast@victorjm.com
Scott Lewis is based in Golden Colorado where he is a principal with the Spartan Investment Group. Our team at Y Street Capital is also work with the Spartan Group on a couple of projects including the construction of a new storage project in Grand Junction Colorado. On today's show we are talking about project execution and scaling the business. To connect with Scott, visit spartan-investors.com
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at the build to rent trend that’s growing across many parts of the United States. This is where you build an entire community of detached single family homes or in some cases townhomes.
In fact there is a continuum of product offerings that are possible to bridge the gap between the density and cost of detached homes versus a multi story apartment complex.
The traditional thinking is that the most lucrative investment is always the highest density property. The more units you can put onto a piece of land, the more you can get in terms of income and value.
On today’s show we are going to look at the cost of construction associated with these different building styles to see how that might influence the choice of one over another.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about different types of trusts. Now before we begin, let me state categorically that I’m not a lawyer and I’m not an accountant and I’m not here to provide any form of tax advice or legal advice.
The purpose of today’s show is merely to discuss different types of trusts so that you are armed with enough information to conduct additional research of your own, and then in turn seek advice from your own advisors, licensed to practice in the jurisdiction where you reside.
So here we go.
A trust is a legal relationship that entails the separation of legal ownership and beneficial interest. It is created when property is transferred by a settlor, who owns it, to a trustee, who holds legal title to it for the benefit of another person or persons, known as the beneficiaries.
Most trusts have a trustee whose primary role is to enact decisions on behalf of the trust’s beneficiaries. There are many types of trusts and we’re going to briefly define a few of those today.
On today’s show we are talking about how and when to hire an interior designer.
As developers and as building owners we often look to the architect to help us determine the aesthetic of our buildings. But often the skillset is not sufficient to cover the breadth of interior design.
We often hear the term interior decorator and some people use these terms interchangeably. But they are very different in my mind.
While there is some overlap in their responsibilities, there are distinct differences in terms of education, scope of work, and professional expertise.
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA episode. Steve asks “Without a crystal ball but more broadly, what is your opinion of bitcoin as an investment?”
Host: Victor Menasce
email: podcast@victorjm.com
Our book this month is called “Noise: A Flaw in Human Judgement” by Daniel Kahneman, Olivier Sibony, and Cass Sunstein. Daniel Kahneman is an author, psychologist and economist notable for his work on hedonic psychology, psychology of judgment and decision-making. He is also known for his work in behavioral economics, for which he was awarded the 2002 Nobel Memorial Prize in Economic Sciences. He is also the author of Thinking Fast and Slow which we reviewed on the show last year. In this book, the authors make the distinction between different sources of deviation from the ideal target. The most obvious source of error is bias. But in many cases, noise can be as large as bias when it comes to introducing error or any unwanted form of variation.
Host: Victor Menasce
email: podcast@victorjm.com
Sean Roberts is based in Denver Colorado and is the CEO of Villa Homes. The company is focused on designing and building a wide product line of factory built accessory dwelling units for the California market. They are the largest supplier of volumetric ADUs in the state and target both residential in institutional clients.
To connect with Sean and to learn more, visit villahomes.com
host: Victor Menasce
email: podcast@victorjm.com
Tim Lyons is managing two careers simultaneously. He's a Lieutenant with the NYC Fire Department and is also a managing partner with City Side Capital, a FINRA registered broker dealer license. On today's show we're talking about managing dual careers and capital allocation in today's environment.
To connect with Tim, visit citysidecap.com or check out the Passive Income Brothers Podcast.
Host: Victor Menasce
email: podcast@victorjm.com
It appears as though a lot of people got 2023 wrong. What happened happened, and what didn’t happen, didn’t happen. But the history books are actually based on the narrative that is attached to what happened.
I was thinking hard about what to say about 2023 that would be insightful and meaningful.
We could attach the narrative that In 2023 interest rates went up. Or did they? The yield on the 10 year treasury was 3.83% on January 1 and we closed out the year at a yield of 3.88 today, up slightly from yesterday’s 3.77%. Hardly a monumental shift in a year. Yes the rate fluctuated substantially in the middle. In the end, it went sideways, it was a huge nothing burger.
We could say that interest rates went nowhere in 2023. It would actually be a true statement. But short term rates did increase in 2023 which definitely impacted many borrowers.
The Fed Funds rate went up from 4.5% at the start of 2023 to 5.5% today. When you look at the numbers in that context, it doesn’t seem monumental either. If you take it back to March 2022, then you see the most rapid increase in rates in modern history. But here too, the conclusion is subjective.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are examining the ways in which energy efficient systems are not achieving their performance goals due in part to the way traditional systems have been used. As we are getting deeper into the winter heating season this is an important factor when it comes to energy efficiency and saving money in particular.
To understand this we need to take a closer look at how energy use is charged to the end customer and the interaction between the customer behaviour and the billing process and the third variable in the system which is the thermostat.
There is a very clear trend towards eliminating traditional heating systems replacing them with heat pumps. Heat pumps are theoretically more efficient than traditional counterparts like electric heaters, or petroleum based furnaces.
Increasingly the electric utilities have introduced a multi tiered time of use pricing model. The rate that you pay for electricity use varies widely based on when you use it.
On today's show I will show you how to avoid some traps that can cost you a lot of extra money for no good reason.
On today’s show we are looking at Florida’s Live Local Act. Florida is an example of how one state has taken real steps to create the incentives for new affordable housing to be created. This legislation is a series of incentives designed to stimulate the development of workforce housing. Many of Florida’s high priced communities have become impossible for the people who work in those communities to live in those same communities. The result is that service staff that work in restaurants, clean homes, cut the lawn, teach in schools, work in hospitals are commuting from a long distance away.
Cities like Miami have very unusual characteristics in their housing market. There is very expensive new construction, and much less expensive housing that is quite old housing stock. The average is somewhere in the middle. But the averages can be misleading. There is virtually zero housing at the average. It’s almost a bipolar distribution with nothing in the middle. Many cities in Florida are increasingly experiencing this phenomenon. Cities like Palm Beach have virtually zero workforce housing.
The Act provides for a comprehensive, statewide workforce housing strategy, designed to increase the availability of affordable housing opportunities for Florida’s workforce, who desire to live within the communities they serve. To date, the funding program has enabled housing for about 13,000 families. That comes to an average of about $15,000 per household.
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA episode. Today’s question comes from J who writes:
I’m performing due diligence on an investment opportunity for a conversion of an existing property into a multi-unit property. This is essentially a repartitioning of an existing 3000 SF property into multiple units. The total investment is about $1.5M and the deal sponsor is estimating that the property will be valued at $3M based on the income approach. It’s in an area that is not known for the most expensive properties. What questions should I be asking from a due diligence perspective?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at real estate in China to try and understand some of the factors that have molded that industry into what it has become today.
Private ownership of property in China began in the late 1970’s and accelerated through the 1980’s and 1990’s. At the same time, there was a mass migration from the farms in rural areas to the cities to work in factories.
In North America and Europe, when you buy a new condo apartment, you might give the developer a small deposit to show your commitment to purchase the unit when completed. But in China, buyers give typically a 40% downpayment and then secure a loan for 60% of the purchase price. The developer then gets the downpayment and the loan proceeds pre-construction and the new owner starts making payments to service the loan immediately, even though they might not take possession of their home for another 2-3 years.
Over the last 10 years the population has continued the shift from rural areas to the cities with the urban population growing by 200M people and the rural population shrinking by 146 million people.
So just like in the US where some cities have been shrinking. I’m thinking of cities like Detroit which has lost more than 50% of its population since the peak in the 1970’s, many small Chinese cities are getting hollowed out.
Some estimates put the number of vacant homes between 60M - 80M empty homes.
Ray Heimann is based in Pittsburg, PA where he is a principal with Terra Capital. His firm specializes in redeveloping historic properties in mature neighborhoods and converting them into luxury class multi-family properties with old world charm. This is a unique angle on multi-family investing and redevelopment. To learn more and to connect with Ray, visit usaterra.com
Host: Victor Menasce
email: podcast@victorjm.com
Anna Olin and Weina Zhang are based in Las Vegas where they manufacture unitized building structural systems that embed the buildings structural elements in the core which correspondingly simplifies the building facade construction. The labor savings of 40% means significantly lower cost compared with other conventional systems.
Connect with Anna and Weina at zlifeco.com or visit their most recent project at midtownvegas.com.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the law of supply and demand. This is one of those principles that I treat with the same reverence as a law of physics. It’s a little like gravity. If you try to fight gravity, you’re probably going to come out on the losing end of that battle.
Back in the 1950’s we had explosive population growth in North America. This was the so-called baby boom. Demographics following the apocalypse of WW2 meant growing population and the associated economic boom that comes with it. We no longer have these conditions in our society. Many western economies are experiencing aging populations, declining birth rates and falling demand for housing, along with shifting demand for services.
If populations are growing, it’s the result of immigration.
Host: Victor Menasce
email: podcast@victorjm.com
On yesterday’s show I speculated on some of the reasons why the Fed might have pivoted. These reasons all sounded pretty plausible. Then I listened to an interview with Chicago Fed President Austan Goolsbee, who was on the Fed’s rate-setting committee this year. He spoke with the WSJ’s Take On the Week podcast host to discuss why “all things are on the table” when it comes to interest rates, including potential rate hikes, and why he thinks there is still a risk of recession. Plus: what’s keeping him up at night, and why he says it may be time for the Fed to shift its focus from inflation to the slowing U.S. labor market.
Naturally, Austan Goolsbee was careful not to make any predictions. But he did provide some meaningful insights as to why the change of heart at the Fed. He was asked about the spectrum of opinions across the members of the Fed. While all of the FOMC board members and all of the regional bank presidents have a voice at the table, not all members have a vote. There is a rotating voting structure where each board member serves a term on the rate setting committee.
In retrospect, I totally missed what was an obvious reason for the change.
The Fed is well known for relying on the so-called Phillips curve as one of the core financial models when it comes to understanding the economy.
On today’s show we are talking about why the Fed made a surprise announcement last week which involved the potential for several 0.25% rate cuts in 2024. This seems like a dramatic about face compared with the rhetoric from the Fed only a few weeks earlier.
So the question is, what did the Fed see that caused them to change their tune?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at a new report issued by the staff at the US SEC to the SEC and to the Congress. The law requires the SEC to undertake a review of the accredited investor definition, at least once every four years to determine whether the requirements of the definition should be adjusted.
This 53 page report is packed with tons of interesting data. Based on the findings, I'd be shocked if we don't see an amendment to the definition sometime in the first half of 2024.
On today’s show we are talking about the shrinking influence of governments around the world. Politicians act as if they can control what happens within their borders. They act as if the national economy is under their control, and that if they set the rules for the nation, they can control what happens within their borders.
But the fact is, we have a globally interconnected world.
It’s becoming more and more difficult for governments to control what happens within the borders.
The Euro dollar system which involves the movement of funds internationally can have as large an influence if not even greater influence on financial markets than governments. Investors influence the market more than governments do.
Interest rates around the world are going down all over the world. Central banks are not doing much to push rates lower. The Fed did not lower rates this past week. The bank of Canada kept rates constant at the December meeting.
ECB officials agreed Thursday to hold the bank’s deposit rate at 4% for a second straight meeting. The Bank of England Thursday also announced that it would leave its key rate unchanged for a third straight meeting. The Swiss National Bank on Thursday kept interest rates on hold at 1.75%.
So then why are rates falling?
Dr. Neel Chadha is a practicing physician in Ottawa Canada and is also a part-time developer of senior housing, assisted living and memory care facilities. On today's show we're talking about designing service offerings. You can connect with Neel at neel@lanarklifestyles.ca
Host: Victor Menasce
email: podcast@victorjm.com
Richard Crouch is based in Richmond Virginia where he is with the law firm of Woods Rogers Vandeventer Black. On today's show we are talking about some of the common pitfalls when structuring agreements.
To connect or to learn more you can email Richard at richard.crouch@wrvblaw.com or visit their website at https://wrvblaw.com/
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about a concept in project management that is rarely discussed. When we think about the items that determine a project’s timeline, there are all of the text book steps in developing a project plan.
More advanced project management means identifying those project constraints that are critical in nature. This is taken from the theory of constraints work by Eli Goldratt.
The idea behind the theory of constraints is that there can be other critical resources apart from time. The impact of a critical resource can result in time delays, but in that instance it is not time that is the critical resource. This is a subtle but important distinction.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re going to the dark side to listen to Jim Cramer from CNBC and try to learn why the DOW skyrocketed over 500 points in the wake of yesterday’s interest rate announcement by J Powell.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the latest CPI data announcement. This data is important going into the final FOMC meeting for the year, where the Fed held interest rates steady again for the third meeting in a row.
The month over month data showed an increase of 0.1% in consumer prices compared with a month over month increase of 0% in the month of October.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about geopolitical stability and the vulnerability of nations. The idea behind globalization was that by creating economic interdependency, the world would become a more peaceful place. Many wars have an economic underpinning. But if both sides in a conflict would be harmed by economic disruption, the incentive for confrontation should be reduced.
It turns out that every nation has a weakness when it comes to globalization. No country is an island unto itself that can be fully self sustaining.
Host: Victor Menasce
email: podcast@victorjm.com
If you’ve been listening to the podcast for a while, you will know that I’m a proponent of the laws of supply and demand. If you ignore the laws of supply and demand, you do so at your peril.
It’s always been the case that a new building will go through a process of offering leasing incentives for some of the first tenants and then remove the incentives at certain occupancy thresholds, and eventually raise starting rents as the building approaches stabilization. That’s a pretty standard process and applies equally to both residential and commercial buildings.
According to a recent study published by Costar, new properties in some over supplied markets are offering deeper and deeper leasing incentives in order to attract clients. Last year was a 40 year record year with new supply of over 950,000 multi family apartments entering the market. Some the hottest sunbelt markets can only be described as over supplied. It will take time for those markets to absorb the extra units.
Host: Victor Menasce
email: podcast@victorjm.com
Ed Mathews is based in central Connecticut where he runs Clark Street Capital. On today's show we are talking about what forms of marketing are effective in today's environment. To connect with Ed, visit Clark Street Capital on all the social media platforms or check out his podcast at Real Estate Underground.
host: Victor Menasce
email: podcast@victorjm.com
Ryan Smith is based in San Diego California where he specializes in SBA financing for business across the US. On today's show we are talking about the nuances of the different SBA programs. You can connect with Ryan at thinkSBA.com
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about why we are seeing long term interest rates falling, even though short term rates have held steady since mid summer.
We can see clearly what has happened in the market. Long term rates went up from June to October, peaking at nearly 5% for the 10 year treasury. The rates have dropped by nearly a full percentage point since the end of October. The yield curve had nearly flattened after being inverted for much of the past 18 months. Now the yield curve is deeply inverted again.
As of publication of today’s episode the yield for the 10 year was 4.12%
The rates for permanent financing are indexed to the 10 year treasury in the US, and the commercial bond rate in Canada. Canadian CMB bond rates are even lower at 3.66% for the 5 year and 3.72% for the 10 year.
It’s tempting to simply rejoice at the lower borrowing costs and ride off into the sunset with new commercial loans at respectable rates. But life’s not that simple. The real question is why are rates falling so rapidly after rising sharply in the weeks leading up to the middle of October?
What is the market telling us?
What is the bond market telling us about the economy?
What is the bond market telling us about inflation?
What is the bond market telling us about the future trajectory of interest rates?
What is the bond market telling us about the future price of the medium term treasuries, and is there anything we can learn from that?
Host: Victor Menasce
email: podcast@victorjm.com
Today’s question comes from Omar.
I’m working the design of a new building and the electric utility is forcing me to change the design of the electric meters from a wiring closet inside the hallway of a residential building to the building’s exterior. This is going to require the running of conduit for several hundred units from the transformer vault to the exterior of the building and then from the outside back into a wiring chase. I’m estimating the cost of this additional electrical work at nearly $4000 per unit. I’m facing a project cost impact more than $800,000. What can I do to save cost? Having a few hundred electric meters on the exterior of the building is going to consume a lot of area and be very ugly. Their constraints just seem insane. Do I just have to meet the utility’s requirements or are there alternatives?
Host: Victor Menasce
email: podcast@victorjm.com
Today's question comes from Richard who asks: "I’m considering an investment in a boutique hotel vacation property in Costa Rica with 18 rooms on the beach. For investors looking beyond their local markets, what considerations and challenges should they be mindful of when venturing into international real estate investments?"
Host: Victor Menasce
email: podcast@victorjm.com
Today's show is a very special segment with Dallas based CPA Mike Pine. We're talking about depreciation and how it can be advantageous for investors of all types.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about staffing. We’re reading daily headlines of staffing cuts at companies across the economy. Just in the past week we’ve seen headlines of 1500 people let go at Spotify, 3000 at TD Bank, 1000 Track maintenance workers at Union Pacific Rail, 1200 at Broadcom in the SF Bay Area just to name a few.
The question is, how does a business owner know when is the right time to hire, and when is the right time to reduce the workforce? Money comes into a business in one of three ways:
- Earned income
- Residual income
- Capital gains
Workforce reductions are among the hardest decisions for a business owner or a manager to make. But in truth, the hiring decision is almost equally difficult. Both decisions involve solving a problem.
In the case of hiring, chances are that the organization is stretched and having a hard time keeping up with the workload. Hiring can bring some relief to overworked people and both customer and employee satisfaction can improve with the right hires.
Derek Vickers is based in Orlando, Florida where he invests in mobile home parks in Florida and the Carolinas. On today's show, we're talking about how to create value in mobile home parks. New parks are not being permitted in many communities and a turn-around on existing parks can be a good affordable solution in the market.
You can connect with Derek at derekvickers885 on all of the social media platforms and check out his webinar on MHP investing at go.parkinvestingpro.com.
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Host: Victor Menasce
email: podcast@victorjm.com
Greg Mohr is based in Lincoln Nebraska where he is a national franchising consultant, helping potential franchisees find the right business to undertake.
To learn more and to connect with Greg, visit franchisemaven.com
Host: Victor Menasce
email: podcast@victorjm.com
“Never Split the Difference: Negotiating As If Your Life Depended On It" by Chris Voss is an insightful and practical guide to negotiation, drawing on the author's extensive experience as a former FBI hostage negotiator.
Host: Victor Menasce
email: podcast@victorjm.com
The COP28 summit just got underway in Dubai, a region known for oil production. On today’s show we’re going to look at a recently published paper coauthored by Kelly Shue of Yale SOM and Samuel Hartzmark of the Carroll School of Management at Boston College.
This paper shows categorically that the penalties imposed on high polluting firms actually don’t have the desired effect and in many cases can be counter productive to the stated goal.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about how a $40 tool can save you thousands or even tens of thousands of dollars in energy costs. As real estate investors we often spend the bulk of our time in the relative sanitized environment of the office and spreadsheets. Your buildings are literally throwing money out the window.
Energy costs are a primary line item in your expenses for any investment property. Now some of you might be thinking that the cost of heating and cooling is being paid by the tenants and you don’t need to worry about the budget for your tenants.
Your focus as an investor should be on the bottom for your property, not getting caught up in the weeds of your tenants finances.
Now you could go out and hire an energy consultant who will come to your property with thousands of dollars of high priced thermal imaging equipment that will show you exactly where you are losing energy from your building. That is certainly one option.
You need to know where your building is losing energy. That means creating a map of where your building is leaking. You don’t need five decimal points of precision in those measurements.
host: Victor Menasce
email: podcast@victorjm.com
On today’s show, we are talking about one of the implications of artificial intelligence that is not being widely discussed in the main stream media.
There are billions of people in the world. Designing and tailoring products for individuals has been largely ignored as even a remote possibility. It takes far too much effort. To develop custom products for each individual on the planet. We have lived much of the past century with products that are designed for the masses. If you think about a standard bell curve, what in statistics is called a normal distribution, product developers, and product marketing have been aiming at the average, and try to remain within one standard deviation from the average.
When marketers send messages to their target demographic, they tend to put them into buckets. This is also true when it comes to trends in voting. What matters to the Christian voter, to the hispanic voter, the indigenous voter, the immigrant voter, the African American voter, and so on.
Increasingly AI can be used to create messages that are not tailored to a group, but tailored to an individual.
The question is, could AI be used to influence an election result?
On today’s show we are looking at the result of a lawsuit that has been decades in the making. I’ve wondered for a long time why real estate commissions in the US have remained solidly anchored at 6% when in other markets real estate commissions seem to fluctuate much more widely. For example, where I live in Canada, it’s much more common in high priced markets like Toronto to see commission structures where the selling agent is charging 1%-1.5%, and the buyer agent who has a lot more work to do in many cases charging 2.5% for a total of 4% or 4.5%.
In most professions there are two separate industry bodies. The first is a professional association that acts on behalf of the members. The second is a quasi government body that serves to regulate the industry and to enforce the licensing requirements. They also serve to protect the public. You see this dual structure in most professions whether we are talking about doctors, lawyers, psychologists, and also real estate agents.
The body that represents real estate agents is an industry body in the US called the National Association of Realtors.
A Kansas City jury last month delivered a $1.8 billion verdict to home sellers in Missouri against the National Association of Realtors and several major brokerages, finding they had conspired to keep commission rates high.
Bob Knakal is a senior executive at JLL in New York City. On today's show we are talking about some of the challenges facing real estate in the New York market. JLL is a large national commercial brokerage and the New York team is truly expert at what they do. You can connect with Bob at bob.knakal@jll.com
Host: Victor Menasce
email: podcast@victorjm.com
Chris Larsen is based in Asheville, North Carolina where he runs Next Level Income. On today's show we are talking about economic super-cycles. You can learn more or you can connect with Chris at nextlevelincome.com.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about measurement diligence.
People are human and they make mistakes. Often these potential mistakes are not checked, double checked or triple checked. You have no doubt heard the mantra, measure twice, cut once.
Measuring sounds easy. In some ways it is. You take out your tape measure and you just measure.
Diligence requires attention to detail.
Those who make a lot of measurement errors are also prone to missing the details in a contract, or the details in a report. It requires a lot of focus and diligence to catch errors. If you think that errors are rare, you might be more prone to observer bias.
This brings me to the most overlooked role in any organization.
Quality assurance is a mandatory function in any business in my experience. The review process is a formal process that can’t be skipped. So often I work with consultants who aim to deliver their work on the deadline. They are assuming that there are no mistakes. They are assuming no review time in their schedule. If you actually do perform a review, you are guaranteed to be late. If you find an error, which is likely, then you are guaranteed to be even later than late.
I started today’s show talking about measuring. But measuring is a metaphor for any critical item. It could be a test result or a consultant report. Each time a consultant makes an error, it can result in delays in securing building permits or in redesign of the project. If people are not used to the review process, they might be inclined to charge extra for that service.
Host: Victor Menasce
email: podcast@victorjm.com
Happy Thanksgiving to our listeners in the United States. We have lots to be thankful for. I’m personally thankful for a long list of things. I’m thankful for my health, for my family, for having the privilege of working with great people. I’m grateful for friendship and for you the listener to the podcast. I love listener questions.
On today show, we are looking at several leading indicators that are painting a much clearer picture of what’s happening in the economy then the shortlist of lagging indicators that the federal reserve references as meaningful in their committee meetings that are held a times a year.
The Federal Reserve is fixated on inflation, Gross, domestic product and unemployment. The only way to reduce wage and price increases is with a contraction in aggregate demand. However, government spending continues to grow with any contraction being disproportionately, concentrated on the private sector. The government didn’t get the memo that demand needs to shrink.
There is a new law which takes effect Jan 1, 2024. The primary purpose of the Act is to provide greater transparency of legal entities to detect and combat illegal activities. The new reporting requirements, however, will cause millions of existing legal entities to file new beneficial ownership disclosure forms with the federal government. The regulations are written so broadly, that nearly every small business in the US will be swept up in this new law.
The idea here is not for you to be getting your legal advice from a podcast. That’s certainly not my role. You want to seek your own legal advice from your own law team. The purpose behind reporting this on the podcast is simply to make you aware that you likely have some work to do to understand the new rules and make sure you’re in compliance.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at the results of one of the most anticipated real estate auctions this year. Signature bank failed in the Spring of this year, shortly after the failure of Silicon Valley Bank.
The loan portfolio was finally put to auction and it looks like a joint venture of two nonprofits and Related Fund Management is poised to win an auction for billions of dollars of Signature Bank loans backed by New York apartments,
Signature failed in March following a run on its deposits, the fourth largest bank failure in U.S. history. While the failure had little to do with its real-estate portfolio, it was one of the biggest commercial property lenders in the New York region.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show, we are talking about four ways to liquidate debt. Our entire economy is driven by access to credit. Credit facilities of all types are essentially a claim on future earnings. I don’t have the money today, but I will in the future if you lend me some of that excess money that you are not using right now, I’ll give it back to you with extra in exchange for letting me use those funds today. It doesn’t matter cause weather the borrower is an individual, corporation, charitable, organization, or the government of a sovereign nation.
There are four ways to liquidate a debt obligation.
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You can repay the debt to future earnings and rely upon your week to week months to months, cash flow to service that debt and repay both interest and principal over the life of the loan.
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You can rely upon a capital transaction to provide a source of funds to repay the loan.
3 You can wipe out the debt through an active insolvency by seeking bankruptcy protection.
- You can inflate away the debt.
Shannon Robnett is based in Boise Idaho where he develops multi-family apartments. On today's show we are talking about how to navigate the current market environment with all of its challenges. There are a few nuggets in today's show that you will definitely want to pay attention to. To connect or to learn more, visit https://shannonrobnett.com/
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show, we are taking a look at why interest rates for commercial real estate are actually falling despite the hawkish rhetoric this past week from Federal Reserve chairman Jerome Powell. Since the middle of the summer we have seen rising yields on the 10 year treasury. The rate peaked on the 19th of October at 4.99%. This benchmark rate has a much larger impact on Real Estate Investors Than the federal reserves short term, federal funds rate. Rates went up over the summer and into the early fall, because the US treasury has been printing vast sums of money and issuing new debt in addition to the rollover of existing debt that has matured.
We have seen the 10 year yield fall to 4.43% since the middle of October. That’s more than 0.5% drop in less than a month, even though the Fed is holding short term rates steady.
This is one of those stories where bad news is good news. The thinking is that if the economy is weak and we enter a deflationary recession, or a disinflationary recession, the Fed will pivot from their hawkish stance and lower interest rates. The mainstream media including the Wall Street Journal is pushing a narrative that the lower CPI numbers are the reason we need to celebrate that interest rates have peaked and are heading down from here. I think the story is more complex and more nuanced than that.
Host: Victor Menasce
email: podcast@victorjm.com
Jeff Love has been helping commercial clients with their real estate legal needs for more than 15 years. On today's show we are talking about distress in the current market. To connect with Jeff, visit
gibbsgidden.com
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about the forecast flood of distressed deals in the marketplace. We’ve been hearing about how distress is coming and how deals will be available.
I’m here to tell you that the future is now. We are starting to see a regular flow of large assets and portfolios of projects coming to the market.
I’m getting phone calls from brokers on a nearly daily basis. Many of these so-called deals are frankly located in a areas that are far from our criteria. The team therefore needs to be incredibly selective to only allow projects into the pipeline that are truly exceptional in the context of today’s degraded market conditions. A random piece of land somewhere is not going to meet that criteria.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about deal structure. Some of the financing vehicles that are increasingly common in real estate had their roots on Wall Street. Others had their roots in the tech environment of Silicon Valley.
When investors want to participate in a startup business that will certainly evolve over time, how do you decide what is fair to both the investor and the management team? What is the monetary value of the investment, pre-money, and post money? How do you know what percentage of the business to sell to investors?
The value created by the business has several elements. The seed capital is part of it. But so too is the creativity and resourcefulness of the team. You won’t achieve business success, or any investment returns without both.
Host: Victor Menasce
email: podcast@victorjm.com
Prices in real estate are not determined by the broad market. Instead they’re often set by transactions at the margins of the market, by a tiny percentage of properties that transact, and not the majority of the market that is just staying put. On today’s show I’m going out on a limb to predict that we have just experienced several bellwether events that are signalling to the market the contagion of financial distress.
Host: Victor Menasce
email: podcast@victorjm.com
Matt Picheny is based in NYC where he acquires and manages multi-family apartment assets across the southern US. Matt is also partnered with Y Street Capital on two projects. On today's show we are talking about asset management. To connect with Matt and to learn more, visit picheny.com
Host: Victor Menasce
email: podcast@victorjm.com
Paul Winterowd is based in Salt Lake City where he specializes in helping sponsors capitalize commercial real estate projects. On today's show we're talking about the difficulties being faced by borrowers in the current environment. To connect with Paul, visit paulwinterowd.com
Host: Victor Menasce
email: podcast@victorjm.com
On today's show, Robby asks: "Why does Taiwan dominate the semiconductor industry?"
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we are talking about the Buy On The Line Strategy
Host: Victor Menasce
email: podcast@victorjm.com
In September of 2019, I published an episode on the podcast entitled “Why Wework doesn’t work.” This week Wework filed for Chapter 11 bankruptcy protection in NJ. The bankruptcy filing affects the main company, and over 400 subsidiary entities that also simultaneously filed for bankruptcy.
The landscape is littered with companies that have made long term obligations and have only secured short term sources of revenue to cover those long term obligations. Wework signed long term leases, many with payment guarantees that stretched years into the future. The only way out of those leases was would be to force a reorganization in a bankruptcy proceeding. The company’s balance sheet shows about 16B in assets and $18B in debts.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at the energy transition away from fossil fuels. This is not real estate per-se. But it is a macro economic factor that affects our economy very deeply, even though most members of the population are completely oblivious. With global geopolitical tensions rising, understanding energy sources is critical to understanding what is happening in the economy. Energy is the economy. For every unit of economic output, there is an equivalent unit of energy consumed somewhere in the world.
You might be wondering why the price of gasoline is falling at the same time that the price of diesel is rising. On today’s show we’re going to answer that question.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show, we are talking about the importance of offering a discount without lowering your price. There is so much emphasis on sale price that the value of inventory is strongly linked to the most recent comparable sales. From the perspective of the end customer, affordability is a function of the total sale price and more importantly, the monthly carrying cost associated with that purchase.
When you visit a car dealership and the dealer is offering that shiny new vehicle with a 1.9% interest rate don’t be fooled by thinking you’re getting a discount. The dealer is charging you thousands more for that vehicle in order to give you that 1.9% interest rate. They actually tell you what it costs for that financing when they say, take $5000 off the sticker price or 1.9% financing.
Most people understand the game when we’re talking about buying a new car. These techniques are not typically associated with real estate.
Host: Victor Menasce
email: podcast@victorjm.com
Clayton Young is an elite distance runner. He is currently ranked among a handful ot top runners in the US and top 50 in the world. On today's show we are talking about the mindset and habits that are required to do anything at a high level, whether it's in sport or in business.
To connect with Clayton you can email him at claytonyoung88 at gmail.com. You can also follow him on social media with the handle _clayton_young_
Host: Victor Menasce
email: podcast@victorjm.com
Chris Long is based in Central Florida where he builds and operates Longyards facilities across the US and Canada. On today's show we are talking about the market characteristics of industrial outdoor storage and what customers are asking for.
To connect with Chris, visit longyards.com
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about translating vision into execution.
There are many companies that have an impressive company tag line. But when you ask employees and stakeholders about it, there is usually an awkward pause. What comes after that is often a disjointed statement.
At our development company, we spent a lot of time thinking and refining what our business is about. We are real estate developers. All developers have a calculator that works pretty much the same. In order to generate a profit, you need income to be higher than expenses. You want to build the best product for the lowest possible cost. All of the usual things that maximize profit. For many developers, that means squeezing the subcontractors.
When I tour newly completed projects in the market, I’m stunned at how poorly things are built. I’m astounded at the low quality of finishes. But most of all, these brand new apartments in supposedly luxury buildings are truly awful. I see living rooms with columns that make the space virtually impossible to furnish. I see bedrooms that are so small you can’t fit anything but a bed and a single night table. You’re thinking of hosting friends for dinner? Maybe have dinner in a restaurant because there isn’t really a space to entertain. That’s what I see when I look at many brand new projects.
So back to our company vision.
We thought long and hard. Our company exists to build communities that people feel compelled to call home.
So what does that really mean? How does that translate into what we actually do? Does it mean sacrificing profitability?
This vision is more than just a vision, I consider it a guiding principle.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about signs of stress in the construction industry.
It’s no secret that many developers have put projects on hold as a result of higher interest rates.
When we talk about counter party risk, that term conjures up an image for the GFC that started in 2008. This is the result of an asset being held by one party constituting a liability for another party. If the liability can’t be met, then the asset on the books may not be properly valued and may need to be written down. We saw the cascade of dominos across the entire banking system. The Federal Reserve recognized the linkages between different counterparties and has attempted to alter the structure of the banking system by encouraging banks to borrow from the Fed, or by putting excess reserves on deposit with the Fed. That way if the Fed is the counterparty in most cases, the systemic risk to the banking system would be reduced. Sounds good in theory.
On today’s show we are going to look at another form of counterparty risk that is rarely considered. It was brought to our attention in the past few days. Our own due diligence processes are being strengthened as a result of what we have learned.
Host: Victor Menasce
email: podcast@victorjm.com
Brené Brown, renowned for her research on vulnerability, courage, and empathy, delves into the heart of leadership in her book "Dare to Lead." In this captivating and insightful read, Brown explores the intersection of vulnerability and leadership, offering a refreshing perspective on what it means to be a daring and effective leader. Brene Brown is someone who I’ve been following for years. Her work on the emotions that drive behaviour has been groundbreaking. I would describe her work as being in the shadows, in involving topics that are rarely discussed in the context of leadership. At the core of this is shame. Leaders are just people and people often grapple with shame at their imperfections.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about what is driving the economy.
There was a time when I thought the fear over communism taking hold in the west was overblown. Yes, communism had taken hold in China, the Soviet Union, and Eastern Europe. But we saw how that turned out. Communism is a recipe for economic stagnation. I have visited parts of Eastern Europe, the Ukraine, and mainland China. I’ve seen the remnants of communist economic policies and how it killed innovation and entrepreneurship. I’ve seen the drab grey concrete buildings with virtually no interior finishes. These cement caverns feel more like a war bunker than a home.
People who rail about communism are out of touch. Don’t they know that the Berlin Wall fell in 1989? Don’t they know that China opened up their economy to more free market forces? Have they not visited Shanghai and seen the advances that free market forces have brought to China?
We don’t need to worry about government dominating the economy here in North America. After all, we hear that consumer spending influences 70% of GDP. That statistic is quoted regularly.
So when you look at all layers of government, government spending in the US stood at 38% of GDP. In Canada, government spending at all levels is at 41% of GDP.
Communist China reports they are at 31% of GDP for all levels of government. Russia is at 36% of GDP.
Exactly what is communism?
Host: Victor Menasce
email: podcast@victorjm.com
Kelly Koontz is based in Seattle Washington where he is a principal at Submetering Solutions. The company specializes in all forms of submetering for the major utilities like water, gas, electric and more. Some of the newer technology meters don't require cutting pipes and merely wrap around the pipes.
To connect with Kelly or to learn more, visit submetersolutions.com/espresso and you will be able to get in touch directly.
Host: Victor Menasce
email: podcast@victorjm.com
The Fed is losing money. Now you might say, how can the Fed lose money? Isn’t the Fed the very definition of money? Can’t they just print more? Well I guess sure they can. But printing money only works as long as confidence remains in the currency. It works until it doesn’t. When it doesn’t, then it’s incredibly difficult to restore that confidence.
Host: Victor Menasce
email: podcast@victorjm.com
Chris Prefontaine is based in Rhode Island where he invests in the local and nearby states. The strategies he teaches apply nationwide. To connect or to learn more, visit smartrealestatecoach.com. To get a copy of the free book, visit whickedsmartbooks.com/victor1 and they will mail a physical book to you at no cost.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the technology in some of the newest materials for new construction.
It’s increasingly common to have building plans examiners and building inspectors reject materials for use in a new construction project. This often comes down to an issue of liability.
Gone are the days of stick building a frame and slapping on some siding. There is an entire building science and modern buildings have a lot of technology built into the structure, the cladding, the windows, in fact the entire building envelope.
Buildings can degrade with moisture and multiple defences agains moisture penetration are key to having a long life building.
That means designing layers to keep moisture out, and then making sure that moisture has a way to get out if it does happen to penetrate the first layer. The other source of moisture is the result of condensation. This happens when there is a difference in temperature between inside and outside. If its colder outside, then moisture is likely to be on the outside. If it’s colder inside, then moisture is likely to condense on the inside. Both can be a problem.
The latest innovation is something called an air barrier. These new technologies have created confusion with contractors and many of them don’t understand the difference.
Host: Victor Menasce
email: podcast@victorjm.com
When I speak with listeners of the podcast, I’ve been asked on numerous occasions how I come up with topics for the daily show. More specifically, how do I decide what angle to explore on a particular topic.
I get this question often, so I decided to dedicate a few minutes to sharing how the background work happens in coming up with a new episode. When deciding the content for the show, I’m looking for a variety of topics that are going to be interesting to my listening audience.
That means a mix of topics that are more evergreen in nature, as well as topics that are a tie-in to the news. An evergreen topic is not tied to a particular point in time. For example, I did an episode on water rights and how they differ from one jurisdiction to another.
Tie-ins are related to what’s happening now. For example, if the Fed makes an announcement on interest rates, then I’m going to report on that in real time. Talking about it a week later makes no sense.
Real estate investing is affected by many factors, ranging from the macro-economy to the micro.
Then there are specific vertical asset classes each with their own dynamics.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about ways in which you could get a solar system almost for free. That’s right, you heard me correctly.
Under the inflation reduction act, the US Federal government offers a tax credit of up to 30% of the cost of a solar power generation system being installed. When talking solar power, I’m talking about commercial systems that would serve an entire business like a warehouse. But there are additional incentives that can be layered on top of the investment tax credits.
There is a program of grants administered by the US department of agriculture call REAP which is an acronym short for Rural Energy For America Program.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about getting paid, and who gets paid and in what order. Investment options often include a waterfall provision. This defines the order of precedence of payment. This is an important element of any investment. On today’s show we are going to look at a few of the popular offerings we see in the market, and then we are going to share what we do in our projects. To be clear, we are not soliciting for investment here. This is an educational piece designed to explore investment structure so that you can better evaluate whether a particular structure is beneficial for you. Of course you want to consult your CPA to make sure there are no unintended tax consequences.
At the most basic level, the waterfall speaks to who gets paid in a project and in what order. There are infinite possibilities for the structure you could define for how investors and shareholders get paid. You can get as sophisticated as you want. But if investors can’t understand it, it’s not worth the extra complexity.
Host: Victor Menasce
email: podcast@victorjm.com
On today show we are looking at a tug-of-war that is underway in the financial markets. There is also a competition for capital between government and private enterprise. For the moment it appears as though government is winning that battle for dollars. We have an economy that is partially being controlled by two gigantic levers. The first lever is monetary policy and the second lever is fiscal policy.
But before we use these terms, it would be useful to define them.
Monetary policy is controlled by the central bank. Those decisions affect bank liquidity, the printing of currency units, and the setting of interest rate policy.
Fiscal policy refers to the decisions made by governments to spend money. Fiscal policy affects taxation, entitlement programs, public infrastructure projects, military spending and so on.
We literally have a situation where central banks are standing with both feet on the brakes. Governments on the other hand, have their foot firmly on the Excelerator. If you have ever tried this in your car do you realize of course that you will either burn out your engine or your brakes very quickly. governments of course.
Host: Victor Menasce
email: podcast@victorjm.com
Galen Hair is a lawyer who specializes in litigating insurance claims on behalf of real estate owners against insurance companies. On today's show we are talking about the insurance landscape and what property owners can do in the current environment.
To connect with Galen, visit https://insuranceclaimhq.com/
Host: Victor Menasce
email: podcast@victorjm.com
Jason Buxbaum is based in Phoenix Arizona and invests in developing and redeveloping workforce housing across multiple markets in Arizona and Texas. On today's show we are talking about the market dynamics and how they're changing. Opportunity that disappeared for a while is now reappearing in a different form.
To connect with Jason, visit JevanCapital.com
On today’s show we are challenging some conventional wisdom. Subtrades are pretty set in their ways about how things get built. They have their preferred suppliers. They expect materials to be packaged in a specific way. They have familiarity with a regular and repeatable process for installing materials. Any deviation from those tried and true methods is going to disrupt the normal flow.
The key to building cost effectively often requires creativity. That can mean alternate sources of supply. Some materials can be purchased in lower cost geographies and shipped all over the world. The problem is that some materials have not been tested or certified to US or Canadian standards. Building codes are international in nature, but they are also highly localized as well. Many local jurisdictions point to the national codes and standards. But they often have local regulations to meet as well.
Importing products that are not certified has risks. The most famous example is Chinese drywall.
We have been scouring the planet for high quality materials that can reduce the cost of construction while still meeting the requirements of the building code and materials certification standards.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are making a distinction between new supply and value added opportunities. Investors over the past few years have focused on two different investment theses. Thesis number one is the traditional value added project. This is where you take an existing project that was built a number of years ago. It’s getting tired and the lack of modern amenities and finishes makes the property less desirable and therefore it attracts lower rent.
The idea is to vacate enough of the units that your can improve them over a period of time.
The second involves new construction. This is where developers come in. They are adding new product to the market. These gleaming new buildings have modern amenities. They are generally very desirable properties.
What these two approaches neglect is the real needs in the market. Where are the gaps? Is there a business opportunity to fill those gaps?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show, we are looking at a market effect that could have been easily predicted. In fact, we made precisely this prediction on the show back in 2021. When markets over-shoot the long-term averages for demand, it is reasonable to expect a bit of a boomerang effect on the tail end of that demand.
I have long maintained that second homes are a discretionary investment. People will do everything they can to protect their primary residence and ultimately sacrifice when it comes to a second home. In 2021 and 2022 we saw the surgeon demand for vacation properties whether it was a lakefront cottage Ski chalet in the mountains. There was absolute white hot demand for what seemed like scarce number of properties. Many buyers of these properties, finance their purchase by tapping into a home equity line of credit rather than getting a fixed rate financing pacifically tied to the new property. With the rapid increase in interest rates, the carrying cost associated with these vacation properties has increased dramatically.
Owners of these cottages are looking to unload them for a variety of reasons. Some have discovered the cottage. Life is not for them. Some have decided that living in a rural area, not fit their lifestyle. Install others simply cannot afford a higher caring cost at today’s interest rates.
The market averages seem to obscure what is truly happening in the market. Paradoxically, sales, volume and prices, in the luxury segment of the market appear to be largely unaffected. These buyers are more sophisticated. They are typically paying cash, and therefore they are largely unaffected by the recent spike in interest rates. we are seeing softness in demand and pricing at the lower end of the market.
Lower end properties in less desirable locations are sitting on the market with next to no activity.
Some brokers are reporting price drops of nearly 30% on these lower end properties.
On today show we are looking at what seems like a huge paradox in the world of energy. On this show we look at energy from time to time. Why is that? Because energy is the economy. If the economy is cooking, then energy consumption will rise. If the economy is faltering, then energy consumption will fall.
There is normally a correlation between prices for gasoline at the pump and the price of crude oil. After all, gasoline is refined from crude oil so it only stands to reason that if oil goes up in price, then so too the price of gasoline should increase as well.
Gasoline prices are falling off at the pump in addition to following in the wholesale market, at the same time as we have seen an increase in the global price for crude. I’m not talking about the recent spike in prices as as result of the conflict between Hamas and Israel. Israel does not produce oil, nor does Hamas. But Iran does, and Iran is believed to be an architect of the attacks in Southern Israel. Saudi Arabia has cut back on production and so has Russia.
So what does this mean?
Host: Victor Menasce
email: podcast@victorjm.com
On today show, we were talking about the supply chain in construction, and how certain seasonal effects are clouding the picture of what is happening in the real economy. At this time last year lead times four windows and doors were running incredibly long. Many window manufacturers were quoting delivery times of 16 weeks for specialty windows and sliding patio doors. By March of this year, those lead times had reduce to no more than 3 to 4 weeks. And by late spring manufacturing lead-times had reduced to a very respectable two weeks. It seemed like the post pandemic supply chain crunch was finally over.
In the past few weeks, we have seen lead-times extend for many different products. Standard lead-times for windows remain short at 2 to 3 weeks. Specialty windows are now five weeks. Patio doors are 16 weeks vinyl siding as a lead time of 6 to 8 weeks. Cement board siding is six weeks.
The spike in lead times are a function of a localized surge in demand to complete building envelope prior to winter setting in. Construction crews want to use the time during the colder months to complete the interior work without having to worry about the building envelope.
Host: Victor Menasce
email: podcast@victorjm.com
Gabriel Lajeunesse is a wealth advisor with UBS and is based in Burlington Vermont. On today's show we are talking about investing in the current market conditions. To connect with Gabriel, you can find him on LinkedIn and on Twitter.
https://www.linkedin.com/in/gclajeunesse/
Host: Victor Menasce
email: podcast@victorjm.com
On today's show, our guest is a full fledged CPA who specializes in Tax and real estate investors
To connect with Cherry, visit realestatetaxtips.ca
Host" Victor Menasce
On today’s show we are talking about the marketing of new development projects to city officials. It’s difficult to know what is the best way to communicate with bureaucrats and politicians who have a say in determining whether your proposed project is going to be approved or not.
Cities have well defined templates for submission and they try as much as possible to make all applications look the same by sharing the same format.
When you talk to city officials, they will often offer guidance on what is required to get a project approved.
Zoning codes define things like the building envelope, the height, the setbacks from the property line, parking ratios, density, and so on. But the politicians who ultimately approve the project are going to answer to the local residents who will be forever angry that a politician approved an ugly building.
But what constitutes and ugly building?
Host: Victor Menasce
email: podcast@victorjm.com
Today's question comes from John who writes:
"You have answered a question for me in the past and is was well received for me.
Next question is I have heard a few different people say that back in the 80s, the debt was inflated away. I only know how to pay down debt. I don’t understand how debt can become inflated away? "
Host: Victor Menasce
email: podcast@victorjm.com
This question comes from Sam who writes:
I have 7 acres near a major boat ramp North of Houston that I am looking to develop.
The area has grown 4.11% per year for the last 2 years according to the Census. With a major development up the road I expect this trend to continue. I am having trouble finding info on income growth do you have any input on where to find this data?
Do you have a Development Pro-Forma that I could look at? I don't know what I don't know and would love to learn for your experience/mistakes. The land does not have many trees, ground is relatively flat and the lot will be crushed concrete.
-Are Contractor Garages a good option to add to a storage facility/what is the typical square footage per capita needed?
-With Shipping Containers are you able to refinance the property once it's almost full or is it best to sell and buy something with Real Property?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about a new program being offered by Fannie Mae that theoretically should make real estate more accessible than ever.
Starting the weekend after November 18, 2023, Fannie Mae will allow 5% down payments for owner-occupied 2-, 3-, and 4-unit homes.
We don’t know exactly what the underwriting rules will be. The announcement was buried deep in the Desktop Underwriter and Desktop Originator Release Notes dated October 4. The version 11.1 release of the software will be rolled out on November 18. This software is used by loan originators who work with Fannie Mae to determine whether a borrower will qualify for a Fannie Mae Loan.
As real estate investors in the commercial space, we are familiar with underwriting requirements. In particular, a property must generate enough income to more than cover the debt. The Fannie Mae announcement makes no mention of a debt coverage constraint. They typically use the debt to income ratio as a proxy for affordability.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show, we’re talking about why the United States needs inflation. In order to understand us we need to go back to the. Following World War II.
From 1945 until 1951 US government Debt went went from 110% of GDP to 50% of GDP. How did they do it? In 1945 US government debt as at an all time high as a result of the second world war. All wars are inflationary and WW2 was no exception.
There was a massive liquidation of government debt. Real interest rates went to -13%. Inflation was running hot after WW2 peaking at 19% in 1947, but Fed rates were kept low around 2% from the period of 1945 until 1951. After Pearl Harbor the Fed capped the rate at 2.5 from 1943 until 1951. This was a wartime decision. The Fed was not allowed to operate independently during those years.
It is was trick issue. You can fool the world once. Those who bought those 30 year bonds were virtually wiped out by the time 1980 rolled around. The government made every single interest payment, but the debt got inflated away.
Fast forward to 2023. The treasury needs to roll 5T in debt next year, plus whatever they issue in new debt. It’s unclear who will buy all of that paper. The US cannot afford its own debt.
The only way this is solved is with negative real interest rates
Host: Victor Menasce
Daniel Angel is based in Atlanta where he invests in multi-family apartments. On today's show we are talking about the state of the market and navigating the headwinds that we are all experiencing. To connect with David and to learn more, visit apexinvesting.us.
Host: Victor Menasce
email: podcast@victorjm.com
Peter Neill and Ron Lockhart are based in Philadelphia where they redevelop blighted properties into affordable housing in Philly, Baltimore and New Jersey. On today's show we talking about how their investment model is extremely resilient even in today's high interest rate environment. To connect and to learn more, visit gsprei.com
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are exploring the limits that could trigger the next major breakage in the economy. I believe that the conditions are consistent with those that led up to the black Monday stock market crash in 1987. I remember that day very well. I was in my fifth year running my family’s investment portfolio and I was in my early 20’s. What’s different then is that the US had a debt about 30% of GDP and an annual deficit running about 2% of GDP. Today, the US has a debt of 130% of GDP and a deficit of about 8% of GDP.
There are stark differences, and some similarities.
I believe that the first dominos fell earlier this year in March. But it didn’t create a huge domino effect cascading throughout the system. Part of the reason for that is that the US had stopped issuing new treasuries. If you remember, the US had exhausted its debt ceiling and was spending down the balance of the Treasury General Account.
Host: Victor Menasce
email: podcast@victorjm.com
More farmland is now hitting the market as a large percentage of America’s farmland is owned by people aged 75 or older. Forbes Magazine recently published an article about this phenomenon. We have experienced this first hand. Last year, our team acquired the last remaining piece of the Norris Ranch. At one time, the Norris Ranch was more than 20,000 acres called T Cross Ranch. On today's show we are digging deeper into this growing opportunity.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are going to look at some soft data. A few days ago we explored the difference between hard data and soft data when it comes to economic indicators. Hard data includes things like the unemployment rate, the CPI, GDP, GDI and so on.
Soft data consists of market sentiment information. On today’s show we are looking at the market data produced by research firm Pulsenomics. The company was in the headlines yesterday with an announcement of a Partnership between Pulsenomics and Fannie Mae to Produce Home Price Expectations Survey
The company has been conducting home surveys for years. They publish the widely read U.S. Housing Confidence Survey every quarter.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the elements of negotiating a construction contract, specifically using the industry standard AIA contract forms.
I’ve heard a number of people insist on using the industry standard AIA contracts. These industry standard contracts are supposed to be a fair contract that is not one-sided favouring neither the owner nor the general contractor.
I compare the AIA contract to the standard real estate board purchase and sale agreement template. Nobody would ever use the standard real estate board contracts without alteration. They are, after all, just a blank template.
The benefit and the problem with these templates is that they are very easy to customize. Unless you are familiar with the contract in detail, it’s going to take a lot of work to close down all of the potential landmines that exist in these standard contracts.
It starts with having a clear understanding of what your goals are as a property owner.
Host: Victor Menasce
email: podcast@victorjm.com
On today show, we are going to look at two different words that are used to describe macro economic factors, and in each case we’re going to look at an important distinction in the nature of these anomic indicators. We’re going to start by looking at economic data generally. Economic data breaks down into two major categories. There is what is called soft data and hard data. hard data consist of the consumer price index, gross domestic product, gross, domestic income, the producer, price index, the unemployment rate, and labor, force, participation, there’s a long list of data, that is compiled and reported by the Bureau of Labour Statistics in United States, Statistics Canada in Canada, and Eurostat in Europe.
These numbers tend to be lagging indicator’s.
In addition to the hard data, there is a rich array of soft data about the economy. These are things like indices of consumer confidence the purchasing manager index. These numerous measures communicate the sentiment of consumers and business owners about how they feel in the current market conditions in addition to their outlook for the coming months. These are, however, just opinions. They are surveys. Opinions are influenced by factual information to be sure. but opinions are also influenced by other factors. The second reason why consumer confidence might provide useful early information is if consumers’ responses to the survey questions provide good forecasts of future economic activity. This would occur if consumer confidence has a causal influence on economic activity, but this influence takes several months before it is fully realized.
Host: Victor Menasce
On the first day of each month we review the book of the month. Our book this month is "Buy Back Your Time" by Dan Martell. In the book, he offers a refreshing perspective on time management and productivity, focusing not just on doing more but on reclaiming our most valuable asset – time itself.
Host: Victor Menasce
email: podcast@victorjm.com
Chris Balzaretti is based in NY and invests both in NY and Texas. On today's show we are talking about the lessons from Texas investments made during the past few years. To connect with Chris and to learn more, you can email Chris@takeflytecapital.com
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the commodities super cycle. We often hear those words, but what do they actually mean? What does this mean for real estate investors?
I’ve witnessed the shocking price increase of copper wire. Six gauge wire is used in high load applications like stoves and clothes dryers, AC units, hot tubs and EV chargers. I’m seeing that wire pricing at over $5 per linear foot. That’s much higher than I ever remember. As we transition to using more electricity and away from gas based appliances, the demand for copper is going up.
But the biggest issue is that the mines needed to produce these minerals take years to bring online. There is the entire regulatory process to get a mine approved which takes years. Then you need to make the capital investment and then develop the mine into a producing going concern.
The cost structure that was in place the day the mine was conceived will always be dramatically different from the cost structure when the mine actually hits production. For example, the cost of a lithium mine in Canada is now forecast to be 38% higher than estimated just 18 months ago. Lithium is the key ingredient in Li=ion batteries which make up the majority of high performance batteries. It’s possible that new battery technologies will reduce our dependence on Lithium in favour of cheaper minerals like Sodium. But for now, we’re stuck with Lithium and copper. We don’t have a replacement for copper.
Host: Victor Menasce
email: podcast@victorjm.com
The United Auto Workers didn’t get the memo. Jerome Powell wants to stamp out any possibility of a wage price spiral.
The auto industry is in the middle of an escalating strike as the United Auto Workers are fighting for a catch up on the concessions delivered when all of the major US auto makers were on the verge of bankruptcy in the wake of the 2008 Financial Crisis.
But the United Auto workers are demanding a 40% increase in wages over a three year period. The question is, do you think that workers all across North America are looking to the resolution of the strike with the Detroit auto makers? I don’t believe that the workers will get a 40% increase in their contract. I expect they will come closer to 25%. But even that is going to fuel a demand for higher pay across all of manufacturing.
There is no question that wages have not kept pace with inflation. That means reduced purchasing power at the cash register for employees in nearly all sectors of the economy.
What does this all mean?
Host: Victor Menasce
email: podcast@victorjm.com
On today show we’re taking a look at how insurance is affecting choices in design.
Why are some insurers are exiting geographic areas entirely. What does this mean for owners of real estate in those locations? Insurance is both optional and essential depending on your circumstances. If you were ultra wealthy, then you can self in sure. However, For the rest of us and for anyone who borrows funds from a bank insurance is not optional. So what happens if you reside in California and your insurer decides to exclude California from its product offerings? What do you do if you reside in Florida and now your insurance company has removed Florida from its list of offerings? Does that mean the risk of living in Florida is simply too high? Should everybody just leave? Why don’t we empty out the state of California. The risk of wildfires is simply too high for people to live there, not to mention the risk of earthquakes. There is considerable precedent for governments to step in and provide insurance solutions. When private businesses decide that insurance is no longer profitable. There are simply some risks for which there is no insurance at all. For example, you will not find an insurance policy that will cover you for the risk of a landslide anywhere in the United States, that is simply not an insurable risk. If you happen to live in California, and other parts of the country that have experienced landslides.
There are very few insurance companies offering flood insurance. When you buy flood insurance in the US, this policy is typically underwritten by the Federal Government and administered through your insurance broker.
Would you spend extra in construction if you knew it would reduce your insurance cost?
Host: Victor Menasce
email: podcast@victorjm.com
Real estate investors generally don’t care about short-term interest rates. The short term rates affect the cost of capital for bridge financing where those loans are indexed to the secure overnight funds rate. Short term debt can be replaced with permanent financing. I really painful increase in borrowing costs is tied to long-term interest rates.
We have experienced an inverted yield curve for much of the past two years.
This past week, yields on the 10 year Treasury hit 4.5%, a 16 year high. When you read the mainstream media, it’s as if the pricing for the 10 year Treasury is linked to inflation expectations and to some forecast of the Fed’s higher for longer narrative.
The question is why have the yields on US government debt increased in particular over the last 60 days? The United States has issued $1 trillion of new debt over the last three months. They have literally flooded the market. When you flood the market with any commodity, prices will fall which means yields will rise.
Host: Victor Menasce
email: podcast@victorjm.com
Aesops Fables are classics credited to Aesop, a slave in ancient Greece. The stories date back to a time between 620 and 540 BCE with each story containing a life lesson.
We are starting today’s episode with a fable called "The Ant and the Grasshopper.”
Host: Victor Menasce
email: podcast@victorjm.com
Josh Lessard is the research engine behind George Gammon and the Rebel Capitalist Show. On today's show we are talking about Josh's journey to becoming a central figure in the Rebel Capitalist team when he was just emerging from high school. To learn more from Josh, check out the Rebel Capitalist show on Youtube.
Host: Victor Menasce
email: podcast@victorjm.com
Scott Smith is based in Austin Texas where his law practice specializes in asset protection and insurance litigation. On today's show we are talking about structures to protect assets and create resilience from the many threats to your wealth. To connect and to learn more, visit royallegalsolutions.com
Host: Victor Menasce
email: podcast@victorjm.com
Robert asks - “Most successful people have mentors. Who are your mentors?”
This is such a great question. In fact I’m struck by the fact that in five and a half years producing a daily show, this topic has not come up before now.
I’ve had a number of mentors over the years. They date back to my days when I was in the tech industry.
I believe it is so important to have people to learn from in your life. Overwhelmingly, the people I look to for guidance are much older, and I have a few who are younger. For example, I have a mentor who is 21 years of age. More on that later.
Before I answer who my mentors are, I think it’s important to define what we mean by a mentor. Mentors are those who provide you guidance
On today’s show we are examining the latest Federal Reserve announcement and trying to make sense out of it for real estate investors.
We’re looking at what was said, the underlying assumptions, and what the likely decision points will be.
When asked if a soft landing was now a baseline expectation, Powell said “No, No” he wouldn't go that far. At this point he was off script. A soft landing is his hope, but not his base case. So he was clearly acknowledging that a soft landing is unlikely.
So here is my interpretation of what was said in totality. There are clear contradictions. The economic forecast says soft landing, and Powell was clear that he doesn’t believe the soft landing as the most likely outcome. He used the word “carefully” on numerous occasions to describe the Fed’s stance. He said that word more than I’ve heard him use it before. To me, that signals a recognition that conditions could change that would warrant a change in policy.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at a new report on The Evolution of Work from Home published by three authors: Jose Maria Barrero, from the Instituto Tecnológico Autónomo de México Nicholas Bloom University of Chicago Booth School of Business and Hoover Institution & Steven J. Davis from Stanford University
This 29 page paper has been in circulation since July as a working paper and was finally published yesterday by the Bureau of Economic Research.
This piece of research shows us how work from home has changed not just since the pandemic, but over a longer time period. Working from home has been rising in the United States for many decades, driven by the continuing improvements in technology that enables remote working.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we are talking about a new development project in Spokane. We believe it's important to design products that are differentiated in the market. We will be hosting a webinar on September 19 and would invite you to attend. To register for the webinar, click on the link below. If you can't attend at the specific time, we will send you a recording of the webinar.
https://event.webinarjam.com/register/11/8y93rf9
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about buildings that are built so fast that they cannot possibly be structurally sound.
Guess what? They’re not.
These buildings have been called Tofu Dreg buildings.
It’s not unusual in China to see 30 story buildings being erected in a fraction of the time we see in North America. Sometimes in only a couple of months. That’s incredibly fast. These buildings are clearly visible during construction. There is a concrete slab being poured on top of a grid of concrete columns. Many of them don’t have proper shear walls.
Observing virtually anything in China is very impressive. They throw armies of people at solving virtually any problem. I’ve witnessed this first hand on visits to China. Many of the projects are built by very low paid migrant workers.
The problem with using this approach in construction is that these buildings are structurally unsound. Concrete requires time to cure and harden. Concrete buildings have forces to contend with apart from just gravity. The lateral loads on a building due to the wind can cause them to collapse like a house of cards.
The number of high rise building failures in China is alarming. We are talking about buildings that are less than 20 years old. These buildings should not be failing, not even after 50 or 100 years.
Host: Victor Menasce
email: podcast@victorjm.com
Kent Ritter is based in Indianapolis where he has built a portfolio of multifamily apartments. His firm Hudson investing is undertaking its first development project in a suburb or Indianapolis and on today's show we are talking about the transition to new development and some of the nuances of making that shift. You can connect with Kent at kentritter.com
Host: Victor Menasce
email: podcast@victorjm.com
Ben Fraser is based in Kansas City and is involved in multiple asset classes. On today's show we're talking about industrial and understanding some of the nuances of that segment. To connect with Ben and to learn more, visit aspenfunds.us
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at a headline article in the WSJ.
The topic is banking. Think about it. Every bank’s risk management department would have stress tested the existing loan portfolio. They would have looked at the maturity dates of each loan, and forecast what would happen to those loans if they were refinanced at today’s rates.
We have not seen a massive wave of defaults yet. Yes, a few hotels have fallen over, and a bunch of corporate debt has caused bankruptcies. Trucking company “Yellow” is a great example of a company that fell into a debt trap. The SF Hilton is another.
By and large the banks are still showing strong balance sheets. But the signs are clear that they are not writing new loans. They want to write new loans. That’s how banks make money. They just can’t.
That’s why Jamie Dimon, CEO of JP Morgan Chase was quoted as saying “All loans are bad”. This is not an issue of a few mid-sized banks. This is every single bank. We had more than a decade of low interest rates being “normalized”. Doubling and in some cases tripling the cost of capital in less than a year is inflicting massive pain across the entire debt based economy.
The Wall Street Journal article totally misses the essence of problem. The article is shrouded in sanitized language.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show, we are talking about some of the dynamics that are showing up in the small investor segment of the real estate market. We are starting to see anecdotal boots on the ground evidence of properties being offered for sale that in my opinion are experiencing negative cash flow. In many major cities a small but significant percentage of condominiums, between 20-25% of new construction condos are owned by smaller individual investors who in turn put these properties into the rental market. Overwhelmingly these smaller condo units are investor owned. You often see the smaller lower cost units in condo buildings being purchased by investors, typically in preconstruction, prior to the building even breaking ground. In my home city these smaller units were really designed to maximize the revenue per square foot. These are small units! Many are between 400SF-500SF. These studio apartments are often very difficult to furnish.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we are going to talk about the world of exempt market securities. But before we do, then let me make it clear. I am not a lawyer, nor am I a securities lawyer. The purpose of today’s show is not to provide legal advice, but merely to arm you with perhaps enough knowledge to ask questions of your legal advisory team.
The reason we are even covering this today is because I get frequent questions from both newer and seasoned investors on the various types of securities offerings, and why one might be different than another.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the difference between two types of inflation. Economists have terminology for inflation that is used to describe the nature of the inflation.
The first is cyclical inflation. This type of inflation is caused by a short term economic disruption, for example a supply shock. Once that supply shortage is resolved, prices tend to normalize and the inflation essentially disappears. Some economists use the term transitory to describe a cyclical inflation.
The second type of inflation is called secular. This is a deeper and more systemic type of inflation that tends to persist because it is being driven by multiple factors including the so-called wage price spiral.
Once you have secular inflation, it is much more difficult to eliminate from the economy.
It appears as though we have a cyclical inflation happening right now. The supply shock that occurred during the pandemic has subsided. Inventories are bloated and prices are falling as suppliers compete more aggressively for customer’s business.
Secular inflation is when inflation expectations become anchored. The factors influencing inflation become systemic and entrenched.
On today’s show I’m going to make a case that even though we are in a disinflationary period, and parts of the world are experiencing deflation, the disinflation we are experiencing is a result of a cyclical downturn against the backdrop of a longer secular cycle.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we’re taking a look at the big picture of the housing market in both the United States and Canada and asking the simple question. Is this a healthy housing market? If so, then why and if not, why not?
Host: Victor Menasce
email: podcast@victorjm.com
Ross Hamilton is the founder of Connected Investor, which was sold to First American Title a little over a year ago. On today's show we are talking about some of the technology innovations that are coming to the world of real estate transactions. To connect with Ross, you can email him directly at ross@successcap.com. His charity is savinghomes.org which is doing amazing work to help people out of distress situations.
Host: Victor Menasce
email: podcast@victorjm.com
Scott Carson is based in Austin Texas where he specializes in purchasing and repairing distressed loans from banks and commercial lenders. Scott is a real experr in the field and he shares some insights as to what is happening in the market today. To learn more or to connect with Scott, visit weclosenotes.com or talkwithscottcarson.com.
Host: Victor Menasce
email: podcast@victorjm.com
With tax deadlines coming up and only a few months remaining in the year, we are getting a lot of tax related questions at our development company Y Street Capital. These questions are often coming from prospective investors who are looking at our investment offerings.
As always, we don’t offer tax advice. Most importantly, we advise our investors to never let the tax tail wag the investment dog. What that means is that we believe investors should make investments in sound investments first and foremost. If there is a tax benefit on top of the sound investment, then that’s the icing on the cake. But if the focus is entirely on the tax, then the investor runs the risk of putting icing on a mud pie. We don’t want that.
Host: Victor Menasce
email: podcast@victorjm.com
Today's question comes from David who writes:
Thank you for all the education you provide daily! It’s clear and concise and relevant and much appreciated.
In talking with a Canadian associate this weekend I was informed that Canada doesn’t offer 30 year fixed financing like in the States. I never knew this!
In talking with another Canadian today we were discussing that in his lifetime there hasn’t been such a quick and continuous rise of interest rates. This appears to be new territory for Canada.
With the housing stats discussed, time on market increasing, and quantity of houses on the market decreasing, this is confusing. I understand why time on market would be increasing but can’t get my head around why quantity of housing on market is decreasing.
Wouldn’t folks with a mortgage rate that is potentially resetting in the near future be in a position of having to get rid of these mortgages whose monthly payment is about to reset significantly higher?
Seems like a big onslaught of distressed property is headed down the pike in Canada.
What other factors do you see at play here that help to make sense of what appears to be conflicting numbers of time on market vs. quantity of houses on market.
On today’s show, we are putting some of the global financial risks on your radar that is not getting any air play in the news. If you have been a listener to this podcast for a while, it should be clear that we are in the throes of a global economic downturn. However, the manifestation of that is not identical on every single continent. There are three different predominant themes in the economy in North America, Europe, and Asia.
Host: Victor Menasce
email: podcast@victorjm.com
This question comes from Ravi who writes:
I have been a long time listener of your prodcast. In fact I won a signed book a few years ago. I have a lot of respect for you and was hoping to get your opinion regarding the build to rent investment thesis. I have considered investing through a company called Southern Impression homes. I was not sure if you had any experience with them. They build single family, duplexes, and quads in the Florida area and also manage them. The concept seems compelling and appears that private equity companies are now involved. Perhaps, my question may have broad interest for your listeners. Once again thank you all of your great work.
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA episode (Ask Me Anything)
Jay writes:
I recently bought a lot in a subdivision. Where do I find out what the developer has agreed to do exactly for the infrastructure? I already discovered a public access walk path that is graveled and the plot said it’s supposed to be paved. Where can I go to get details of what is supposed to have been done to the infrastructure including promised amenities?
Host: Victor Menasce
email: podcast@victorjm.com
Angie Stauffer is based in Gilbert Arizona where she is a senior executive with YRefy. The company helps student loan borrowers in distress with loan modifications. These loans cannot be forgiven through personal bankruptcy. By lowering the interest rate and extending the amortization period, the company gives the borrower a realistic and affordable plan for repayment of the loan. To learn more, visit investyrefy.com or reach out to Angie at AStauffer@yrefy.com
Host: Victor Menasce
email: podcast@victorjm.com
Robby Butler recently joined our real estate development team. On today's show you're going to get a chance to meet him for the first time. You can reach him directly at robby.butler@ystreetcapital.com
Host: Victor Menasce
email: podcast@victorjm.com
In his book "Building an Elite Organization", Don Wenner, the CEO of DLP Real Estate Capital, documents some of the principles that he has used to grow his company and has earned the honor of being on the Inc 5000 fastest growing company list for 8 years consecutively. Many of the ideas in the book are echo’s from other works. Jim Collins, the author of Good to Great is quoted frequently throughout the book. I met the author at an institutional investment conference. His company is well along the path of growth that our own organization shares. For that reason, I felt that it makes sense to learn from those who have paved the road before you. The folks at DLP also use ideas from the book “Traction” by Gino Wickman. We have reviewed that book on this show in the past. We too use the systems from Traction in our company. I consumed the book almost like a practical users’ guide to these other books that I have previously read and implemented in our business. What I learned from this book is that our implementation of these systems has flaws. I already knew that our implementation had flaws, but I didn’t necessarily know what the flaws were.
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA episide (Ask Me Anything). Michael writes:
"Hey Victor, I have been investing in multifamily properties for over a decade, mostly in smaller deals but a few in the $1M to $2M range. I've been encouraged to do cost seg studies many times over the years and cannot get the math to pencil out. As an actuary by trade, I have a high degree of confidence in my analysis, but am wondering if I'm missing something or if this works in some cases. Have you had any deals where completing a study made sense? If so, can you explain why it made sense?"
Today's question comes from Robert who askes:
What is your criteria for selecting guests who appear on the weekend edition? How do you vet podcast guests for your show?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about what is happening in the economy. There is a narrative of bumpy landing, to a soft landing, and now more recently, no landing. It seems as if the market is convinced that the US economy is strong and is going to emerge from this deceleration into recovery. The stock market is booming which quite frankly is delusional optimism.
We have seen a rapid increase in long term interest ratesfor both the 10 year and the 30 year US Treasury. The question is “Why”?
Host: Victor Menasce
email: podcast@victorjm.com
Today's question comes from Tracy who writes:
I am a developer/builder in Eastern Washington State. I have beenin talks for months with a regional bank for a new apartment building. We have satisfied all the preliminary requirements to be pre-approved. Recently, we went for final loan approval for the project and the bank came back with the determination that they did not have the liquidity to fund the 7.5M loan and they could not find another bank that was willing to participate in the deal.
I am not completely surprised by this given the information you have imparted in your hugely informational podcast. However, I have several commercial loans with this bank, and it made me start thinking that I should probably check the health of the bank so I could determine if there is additional risk to my portfolio.
So, my question is: What information should I gather and how do I gather it, to determine the stability of a bank?
A secondary question is if a bank fails what happens to those that have debt with that bank? Everyone talks about the deposits, but how does abank failure affect those who have loans in place with the failing bank?
Host: Victor Menasce
email: podcast@victorjm.com
Scott Choppin is based in Southern California. His company specializes in purpose built urban townhouses for rent. On today's show we are talking about the challenges and merits of building in California.
He publishes a weekly article on Substack called "The Real Signal". You can also connect with Scott on Twitter @ScottChoppin.
Host: Victor Menasce
email: podcast@victorjm.com
Tim Milazzo is based in New Smyrna Beach, Florida where he is the founder and CEO of StackSource. The company focuses on driving transparency into the borrowing process for commercial real estate borrowers. To find out more, visit stacksource.com
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA episode (Ask Me Anything). Rueben asks:
Can you suggest a good program for helping me build out my budget for a new single family 1500 sq. ft. construction?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about demographics and policy. In Canada, our fertility rate is 1.48. We’re not making enough babies to maintain population. Like most western economies, fertility rates are below the 2.1 required to maintain population constant.
The US is at 1.64
Italy is at 1.24
China is at 1.09
So countries with low fertility and rising populations are acquiring population through immigration. That’s true in the US, Canada, and much of Western Europe.
Canada is a large country in terms of land mass. But if it’s built, it is full. With nearly 1M people admitted to the country in 2022, people are finding it hard to find a place to live. The vacancy rate in many cities is hovering near and in many cases below 1%.
Newcomers to the country are having a hard time finding accommodations. I’ve personally had conversations with parents who are struggling to find student housing for their children who are moving away to attend university in another city.
Many foreign students choose to stay in Canada after their degree and eventually become permanent residents and then naturalized citizens.
This past week, Canada’s Federal government announced a plan to solve the housing problem by limiting the number of foreign student visas.
Honestly, this is one of the dumbest ideas I’ve seen in a long time. In an environment when you have an aging population, you want your immigration to be biased towards a younger demographic. You want people who are just entering the workforce to be the ones coming into the country. If the first few years of their stay here involves training and education that will enable a high quality of integration into the society, you can’t ask for better. Those who enter the country in their later years where they will contribute less to the economy and potentially represent a strain on the health care system exact a higher cost on the country.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s question comes from Paul, who asks: I have a multi family apartment project that is currently up for renewal of its insurance policy. I have a quote for new insurance, but I’m having a difficult time, assessing whether the insurance being quoted is going to leave me over insured or under insured. I would like to have replacement cost insurance. How would I determine replacement cost for an apartment complex that is 40 years old. How do I determine the correct level of coverage?
HostL Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at the economy in China. China is the world’s second largest economy and it is the most systemically important from a consumer perspective. China is the factory of the world, at least for now.
As China’s industrial sector boomed over the past 40 years. People moved from the farms into the cities in order to work in factories. The growth in manufacturing was only possible through the availability of inexpensive labor coming from the farms.
We’ve seen entire cities built on speculation with the assumption that the space would be absorbed.
At this point China’s problems are systemic.
There are four major structural factors that are suppressing the Chinese economy. Three out of the four structural factors were present prior to the pandemic. But the disruption caused by the pandemic was so massive cause that it masked the presence of these for structural factors.
Call number one we see a drop in demand in domestic consumption. A lot of this has to do with declining consumer confidence from deflation, and a reverse in the wealth effect that comes from falling real estate values.
The second factor is that the credit markets appear highly leveraged. Borrowers have taken on about as much debt as they can stomach. With falling real estate prices, there is no opportunity to refinance and the mortgages remain. The banks are worried about large scale default rates. In the US in the 2008 era, the default rate peaked at about 10% which is incredibly high. But in the early 2000’s, some banks in China were reporting default rates between 22-25%. It took a large scale government bailout of the banks in order to prevent collapse of the financial system.
The fertility rate in China is currently 1.09, one of the lowest in the world.
We have heard about how the decline in China’s population is going to create massive problems for the Chinese economy, much like it did in Japan after Japan’s population peaked in the 1990’s.
Even though China’s population has peaked and is declining, that’s not enough to create the residential vacancy we are observing. There is a drop in household formation which is creating a gap in demand for housing. China’s urbanization trend could continue if the agricultural practices were to modernize and become less labor intensive.
Strangely, despite the falling population, the unemployment rate among young adults currently stands at 21%. The Chinese government announced that they will no longer report that statistic.
The final structural problem is the diversification of supply chains away from China. Geopolitical tensions between China and the West has cause direct foreign investment into China to plummet as companies set up second source manufacturing outside China.
Host: Victor Menasce
email: podcast@victorjm.com
As many of you are aware, the real estate development company that I’m a partner in is building several projects. On today’s show, I’m going to give you an update on the Norris Ranch project in Colorado Springs. It’s been about ten months since we closed on the purchase of this iconic property. While our investors get regular updates, we know that many of our listeners are also interested in following the story.
Let’s start with a bit of background and context. The Norris Ranch is a property of 1783 acres on the Eastern edge of Colorado Springs. The property is sandwiched between Pike’s Peak National Cemetery and Schriever Air Force Base. Schriever is US Space command. They are our neighbor.
The idea behind developing this property involves a major expansion of the city. It will contain 4 densities of residential, retail, commercial, office , hotel, police, fire, schools, etc.
We started the annexation petition to the city in August of 2022, expecting the zoning and annexation process to take about a year.
Ken Gee is based in Cleveland Ohio and he invests in multi-family assets. On today's show we are talking about the merits of a fund model versus syndicating individual deals. To connect with Ken and to learn more, visit kripartners.com
Host: Victor Menasce
email: podast@victorjm.com
Kevin Amolsh is based in Denver Colorado where he runs The Pine Financial Group. They're a private lender with $130M in assets under management. To connect or to learn more, visit https://pinefinancialgroup.com/ or visit https://thepinereport.com/ to get a copy of their latest report on lending in the current environment.
The mainstream media continue to push the narrative that the US and Canadian economies are strong. Unemployment is low and the service sector of the economy is doing great.
This is what is driving the soft landing hypothesis.
But what is being overlooked is the economic headwind that is about to hit the US economy
The US government is low on tax revenue this year. We have reported on the fact that the US Treasury has experienced as massive fall in tax collections this year. We know that there have not been any massive tax cuts announced for this year. So there is no way that the amount of personal income tax collected in 2023 can be down and the economy is growing at the same time. Those two numbers need to track each other very closely.
Effective September 1, in less than two weeks, US student loans become due again.
The US has 45 million people with student debt. Over the past three years, about 60% of the borrowers with student loans took advantage of a pandemic forbearance offer on student loans. That comes to 25.6 million people. The Biden administration attempted to extend this forbearance even further and this executive order was struck down by the Supreme Court. The power of the purse, that is government spending and tax collection is vested with the Congress and not the executive branch of government which is the President’s office.
Effective Sept 1 the interest will start accruing again on these 25.6 million loans and the average payment of $300 per month will need to start coming out of bank accounts on October 1.
For the last quarter of the year, that amounts to approximately 23B dollars that will be pulled out of the economy. Now that might not sound like a huge sum of money within the context of the entire US economy.
But the impact is larger than just 23B. Remember that when money is spent in the economy, it tends to recirculate. This is called velocity of money, the notion that money circulates in the economy. But when a loan is repaid, the velocity associated with that transaction is zero. Those funds go to money heaven.
On today’s show we are talking about the process for getting properties rezoned. The subject of today’s show is a three parcel land assembly in my home city of Ottawa Canada.
At the start of the planning committee meeting there were no less than six projects being reviewed. Several that had contentious elements were held for further discussion after the procedural portion of the meeting.
That front end portion of the meeting that lasted a total of 11 minutes. In that time, all of the projects were announced including our project. The committee basically uses that introductory session to set the agenda for the remainder of the meeting.
We were asked if there was any public input. There being none, we asked if we wanted to make a presentation even if the committee recommended approval of the zoning application. We declined to present. The city staff on the file had been in fact notified prior to the meeting that they were not being asked to make a presentation at the meeting.
The project goes next to city council within about a week for a vote, which is then followed by a 20 day appeal period. Upon expiry of the 20 day appeal period the zoning is fully ratified.
Just like that, in about a minute, two years of work were came to a milestone. Our company has multiple projects underway. These are the moments we regularly work towards
Host: Victor Menasce
email: podcast@victorjm.com
Allan Asks:
Hi Victor,
Thank you again for your excellent content and insight. There is so much of a “punch” packed into a small amount just like an espresso.
Hopefully this isn’t an obvious question and worth your time to answer but how do you stay up to date finding books that will be Books of the month? Is there any particular strategy to staying in tune with new material and content to internalize and make a part of you.
Thanks again for all you do!
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at what can happen when politicians print too much money. The US, Japan, Canada, the UK, and Europe, China and many others are all at risk of becoming financially unstable. Argentina has a history of being fiscally irresponsible. The country has debased the currency a lot over the past two centuries. The country has also defaulted on its debt 9 times in the modern history.
Argentina defaulted on its foreign debt in December 2001. Many analysts thought this would lead the country into a long period of stagnation and would make it a pariah in the world’s financial markets for a long period of time. Oddly this did not occur.
A sovereign debt default occurs when a country does not meet a debt payment (principal or interest), that is it fails to meet the terms of a contractual agreement.
The incentives for avoiding default are not associated with the collateral damage but with the country’s reputation. A country’s incentive to make repayments is to preserve its future access to international credit markets and international trade. If you become known as a credit risk, then your borrowing costs go up which can have an impact for decades after a default event.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s question is actually two listener questions, both of whom have described very similar situations.
JR got plat approval and paid a contractor called straight edge for the horizontal development. That work consists of the road paving, and the infrastructure that is buried in the ground. Straight edge went bankrupt and never paid the paving bill. So the Paving company files liens on all lots that aren’t owned by home owners. That’s a total of building 20 lots at $6500 a lot. The total paving bill was $130,000. Fortunately JR is eating the loss and reimbursing the cost to the paving company. At the end of the day, it matters the people you’re doing business with. What should JR have done differently?
The second question comes from Mark who had a very similar situation involving a contractor whose business partner disappeared and emptied the company’s bank account. The contractor had been paid for steel and concrete work, but the subcontractors were not paid. The original contractor was forced out of business. The subcontractors wanted to be paid and put a lien on the property. Mark now faced the prospect of paying twice for the same scope of work. Not only that, but the original contractor had low bid the job in order to get the business. After interviewing several contractors to complete the construction, it was clear that the project could not be completed for anywhere near the original construction quote. How could Mark have prevented this from happening?
These are both excellent questions. The very fact that we have virtually the same question being asked twice within a relatively short time period suggests that this is a shockingly common occurrence.
Susan King is based in Chicago where she works with HED, a major national architectural design firm. On today's show we are talking about architecture and how it applies to design of affordable housing. To connect with Susan, visit HED.design or connect with her on LinkedIn at https://www.linkedin.com/in/susan-king-faia-leed-ap-bd-c-lfa-0057b45/
Host: Victor Menasce
email: podcast@victorjm.com
We hear about all of the risks in the current market environment. But we rarely hear ideas on what you can do to find opportunity in the current conditions. Today's talk was recorded at the 2023 Investor Summit.
Host: Victor Menasce
email: podcast@victorjm.com
One of the goals of this show is to help you connect the dots on what is happening in the economy. Today’s show is not strictly about real estate. However, we have seen central banks in the US, Canada, Europe, and the UK all raising interest rates to combat inflation.
On today’s show I’m going to share some data with you that hopefully will convince you that we are already in a global downturn which will cause central bankers to flip from restrictive monetary policy to stimulative monetary policy. There is no soft landing in this story. It’s a hard landing and there is no question in my mind that we are already there.
We are talking about how the result of globalization is a global economy.
Host: Victor Menasce
email: podcast@victorjm.com
Last week Fitch downgraded the sovereign debt rating for the United States. And late Monday, Moody’s downgraded the ratings of several US banks. Moody’s took action on 27 banks, including downgrading the credit ratings of 10 and putting others under review or giving their ratings a negative outlook.
Many of the reasons for the actions will be familiar: Rising deposit costs and risks to commercial property and construction loans posed by the shift to remote work.
Host: Victor Menasce
email: podcast@victorjm.com
If you're currently an accredited investor, then you definitely want to pay attention because I believe that in a year from now you may not be accredited any longer. And if you are not an accredited investor, then I've got some good news for you, because there's actually a non-financial path that you can take to becoming accredited. Currently, the SEC is looking into increase in the accredited investor qualification threshold from its current $1 million net worth requirement to as high as $10 million as reported by Bloomberg.
One of the byproducts of inflation is that what once seemed like a really big number is now not so large after all. When a number is hard coded in the legislation, it will eventually become meaningless. There was a time when $1M was a really huge number. Today, it’s just a big number. So they’re going to contemplate resetting the threshold to qualify as an accredited investor.
At the same time, the SEC has already passed a rule that would allow non-accredited investors to qualify as an accredited investor. You might be able to qualify by taking an test for financial literacy.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about water. Water is one of those life sustaining commodities. Water is seemingly everywhere, and scarce at the same time. 3/4 of our planet’s surface is water. Our human bodies are about 65% water.
In many parts of the country if you don’t have municipal water supply at your property, it is often sufficient to drill a well and you will find water.
But in arid parts of the world, water can be in short supply.
Water in most commonwealth countries follows Riparian water rights which is based on British common law.
In the Western part of the United States, water follows the doctrine of prior appropriations.
All of this means that the ownership of the water is separate from the ownership of the land. Water is treated in a manner similar to mineral rights. Just like mineral rights can be separated from the land and sold. So too the water rights can be severed and sold. The office of public record for water right ownership is the county recorder’s office for the counties in which the water is diverted. Just like the county recorder maintains sequential order of priority for ownership, easements, and liens, water follows the same process.
When you buy a parcel of land, a certain amount of water is associated with the land, and this water right is recorded on title. This is usually measured in annual usage measured in acre feet along with a peak flow rate measured in CFS.
In the Western part of the US, when you purchase land and rezone it for development, you often need to surrender your water rights to the municipality in exchange for getting access to the city water supply. If your property doesn’t have enough water rights to sustain the density you are seeking, you might be forced to buy additional water in order to qualify for the density you are seeking.
On today’s show, we are looking at a human phenomenon called bias. We would like to think that the professional, economists and decision makers in government, or making objective decisions using hard data. However, we see the exact opposite and play in numerous facets of our economy. On today’s show I’m going to give you two distinct examples from vastly different areas of government. Both of these examples have had severe economic impact with nothing more than recent events to skew the decision making process.
Biases are often clouding the human decision making process. The most common of these is something called confirmation bias, confirmation bias of the process, whereby a thesis is formed, and then the decision maker goes looking for data to support the thesis. You would think having supporting data would be a good thing. however, when the decision-maker ignores conflicting data or fails to look for conflicting data, the result is confirmation bias.
If you look at the actual data in 2019, the annual consumer price rate of increase was higher than in the most recent report in 2023.
In the face of stronger economic data, the Fed was dropping interest rates in 2019, whereby today they're increasing interest rates. When you look objectively at the data, you could argue that we should be doing the opposite.
Host: Victor Menasce
email: podcast@victorjm.com
Arielle Evan comes to us from Israel where she is CEO of Compera. The company is focused on managing affiliate relationships for property managers and tenants across multiple domains. By offering preferred services to tenants, the landlord provides a valuable service and this can also translate into a supplementary revenue stream. To learn more or to connect with Arielle, visit Compera.io or email Arielle@compera.io
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we are talking about how to use cost segregation to take advantage of tax savings. Joseph dispels some myths around cost segregation that could result in major savings even for smaller properties.
Another area of major savings is energy. There are grants and tax credits available under the inflation reduction act that can make energy improvements compelling for all types of properties.
To learn more, you can connect with Joseph at ustagi.com
Host: Victor Menasce
email: podcast@victorjm.com
Today’s question comes from Steve in Salt Lake City
I have noticed living in the greater Salt Lake area that the styling of new multi family buildings has become very cold and austere it’s almost like the same template is being used. What factors do you use and what are your opinions on exterior building styling and it’s importance?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about how the forecast bloodbath in hospitality is just getting started. Last month we saw two of San Francisco’s large hotels handing the keys back to the lender. The owner of the San Francisco Hilton and the Park 55 Hotel announced in June that it will immediately stop making payments toward a $725 million loan, slated to mature November 2023. These two hotels represent about 3,000 hotel rooms. The troubles in San Francisco have been widely covered in the mainstream news media. Locals and businesses have been leaving the city in droves. The troubles in SFO seem to be spreading North of the Golden Gate Bridge into Napa and Sonoma county.
Two recently opened Wine Country hotels face a potential $80 million foreclosure this month, according to public documents in Napa and Sonoma counties.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about industrial and what can happen when investors move en masse toward the same target. The folks at Marcus & Millichap issued a wave of mid year updates on the industrial sector for almost all of the major markets across the US.
The thesis is that with the growth of e-commerce and with supply chain constraints during the pandemic and with geopolitical risk, there would be need for more warehousing in North America.
We humans have a tendency to project current market conditions into the future. This is called recency bias and is not necessarily indicative of long term trends or needs.
A lot has been built and it’s not clear that the demand is there to absorb all of this new supply. It’s likely that the vacancy is migrating to some of the older product in the market. Asking rents are up in all markets. Asking rents are up 19% in Dallas, 31.9% in Charlotte, 5.6% in NYC and 12.3% in Austin. These rent increases are impressive, but remember these are asking rents. They are not backed by leases. I’m sounding a tiny alarm bell that this sector is showing signs of being overheated and I’m expecting a softening in the coming year. Investing in industrial right now could have elevated risk.
Host: Victor Menasce
email: podcast@victorjm.com
In his groundbreaking book "Influence: The Psychology of Persuasion," renowned social psychologist and marketing expert Robert Cialdini. He delves into the world of human behavior and unravels the secrets behind the art of persuasion. Cialdini came from the world of academia that had long resisted publishing works in the popular press instead of strictly academic publications. It was with concern about ridicule from his peers and with great hesitancy that his book was written with a broad audience in mind.
First published in 1984, this timeless classic remains relevant and influential, serving as an essential guide for anyone seeking to understand the subtle forces that drive human decision-making and influence.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s question comes from Chris who writes.
What are your thoughts on diversification? I keep hearing about how diversification is important to mitigate risk. How would you diversify your real estate investments? I’m not even clear on what would be considered to be truly diversified versus scattered.
Host: Victor Menasce
email: podcast@victorjm.com
Kenny Rose is based in Chicago Illinois where he is the principal at Franshares a company that specializes in fractionalizing share ownership in franchises across the USA. Franchises come in all shapes and sizes. They range from food and beverage, to fitness, to waste management to property management. On today's show we are looking deeper at franchising and the opportunity to own fractional shares in frachises.
To connect with Kenny, visit franshares.com.
Host: Victor Menasce
email: podcast@victorjm.com
Travis Godon is based in Ely Nevada where he specializes in land development for large utility scale solar farms. On today's show we are talking about the criteria that make for a suitable solar farm. To learn more or to connect with Travis, seek him out on LinkedIn at https://www.linkedin.com/in/travis-godon-b4a772ba/
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a snapshot look at how one state is trying to address housing affordability.
Home pricing follows the laws of supply and demand. Sellers put their home on the market and buyers place an offer. That price might be low than asking price, higher than asking price, or at the asking price. It’s a full contact negotiation. There is nothing compelling a buyer to pay a particular price. If the buyer and seller can’t come to terms, then no deal gets done. This is the classic process of price discovery.
Some jurisdictions have been addressing affordability by applying downward pressure on landlords and developers. Those greedy landlords are to blame for the lack of affordability. I’m thinking of places like California that have imposed state level and even municipal level price controls on rental housing.
The effect of these measures is to discourage landlords from entering the market. The net result is fewer landlords, fewer rental properties and therefore higher rental rates.
The state of Utah on the other hand has been growing rapidly and has experienced net migration growth for 31 out of the last 32 years. Utah also has the highest birth rate in the nation and is one of a very states that is growing organically.
The state has also taken a very enlightened approach to encouraging new product to enter the market. The first step to encouraging growth is to remove the bureaucratic obstacles to growth.
The legislature has implemented 10 initiatives aimed at reducing bureaucracy and encouraging development.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at interest rates. Yesterday the Federal Reserve increased the Federal Funds rate to a range between 5.25%-5.5%.
This clearly sets the stage for short term interest rates to increase. The yield on the 10 year treasury decreased from 3.91% to 3.86% following the Fed announcement.
The yield on the 30 day Tbill is currently 5.46%. This is matching the Fed funds rate.
Back in October of 2022 the 30 day T-Bill yield was ranging between 2.85% and 3.75% as the Fed was aggressively increasing rates during that period. The yield on the 10 year Treasury at that time was 4.25%. The interest rate that most investor care about is linked to the yield on the 10 year Treasury.
Today we have an interest rate inversion where the market is clearly signalling to the Fed that they don’t believe them.
The real question is what’s next?
We are seeing deflationary prices. We have a globally synchronized economic cycle.
The Fed says it is raising rates, and the European Central Bank says it is raising rates. But as we have discussed on this show before, we have not seen a dramatic rise in bond rates over the past 8-9 months. Since most long term lending is indexed to the yield on the 10-year or the 30 year bond, these numbers have hardly moved since October.
If you listen to the rhetoric from the Fed Chairman, you would think they have tremendous influence over the market.
The market sets the rates, not the Fed Open Market Committee.
In Europe, we are seeing demand for credit falling. This is not being driven by rate increases. The reason we know that is that rates have hardly increased. So that cannot be the reason. Businesses are not going to stop borrowing money for a couple of percentage points if they have things to do that will drive business growth. We went from 0% to 2% in Europe. That’s not enough to choke off business activity. There must be another explanation.
These are deflation and recessionary markers that are consistent with an economic cycle.
Rates rise when there is a competition for money. Rates fall when there is a lack of demand for money. When we talk about money markets, this is an accurate term in the true sense of the word “market”. Just like the price of tomatoes or gold or oil, if demand goes up and exceeds supply, the price goes up. If demand falls, then prices fall. It’s the same thing with money. If demand for money goes up, then interest rates rise. Regardless what the Fed says about rates, we see supply and demand forces are dominating the cost of money over the longer term.
On today’s show we are not talking about real estate, but instead about a major shift that is taking place in society.
We have an unstated assumption in our world that more is better. We want more money, a bigger house, a faster car, a bigger boat.
As investors we want more units, more mobile home parks, a higher rate of return, a longer vacation.
Marketers want more content, more more more. We are literally carpet bombing people with advertising.
To what end?
That is the same impetus that drove fossil fuel extraction. It is the same impetus that drove the building of entire cities in China that remain empty with no inhabitants. It is the same impetus that created the Netflix library with more streaming content than you could ever watch in your lifetime.
We are mechanizing art. We won’t have the time to absorb it all.
We are going to need AI to summarize the crap created by AI for us.
Host: Victor Menasce
email: podcast@victorjm.com
Tenants can hardly be blamed for being confused. Many have never owned a home and they have no idea what it costs to own and maintain a property.
With the rise in interest rates, home affordability has become even more expensive. Inflation has affected many of the maintenance and repair costs. Air conditioners have gone up between 15%-25% in the past year. If your air conditioner fails, you will feel the pinch. That means your replacement budget just took a substantial hit as well.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at a fundamental economic concept, called the law of supply and demand. I have been a huge believer in the law of supply and demand as one of those fundamentals that must be respected. I treat it like a law of physics similar to gravity.You can try to bend the laws of physics, but gravity will usually win that battle.
Suppliers, often struggle with assessing demand, simply based on customer orders.
One of the largest contributors to that confusion is the buffering of demand and supply chain inventories. The larger the buffer, the larger, the potential for confusion. Over the past several decades, businesses all over the world, have aimed to reduce inventories, in order to reduce the cost of carrying that inventory. it takes a lot of working capital to carry inventory on a large scale.
The law of supply and demand is fundamentally rooted in the distinction between demand and utilization. I am making the distinction between demand and utilization. They are different.
Shawn Moore is based in Park City Utah where he specializes in short term rentals. On today's show we are talking about the state of the short term rental market and how it is changing and "growing up". To learn more or to connect with Shawn, visit https://vodyssey.com
Host: Victor Menasce
email: podcast@victorjm.com
Sara Martin is an architect and project manager with HED specializing in design of data centers for high capacity computing installations. On today's show we are talking about the data center industry and the characteristics of a modern data center. To learn more you can visit hed.design or connect with Sara directly on LinkedIn at https://www.linkedin.com/in/sara-martin-7b61b546/
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show, we are looking at different types of money printing to understand the impact that money supply has on consumer price inflation. Have you wondered why we don’t have hyperinflation with the tens of trillions of dollars that are loaned into existence through the banking system? There is one school of thought that says all forms of inflation are rooted in debasement of the currency. That theory says that inflation is a monetary phenomenon that is the result of inflation of the money supply. The price increase we see is a symptom of the inflation and not the inflation per se.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s show is another AMA episode (Ask Me Anything)
Allan asks:
I have been listening to your show for about two years now and love the depth and variety of what you share. I’m amazed at how much you can pack into just a few minutes.
My question is, what are your minimum deal standards when you consider a new development deal? I’m finding that the numbers are more difficult to make work in the current environment with the rise in interest rates? Have you altered your standards to make projects work?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about how maturing cities handle growth and development.
There are two costs associated with growth. There is the initial cost, and then there is the lifecycle cost.
Buildings and neighbourhoods go through cycles of development, stagnation, decline and renewal. Cities therefore go through cycles as well.
When a city is growing it costs money to build roads and schools and infrastructure like water treatment and sewage treatment. These costs are initial costs that are often paid for by developers that are responsible for the growth. For the first number of years, that new infrastructure is very low maintenance. It’s new and pristine and the cost of maintaining it is effectively zero. But eventually, those roads will need to be repaved, and the sidewalks repaired. Landscaping will need a refresh.
The schools that were new and filled to capacity will eventually be under-utilized as families move out of those mature neighborhoods. The cost of maintaining the roads and the schools remains constant over time.
It’s much cheaper to re-use existing infrastructure through the process of urban renewal instead of letting major regions of the city decay into an urban wasteland.
Intensification is the word that best encapsulates the eco-friendly aspect of urban renewal.
The problem with infill projects is that they’re small. They’re too small for large scale home builders. You can’t mobilize an entire framing crew to move from one property to the next in an infill setting. There is simply not enough work to make the process efficient.
Just like an assembly line is more efficient at making cars than building them one at a time, a residential subdivision is the assembly line equivalent when it comes to home building.
But we’re trading one form of efficiency for another. Efficiency for the builders is coming at the expense of efficiency for the city. The life cycle cost for the cities is actually more important. Intensification in cities is environmentally friendlier than gobbling up more agricultural land and allowing cities to expand outward meanwhile land in the core lies under-utilized.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we are announcing the contest winners.
Chris De Celle
David Ortiz
Emilio Tucker
Emails have been sent to each of you to get your mailing details. Congratulations to our winners.
On today show, we are talking about an impending surge in unemployment.
This is not on many economists radar and certainly we don’t have government talking about it. Certainly the mainstream media has published lots of stories about how artificial intelligence could replace some jobs in the future. But I’m here to tell you that the future is now.
If your tenant has a steady job in customer service, there is a 90% chance that they will lose their job within the next 3-18 months.
That’s right, 80-90% of customer service jobs will disappear.
The reason for that prediction is the Pareto principle. The Pareto principle is often called the 80/20 rule.
I'm going to give a real life example where that has already happened.
On today’s show we are looking at one of the most convincing economic indicators in advance of next week’s Federal Reserve meeting.
We hear politicians talking about how the economy is strong and how unemployment is near record lows. Inflation is coming down, but core inflation remains elevated. Maybe there will be a mild recession or a soft landing in the fourth quarter of this year. For now, we have a hot economy. The consumer is driving the economy. Airlines are reporting record profits.
For the first five months of this year, the congressional budget office has been reporting falling revenue. The treasury took in 1.693T in individual income taxes up to June 2023 compared with the same period last year which was 2.135T.
That’s a short fall of 442B in individual income tax receipts compared with the same period last year.
This is a 21% reduction in income tax receipts compared with last year. How can the economy be growing with a 21% reduction in income tax receipts?
Host: Victor Menasce
Jmi Pfeifer is the founder of Left Field Investing an online investment club with about 1,800 members. On today's show we are talking about how the community operates.
To connect or to learn more, visit leftfieldinvesting,com
Host: Victor Menasce
email: podcast@Victorjm.com
Leandro and Arturo are principals at Primestor, a Culver City development company specializing in building in some difficult parts of South Los Angeles.
Host: Victor Menasce
podcast@victorjm.com
On today’s show we are talking about how to evaluate a proposal from a consultant. We are going to look at two proposals from different geotechnical engineers. These two proposals differ significantly in both price and scope. One proposal is nearly double the price of the other. How would you evaluate which quote to accept? Which proposal is better?
Let’s start with even asking the question: Why do you need a geotechnical engineer? What do they do, and why do you even need to spend money on this?
The geotechnical engineer does an analysis of the soil stability on your development site. They determine what it will take for your building to stay standing over the lifecycle of the building.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about some of the tricks that bureaucrats use to manipulate the inflation metrics that are being used to decide monetary policy. The cost of money affects the cost of virtually everything we buy. So the power to manipulate the economy and affect the fortunes of an entire population is in the hands of a handful of people who quite frankly have not earned the right to wield so much power.
But before we talk about the manipulations we need to define a few terms so that the incentive for the manipulation is clearly visible.
Let’s start with the gross domestic product. You calculate the GDP by adding up all of the economic activity and that gives you the gross domestic product. If the amount of economic activity has grown, by say, 2%, then the economy grew by 2%. But wait a minute, we know that there is this thing called inflation.
So in fact we need to subtract the rate of inflation from the GDP metric in order to get the real GDP metric that has been adjusted for inflation. In our example, if the economy grew in nominal terms by 2%, but inflation was running at 1%, then we would need to subtract the 1% inflation rate from the nominal GDP in order to get the real GDP.
So getting an accurate measurement of inflation is critical to getting an accurate measurement of GDP.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at a looming problem that threatens the functioning of the entire legal system in North America.
Justice delayed is justice denied. The rule of law depends upon having a functioning legal system. In the absence of a working legal system, criminals will increasingly take their chances that the statute of limitations will prevail and they will get away with offences that in a different environment would result in litigation, judgements, and possibly even criminal convictions.
There is a shortage of judges across both the US and Canada. The net result is that civil and criminal cases are going into a queue that is measured in years.
Host: Victor Menasce
email: podcast@victorjm.com
This question comes from Elizabeth who asks:
I’m looking at a property which borders on an environmentally protected wetland area. Of the acreage, about 80% is outside the environmentally protected zone. So I should be able to develop on the part that is not environmentally protected. What should I look out for when considering this property?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at the weeks ahead. We are expecting a number of announcements including the upcoming interest rate policy when the federal reserve meets near the end of July.
The latest numbers coming out of Washington suggest a robust economy. At least that is the official narrative. Yet there are so many other metrics pointing in the opposite direction.
Host: Victor Menasce
Vikas Gupta is based in Pasadena California with a software startup called Azibo. Azibo is a software company that specializes in serving smaller independent landlords with a property management system that is highly integrated, but still easy for smaller landlords to use. To learn more or to connect, visit azibo.com
Host: Victor Menasce
email: podcast@victorjm.com
Calvin Roberts might be the youngest insurance brokerage principal I've ever met. But he is clearly one of the most knowledgeable. On today's show we are talking about the massive increases in insurance premiums and explaining the underlying factors.
To learn more or to connect with Calvin, visit falconinsagency.com.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the architecture of the future. We are all accustomed to seeing the usual rectangular buildings with the vertical walls and 90 degree angles everywhere. Architects made them more interesting by articulating the facade with indentations and projections. Changing the materials on the exterior creates a sense of form, superimposed on what is still a rectangle.
I know what you’re thinking, any other shape is simply too costly to create. Standard materials can’t be used and it requires a tremendous amount of customization to create any other shape. All of this translates into extraordinary cost. With all of the emphasis on affordability, who needs a building shaped like a dolphin anyway? Ok, it doesn’t need to be a dolphin, but who needs a curved wall anyway? It’s going to make decorating the interior space difficult. Artwork won’t hang nicely on the walls. Our entire world is centred around flat surfaces. Even if it were practical to create irregular shapes in a building, would you really want that anyway?
What about those really tall narrow buildings that rise hundreds of feet into the air? When the buildings are that thin, how do they stay standing? Why don’t they fail in a wind storm?
On today’s show we’re going to answer these questions and more, with the answer coming from the world of crustaceans.
Host: Victor Menasce
email: podcast@victorjm.com
Today is a milestone for the Real Estate Espresso Podcast. This is the 2000th episode of the podcast. It seems like yesterday that the podcast was a concept, an idea. I had been experimenting with various ways of communicating and had been a guest on numerous shows. Publishing a show for 2,000 days in a row has definitely been a project.
In fact, of the 2M podcasts out there, 90% quit after 3 episodes, and another 90% of the remainder quit by episode 20. So to help celebrate 2,000 episodes, we’re going to be holding a little contest. A few lucky winners will be getting some podcast SWAG. We’re talking coffee mugs. I realize that some of you like a tall coffee and not just an espresso. So in about the time it takes you drink your morning coffee, you can share those few minutes with the real estate espresso podcast. To enter the content, send an email to podcast@victorjm.com and put the number 2,000 in the subject line. The drawing will be held on July 14. To all of those who enter, best of luck and thank you for celebrating 2,000 episodes with me.
On today’s show, I’m going to take you through a little bit of a thought experiment. We know what has happened as a result of the rapid rise in interest rates and how it has affected the housing market. We know that supply of homes for sale has declined as a result of the so-called lock in effect.
If interest rates fall, will we see a deluge of houses come onto the market for sale?
Host: Victor Menasce
email: podcast@victorjm.com
Today’s question comes from Matt who asks:
I have a property that we are considering buying that is in a hot neighborhood. The rents in the area are $2,500 a month for a 2BR apartment which is strong for the city as a whole. The city is a rustbelt city that has seen a lot of growth
The subject property was an industrial site that likely has contamination. The phase 1 indicates there is lead in the ground and there are likely petroleum products in the ground as well.
The seller is pushing for a closing of 30 days after completion of the environmental phase 2.
The existing building is about 19,000 SF of structure above ground and we could ultimately build about 27 apartments in the existing structure. The land is $500,000 and it would likely require about $500,000 in environmental remediation costs. It’s likely that the site would qualify for 100% of the site remediation to be government funded.
What do you think about this deal?
Host: Victor Menasce
email: podcast@victorjm.com
On today show, we are looking at the market for construction workers. With the rising interest rates, there has been a significant reduction in the number of construction jobs underway compared with the same period Last year.
It’s no secret that there is a shortage of workers in construction jobs.
According to a report in yesterday’s Wall Street Journal, many builders in Florida are experiencing an acute shortage of workers.
Host: Victor Menasce
email: podcast@victorjm.com
On this podcast we keep trying to make sense out of this economy. It is confusing and there are numerous contradictory signals.
On today’s show we are taking a look at why there appears to be a labor shortage. We keep hearing about the so-called labor shortage and politicians and the Fed keep pointing to the historically low unemployment rate.
So where did all the people go? There was not a labor shortage before the pandemic, although we did have historically low unemployment even back in 2019.
Host: Victor Menasce
email: podcast@victorjm.com
Stewart Heath is based in the Huntsville market where he invests in stabilized commercial assets that have a customer facing component. On today's show we are talking about the opportunity that is coming in the world of commercial real estate, as well as some of the risks and pitfalls. Stewart can be found at harvardgracecapital.com
Host: Victor Menasce
email: podcast@victorjm.com
Our book this month is The Wim Hof Method: Activate Your Full Human Potential, by Wim Hof.
Wim is famous. He has broken more than 26 world records. Some people call him the Ice Man.
In this book, Wim takes the reader through his personal life journey of accidental discovery.
I’ve taken several training courses on the Wim Hof method. Each and every time I come away with a deep sense of calm that is unlike any other.
A key element of the Wim Hof method is exposure to cold. I know what you’re thinking. That sounds uncomfortable.
The second major component of the Wim Hof method is breathing. I’m not talking about the routine shallow breathing that we are accustomed to.
Wim teaches deep breathing, utilizing our full lung capacity. The cycles of deep breathing will leave you feeling lightheaded and cause tingling in your hands and feet. But there is nothing wrong. You are merely pushing out the carbon dioxide from the blood stream and maximizing the oxygen saturation.
The combination of these two unlocks capability within the body that most never knew was there.
Definitely immerse yourself in the Wim Hof Method.
On today’s show we’re talking about household formation and why some adult children are living at home for so much longer than in generations past.
It’s not secret that home affordability is a problem for many who are newly independent young adults.
There are a few paths:
1) After kids leave home they get a job, the best job you can get, and hope to save money from left over after they’ve paid rent, the car, student loan, and the latest meal from door dash.
2) Get a high earning job, rent a modest apartment and save up their pennies until they can afford a downpayment for a home.
3) Get a loan for the downpayment from their parents
4) Save most of their salary while living at home until they can afford a downpayment.
It seems like an increasing proportion of young adults are relying on methods #3 and #4.
On today’s show we are talking about a project that so far has gone nowhere. It’s not a large project, and we did not have anything invested in it besides some time.
The subject property was part of a development in the province of Quebec.
The owners of the land had got the property zoned for residential and developed the half of the land and sold half of the project for single family homes. Half of the road was built and homes were built on portion that was developed. It’s not entirely clear why the other half was not build. Maybe the owner ran out of funds. Who knows. The other half of the property which comprises about 18 acres was left undeveloped. Naturally, the property taxes on residential land are higher than the taxes on agricultural land.
The owner of the property was tired of paying the higher property taxes on the land that was basically doing nothing. So he downzoned the undeveloped 18 acre portion back to agricultural.
The next generation were left owning this land and they recognized that the value of the land would be enhanced considerably if it were zoned residential. So we entered into a purchase agreement with the current owners that was contingent on getting the land rezoned back to residential.
Norway raised their interest rates by 50 basis points and announced another raise in August.
Switzerland raise their benchmark rate by 25 basis points.
The UK raised it’s benchmark rate by 50 basis points up to 5%.
China lowered its rate because they see ahead what is going on in the real economy.
If you’re confused by all of this seemingly contradictory data, you’re probably not alone. It is confusing.
The root of the uncertainty and the apparent contradictions can be found by looking deeper at the data. There is one thing that is the master resource that cannot fool anybody about what is happening in the economy. The economy and energy are inextricably intertwined. If the real economy is growing, then so too is energy consumption. If the economy is shrinking, then energy demand will fall.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at what is happening in the world of travel and tourism. These changes could have an impact on the world of hospitality as a result, and I believe an impact to where you might choose to invest.
The so-called revenge travel wave from the pandemic is largely over. Travel patterns are starting to normalize. They’re not reverting to pre-pandemic, since you can never truly go backwards. You can only go forward to a new normal.
Here are a few things I’m observing in the world of travel.
There is pent up demand for cruise ship travel. Back in 2019 there were 29.7 million cruise ship passengers. That went to essentially zero during the pandemic. Even in the second quarter of 2023, cruise lines were rebuilding, and getting back to pre-pandemic levels. Carnival Cruise line reported their latest financial results for 2Q2023. They reported record bookings and record deposits for future sailings. How will this affect the world of travel and tourism?
On today show we’re taking a look at a major shift in the rental housing market. This change is a direct result of the rapid increase in interest rates. A lot has been written in recent months about the so-called lock in effect. I recently attended a talk by Dr. Doug Duncan, chief economist at Fannie Mae. He was speaking at a real estate meet up in Silicon Valley last week, where he shared a tremendous amount of data that the chamber Fannie Mae uses to understand what’s happening in the housing market. And I talked, Dr. Duncan shared that 90% of existing residential mortgages in the United States are more than 100 basis points below current interest rates. Furthermore, 70% of residential mortgages are 200 basis points low current mortgage interest rates. These people sell their homes and buy a replacement home, their housing cost will go up dramatically just due to interest rates. Financially, these people cannot afford to sell. They are locked in to their current low interest rate mortgage. This is going to put a tremendous amount of pressure on new supply entering the market.
This is exactly what we’re saying in the current market. There are very few homes for sale. Prices have stabilized after falling in the fourth quarter of last year. In many markets, we are seeing prices rising again due to the shortage and supply combined with an excess of demand. of course it makes no sense to look at the averages because the averages obscure what is happening in the real economy. We see that homes at the affordable end of the spectrum are continuing to fly off the shelf. Homes at the luxury end of the spectrum are taking longer to sell.
Buyers last year were cancelling contracts with new home builders over rising interest rates. Today builders are seeing an increase in demand for new homes. However, the demand for new homes is overwhelmingly at the affordable end of the spectrum.
Let’s go back and ask the question why do people sell their homes? People sell their homes when they want to move or they feel that the need to move. Older adults are sometimes ageing out of their homes. Sometimes people move for employment reasons. Sometimes they move for lifestyle choices, so what happens if someone needs to move but does not want to sell their house? They are locked in. I expect a large percentage of these homes to show up in the rental market. This is likely to translate into a supply surge of rental properties in the market. The forecast surge in demand for rental properties due to higher borrowing costs is likely to be satisfied by the unexpected supply of rental properties.
The rental market vacancy statistics that are maintained by the large national brokerages tend to focus on the larger scale commercial rental properties. Individual single-family homes in the rental market tend to fall below the radar.
This could result in market vacancy metrics that are inaccurate over the coming months.
Ken McElroy is based in Scottsdale Arizona. I caught up with Ken and his sons in Belize this month where we were speaking at the Investor Summit on Sand. On today's show we are talking about the key constraints in the current environment. To connect with Ken, visit KenMcElroy.com where he shares tons of content and a very widely followed podcast and Youtube Channel.
Host: Victor Menasce
email: podcast@victorjm.com
Alan Stewart is based in Grapevine Texas where he has built a sizeable portfolio of rental apartments. On today's show we are talking about making improvements that don't necessarily have to cost extra. To learn more or to connect with Alan, visit his website at sapientcg.com
Host: Victor Menasce
email: podcast@victorjm.com
Investing is not easy. It is an active business that requires continuous improvement of systems and processes. It also comes with risks that you need to understand and quantify
On today’s show we are talking about one of the biggest risks to a short term rental property. Last week Dallas City Council voted to outlaw short term rentals in residential zones. You wake up the next morning and realize that you are potentially out of business. Naturally, there is a lineup of lawsuits arrayed against the city.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we are taking a look at what is happening in the world of softwood lumber and lumber futures. The entire construction industry for new homes and for many multifamily apartment developments is heavily influenced by lumber futures pricing.
There's a fundamental change taking place in the way that lumber futures are sold. But first we need to look at the two different types of futures contracts. The first type of futures contract is to purchase a single railcar worth of softwood lumber. That futures contract is an obligation to take delivery of a railcar worth of lumber. The second type of contract is an option contract which gives the buyer the option but not the obligation to purchase a railcar worth of softwood lumber. This distinction is important since it would intuitively makes sense that you would pay a different price for the option versus the price you would pay to fulfill an order.
Futures contracts are being cut in size by 75%. Builders have been struggling with gaining control over their cost structure over the past couple of years with the wild price swings we have experienced. By accessing the futures market, builders will be able to control their cost structure in ways that had been previously impossible.
For those who are developing multi family apartments, this can be a game changer. The smaller options contract also means that the cost of hedging for a single project is much lower.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at crypto currencies. It should come as no surprise that governments the world over are not enthusiastic about having a grass roots competitor to official currency of the nation.
Since most of the world exists in the realm of fiat currencies, the most practical way into the world of crypto currencies is through a crypto exchange.
Is it a coincidence that the SEC is targeting crypto exchanges? We don’t know for sure, but today’s show is going to zero in on that question and postulate why there seems to be a war on crypto from regulators.
The SEC has targeted two of the largest crypto exchanges Binance and coinbase. Binance has 62.5% market share and coinbase has 5.4% market share.
The government doesn’t want to call crypto a currency. Legal tender is the legal tender of the United States or the European Union or whatever jurisdiction. If crypto currencies are not money, then what are they?
Now I’m not a lawyer, nor am I a securities lawyer. So I’m not qualified to comment on the merits of the case on either side. But it is clear that the SEC is arguing that securities laws apply to both Binance and Coinbase. If these are indeed securities, then securities laws would indeed apply.
So why is all of this happening, and why is it happening now?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about demographics and how this affects real estate on a global basis.
Most western economies have declining birth rates. The population of the world is growing.
On today's show we are looking at whether investing strategy is influenced by fertility rates and migration patterns.
Host: Victor Menasce
email: podcast@vjctorjm.com
Oh today’s show we are talking about the current macro economic climate and provide a forecast for interest rates for the second half of this year.
The fact is that we live in an interconnected world and the attempts by central bankers to look at the economic conditions within a nation as a closed system is extremely naive.
We have Germany in recession having experienced two consecutive quarters of economic decline. New Zealand is now officially in recession.
The biggest news in the past week is that China announced a drop in interest rates and is launching a massive public infrastructure spending program aimed at stimulating its flagging economy. As the largest manufacturing economy in the world, China’s manufacturing is a bellwether for global consumption. The promised economic jolt from China reopening from the COVID pandemic lockdowns failed to materialize. It was an economic whimper.
Host: Victor Menasce
email: podcast@victorjm.com
Russell Gray is the co-host of the Real Estate Guys Radio show, now in its 26th year. On today's show we are talking about the current monetary environment and the risks inherent in today's FIAT currency based system. To connect with Russ or to learn more about the upcoming 22nd annual Investor Summit at Sea, send an email to summit@realestateguysradio.com, or visit realestateguysradio.com
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we are talking with Chad Zdenek who is based in Los Angeles. Chad has a side hustle as the host of at documentary TV series called "Inside Mighty Machines". By day, he owns and operates a portfolio of multi family apartments. On today's show we are talking about making changes to property management and the challenges inherent in making such a change. To learn more or to connect with Chad, visit csqproperties.com
Host: Victor Menasce
email: podcast@victorjm.com
We have all experienced entering a search query only to receive a long list of unrelated products that happen to match one of the keywords in the search.
Incorporating artificial intelligence into the customer experience will transform search. You might be wondering how this will affect real estate investors.
I’m glad you asked.
Imagine you have a portfolio of rental properties and the client is looking for a three bedroom apartment within 10 minutes walking distance of a specific elementary school, or within a five minute walk of the number 65 bus route. Today’s apartment listing sites force you to wade through hundreds of listings and for you to make the determination whether a property will meet your criteria.
In the future, those companies that deliver a better search experience will have the differentiated offering in the market.
In fact it will not be enough to incorporate AI in your offering. You have to remember, these systems can learn. Just like you have to train a newly hired employee in your business, you will need to train the software to respond appropriately for your target customer’s queries.
Host: Victor Menasce
email: podcast@victorjm.com
Today's question comes from Adam who writes:
Hello Victor,
Thank you for the wonderful podcast. I am a daily listener and I regularly recommend the Real Espresso Podcast to others.
Today you ended your podcast (S6 E166 Cand the Banks Survive Another Rate Increase?) with words "before it all comes crashing down". I know many are like me wondering what this crash will look like in our own sectors of real estate, but I also know you are not big on making predictions.
That being said, when you say "before it all comes crashing down", what does that mean for us real estate investors? Which real estate asset classes do you think will be impacted most?
Thank you again and have an awesome day!!
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the coming financial crisis. You might be wondering how I can say that. We are not seeing more bank failures since the failure of First republic Bank.
We are seeing signs of it creeping into the news headlines. Yesterday’s Wall Street Journal has zero’d in on the looming crisis in commercial real estate and the associated credit crunch. Today the Federal Reserve is meeting, as they do every six weeks. Their interest rate announcement will be a few hours after this podcast is published.
The bank failures so far this year, while larger and more severe than the failures of 2008 have been explained away by banking regulators and Federal officials as isolated cases. These banks we are told were not well managed.
But on today’s show we are going to look at the underlying conditions that led to the failure of these institutions and see if they are isolated to those banks or not.
Host: Victor Menasce
email: podcast@victorjm.com
This question comes from Paul who writes:
I have booked a strong capital gain as a passive investor in a syndication. The sponsor of the deal is asking all investors to come along for the ride in a 1031 exchange. The sponsor seemed to do a good job on this first project. However, the proposed replacement property is in Houston and I don’t have a good feeling about the fundamentals of this replacement property.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about my personal experience with the media.
I also want to be careful to make sure this does not come across as sounding like a bunch of conspiracy theories.
There is an accepted social norm called social proof. This is based on the idea that if you say you are great, that is not as powerful as having someone else say you are great.
That is why reviews for a hotel on Trip advisor are more valuable than a glossy advertisement from the hotel saying how great the hotel is. We can also imagine that maybe not all of the reviews on Trip Advisor could be planted by people connected to the hotel. The long list of glowing reviews can sometimes overshadow the small number of negative reviews. The question is, “What is are more accurate reflection?” Are the negative reviews more accurate? Who knows?
We tend to believe what we see, read and hear in the news.
Andrew Abernathey is based in Phoenix Arizona where he develops storage facilities in Arizona and California. Working closely with a family office, Andrew and his team at Abernathey Holdings are scaling up aggressively. To learn more or to connect with Andrew, visit Abernatheyholdings.com
Host: Victor Menasce
email: podcast@victorjm.com
Anna Kelly is based in Lancaster Pennsylvania and she invests in several markets across the SE USA including multi family apartments and short term rentals. She has established herself as a leader in the space. On today's show we are talking about risk, and some of the lessons of the past three years. To learn more or to connect with Anna, visit reimom.com
Host: Victor Menasce
email: podcast@victorjm.com
Today's question comes from Christian who asks: I’m small time RE investor and about to do my first long distance flip. Is it worth hiring a project management company? It is a flat fee and they would help with design, compare costs, negotiate with contractors, and management. The project budget is $50k-$100k and the cost is $7k for the PM. Is it worth it?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are going through a thought experiment about the risk of large global divisions and how that might affect your real estate development project.
To walk through the process, we are going to use an example of a small construction project for a single family home. The home is already under construction and the foundation has been poured and the wood framing is 80% complete. The project has been started and like all construction projects, once it is started it must complete.
Any discussion of risk requires a more detailed analysis of the elements of risk. Let’s start with a definition of risk.
A risk is anything that is not in your plan. In this context it is fair to say that most businesses have not taken into account the risk of China becoming fully isolated from the western world. Europe and the US would certainly face severe product shortages if that were to happen. When we talk about risk we need to break it down further. Risk gets broken down into likelihood and impact.
We know from history that people are notorious poor at assessing whether a risk is likely to come true or not. So we are not going to even try to assess the likelihood.
What we can quantify is the impact.
Host: Victor Menasce
email: podcast@victorjm.com
The Wall Street Journal finally reported on something that investors and lenders have known for more than nine months.
The rapid rise in interest rates has created a structural problem for commercial real estate.
The issue goes far beyond the headline that nearly $1.5T in commercial real estate debt is vulnerable to default in the next three years.
The punch line of the article is that lenders are prone to foreclosing on these loans because the issues with office occupancy are not likely to be resolved anytime soon.
Unfortunately the simplified reporting completely neglects the fact that the lender is not some rich dude who can withstand the loss with no consequences to everyday citizens.
The counter party risk that was present in 2008 is still present today.
Why is that?
How do you know if a project bid is good? On today’s show we are talking about how to value engineer a project.
We’re going to look at a project that has a firm bid on it. Overall, the construction bid seemed to be fairly reasonable in terms of total price per square foot. Having said that, there could still be problems in the bid. Some line items might be too high and others might be too low. One of the most common mistakes is to accept a total price merely because the overall price seems to be in the ballpark.
When we conduct a budget review we look at every single line item. When problems occur in a budget, it is often because the scope of the work has an error in it. We double check the contractors numbers of every single component of the project. We use material estimating software that measure the dimensions for each material using the architectural drawings. We measure the roof area, the wall area, the number of electrical fixtures, all the doors, you get the idea. There are literally hundreds of line items to be estimated. It is in this process that we find errors.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at the design of industrial warehouse buildings. Building designs are changing from a functional perspective and this is important when you consider investment in industrial buildings.
When we hear about warehouses, people tend to talk in terms of square feet and rent per SF. But these facilities are not universally interchangeable. Operators think in terms of volume, not just area.
So when you take design into account it is clear that not all warehouses are considered equal. Older buildings that do not meet the logistics demands of a modern facility will not even be considered. They are treated like a functionally obsolete building, even if they are only a few years old. It all comes down to the racking system that is used to plan the warehouse operations.
Host: Victor Menasce
email: podcast@victorjm.com
Deborah Smith is based in the NY area where she plays a key role in institutional investing at the Center Cap Group in industrial real estate. In particular, she is a big fan of industrial outdoor storage. We share that in common. On today's show we are talking about the market dynamics. To learn more or to connect with Deborah, visit centercapgroup.com.
Host: Victor Menasce
email: podcast@victorjm.com
Dan Haberkost is based in Colorado Springs where he is the founder of Front Range Land. The company specializes in in-fill land improvements all over the South-east. On today's show we are talking about the current market conditions for in-fill land projects and the marketing for land. To learn more or to connect with Dan, reach out to him on Instagram at https://www.instagram.com/danhaberkost/
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show, we are taking a look at one of the largest economies in the world and wondering why it seems to be sputtering.
We are of course, talking about China. Earlier this year the Chinese economy was in strict lockdown due to the COVID-19 pandemic. After weeks of protest, the Chinese government change course and opened up the economy, seemingly overnight. At the same time, the economy inn, Europe, Japan, And even the United States were showing signs of weakness. China reopening was heralded as the saviour to pull the global economy out of what seems like an impending recession, but that recovery failed to materialize.
We witnessed other economies around the world emerge from the lockdown to the pandemic and experience a massive surge in spending. We saw a recovery in demand for products and services that have been suppressed during the lockdown periods. We saw international travel resume. We saw a surge in demand For new homes.
We saw businesses throughout the west, respond to the supply, chain shortages of the pandemic, whereby they were placed just in time inventory management with just in case inventory management. Retailers did not want to leave business on the table by failing to carry ample supply or products that customers wanted to buy. After all, interest rates were low, and the additional cost of carrying that extra inventory was much cheaper than the loss of revenue associated with supply chain shortages.
Surely, China reopening would see a surge in demand for everything from finished products to raw materials.
But it did not happen. Why did China’s economy sputter when the rest of the world emerged from the pandemic with their economy on fire?
Host: Victor Menasce
email: podcast@victorjm.com
Our book this month is called "Debt: the last 5000 years.”
I expected this book to be thought-provoking, and it did not disappoint.
The author of the book is anthropologist David Graeber and the book was written in the week of the great financial crisis of 2008 and published in 2011.
For those who went through 2008, and for those who remember it, the great financial crisis was the mother of all deleveraging events observed so far in our modern history.
The author of the book is also the organizer of the occupy Wall Street movement, that captured headlines and attention from around the world. The association with the occupy Wall Street movement immediately biased me against the book. However, as I went through the books pages, I found the authors arguments to be well constructed.
On today’s show we are looking at an outlook for inflation of construction prices and how this is going to play out over the next three years.
There is no question that construction prices have come down in the past 6 months and continue to fall. This has been driven by the fall in lumber prices. Labor prices have stabilized and many subcontractors who have been forecasting no capacity for the next 36 months are coming back on one knee asking for work.
The pricing for construction sub trades varies widely. We have seen prices for HVAC increase during the pandemic. We’ve seen paint and steel and copper and fasteners all go up in price. For the time being, these prices have stabilized.
The question then becomes what will happen in the coming years? Can we forecast what will happen next, and what can we do about it?
I believe that the answer is yes, we can predict what is going to happen.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are going to put forward a hypothesis. A hypothesis is an untested idea. It’s hypothetical which is why it is called a hypothesis.
Specifically we’re going to look at the balance of revenue and expenses that make for a profitable venture in hospitality.
It’s no secret that hotels suffered greatly during the pandemic. They were forced to close as the stay at home mandates caused travel of all kinds to dry up. A few that agreed to become quarantine facilities enjoyed some revenue thanks to the very government that forced the closure.
Short term rentals suffered greatly as well. Depending on the location, some managed to get revenue from traveling health care workers who were on pandemic duty to provide relief to overworked and overstressed ER facilities.
If you’ve traveled lately, you will notice that hotels have become a lot more expensive. I used to find bargains for hotels in NYC for $150-200 per night prior to the pandemic. Sure you could spend $1,200 a night if you wanted to. But you could still find good hotels in good areas at a decent price.
In Toronto, I could find bargains in the downtown core for under $200 a night.
This week I was at a conference in Toronto and it was extremely difficult to find a hotel room in the downtown core at the last minute under $500 a night. Most were $700 a night.
Several of the people I spoke with at the conference had booked a short term rental and were grateful to have paid a lower nightly rate than the equivalent hotel room.
It’s no secret that interest rates have gone up. You had to be living under a rock to have missed that one. Hotels are sometimes owned by the brand, but often are independently owned and flagged under a franchise agreement.
The issue is that a significant percentage of the hotels in the world were funded through bond offerings at extremely low interest rates over the past decade.
Some of these hotels have bonds coming due this year and next year and the year after that. They will be forced to refinance at higher interest rates.
This means that those hotels will need to increase their nightly rates in order to survive. If the market won’t tolerate higher nightly hotel rates, then the owner will have to hand the keys back to the lender. A hotel in foreclosure is likely to close which will remove supply from the market, which in turn will push up nightly rates.
I don’t see a scenario in which hotel rates don’t go up from here. Even in a recession, falling travel won’t mean lower nightly rates. The hotels will fail. So the only choice for owners is to raise nightly rates. They have no choice.
They have to find a way to increase revenue or die. I’m convinced that the hotels will act in tandem to protect the industry.
If hotel nightly rates go up, then STR rates go up.
There you have it. That’s the hypothesis. The only thing that could hurt STR owners is if government steps in and forces STR to close, or imposes regulation that is so onerous, that is makes an STR business impractical. Local governments might do this to protect the hotels from going under.
Of course everything I’ve said on today’s show neglects the hyper local nature of real estate, hospitality and STR. Your local situation could vary widely. But maybe an analysis of the hotel business in your area could yield some valuable data that might validate, or maybe invalidate this thesis.
On today’s show we’re coming to you live from Multi Family Conference in Toronto.
There were a number of great speakers at the conference, but I want to focus on one speaker in particular. Our North American culture can be celebrity obsessed and I don’t buy into that. However, I believe that success leaves clues and that success is rarely accidental.
That speaker was Alex Rodriguez. He is known as a baseball player, first for the Seattle Mariners, then the Texas Rangers and finally the NY Yankees. He played a total of 22 seasons in MLB, an industry in which the average tenure is 5.5 years.
Most recently he is known as one of the Sharks on the TV Show Shark Tank. Naturally, most people believe that he made his money in baseball. There is no doubt that baseball helped. But baseball did not come close to affording the growth that Alex has experienced.
I’m here today to talk about none of the celebrity stuff that most people focus on. Alex Rodriguez is a real estate investor. He started like all of us, with a small single family rental, duplexes, triplexes and eventually moved up to small multi-family buildings 10 units, 12 units and so on. He started investing early during his baseball career. In the early days, his baseball salary was used to cover the negative cash flow in his real estate portfolio and there were many times when he was at risk of running out of cash.
Today, ARC has a portfolio of over 20,000 units. He is not known as a real estate investor. But he is a real estate investor at a very high level.
A portfolio of that size is operating at an institutional level. Here are some of ARod’s key take-away’s.
- He has been investing in real estate for over 22 years. This looks to me like one of those 20 year overnight success stories.
- He continues to grow the ARC companies by having hired A players. He has had the good fortune of developing a friendship with Warren Buffet who counselled him to only hire A players. A players tend to hire other A players. B players tend to hire C players which can poison an organization. He’s better off maintaining a smaller organization of higher quality people than having an organization of mediocre players.
- While ARod had an impressive 696 HR in his 22 year major league career, ARod also holds the title of having the fifth most number of strike outs in the history of major league baseball. It was this fact that trained Alex to approach the plate to a clear head each time he went at bat. It didn’t matter if he had just struck out. It was this quality that meant he could simply never quit. He was unaffected by setbacks and failures along the way. In his experience, most people can’t handle the emotional pain of failure and quit far too early. He has tried to bring some other professional athletes into real estate investing only to see them quit after a short period when they discover that it’s difficult.
- When A rod is hiring people into the organization, he always looks for people who have that emotional stability in the face of adversity. It’s the one thing he looks for that he considers to be a super-power in business.
Host: Victor Menasce
email: podcast@victorjm.com
Mark Kenney is a principal at Think MultiFamily in Dallas Texas. He and his partners have amassed a portfolio of more than 14,000 apartments. On today's show we are talking about lessons learned from the current market conditions. This is a fairly sobering episode and Mark is extremely transparent about the stresses he is experiencing. To connect with Mark and to learn more, visit ThinkMultiFamily.com
Host: Victor Menasce
email: podcast@victorjm.com
Quentin DeSouza is based in Toronto Canada where he has grown as sizeable portfolio of multi-family apartments. On today's show Quentin talks about his strategy for stimulating rent growth in a rent controlled market. To connect or to learn more, reach out to Quentin at quentindesouza.com
Host: Victor Menasce
email: podcast@victorjm.com
Today’s question comes from Mathieu who asks:
I’m experiencing sellers who are demanding unreasonable terms when it comes to even looking at a property. They are asking me to get the property under contract before even viewing the property and they are demanding due diligence timeframes and closing schedules that are simply unreasonable for us to accept. How would you recommend that we negotiate the property purchase under these conditions?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at short term rentals to see what market conditions are best suited to this product type.
In addition, some critics are zeroing in on a legal gray zone in the world of residential tenancies, short term rentals, hotel stays, and medium term rentals.
The world of short term rentals has been suffering a growth in supply and a fall in occupancy in some major metros. Phoenix and Las Vegas are among those cities that have suffered the most.
But any market follows the laws of supply and demand. The bright spots are those cities where constraints on supply are being imposed through regulation. Without constraints on supply, the sharing economy will continue to attract new entrants until the revenue falls to a level of tolerable pain and nobody is making any money. The classic example is that there is no constraint on adding another vehicle to the fleet of Uber drivers. Supply can grow unconstrained.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at the so-called liquidity crunch to understand why it is happening. Is it just rumour? Is the lack of liquidity real?
On today’s show we have concrete proof as to why the credit markets are seizing up.
A few months ago it was simply a thesis that the regional banks were losing deposits to the major banks. These medium sized banks were under pressure ever since the failure of Silicon Valley Bank.
The outflow of capital has been largely to the benefit of the larger banks like JP Morgan Chase, Wells Fargo and Bank of America.
But the outflow has not been a zero sum game. A recent review of the Federal Reserve Bank of St. Louis data set shows that nearly $1T in deposits have left the banking system entirely since June of 2022. The bulk of that decline was in the last 8 weeks. Back in June there was 18.1T in deposits in US banks. Today, that number is down to 17.1T. Somewhere along the way, 1T just vanished from the banking system.
The question is, where did it go?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about conservation easements.
We tend to think of the income tax code as a mechanism for extracting revenue from the population and from businesses. To be fair, that is true. But there are thousands upon thousands of pages in the tax code.
You can describe how much a business or an individual needs to pay in income tax in a very small number of pages.
The remainder of those thousands of pages is primarily a series of incentives
Conservation easements are one of those incentives.
Under standard conservation easements, landowners give up development rights for their acreage to a land trust. In return, they receive a charitable deduction equal to the property’s value, at its highest and best use, and the public benefits by the preservation of the land, which in some cases is made available as a park. In order to be eligible for conservation, the land must have actual conservation value. If the land was previously developed, it’s unlikely that you would successfully argue that the property has conservation value.
Conservation easements are more robust than zoning when it comes to protecting land. Zoning can be changed, and conservation easements are perpetual.
But there have arguably been abuses of this provision that went beyond the original intent of the legislation. In particular, the so-called syndicated conservation easements have been deals where promoters would buy a piece of land for a low price and then go get an appraisal for the value of that land as development land, regardless whether there was any realistic development potential for that land. With that appraisal in hand, the land would be donated to a land trust and the promoter would claim a tax deduction for the appraised value of the property.
Host: Victor Menasce
email: podcast@victorjm.com
Today's question is from Marc in MontrealThe information you provide on your show helps me every day sharpen my strategies and tactics. Thanks for that.I run a strip mall with a laneway behind it that is used for a McDonald’s drive through. The city, rightly or wrongly, is not permitting McDonald’s to update is signage until “this is resolved”. This seems quite unreasonable since the laneway does not belong to them, the last owner was alive 80 years ago, and this usage has been in place for 10 years. We are going for prescriptive acquisition.Strangely enough, a neighbour on the other side of the laneway has a garage door that backs right into the laneway. The lawyer has said that it would be good to get an agreement with this neighbour before taking ownership of the land, since they would likely object to potentially losing an exit for their garage.Even if we were to buy this neighbour out, we would still need an agreement that would keep the value of this property. My question is “how would you go about making an agreement with this neighbour, and what kind of agreements are possible?"----------Host: Victor Menasceemail: podcast@victorjm.com
Brett Swarts has been active in sheltering real estate from capital gains tax for several decades. On today's show we are talking about several strategies that can be used to shelter from tax including the Delaware Statutory Trust and the Deferred Sales Trust.
Host: Victor Menasce
email: podcast@victorjm.com
Max Hansen is based in Utah where he has been practicing as a 1031 Intermediary for more than 40 years. On today's show we are talking about some of the nuances of sheltering capital gains tax in the US tax code. To connect or to learn more, visit accruit.com, now part of Millennium Trust.
Host: Victor Menasce
email: podcast@victorjm.com
This past month, a milestone was passed that went largely un-noticed. China exported more goods in Remnimbi then in US dollars for the first time in modern history. This means that more and more countries are willing to do business with China.
When you consider what it means to be financially responsible, a few things come to mind.
- You pay your bills
- You follow a set of well established rules
- You earn more than you spend
Countries that don’t follow these principles get punished internationally. You see their currencies fall in value. Countries that can’t be trusted don’t have the privilege of borrowing in the own currency. They must borrow against a financial standard that is going to be predictable.
But when you are the world’s reserve currency, you can get away with breaking a bunch of these rules without much consequence. The international community will give you a pass.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at why we are experiencing a banking crisis. There are those in the Federal Reserve and in the media who are critical of recent bank failures. Those banks were irresponsible and didn’t hedge their interest rate risk properly.
Silicon Valley Bank in particular received heaps of criticism for not hedging their interest rate risk.
But let’s step back for a moment and look at the big picture.
We have more than 10 years with interest rates being held near the zero bound. In that environment, interest rates on loans have been at historic lows. The problem is that our banks have a fractional reserve system. If every depositor comes to withdraw their funds all at once, the bank will go broke. Every bank, not just poorly managed banks, every bank will experience the same outcome regardless of size.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about why the math of home affordability is broken. The critics of home affordability put the blame at the feet of developers and home builders for not building affordable homes.
But the price of homes in the resale market is set entirely by market forces. This is a function of the laws of supply and demand, combined with the ability to pay.
The simplest evidence of that is the fact that many homes were selling above asking price over the past three years. There is nothing forcing a buyer to offer above the asking price for a home.
Who is to say that homes should cost less, when clearly buyers are willing to pay more. The value of any asset is always viewed through the eyes of the buyer and what they are able and willing to pay.
Host: Victor Menasce
email: podcast@victorjm.com
In the world of economics, it’s vital to understand energy. Energy is the economy. The economy and real estate are connected through multiple threads.
The ESG movement of environmental sustainability and governance has its heart in the right place. The problem is the so-called greenwashing which is the process of adopting the branding of something green and environmentally friendly, but doing something dirty under the covers.
On today's show we are going to be digging into some pretty shocking movements under the banner of ESG.
Host: Victor Menasce
email: podcast@victorjm.com
Today's question comes from Ms. Cortes in Atlanta who asks:
I’ve been offered an opportunity to invest in a ground up construction of a new warehouse located near I-10. I’ve sent you the entire package of information from the deal sponsor including the webinar and the investor package. I’d love to get your perspective on the offering and whether this is something you would consider investing in.
Host: Victor Menasce
email: podcast@victorjm.com
Matt Pestronk is based in Philadelphia and specializes in redeveloping office assets in the North Eastern states. On today's show we are talking about the subtleties of office conversion projects. You can connect with Matt at postcre.com
Host: Victor Menasce
email: podcast@victorjm.com
Michael Flight is based in Oak Brook, Illinois and has been investing in shopping centers since the 1980's. On today's show we are talking about the changing nature of retail and how the retail apocalypse is not upon us. Michael has been doing some innovative work in the realm of combining blockchain technology with commercial real estate. To learn more about this get a copy of his blockchain paper at investonmain.com or visit his investment company at libertyfund.io.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the process of getting approvals for even simple projects.
We are talking about a project that recently received full approval to move forward with construction. Even in cases where the zoning is not changing and no new buildings are being built, it is possible that the site plan application results in a review of similar scope as a major planned used development.
Some areas are more difficult to develop than others due to the simple physical attributes of the site.
The property in question is in Winterhaven Florida. This is the site of our next industrial outdoor storage project. I’m pleased to report that this project has reached full approval to move into construction. Winterhaven, like much of central Florida has a lot of lakes. I mean a lot of lakes. On today's show we are talking about some of the complexity of designing in an area with a high water table.
As many of you know, our development company at Y Street Capital is very active in the world of storage among other things.
I’d like to invite you to an educational session where we are going to do a deep dive on this subsegment of the storage asset class called industrial outdoor storage. The webinar is going to be on Tuesday May 16 and there are a few time slots to choose from.
If you’d like to attend the webinar to learn more about IOS, click on the link in the show notes where you will have the opportunity to register for the information session.
This will be a relatively short webinar focused primarily on education you on the various factors, metrics and requirements of the industrial outdoor storage segment.
To register, click on the LINK
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are going to look at an asset class that continues to attract attention from both individual investors and institutional players. That asset class is storage. Storage is seen as a recession resistant asset class. There are clearly many signs that the global economy has entered recession, even if there have not been any official announcements to that effect.
But saying storage alone is too simplistic. The asset class segments further into many types of storage, each with their own specific needs and customer base.
As many of you know, our development company at Y Street Capital is very active in the world of storage among other things.
I’d like to invite you to an educational session where we are going to do a deep dive on this subsegment of the storage asset class called Industrial Outdoor Storage. The webinar is going to be on Tuesday May 16 and there are a few time slots to choose from.
If you’d like to attend the webinar to learn more about IOS, click on the link in the show notes where you will have the opportunity to register for the information session.
https://event.webinarjam.com/register/2/5yq61fn
Host: Victor Menasce
email: podcast@victorjm.com
On today show we’re talking about housing needs in manufacturing corridors. Yesterday I attended a meeting involving politicians and city staff from five different communities along the St. Lawrence River seaway. Many of these communities have experienced a resurgence in Manufacturing as North American companies have expanded domestic manufacturing capacity. During the pandemic these communities experienced a huge influx of population from people seeking a lower density lifestyle with incredible outdoor amenities and still remain within an hour of a major city.
The problem is that many of these communities are experiencing a severe shortage of housing. That is a combination of new housing, affordable, housing, or merely available housing at any price.
Several themes stood out from the conversations involving politicians, city, staff, and major employers. The employers are struggling to attract new workers because of the lack of available housing. So instead they are just poaching from each other instead of growing the pool of employees.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about one of the most overlooked line items in a property budget. This is the dreaded repairs and maintenance line.
Operating budgets make reasonable assumptions about the natural timeframe for equipment replacement, and the lifetime for windows, roofs, caulking, and so on.
Where it gets difficult is when big ticket items hit all at once due to supposed one-time events.
It seems like no property owner is immune.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at the underlying data that is being used as central in the narrative about the health of our economy and the flight against inflation.
The message out of the White House and the Fed is that the economy is strong, too strong even. Look at all the strong employment numbers.
Each month we keep hearing how we have a hot jobs market. Interest rates have to go up to fight inflation and the number of people entering the job market is indicative of a hot economy.
The fact is, if you look through the history of jobs reports you see that there is a consistently large discrepancy between the headline number that is reported and the subsequently revised numbers.
The headline number catches the headlines and that’s what sticks in people’s memory. Additionally, we see policy makers like the Federal Reserve setting interest rate policy based on those headline statistics.
But then those numbers get revised which means they were wrong. Decisions are getting made based on bad data.
How wrong do you ask?
Well, the March 2023 headline report was for 236,000 jobs created in the month of March. That was later revised down by 71,000 jobs. In February, the report was for 326,000 jobs. That was later revised down by 78,000 jobs to 248,000 jobs. The January number was revised down by 45,000 jobs.
I don’t want to mislead you. The corrections are not always downward revisions. The bureau of labor and statistics has been wrong in both directions. During the pandemic, they mis-reported the numbers of job losses by hundreds of thousands.
The problem is that interest rate policy is being set on the basis of a flawed model of inflation.
Andrew Crebar is the CEO of Honey Bricks, a platform for enabling young, newly accredited investors to invest in private placement real estate projects. On today's show we are talking about this specific high income earning demographic and how they are looking for alternative investments with top notch operators. To connect with Andy Crebar, visit honeybricks.com
Host: Victor Menasce
email: podcast@victorjm.com
Todd Sulzinger is based in Redwood City California. He spent much of his career in finance roles in the tech industry before moving into the world of real estate investing. On today's show we are talking about the Silicon Valley Bank failure, mobile home park investing, and fund management. To connect with Todd, visit blueelminvesments.com
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at how AI can be a useful research tool for real estate investors.
A lot of emphasis for AI tools has been for mining the universe for information and writing new material such as blog posts. No doubt, there is some utility there. But the quality of writing is low in my estimation.
The real power of these AI tools is as a better research tool. There are many tasks that have traditionally been the subject of very tedious activity. Legions of virtual assistants have earned a living half a world away performing these low skill tasks.
Recent advances in AI have made some types of information searches extremely powerful. For example, you can ask an AI tool like Chat GPT for information about precedent setting court cases in a particular jurisdiction on specific regulations.
For example, I asked ChatGPT to list the precedent setting zoning cases in the Province of Ontario involving R4 zoning.
Within seconds, I had a list of three precedent setting cases in the Province of Ontario regarding zoning in R4 zones. I then asked for more examples. Instantly, the tool produced four more examples. By contrast, a Google search simply took me to a legal scholar site as a portal, but offered no direct reference to any cases.
As developers, we are often making risk assessments when it comes to asking for variances from the planning committee and ultimately city council. Understanding the case law can help provide developers with the perspective of where the appeals process has concluded in favour of the developer and when they have upheld the city’s decision.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking yet another look at the macro economic environment. Virtually everything in the world of real estate investing is being dominated by the macro environment.
The Federal reserve increased the Fed funds rate another 25 basis points. They made the argument that future rate hikes are going to be data dependent.
I watched the entire press conference today and there were some obvious holes in the press conference.
The first major hole is that there were no questions on the Fed’s balance sheet. That’s astonishing to me. The discussion centered entirely on interest rates and there was virtually no discussion on the stability of the banking system or generating liquidity.
Chair Powell made mention of the most recent report on the retrospective of the SVB failure.
The insane thing about these bank failures is that the underly banks were fundamentally strong. They were weakened and eventually bankrupted by the outflow of deposits.
Chairman Powell said in his remarks that he recognized that his view of the current situation is at odds with history. But he said this time is different. He knows that the this time is different argument is not supported by history.
But it’s never different. The yield curve inversion is screaming, it is the market screaming at the top of its lungs that they don’t believe the Fed. The Fed has it wrong.
So what does this mean for us real estate investors?
I believe it means that we will see more bank failures, and that all the member banks themselves will have to come out of pocket to top up the reserves at the FDIC. That will weigh heavily on bank earnings across the industry. These reserves are not funded by the taxpayer. The fund is funded by the member banks.
More bank failures means tightening credit as banks lose the ability to lend money. They don’t trust their own balance sheet because they know their balance sheet can change on a moment’s notice based on nothing more than rumour.
The second inning is over and the batter struck out at the plate. We are now entering the top of the third inning in this saga.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we are looking for tangible evidence of what investors are looking for.
Host: Victor Menasce
email: podcast@victorjm.com
The Federal Reserve published an ironic report on the day that the FDIC took control over the First republic Bank. The report was all about the demise of Silicon Valley Bank. It was a retrospective of sorts on what contributed to the failure of the bank and what shortcomings were present at the bank regulator.
The thesis of the report is that the issues of SVB were unique to SVB. But that fails to address why there was a similar problem at Signature Bank. Or what about the problems at Credit Suisse, or First Republic Bank?
Under the Dodd Frank Act which was passed in the wake of the GFC the FDIC is supposed to hold 1.3% of all insured deposits in reserve. Well, it’s clear that the FDIC has nowhere near that amount being held in reserve.
The FDIC balance sheet was consumed by 50% on the SVB transaction. There can’t be much left.
So here we are, six weeks after the first bank failure. In the immediate aftermath we were told that the cause was weak management and that the banking system is resilient and strong. Then we heard the same message when Signature Bank failed. Now First Republic, but the banking system is resilient and strong.
The fundamental problem is that there is a mismatch between the nature of the actual liquidity of the banks and the structural liquidity of the banks. What I mean is that depositors can request their money on any given day. But when the bank lends money, they lend it for long duration. So the banks’ true ability to generate liquidity is far less than the expectation of giving depositors their funds on demand.
We learned that lesson when Lehman Brothers failed in 2008. Lehman Brothers bank in the Bahamas was taking in LIBOR deposits which were of short duration. When deposits dried up, the bank became insolvent overnight.
Yes, Lehman Brothers was structurally flawed that is clear. But what about any bank? Are they truly in better shape?
We have banking contagion. It is here. It was easily predictable, and our banking system is not resilient nor is it strong.
There are calls from the white house for increased banking regulation. But if you actually take time to read the SVB report, it is clear that the existing regulations were not actually being used.
Host: Victor Menasce
email: podcast@victorjm.com
Our book this month is called “Thinking Fast and Slow” by Daniel Kahneman. Daniel Kahneman is a professor of experimental psychology at Princeton University. He is the recipient of the Nobel Prize in economics for his life work in psychology and how decisions are made that influence business, society and economics. This book is the result of decades years of research, including numerous academic papers on how thought processes in the human mind function. I thought this book would be very Powerful because there are many examples of flawed thinking in every day life and certainly in business. Moreover, the book was recommended to me by Ken McElroy, and when Ken has something to say, are usually listen.
Host: Victor Menasce
email: podcast@victorjm.com
Taylor Loht is based in Richmond Virginia where he has secured a FINRA broker-dealer license and is active raising capital for sponsor projects across the nation. So far he has raised $200M in capital. You can learn more and you can connect with Taylor at NTCapitalGroup.com.
Host: Victor Menasce
email: podcast@victorjm.com
Today's show is a live talk from The Real Estate Guys Secrets of Successful Syndication Conference in Dallas Texas, held on March 23. We're talking about the principles of raising capital with investors.
Host: Victor Menasce
email: podcast@victorjm.com
This question comes from Steve in Utah.
Two years ago I bought a subject to rental property that has a loan with it that has a 2.25% interest rate fixed for 30 years. A great deal for me!!! however back in November I noticed the loan servicer had changed. Today this loan would be under wrote at 6%, I did some quick calculations to determine the difference in value to the note holder with vastly different rates. The differences are massive as shown in the chart with the amount of difference in interest paid at at the 5year, 10 year and 30 year points. The value of a loan written at 2.25% has to be a massive discount from face value, Also a factor with this historically low rate is the unlikelihood it’s paid off with a refi. My Question is who is dealing with this loss on paper? Who is bearing the consequences of holding a note that pays this low of interest in this climate? Did the original servicer have to massively discount this loan to off load it to the new servicer? What is happening with these notes that are not sellable without massive discounts to face value? Is this the banking crisis in a nut shell? weather its the bank holding treasuries it bought at very low rates, or note they made at very low rates, isn't the outcome the same? is it all marked to market now?
Host: Victor Menasce
email: podcast@victorjm.com
On yesterday's show we talked about how there are signs of monetary deflation present in our economy. We discussed the definition of what is inflation and what is deflation?
Today's show is the second in a two-part series on monetary deflation. On today’s show we are looking at specific examples of how money can disappear from the money supply.
Host: Victor Menasce
email: podcast@victorjm.com
On today show, we are looking again at the macro environment. So much of what is happening in the world of real estate is being dominated by the macro environment, which is why we keep coming back that. It’s specifically on today show we are looking at a definition for inflation, in order to understand deflation. There is a case to be made for deflation. Today’s show is the first of a two part series on deflation.
Now I know what you’re thinking. How can we be experiencing deflation when all of the statistics are pointing to inflation. In fact the Federal Reserve and central banks around the world have been raising interest rates in order to fight inflation.
You’re wondering - Has Victor totally lost his mind?
We have become accustomed to thinking of inflation, as meeting the consumer price index. The Bureau of labour in statistics has several metrics for price indices. There is the consumer price index which includes the more volatile food and fuel components. Then there is core, CPI, which excludes These more volatile components. However, in almost every case throughout history, it can be shown that these measures are not the inflation per se, but rather the symptom of inflation.
The actual inflation is the inflation of the money supply. When you have more currency bidding for a fixed amount of goods and services in an economy, that excess money will eventually bid up the price of those goods and services.
So that’s inflation. But what about deflation? If consumer price inflation is the result of inflation of the money supply, then would it make sense that consumer price deflation would be the result of a decrease in the money supply?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about how cities are getting pressure to perform better when it comes to turning around zoning and buildingapplications.
Many cities have earned a terrible reputation for being bureaucratic nightmares when it comes to getting a zoning application approved, or a site plan application, and in some cases a building application approved.
Most cities have recognized that a new zoning application is complex and requires a multi-disciplinary approach. For that reason, most cities offer an informal pre-consultation meeting. This gives a developer the opportunity to get feedback from all of the city departments in a single one hour meeting. There will be the planning department, utilities, fire department, police department, streets department, the parks department, maybe even the local school district.
Having gone through countless of these meetings I can tell you that they are helpful compared with no pre-consultation, but they fall far short of what is ultimately needed. Cities have a job to do and they can’t spend a ton of time in meetings with developers on projects that are still at the concept stage. Who knows if these projects will ever see the light of day?
I can tell you also from first hand experience, that cities often suffer from indecision that looks like moving goal posts from the perspective of the developer. In fact, I can’t think of a single application before a city that has not experienced moving goal posts. By moving goal posts, what I mean is that you get feedback from the planning department telling you what it will take to get your application approved. You hold your round-table pre-consultation meeting with all of the city department. Then you submit the application and the feedback from the city is full of surprises.
Host: Victor Menasce
email: podcast@victorjm.com
Some days it seems like we live in an upside down world.
Today’s show fits in the category of “You can’t make this stuff up.” It’s just too bizarre for words, and it would be even funny if it were not for the fact that this is real.
Charlie Munger, who is Warren Buffet’s business partner is famous for saying “show me the incentive and I’ll show you the outcome”.
The latest bit of insanity coming out of the Biden White House is an idea whereby the government will charge a premium on borrowers with a good credit score in order to make it easier for those with a poor credit score to qualify for a loan.
You heard me correctly. This is the equivalent of taking points away from an A student and giving extra marks to a C student, to make things more fair.
The details are that a borrower with a credit score of 740 or higher will pay an additional fee ontheir residential mortgage.
Host: Victor Menasce
email: podcast@victorjm.com
George is back in NY after spending the winter in Florida. On today's show we are delving into a topic that is explained briefly in a couple of pages in George's book on negotiation. His book is based on the course syllabus from when he taught negotiation at the law school at NYU for more than 20 years.
Host: Victor Menasce
email: podcast@victorjm.com
Jeff Scheckter is now based in Nashville after building a sizeable turnkey rental portfolio in Indianapolis. On today's show we are talking about how the macro conditions are affecting turnkey rental assets and how it might be time to pivot into other opportunities. To connect with Jeff, visit highreturnrealestate.com
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we're looking at some of the most common mistakes that I see multifamily investors make in their underwriting. I'm presented with opportunities for multifamily projects of all shapes and sizes across many markets on a daily and weekly basis. Sometimes this analysis is performed by lenders, sometimes by mortgage brokers, and sometimes by the principals themselves.
So here we go I'm going to give you the top five mistakes I see most often when looking at a multifamily apartment pro forma.-------------------Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at some economic metrics that are not getting much airplay or analysis in the mainstream media. But we real estate investors need to pay attention.
We continue to have both government and Fed officials talking about how the economy is strong and resilient and that we may experience a mild recession later this year. This most recent statement is the closest we have seen Fed officials acknowledge the reality of our economic malaise.
On today’s show we are going to look under the covers in the economy to see what is really going on.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are going back to 1910. These were the origins of the formation of the Federal Reserve during a secretive meeting on Jekyll Island off the coast of Georgia. Leading up to the fateful meetings that took place over nine days, there had been a series of runs on banks and financial panics in 1873, 1884, 1893 and 1907. These banking panics over the preceding decades had caused the outright failure of 1748 banks. The Federal Reserve Act of 1913 was a direct outcome of this clandestine meeting on Jekyll Island. The Federal Reserve was created to protect the banking system. It is owned by the member banks, not the US government. The Federal Reserve Banks that make up the Fed are not banks either in the traditional sense.I have been thinking, long and hard about whether the Federal Reserve has been mistaken in their interest-rate policy. After all, it is a bold statement for some Podcaster located in Canada to declare in unequivocal terms that the Federal Reserve with its hundreds of PhD‘s is utterly and completely incompetent. All it takes is a few minutes of the most basic Internet research to realize that the banking system in the United States is backed into a corner from which it is virtually impossible to see away out. That is, unless the Federal Reserve makes a choice between raising interest rates to fight inflation or lowering interest rates to save the banking system. I I am completely convinced that this is the choice facing the Federal Reserve. ------------Host: Victor Menasceemail: podcast@victorjm.com
On today’s show we’re asking about how crime and lawlessness is bad for business, bad for rent, and bad for real estate investment.
Host: Victor Menasce
email: podcast@victorjm.com
Switzerland is known for playing a central role in the global financial system. The nation’s stance of neutrality has earned it a position of trust in the financial system and the monetary system.
It’s no surprise that the Bank of International Settlements is based in Basel Switzerland.
Established in 1930, the BIS is owned by 63 central banks representing countries from around the world that together account for about 95% of world GDP.
Because of the neutral position of this Swiss entity, the BIS is involved in many global initiatives. They host close to 200 meetings a year at their Basel headquarters. Every 8 weeks, the governors of the members central banks all meet at this location.
The BIS is working hard to understand the global plumbing for central banks in particular. There are a number of pilot projects aimed at improving the global plumbing for central banks in particular relating to the rollout of central bank digital currencies across the globe.
Host: Victor Menasce
email: podcast@victorjm.com
Brennen Degner is based in Denver Colorado where he is a principal at DB Capital Management. They invest in multi-family assets in four states through the southwest part of the US. On today's show we are talking about the capital markets and the current market conditions that we are seeing for investors and developers underwriting deals and managing existing portfolios through the life cycle.
To connect with Brennen, visit dbcap.com.
Host: Victor Menasce
email: podcast@victorjm.com
David Chan is based in NYC where he specializes in agricultural land investing on a nation wide basis. You can learn more at their website farmtogether.com. David shares some eye opening statistics about agriculture in the United States. This is a truly fascinating conversation.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s question comes from Josh at Virginia Commonwealth University
I’m appraising a 504-bed student apartment complex in a tertiary college market in Virginia. The property is unique, and recent comparable sales and reliable market data are scarce. I enjoyed your interview with Will Matheson a couple of weeks ago. I emailed him to discuss my property and get his thoughts on the changing market dynamics.
Do you have anyone else in your network who invests in student housing who would talk to me? I appreciate your help. My students at VCU and I continue to benefit from your content.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re going to ask a number of “What if” questions.
I believe it’s important to stop and think strategically about what is happening in the business world that can materially affect your own business. But before you can think strategically, you need to ask a bunch of “what if” questions.
Over the past decade we have been accustomed to living in a world that has been largely moderate in response. We’ve had a decade of moderation, of broad economic prosperity, of localized problems.
We are so accustomed to calm predictable linear situations, that we can’t wait for things to return to normal.
But what if there is not going to be a return to normal? What if we will experience crisis after crisis after crisis?
Host: Victor Menasce
email: podcast@victorjm.com
This past week, Marcus & Millichap published a new report on BORDER-PROXIMATE INDUSTRIAL
As we talked about a few weeks ago on the podcast, there is growing demand for local manufacturing, or manufacturing located within the continent of the North America. Global tensions with China and Russia have disrupted trade relationships that were once considered stable.
A group of domestic and international companies are planning, or in the process of, nearshoring operations to North America. This reorganization of global supply chains is increasing cross-border trading, a dynamic that will serve as a tailwind for long-term demand for domestic industrial space. Trading with Mexico and Canada was up 12 percent and 9 percent year-over-year, respectively, in January, while trading with China was down 13 percent.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at human behaviour to try and understand what is happening in the housing market.
It’s normal to associate a falling market with falling transactions, rising inventory, and falling prices.
According to the laws of supply and demand, when supply increases and demand falls you will see all three of these classic effects, falling transactions, rising inventory of homes for sale and falling prices
But a funny thing has happened on the way to the market.
In numerous markets all across North America we are seeing falling inventory. We saw inventory peak in October and November in many markets. Inventory in Nashville fell by 30% since the fall. Inventory has fallen by 20% in Charlotte NC.
There are plenty of new listings. But they are not sitting on the market. Inventory is still falling.
Is it possible that we are witnessing a seasonal effect? Does inventory fall during the first quarter in most years?
Well no, in fact, we usually see the opposite. Inventory often grows during the winter months.
Homes that are listing are not sitting on the market for months and months. They are moving.
So why is inventory falling? Does it mean that fewer people are moving?
There seems to be plenty of jobs activity. People are still moving for work. Layoffs are up, but the jobs market seems to be absorbing laid off workers at a reasonable rate.
I don’t have comprehensive data to back this up. I have a few localized examples. But it’s enough to form a thesis. The thesis is that people are not selling their homes unless they absolutely have to.
Many people locked in a good interest rate over the past five years. If they sell their home and buy a new one, they will rate lock at a new higher interest rate. They’re better off keeping their home and renting it out.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about a spring-time ritual. The operation of the sump pump is linked to spring showers and the spring thaw.
All that water being held in the frozen ground or on the surface lets go all at once it seems and the water table rises quickly. Add a few spring rain storms and all of a sudden you have inches of water in your basement.
If you have tenants in a basement apartment, you can be facing the unpleasant task of relocating your tenants into a hotel, emergency repairs, mold remediation, possible insurance claims assuming you even have flood insurance
Sump pumps require regular testing. They can go for months without turning on. Seals may get dry and brittle and the pump could fail shortly after.
But the real test comes when there are multiple failures.
Host: Victor Menasce
email: podcast@victorjm.com
Franco Perez is based in Silicon Valley where he invests in mobile home parks. On today's show we are talking about the mobile home park strategies that Franco prefers in today's market conditions. To connect with Franco and to learn more visit franco.tv or check out his YouTube channel.
Host: Victor Menasce
email: podcast@victorjm.com
Damion Lupo hails all the way from Birmingham Alabama where he specializes in retirement accounts. But not just any retirement accounts. He specializes in retirement accounts that maintain checkbook control with the beneficiary. On today's show we are talking about the merits of such an approach. To connect with Damion and to learn more, visit eqrp.com
Host: Victor Menasce
email: podcast@victorjm.com
Michael asks:
I listened to your podcast about bridge loan default/buying opportunities that would hit the market. Was this message mostly for big institutional investors or for anyone investing in real estate? I was wondering how to find these opportunities to be ready for them when they are available.
Can you give suggestions on the number one source of these deals? Are they brokers? With bankers? or REITs? I'm not really sure where to look.
Host: Victor Menasce
email: podcast@victorjm.com
Today's show was delayed by a widespread power and internet outage in Ottawa as a result of an ice storm.
There has been a lot written in recent weeks about the US dollar and the potential loss of the reserve currency status. Rumors of the BRICS nations forming their own crypto currency between their trading block has been making news headlines.
I’ve actually held off in publishing a podcast on this topic. Merely repeating what you can read in the WSJ and on Bloomberg would not be adding value. I would need to provide an angle that would bring something new to the dialog.
If the US dollar were to lose confidence on a global basis, it would be devastating to the US economy. The result would be a drop in demand for US Treasuries. But since the US government is the largest debtor of all, they will need buyers for those treasuries. In order to attract buyers, they will need to raise the interest rate relative to other offerings in the market.
For the last three decades of globalization, the US has exported its inflation. The manufacturer who sells Christmas ornaments to Walmart collects US dollars from Walmart and then takes those dollars to the bank to exchange into Yuan. The bank then turns those dollars to the Chinese central bank who have an excess of dollars. Rather than sit on those dollars, the Chinese central bank used those dollars to purchase other commodities like oil which they need to fuel their economy, or they use the dollars to buy US Treasuries. In so doing, the US successfully exported it’s inflation.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re going to speak about a question that Ireceived during a live zoom meeting. The question was about whether I thoughtit was a good idea to raise capital in the US for large scale industrialprojects in India. The thesis was that there is a large and growing logisticsopportunity in India and that it could be a great opportunity for US investors.
While the specifics of the question relate to industrial projectsin India, you can substitute your favorite project. It would be beach fronthomes in Costa Rica, or hotels in Rio de Janeiro. My answer would be largelythe same.
The Industrial land in India thesis makes sense. But thatdoesn’t mean that raising money in the US will be easy. In fact, I would contendthat it will be quite the opposite.
-----------Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at a new law in the city of Los Angeles that has been recently amended called SB8.
This new rule states that no new development can take place that demolishes housing whether occupied or vacant unless replacement housing is constructed that maintains equivalent affordable and very affordable units and rents those units to low income households.
What are the intended consequences, and what are the non-intended consequences of this new rule?
Host: Victor Menasce
email: podcast@victorjm.com
Why is our money supply shrinking so much? Will that precipitate a credit crunch? On today's show we are looking at QT and what is driving it.
Host: Victor Menasce
email: podcast@victorjm.com
Brad Cartier specializes in developing new "missing middle" multi-family apartment buildings in secondary and tertiary markets within a radius of Ottawa Canada. On today's show we are talking about the merits of missing middle investment opportunities.
To connect with Brad, you can find him on LinkedIn. Also visit his newletter which can be found on Twitter at https://twitter.com/briefcasere
Host: Victor Menasce
email: podcast@victorjm.com
Dr. Pippa Malmgren is a very well informed economist who has served as a former presidential adviser and a national security advisor to the Joint Chiefs of the US military. She is extremely well connected and offers insights that are not being shared in the mainstream media.
I believe that seeing things as they are happening before they become news is a competitive advantage.
"Signals" by Pippa Malmgren is a thought-provoking and insightful book that explores the power of economic and geopolitical signals in today's interconnected world. In this book, Malmgren offers a unique perspective on the importance of paying attention to the subtle signals that can indicate shifts in the global economy and political landscape.
Host: Victor Menasce
email: podcast@victorjm.com
Governments across the US and Canada are starting to become creative when it comes to addressing the issue of affordability.
Rather than a straight cash handout, different schemes are aimed at assisting financing. California, Utah and Idaho are three states that have recently implemented programs aimed at improving housing affordability.
But the problem is that the true cost is often a combination of variables. Many of these programs have an impact of less than 5% on the cost of housing. Those families struggling with finding affordable housing are not just 5% off from their majic number. The gap is much larger.
At least governments get to claim that they did something.
Host: Victor Menasce
email: podcast@victorjm.com
Tracy from Washington State asks:
What does one do when a City imposes/interprets a code ruling wrong? I have a situation where a City official did not follow the standard guidelines for fire protection in a multifamily unit. Normally if buildings are located 10 feet or further apart standard attic venting can be applied and we designed our duplexes accordingly. When we submitted our plans the City would not let us install venting in the soffit because the homes were 10 feet from the property line and "they did not know what the neighbors would do". Now given we were responsible for all the builds on the street (and could control this), and the setback requirements would not let a home be any closer than the current spacing this was silly. We even went to the surrounding jurisdictions and they agreed we should be allowed to vent the attics. We told the City in question about the stance of the other jurisdictions but the building official was new and stubborn.
So we installed attic fans to compensate. But given a litany of circumstances, the attic fans were not enough (extreme cold weather required extreme heat in the homes) and mold has formed on some roof sheathing due to condensation collecting.
Now I have not only mold mitigation to do (which is done and approved by the City)
I am moving through this but this is not the first time this City has caused problems. They did not meet the statutory timeline for subdivision approval (which they admitted to but I let go) and when they lost staff they extended the normal building permit process from 3 weeks to 6 months costing me hundreds of thousands of dollars in holding costs.
Host: Victor Menasce
email: podcast@victorjm.com
On today show, we are looking at how human behaviour can vary predictably damage to global banking system. There are many examples and many repeated opportunities in history to see this phenomenon at work.
But on today show, we are going to look at a very recent example that most of us can easily relate to. In the early days of the pandemic, we started to experience shortages of every day staples. Households emptied the grocery store, shelves of non-perishable food items Like canned soup, pasta and rice, prepared foods like frozen pizza, and everyone’s favourite toilet paper.
The human response to the risk of a shortage was to start hoarding. Paradoxically, it was the hoarding behaviour that created the shortage. I’ll make sure there is enough toilet paper for me and enough chicken soup for me even if it means that somebody else will not have access to toilet paper or chicken soup.
That was 2020. That was the pandemic. This is now. We are not experiencing shortages any longer. Why are we even talking about shortages?
Well that is actually incorrect. We are experiencing shortages and we are seeing the exact same behaviour that we saw with toilet paper.
We are seeing people starting to hoard their cash, out of of a sense of anxiety about the banking system.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about another missing piece in the puzzle over the evolution of money.
Crypto-currencies were launched with the promise of replacing FIAT currency with a crowd sourced anti-establishment, off-grid alternative. The technology is rooted in the need for a system that would enable online micro-transactions where the transaction cost could be virtually zero.
If you want to make an online purchase within a game that costs only a few pennies, or perhaps a few tenths of a penny, there is no payment processing system that caters to these micro-transactions. Some of the early movers were looking for a light-weight system that would make it possible to create a low overhead transaction. Rather than charge users for the transaction, the would require each computer to do a small amount of work. That work in exchange for money was called hash cash and would take the place of a centralized infrastructure required to process a transaction. After all, data centres are expensive to build and to maintain. They consume a lot of power and required air conditioning. If instead of a datacenter, you harnessed the distributed computing power of all the users, you could get the work of managing and maintaining the database for free and require no data center at all.
This concept was the early days of what later became known as mining for bitcoin. If you do a small amount of work, you get some micro financial credit for the work.
Since the early days of bitcoin the notion of free work has been at the core of the distributed database that makes up the distributed blockchain.
The agenda behind these technologies was simple and pure. Create a low overhead financial transaction system. Later on, blockchain technologies took on the agenda of becoming a crypto currency. The notion of a store of value and an ever increasing value came much later.
It is this quality that has raised the ire of the financial regulators.
Governments generally don’t want competition for the nation’s currency. The US doesn’t want it, China doesn’t want it and have already outlawed crypto currencies.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at some currents that are underneath the surface which to me are very concerning.
We have a history as a society of taking quantum steps to relinquish our individual rights in response to a crisis or even in some cases for convenience.
In the wake of the terrorist attacks of Sept 11, 2001 many people in the West allowed for governments to collect much more information about each of us in the name of safety.
Winston Churchill said, “Never let a good crisis go to waste.”
Today, payments are increasingly becoming electronic, which means that your banker knows when you bought pizza from Dominos at 2AM. So far the government doesn’t know that you ordered pizza at 2AM. But if they did, what value judgement would be applied to that transaction? Would it impact your credit score?
At what point will government become enmeshed in your financial world? What will be the trigger?
Host: Victor Menasce
email: podcast@victorjm.com
Today's show is coming to you live from the Secrets of Successful Syndication Conference in Dallas. We're talking about the current market reality.
Will Matheson is based in Charleston South Carolina. On today's show we are talking about student housing and the strategies that make for successful investment in that specific segment. To connect with Will and to learn more, visit his company website at mathcap.com
Host: Victor Menasce
email: podcast@victorjm.com
On today's show, Roland asks:
I listen to your podcast daily. Thank you for sharing your insights and bringing together a depth of knowledgeable people to share their real estate insights. George Ross is my favourite!
I am writing to you because I am in a predicament with a recent acquisition. Recently I purchased a number of small, run down lake side properties in a small Quebec community about 1h15min from downtown Ottawa, with the intention of renovating and renting them out as short term rentals. I was given what I consider to be a really good deal on seller financing. The properties had been sitting on the market for some time and I befriended the seller. Before moving forward with the purchases I’d done my research - because I own a cottage in the community i knew of its potential revenue and I did my due diligence with the municipality to ensure short term rental was allowed. But recently I was informed by city officials that they will not permit me to run a STR after all, citing their stance on STR has changed.
So with that background I was wondering what you would consider doing in this situation if you were in my shoes. The properties are located on a sizeable lake, the area has a a rich history of tourism specifically anglers from the United States… this is because prior to the pandemic the properties were used by a fishing and hunting business operator. Some of these customers have been coming back and I have a relationship with the retired operator Despite the city’s u turn I remain positive and bullish on the area and the future property value. There is no major attraction in the area other than its proximity to Lac st Marie (about 20 minutes south) but I know the area has members of some of Ottawa’s prominent families who own cottages in the area.
So I am forced to make the space available as a medium to long term rental. I am hesitant to go long term given the rental profile of the community. Then I had a thought I thought maybe you might have some perspective on given your experience in the Ottawa medium term real estate rental space.
What would you do if you found yourself in this situation?
On today’s show we are answering a simple but important question: Is the market ignoring the Fed?
What does the yield curve tell us about the recent 0.25% rate increase announced by the Federal Reserve on Wednesday.
The shape of the yield curve can tell us a lot about the market sentiment in response to the Federal Funds rate.
We have been inverted for much of the past year.
The yield curve has flattened a lot in the past two weeks as a result of the banking crisis. We have seen demand for short term T-Bills spike which has pushed prices up and yields down.
Over the course of the day we have continued to see yields fall despite the rate increase announcement.
The banks have a choice to put cash on deposit at the fed for a rate of 4.75%. Reverse repo is incredibly flexible and secure.
But for some reason, they’re choosing not to put those funds on deposit at the Fed, which offers the highest interest rate in the market and is risk free).
We see all of the Treasury offerings, except the 6 month T-Bill pricing below the federal funds rate.
The two year is down 36 basis points over the day at 3.882%. The 4 week T-bill is at 3.91%, down 28 basis points over the day. The 8 week is at 3.98, roughly flat for the day. The 10 year is yielding 3.462, roughly flat for the day
The 30 year is yielding 3.68, down six basis points from the day before.
All of these rates except for the 6 month are below the Fed funds rate. I don’t believe there is anything magical about the 6 month T Blll other than market inefficiency at play. We will continue to monitor the 6 month to see if the trend we are seeing in the other maturities.
So what does this all mean? Should we be happy and calm or terrified?
On today show, we are looking at why we might be experiencing a global debt crisis. So far virtually nobody in a position of authority is admitting that we have a debt crisis. As I said, on the show a couple of days ago, when a balloon bursts, it’s very often the case that the pin gets the blame and it’s almost never the pins fault.
Before we can understand the problem, we first need to go back to a basic definition.
Debt is a claim on future earnings. The only way to liquidate a debt is for those future earnings to be equal or larger than the debt service. The problem we have globally is that debt has been growing at a much faster rate than the economy.
Why is it that the house of cards has not come crashing down yet?
As recently as two weeks ago, Jerome Powell admitted in the congressional hearings that our current path of exponentially, growing debt is clearly not sustainable.
The answer can be found in the silent tax. The devaluation of the currency, what we commonly call inflation is the magic through which we pay back every penny and still cheat the lender out of their money.
On today’s show we are going to do some math to see the impact of inflation on the value of a loan.
Host: Victor Menasce
email: podcast@victorjm.com
We have had several investors ask us how we launch a new investment offering. On today’s show we are going to take a look under the covers for what it takes to launch a webinar to inform investors of a new investment opportunity.
When we have an investment opportunity in our company, we inform those who are already connected with us by email. We may also get new people inquiring about our offering as a result of referrals from friends. The primary means of communicating is as simple as sending out an email. Sounds simple so far.
But whenever the conversation is between our team and potentially dozens if not hundreds of investors, we need to be extremely organized. Many weeks of work goes on behind the scenes before the webinar can happen, and before the first email goes out.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show, we are looking at the difference between acute pain and chronic pain. With acute pain, such as you might experience when you hit your thumb with a hammer can be all consuming. You can think of nothing else. Acute pain is usually temporary. But while you are experiencing it, dealing with acute pain, takes priority and crowds out virtually anything else. Chronic pain on the other hand, is something that you deal with on a daily basis. It’s a little bit like having a rock in your shoe. It’s enough to be annoying. It slows you down. Often times the pain is not bad enough to motivate you to take off your shoe and get the rock out. You grumble, you complain, but rarely do anything about it.
Our financial system is experiencing both of these types of pain simultaneously. Inflation is analogous to chronic pain and bank failures definitely fall into the acute pain category. We have been hearing from federal reserve chairman Jerome Powell for months now about the importance of taming inflation.
Host: Victor Menasce
email: podcast@victorjm.com
Dan Lazar is coming to us from Melbourne Australia. He started his journey as a tennis player and eventually became Romanian national champion. Today, he's building homes in Melbourne. On today's show we get an update on what is happening in real estate in Australia since the pandemic.
To connect with Dan, visit herox.com.au or reach out to him on LinkedIn.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show I'm speaking with George Ross about the current volatility in the banking system. His perspective is extremely helpful for those trying to make sense out of what's happening.
If you would be interested in participating in my monthly conversations with George, send me an email to podcast@victorjm.com to learn how you can join.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s email comes from Adam in Riverside, Ca.
Victor! Your podcasts are the best! I continue to be a proud, loyal listener. Thank you for continuing to deliver fresh and relevant content.
Back in October, several of your podcasts foreshadowed concerning activity you noticed in the global credit markets/ banking system.
With the recent bank failures I can’t help but wonder if they are somehow related to what you were noticing several months ago.
Host: Victor Menasce
email: podcast@victorjm.com
Today's question comes from Zach who writes:
First, I love your podcast and get great value from it. I really appreciate your straight forward analytical approach and using data to back your conclusions, not just opinion as is so prevalent in todays media.
My question is about a parking lot lease. My company is redeveloping a historic building in a small town tertiary market in middle Georgia. We are converting the building to 7 apartments and 2 commercial units while taking advantage of historic tax credits and other state incentives. At the hearing for the zoning variance (which was approved) the city councils number one concern was the 7 new units taking up parking in the downtown area. In order to mitigate this I received agreement from a local bank you owns a large parking lot across the street to lease 6 parking spaces. This satisfied the city council. As we are nearing the end of construction, the bank has reached out to me asking what I thought the parking spaces were worth. I assume they are trying to set a rental rate. If I were buying them, I would use the income approach determining the income the spaces could bring and applying a relevant cap rate. I plan on billing the tenants $50 per month for “reserved parking”. However, I don’t know what is a good number to negotiate with the bank for the lease of the six spaces. With no comps there is no way to know if $50 is even a market rate. No tenants may be willing to pay that after which I may need to lower the rate.
Currently there is no charge to park in the city. While the city has and ordnance requiring a parking pass for downtown, it is not enforced. There is no where in town that currently charges for parking. In my opinion (having lived in Boston) there is plenty of parking downtown. I hope to lease the spots as cheap as possibly as I set up the agreement mainly to appease the city council and pass zoning. Do you have any idea what I should recommend to the bank as a lease amount?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are asking the question, “Why do we need smaller banks?”
After all, other countries seem to be dominated by a smaller number of very large banks. Why not rely on big banks and get rid of all the small banks altogether?
In the wake of the great financial crisis that started in 2007 and 2008, lending in real estate virtually dried up. Part of the reason that prices fell so much is that the only buyers left in the market were cash buyers.
In a market with a surplus of sellers and zero lending, the number of buyers evaporated. It was not a real estate crisis at all. It was a lending crisis that cascaded and became a real estate crisis.
In those days I was building new apartments in Philadelphia with my partners. These were smaller buildings, student housing, duplexes, triplexes, 10 unit buildings and so on.
There was no way that we would have walked into Wells Fargo or Bank of America and asked for a commercial real estate loan. The policies being set by these lenders were national in nature and the same criteria applied regardless of location. There was no room for local special situations.
No lenders would even talk to us, except about four local lenders. These were smaller regional banks with about a dozen branches.
At first the terms seemed very difficult. In fact, we went down the financing path with one lender and at the end of 90 days, the lender declined the loan. We started a second time with another lenders and this time after 60 days, the lender declined the loan. The third lender offered a 6% interest rate and a 20 year amortization with a five year term and a pre-payment penalty that would start at 5% in year 1 of the loan, 4% in year 2, 3% in year three and so on.
That small bank was Meridian Bank. Today Meridian Bank is in five states and they’re still a small regional bank. The loan terms were not great. We were left with little residual cash flow at the end of each month. That first loan was a blanket commercial loan across four buildings. In those days, the availability of a loan was more important than the rate or the terms. We were able to return capital to our investors and ultimately we held those buildings for a decade and eventually sold them at a handsome profit. At the time, we grumbled over the loan terms. Today my partners and I are very grateful to Meridian Bank for affording us the opportunity to get any financing when nobody else would.
As real estate investors, we depend upon lenders who have intimate knowledge of the local market. Having a major bank swallow up a small bank will force assimilation. The new parent companies don’t have a history of expanding their product offering to include the newly acquired banks in their offering. The products become homogenized. If you fit within the neat and tidy box of an hourly employee buying a single family home, with three years of income history you are a potential client.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re taking another look at what is happening in banking and at some of the risks that are inherent.
The leaders at SVB made a strategic error. They failed to hedge their interest rate portfolio. After years of low interest rate policy and continued guidance from the Federal Reserve of another two years of low interest rates, the bank felt confident in buying long term bonds. These long bonds made up 89% of their securities portfolio, which ultimately left the bank in an illiquid situation where they could not convert bonds to cash without a financial impact. Last week the bank declared a $2B loss on the sale of securities. But In total, the value of their securities portfolio was down $17B on paper if they had to liquidate it all today.
Over the weekend, the Fed put an emergency tool in place to help similarly affected banks, regardless of size. If a lender has a bond that is in their “hold to maturity” category on their balance sheet, the Fed will allow the bank to borrow against that collateral at full face value.
Under the current rules, the banks are allowed to treat US treasuries as good as cash when calculating their reserves on deposit. Clearly a long bond that is trading at a discount in the market is not the same as cash as the folks at SVB found out.
It’s too bad that it’s too late for SVB.
The Fed’s actions over the weekend should be enough to restore the confidence in the banking system and prevent another similar run on mid-sized banks.
In aggregate, the entire US banking system is sitting on a huge pile of bonds that have fallen in value at a time when the Federal Reserve is reducing its balance sheet.
It is an issue that isn’t just concentrated in one or two banks: The FDIC has said that across all banks, there were about $620 billion in unrealized losses as of the end of last year. That number has likely increased since the start of the year.
So the big question on everyone’s mind is, “Is the banking system safe?”
The answer is, “We don’t know”. If we see depositors withdrawing cash on a large scale, the banking system could still fail, even with the measures introduced by the Fed this past weekend.
The logical mind says that the Fed has backstopped the banks and there should be no further concern.
But we have continued to see panic buying of Treasuries and T-Bills. The yield on the 6m TBill fell by 50 basis points on Monday morning and the 1 year TBill fell 63 basis points. The buying frenzy continued throughout the day on Monday. So much for logic prevailing. It seems that depositors are responding emotionally and pulling cash out of the bank and putting excess cash in short term Tbills.
Back in 2008, the toxic debt was subprime loans that were of low quality. This time, the toxic debt is supposedly the highest quality US Treasuries. If SVB is in trouble, then so is everyone else. If the Fed thinks they can wallpaper over it, they are extremely naive.
Host: Victor Menasce
email: podcast@victorjm.com
On today show we’re taking a deeper look at the Silicon Valley Bank failure that occurred on Friday of last week. This spectacular bang failure has been making headlines and I am not going to merely repeat the types of things you might be reading on the front page of the Wall Street Journal. That would not be adding any value to you. I’m going to go out on a limb and state categorically that the federal reserve indeed accidentally engineered the failure of Silicon Valley Bank. That might sound like a bold statement.
We all know what happened. The bank failed in spectacular fashion in what seemed like 48 hours. Clearly the Banks leader ship understood the gravity of the situation in the weeks leading up to the failure. It is alleged that the CEO sold shares in the weeks leading up to the collapse. But that’s a discussion for another day. As of the close of business on Thursday, a little more than 20 billion of the 175 billion still on deposit at the bank, were FDIC insured. Warnings from VCs to their clients is what caused the run on the bank. So the question is how many other banks are carrying assets that in the open marketplace are clearly worth far less than book value? If depositors were to withdraw funds on a moderate scale, and start putting them into US T-bills or German bonds or some other higher quality paper, how many other banks would suffer the same fee to Silicon Valley Bank? Last June when we met with Danielle DiMartino Booth in person at the Investor summit on send she said some thing which I remember to this day. She said the federal reserve will continue to raise interest rates until something breaks. We just did not know what would break. Well now we do. The member banks that on the federal reserve are likely to be the biggest casualties of the banks rapid increase in interest rates. I predict that on Monday morning, one of the consequences of the Silicon Valley Bank failure will be a complete freeze of new loan origination’s nationwide. Businesses with more than $250,000 in bank balances will move their excess funds into 60 day T-bills. We are going to see a panic wave of buying on Monday and the yield for the 60 day T-bills is going to fall. We have already seen panic buying in Asian markets overnight. So it’s not hard to predict the human behaviour.
Host: Victor Menasce
email: podcast@victorjm.com
Marco Santarelli is based in Laguna Beach California. From there he manages portfolios of turnkey rentals across more than 20 markets in the US. On today's show we are talking about the current market conditions. To connect with Marco, visit noradarealestate.com.
Host: Victor Menasce
email: podcast@victorjm.com
Richard Canfield is based in British Columbia and specializes in a concept called "Infinite Banking". This involves using funds borrowed from an insurance policy to help fund your real estate projects. He has a white paper that can be downloaded at 7steps.ca which outlines the steps in the infinite banking concept.
Host: Victor Menasce
email: podcast@victorjm.com
This short segment is an invitation to an upcoming webinar scheduled for Wednesday, March 15 at 6PM Pacific Time, 9PM Eastern. Our team at Y Street Capital has been investing and developing storage product for some time.
Webinar Invitation Link: https://bit.ly/YSC_StorageFundWebinar_RegisterHere
We have a number of new storage projects in the pipeline and launching a fund just seemed to make sense. Storage is a wonderful and recession resistant asset class that performs well in any economic conditions. The storage industry has attracted a lot of attention in recent years and larger institutional players are entering the market. That means the storage industry is changing. Most primary markets are saturated and over-supplied. Even with all the institutional investment, the industry is still 75% dominated by smaller mom and pop operators. The opportunity is located in secondary markets and in specific vertical segments within storage. For example, boat and RV storage is vastly under-supplied in many markets.
If you’d like to learn more, sign up for the Webinar using the link in show notes. Even if you can’t make the live session due to a schedule conflict, we will be recording the session. Registering will give you access to the recording.
This opportunity is not for everyone. Investment is limited to accredited investors, residing in the US and would be by prospectus only in compliance with US SEC regulations.
Whether you invest or not, attending the webinar will educated you on the opportunity that exists in storage and more importantly, where the industry is heading. Again, the link to register is in the show notes and we look forward to talking with you live on Wednesday March 15.
Host: Victor Menasce
email: podcast@victorjm.com
Today I had a realization. Amidst all of the confusion, all of a sudden the economic picture came clear. I was driving in the car this morning and a certain calm came over me.
I’ve been wondering for weeks why there is conflicting economic data and I was unable to make sense out of it.
I know what you’re thinking, Victor you need to get a life. When a moment of clarity about the economy is exciting to you , you need therapy.
So without any apologies, I can hardly contain my excitement.
We are hearing that the US economy is strong, that the economy in Europe is unexpectedly strong. Even in Canada the economy is strong. Employment is strong and we have 50 year low unemployment.
But there is one thing I know about the economy. I treat it like a law of physics.
We all learned about Newton’s second law of physics back in high school. An object at rest will stay at rest and an object in motion will remain in motion. This speaks to the law of conservation of momentum.
We don’t have a corresponding law in economics, but I think the world needs it. That law simply stated is
For every unit of economic output, there is an equivalent unit of energy consumed somewhere in the world.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the fallout of Chairman Powell’s testimony to the House Financial Services Committee on Wednesday and the corresponding Senate committee on Tuesday.
In his remarks, he reiterated that the Fed sees raising rates further in response to the unexpectedly strong employment, GDP and inflation numbers.
On Tuesday, he said the central bank would consider raising the federal funds rate by a half-percentage-point later this month, leading investors to anticipate the larger rate rise.
All of this analysis is based on the famous Phillips Curve that forms the basis of so much of Fed policy. Every time the Phillips curve is shown to have fundamental flaws, they tweak the model to try and take some new factor into account. But the same fundamental flaws exist. The basic premise that a tight labor market automatically puts too much negotiating power in the hands of employees is at the core of the financial model. But if we go back through history there is example after example where a tight labor market did not result in inflation. The conclusions drawn by Fed officials using the Phillips curve each and every time has been shown to be incorrect.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at where companies are making major investments. This is happening at time when economic uncertainty and higher cost of capital would suggest that it is not a great time to make major investments in new plant or equipment.
There are two main drivers for investment in new manufacturing in today’s environment.
- Expansion of capacity for new and emerging technologies
- Global Security of Supply
In my opinion, these two reasons driving investment in new manufacturing.
On today’s show we are going to look at six new factories planned in the United States to see why these factories are being built.
On today’s show we are talking about the theory behind economic cycles and how the theory completely fails to take into account the reality of our world.
If you want to learn more about projects that we have underway at Y Street Capital, visit https://ystreetcapital.com/investors/
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re looking at the impact of black markets on the quality of data in today’s data rich environment.
In particular, we are going to be looking at energy and trying to make sense out of numbers that just don’t add up.
We have experienced one year since the start of the war in the Ukraine. At the start of the war oil prices shot through the roof as energy supply chains around the world were disrupted. Part of the increase in price was caused by fear that economic sanctions would mean oil shortages. Now One year later oil prices have reverted to levels that reflect a new stability. Western governments have imposed supposedly crippling sanctions on the Russian government. They have imposed a price cap on exports of Russian oil. Yet it seems that the crisis of oil supply in Europe has failed to materialize. The shortage of oil was temporary.
The fact is Russia has been able to avoid sanctions on a very large scale by effectively laundering oil in many places around the world. Many countries with excess refining capacity have been purchasing oil from Russia, and then reselling refined products to those very same markets that were previously refusing to purchase Russian oil. there is no shortage at the gas pumps in Europe one of the consequences of this massive black market in oil is a degradation in the quality of the data. If you track the number of barrels of refined product and compare them to the official numbers for crude oil imports, it is obvious that the numbers do not add up.
Host: Victor Menasce
email: podcast@victorjm.com
Neal Bawa is based in Silicon Valley and he invests in multi-family apartments mainly in Texas. On today's show we are talking about the market conditions and the impact of loan interest rates and terms on multi-family projects. To connect with Neal, visit multifamilyu.com. He hosts live webinars on a wide range of topics every two weeks.
Host: Victor Menasce
email: podcast@victorjm.com
Brent Bowers is based in Vero Beach Florida. Formerly from Colorado Springs, he now invests in land nation wide. On today's show we are talking about land investment strategy.
To learn more or to connect with Brent you can find him as Brent L Bowers on TicTok or at his company https://www.thelandsharks.com/
Host: Victor Menasce
email: podcast@victorjm.com
Today's question comes from Zoe who asks:
I purchased my first investment property, a mix-use triplex (commercial main floor and two 2bed/1bath residential above) downtown Hamilton on October 1, 2021 - At the time, we paid $1,100,000, put 25% down, and started a $825,000 mortgage at 2% for 1 year fixed rate.
Prior to closing, my lawyer hadn't received the zoning verification back from the City in time for the requisition date. He told me, the zoning should be fine for the barber, they've been there for 2 years. He didn't advise me to ask for an extension, or to not move forward without having the verification. After closing, the verification came back, indicating that indeed, personal services were not allowed due to the number of residential units in the building (less than three). We figured, since the barber was already in place, and had just renewed her lease, that we would cross our fingers and hope for the best, not sure what else to do.
Initially we were generating $1200 a month in positive cash flow.
In February of 2022, the barber in our commercial unit stopped paying. We ultimately evicted the barber.
We put the unit up for lease, however, due to the zoning, we could only advertise for office space, which during the pandemic was not in demand and rents were extremely depressed and they continue to be depressed even to this day.
An idea to convert the commercial unit to a 2 bed/2bath residential unit was investigated, and it seemed like a value add option to increase rents and value of the property. There would be a tax consequence to the change of use, but
In October 2022, the mortgage renewed. We thought we were pivoting to a residential loan once the project was completed, so we did not take a lower fixed rate option. The open variable rate increased the rate to 8.2% and we are now experiencing extremely high negative cash flow.
Now, 6 months later, at the end of February 2023, the permit for the residential conversion is finally in hand, New quotes for the conversion are now double the original quote.
At this time, my question to you is: What do you recommend in this situation?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at an absolute housing crisis in Canada. For many people this translates into a crisis of pricing. But in truth, this is rapidly emerging as a crisis of availability at any cost.
Canada is a relatively small country in terms of population of 38.6M. That’s up from 37.7M in 2020.
You might be wondering, how can that be? Most mature western economies are experiencing an aging population, declining birth rates, and people are starting families later in life than ever before.
The fertility rate in Canada dropped to 1.53, the lowest on record. That’s down from an average of 1.59 for the period from 2015-2020. In 1970, Canada’s fertility rate was 2.61 and has been dropping steadily ever since.
What is fueling all that demand for housing? That’s what we are going to look at today and discuss what the data is telling us, and where the data is actually misleading.
Host: Victor Menasce
email: podcast@victorjm.com
Our book this month is definitely worthy of the book of the month. Our book is Daily Rituals: How Artists Work by Mason Currey. I was put onto this book by Tim Ferris who has been recommending it for some time.
Daily Rituals is a fascinating book by Mason Currey that delves into the daily habits and routines of some of the most creative minds in history. From writers and painters to composers and scientists, the book provides a captivating look at how these artists structured their lives to maximize their creativity and productivity.
If you are involved in a creative endeavor in your work, you are an artist. The author has compiled a wealth of information on the daily habits of creative geniuses, providing a unique perspective on how they managed to accomplish so much in their lives.
Host: Victor Menasce
email: podcast@victorjm.com
It’s no secret that home buyer activity has shrunk significantly over the past year. But which parts of the market have cooled the most?
On today’s show we’re taking a look at which segments have cooled the fasted.
Host: Victor Menasce
email: podcast@victorjm.com
Today's question comes from Martin who writes:
I thoroughly enjoy the invaluable resource that you provide on the RE espresso podcast. I would like to get your opinion on a project that has come across my desk. Many aspects of the project are subject to the normal DD process. However, having done some research on the special permit that was approved to entitle a 6 unit commercial site to a 56 unit mixed use site, with the addition of 50 residential units (24 Studio, 20 one bed and 6 two bed units) to the existing 6 commercial. There is a restrictive covenant as it pertains to parking. There are 24 designated parking spaces on the site. The planning board approval had an allocation of 12 spaces (2 each) to the 6 commercial units. It seems the remaining 12 are to be allocated to commercial customer parking. They also incorporated a specific condition that none of the residential tenants can own a vehicle. They specifically have tied this to the excise tax bills paid to the City for all vehicles, as proof that tenants of this building do not own a car. This concerns me, as in all of our units, there is at least one vehicle per lease. There is access to the metro train system close by (walking distance) However the site is not a downtown urban development, and is actually situated within 5 miles of the main downtown of a major city. The metro would have one downtown in 12-15 mins. The proforma rents are in line with other class A building comps within a 2-5 mile radius. I have three questions:
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How does one account for the qualitative impact of not being able to own a vehicle.
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Having answered the first question, how to quantify and discount rent comps with other similar class A buildings, that are not encumbered by the aforementioned restrictive covenant.
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As part of an exit strategy what impact on the cap rate should one contemplate for potential buyers. Or, taking the contrarian position, are we moving in the direction of reduced carbon footprint with more people buying into 100% dependency on public transportation in conjunction with Uber /ride sharing, in which case the building valuation would suffer no undue financial degradation.
As always, I appreciate your opinion and keep up the great work on the espresso podcast!
Host: Victor Menasce
email: podcast@victorjm.com
On today's show I'm having a conversation with George Ross about separation of mineral rights on one of our properties located in Colorado Springs and whether the separate mineral rights could represent a risk to any activities taking place on the property.
Host: Victor Menasce
email: podcast@victorjm.com
Mike Kaeding is based in the Twin Cities in Minnesota. On today's show we are talking about cost effective construction techniques. To connect with Mike or to learn more, visit Norhart.com.
Host: Victor Menasce
email: podcast@victorjm.com
Many of you know me as the host of the Real Estate Espresso Podcast. By day, I’m the senior partner at Y Street Capital. We have several projects underway that are open to accredited investors residing in the United States. If you’d like to learn more, you can visit ystreetcapital.com/investors.
The information is not publicly available. But you can register to join our portal and learn more about the projects we currently have underway. This is not a solicitation. Any investment would be by prospectus only in compliance with US securities regulations
On today’s show we are talking about seeing into the future. Having a successful business relies upon seeing into the future and solving the needs of that future before the rest of the world does. Many of the things we can see are hidden in plain sight if you choose to look. But you have to be willing to look.
If you look at history, you will see that wars are very hard to contain. Even the current conflict in the Ukraine is not limited to two countries. We have the entire European Union involved, the US is involved, Iran is involved. It looks like China might become involved.
We are seeing more defence startup companies and defence incubators than ever before. You would have thought traditionally of startup incubators as being focused on technology, or blockchain or biotech. We don’t typically think of defence incubators. But I’m here to tell you that this is a growing industrial complex. If you knew that defence spending was going to increase in a specific geographic area, what would you do to help serve that need. If your philosophically opposed to the notion of defence spending, you might choose to do nothing. And that’s a perfectly acceptable answer. But at least it’s a considered response. Most people by default do nothing because they don’t even think that there might be something to do.
We don’t know if the current war is going to erupt into a hot war on a large scale involving superpowers. Maybe it will remain confined to a proxy war. We can only hope that the conflict doesn’t escalate and that is comes to a speedy end. In war there are no real winners. But again, wars often last a lot longer than people expect them to. Thats what history tells us.
Even if we put a hot war aside,
What is clear is that globalization as we knew it has changed and will probably not revert to the open borders we have experienced over the past two decades.
The huge beneficiary of this shift is Mexico. There are now 28 Chinese companies who have opened large scale manufacturing plants in Mexico to serve North American customers. The cost of labor in Mexico is higher than the cost of labor in China. But the lower cost and time for transportation offsets the higher labor costs making Mexico every bit as competitive as China.
This means that global trade routes are about to change. They won’t change entirely. But some traffic destined for the port of Long Beach, might be coming over land through Texas. Texas may become the next transportation gateway to the rest of North America.
If you could see into the future and imagine a few dozen more major manufacturing facilities in Mexico, how would that change the demand for transportation and for warehousing in Texas? If you could see into the future and fulfill the needs of those supply chains, what would you do as a real estate investor?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a closer look at the impact of the earthquake in Turkey and Syria. We’ve all seen the images of collapsed buildings, of piles of rubble. The impact on those whose lives were lost and those whose lives were disrupted is staggering.
We’re now hearing reports of developers being arrested. Let’s be clear, this was a powerful earthquake. A 7.8 magnitude quake is 10x more powerful than the 6.9 magnitude earthquake that hit San Francisco in 1989. I remember that quake very well. 63 people died in that quake, many related to the collapse of the Bay Bridge.
In Turkey and Syria, the death toll continues to rise and is expected to top the 47,000 already estimated to have died.
The investigations will take months to complete. Some collapsed buildings that are missing structural elements will be easier to investigate.
But the problems appear to be more systemic.
In 2007, the government passed new regulations aimed at cleaning up the construction sector, seeking to make new buildings earthquake-proof and shore up the old ones.
Planning rules have been further tightened since, most recently in 2018, requiring more steel columns and beams to absorb the impact of earthquakes.
But during the same year, the government issued an amnesty for existing buildings that had broken the rules - for a fee.
More than 10 million people applied, netting the state more than $3 billion in registration fees.
More than half of Turkey's 13 million buildings contravene regulations, according to official data, making amnesties popular among property owners, as well as a lucrative source of government revenue.
Another amnesty was proposed last year and was making its way through parliament, despite criticism, even before the latest quake.
At the end of the day, the laws of physics don’t care whether you had paid a fee to the government to gain an exemption from structural violations. The building will either stand or fall.
Turkey is one of the most active seismic zones in the world and has a history of severe earthquakes. Buildings need to be designed to handle these severe events.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at how some changes to the building code are driving significant new costs.
Buildings are becoming healthier than they once were. It’s desirable to insulate a property in order to maximize efficiency. However, these highly sealed homes and offices can also build up toxins or behave in unexpected ways.
If you like to cook, then chances are you want to have an effective exhaust fan above your stove in order to prevent both grease and smells from permeating all over your home. A high capacity range hood is key. But if the range hood is going to pull kitchen smells effectively out of your home, you need a high capacity fan and a large duct to the outside. In the old days, homes were leaky enough that the range hood did not pull enough air to cause a fall in air pressure inside the home. The numerous gaps and leaks around windows, doors, electrical outlets and so on enabled fresh air to seep into the house without creating a problem.
Where problems do arise is when a home is very tightly sealed. At that moment, there are only a few remaining openings for air to enter the house.
There are the bathroom exhaust fans which have a gravity damper that lets only a small amount of air to backdraft into the home. There is the dryer vent which would allow air to be sucked back into the house.
But the problem is that many houses have appliances that burn fuel. Specifically, a natural gas furnace, a natural gas water heater, and a fireplace or wood stove. The exhaust vent for each of these fuel burning systems is another hole in the house. These perforations are designed to exhaust the fumes from the combustion process. But the laws of physics says that air will flow from the location of highest pressure to a lower pressure area.
The problem is that if the fuel burning appliance is having air sucked through the chimney back into the house, you could have carbon dioxide and carbon monoxide being sucked into the house. The larger the fan, and the more sealed your house, the greater the risk.
As a result, the building code is being amended in many communities to introduce an active solution to this problem.
Back drafting of fuel burning appliances like furnaces water heaters and fireplaces can be amplified by the wind created areas of high pressure or low pressure on one side of the house or another depending on wind direction.
In many parts of the US, if an exhaust fan has a capacity of more than 400 CFM, then a makeup air system is required. Some building codes require a makeup air system regardless of the exhaust fan capacity. This requires the addition of a blower of equivalent strength as the exhaust blower to restore balanced air pressure in the house. A passive system is not enough to meet the new code. The makeup air system must have several components that are all interlocked with the kitchen exhaust fan. It must have a damper, a blower, a temperature sensor and a heater. This heater is going to be pretty strong. We’re talking a 10kw heater to warm the air.
You might be thinking that you’re going to go out and spend a few hundred dollars on a nice shiny stainless steel range hood to put above your brand new stove. Then surprise you’re now facing a bill of an additional $3,000 for the makeup air system to balance the air pressure for the range hood.
Host: Victor Menasce
email: podcast@victorjm.com
Federal Reserve officials like to call their decisions “data dependent.” Business leaders say it a little differently, often “data driven.”
All well and good but does anyone really say otherwise? “To say you prefer seat-of-the-pants guesswork” doesn’t typically impress investors. So of course, people claim to be data-driven, even when they aren’t.
Even worse, you can sincerely think you are data-driven while looking at data that’s incomplete, distorted, or just plain wrong. We live in a complex world.
So How Do You Stay Data Driven?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about diversification. You’ve all heard the conventional wisdom. Diversify your investments and you’ll be safe.
But if we look at today’s environment, the traditional diversification doesn’t seem to be delivering the safety that investors are looking for.
If you have a percentage of your funds in the stock market, and a percentage in real estate, a percentage in bonds, some in cash, some in gold, you should be fine.
But here we are in 2023. There is stock market volatility, there is no safety to be found in the bond market, real estate prices are falling, cash is clearly devaluing given the high rate of inflation, gold makes some occasional moves, but going sideways.
On today’s show we’re going to examine the question as to whether diversification truly exists in the manner that was originally intended.
Host: Victor Menasce
email: podcast@victorjm.com
Pete Reese is based in San Diego California where he specializes in flipping land on a national basis. On today's show we are talking about this niche where many parcels of rural land are neglected, unwanted, inherited, and otherwise under-utilized or under-valued. To connect with Pete or to learn more, visit turningprofit.com
Host: Victor Menasce
email: podcast@victorjm.com
Sean Caulfeild is a lawyer with the law firm LMSLaw where he practices real estate and corporate law. On today's show we're talking about several different types of property fraud and how to avoid them. If you have an experience with property fraud, we'd love to hear about it. Send an email to podcast@victorjm.com and share your story.
Host: Victor Menasce
email: podcast@victorjm.com
There are government studies like the census which show migration patterns. These are comprehensive studies that focus on completeness. But there are other studies from moving companies and from U-Haul which illustrate migration patterns in a statistically significant way. The numbers might not be comprehensive, but they show the trends.
Allied Van Lines issued their migration report for 2022 which shows some distinct patterns. But Allied Van Lines is a premium moving service.
Would the more budget conscious movers that use U-Haul mirror the same trends or would the data be different for U-haul and Allied Van Lines. On today’s show we’re going to look at both and compare.
The top outbound states according to the Allied Van Lines study showed
California, Pennsylvania, Michigan and Illinois topping the list.
New York has traditionally been thought of as an outbound state and historically has topped the list. New York had 45% inbound and 55% outbound, so they too lost population, but didn’t make the top five list.
Arizona, Texas, Florida, Tennessee and N Carolina and S Carolina made the top inbound state list.
Other states that boast strong inbound numbers include Idaho with 69.2% inbound and 30.8% outbound, Montana with 93% inbound and 7% outbound.
When we look at the Uhaul data, there are some similarities, and some differences.
The Uhaul data confirmed the same top states.
So we have looked at both Uhaul and Allied Van Lines and have been able to draw the same conclusion about which states are growing the fastest and shrinking the fastest. Even though a full service move and a DYI move are different, there is strong correlation between the two types of moves.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about two different construction costs in the same location. We are vacationing in Mexico for a few weeks and naturally the topic of real estate comes up in conversation as it does.
Our waitress by the pool is in the process of building a new house for herself and her husband in Playa Del Carmen. She shared what she spent for the land and the cost of constructing her new home. On today’s show we are going to compare what she is paying versus what a foreigner would pay.
There are restrictions on what foreigners can buy in Mexico. Within the restricted zones—50 kilometers (about 31 miles) from shorelines and 100 kilometers (about 62 miles) from international borders— foreigners can only hold property in a land trust. Typically, the trustee is a bank. Outside these zones, foreigners can hold direct deed to property with the same rights and responsibilities as Mexican nationals.
Apart form the legal title, there are other differences as well.
We have seen properties for sale to foreigners at prices that rival US prices. Condos having 1300 SF in Playa Del Carmen that are close to the beach are selling for $600,000 USD with a $515 per month condo fee. This comes to a sale price of $461 per SF.
Our waitress purchased a plot of land that measures approximately 40 feet wide by 80 feet deep, fronting on a street. The purchase price for the land was $10,000.
Her home will have approximately 1,200 SF on a single level. Her home will have two bedrooms, a single bathroom, a kitchen and a living room. It will also have a covered porch at the front of the house which is included in the square footage calculation. In the US or Canada we would probably exclude the square footage of the porch in the area calculation.
Our waitress will not connect to city services initially and will rely on well water that comes from a newly drilled well having a depth of 45 feet. Her total cost of construction is $30,000. So her house will cost her a total cost of $40,000. Maybe she’s not including appliances in that cost estimate. So perhaps her total cost is being slightly understated. But the two bedroom condo near the beach having the same square footage and no land is selling for more than 15x the cost of the detached home.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking another look at energy markets.
Many of you might know that my professional training is an electrical engineer. I understand physics, and energy in particular at a deep level. This is an area of such importance that I continue to study it deeply.
When we look at the economy, there is a direct correlation between every unit of economic output that forms our gross domestic product, and an equivalent consumption of energy somewhere in the world.
The food we eat is correlated directly with energy. Energy is required to manufacture fertilizer. Energy is required to transport food from production to your dinner table. Energy is required to manufacture the clothes we wear, the houses we live in, the trip to that sun destination. Virtually everything we do, eat, buy, consume and experience, has energy consumption at its core.
Today, 85% of global energy production involves the burning of some kind of carbon based fuel. It could be wood, coal, oil, natural gas. 85% of our energy production is based on burning something.
We clearly need to reduce this and replace it with more sustainable sources of energy production.
On today’s show I’m here to tell you that this decade we will experience another global energy crisis that is unavoidable. That energy crisis will translate into higher energy costs for everyone which will have an inflationary impact. It will also directly impact everyone’s quality of life.
So why is this important? We are after all real estate investors, not oil and gas investors. Well, since energy cost in a major input variable to anything we do, we need to perform sensitivity analysis on energy costs as we develop our real estate projects.
You might perform a sensitivity analysis that says it will take 10 years to break even on an investment in solar panels on your house. But what if electricity prices double? Now your time to break even is five years instead of 10. Would that change your decision? Would you rather make that investment now so that you are ahead of the curve, rather than having to make a crisis decision? You can bet that those panels will be more expensive in the middle of a global energy crisis. There is a window, a small window in my opinion for you to take advantage of incentives and subsidies that will make an investment in solar infrastructure seem like a genius move.
Host: Victor Menasce
email: podcast@victorjm.com
You can't make this stuff up. On today's show we are taking a deeper look at the incredibly strong January jobs report that 517,000 jobs were created in the month of January in the US.
The report was at odds with the daily reports of layoffs in multiple industries across the nation.
So why do we care about this? After all, we’re real estate investors. Well, the Federal Reserve is setting interest rate policy in large part to cool the jobs market so that we don’t experience a 1970’s style wage price spiral. Since interest costs are front and center for us real estate investors, the employment numbers could be a leading indicator of what the Fed might do with interest rate policy based on employment statistics.
The press have a bad habit of only focusing on one of the two surveys that are conducted on a monthly basis. The household survey tells a very different story than the employment report. It’s a bit like selective truth. The employment report is not the whole truth. It’s a half truth. The other half of the truth is the household survey which continues to show falling work force participation.
The narrative is that a strong jobs market will feed the narrative that central bankers will need to raise interest rates even further to combat inflation. A strong jobs market puts too much negotiating leverage in the hands of employees and that will ultimately fuel a wage price spiral.
The question is, what could be behind this incredibly strong employment report?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are examining a legal case involving Nick Sirianni, head coach of the Philadelphia Eagles. Nick is best known for leading the team to this year’s Super Bowl. The Eagles did not win the Super Bowl in as a result of a field goal by the Chiefs in the final seconds of the game. But no matter what happens on the field, Sirianni has already made a huge impact in the world of real estate, winning a court case that could have national implications for sellers of property. This precedent setting case could affect disclosures of all types affecting the quality of a deed.
Host: Victor Menasce
email: podcast@victorjm.com
Fernando Angelucci is focused on the world of self storage. We're talking about winning strategies in today's environment. To connect or to learn more visit
www.ssse.com or call Fernando directly at (630) 408-8090.
Host: Victor Menasce
email: podcast@victorjm.com
George Bravante is based in the Central Valley in California. After spending a career in accounting and private equity, he moved to California to complete an acquisition. The intent was to stay just a year, which quickly turned permanent. Along the way he acquired thousands of acres of prime farm land. On today's show we're talking about agricultural investing. To connect with George and to learn more, visit bravantefarmcapital.com or his vineyard at Bravantevineyards.com.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about construction defects that require a series of solutions to ultimately correct.
Host: Victor Menasce
email: podcast@victorjm.com
Waterfront property can be some of the most sought after property in the world. This despite the added complexity and risks of owning waterfront property. The shoreline can be constantly changing, whether it is a fresh water situation or by the sea. You may have a survey for your property. But in most cases, you don’t own the shoreline. The shoreline is usually publicly accessible property, at least the first few feet. It’s tempting to landscape the shoreline in order to make the property more aesthetically pleasing.
But altering the shoreline of a body of water, either naturally or through man-made engineering efforts, can cause significant problems.
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA episode.
Today’s question comes from Ryan in Los Angeles who is asking about whether it is better to adapt an existing building for senior housing, or whether it is better to build new?
Host: Victor Menasce
email: podcast@victorjm.com
National Property Management software firm Yardi is one of the premier software systems used by the majority of the large scale property management companies. The data is hosted by Yardi on their own servers. As a result, they have access to a lot of data on their servers. Yardi Matrix is their brand name for their data products.
Yardi published their National Self Storage report at the end of January. This report focuses on the top 31 metro areas in the US. It mirrors what we have known for some time. Storage in the primary markets is saturated with supply. Supply has exceeded demand.
- Nationally, Yardi Matrix tracks a total of 4,627 self storage properties in various stages of development, including 812 under construction, 1,789 planned and 669 prospective properties. The share of projects under construction was equivalent to 3.6% of existing stock in December, unchanged from the previous month.
- Yardi Matrix also maintains operational profiles for 29,032 completed self storage facilities across the U.S., bringing the total data set to 33,659.
- The average national street rate for all unit sizes dropped again on a year-over-year basis, down 2.8% in December. However, average rates remain above pre-pandemic levels. Rates for standard-size 10x10 units decreased 2.3% for non-climate-controlled (NON CC) units and 3.4% for climate-controlled (CC) units. Meanwhile, rates for larger units outperformed those for smaller units on an annual basis, with rates for 10x30 units down 2.4% over the year and rates for 5x5 units down 3.4% over the same period.
So how do you invest in self storage? You pursue secondary markets that are under-supplied.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are doing a deep dive on a new report from Real Estate brokerage and consulting firm Cushman & Wakefield. They recently published a new study on construction costs for industrial facilities based on a survey of construction costs in 43 markets across North America.
We keep hearing about how construction prices have been volatile in the past couple of years. The truth is, some line items are way up in cost and others have fallen dramatically as well. If you’re looking to build an industrial facility, how do you get a realistic budgetary estimate of what it will cost?
This 34 page report does a good job of summarizing the findings of their research.
Host: Victor Menasce
email: podcast@victorjm.com
Jorge Contreras is based in Orange County California where he specializes in owning, managing, and consulting in the field of short term rentals. On today's show we are talking about the changing landscape in short term rentals and how to mitigate the risks. To connect with Jorge, visit https://www.instagram.com/thejorgecontreras/
Host: Victor Menasce
email: podcast@victorjm.com
Sam Kwak is one of the Kwak brothers on the The Kwak Brothers YouTube channel. On today's show we're talking about building a following using media like YouTube. To learn more you can visit the Kwak Brothers YouTube channel at https://www.youtube.com/@TheKwakBrothers/featured
Host: Victor Menasce
email: podcast@victorjm.com
Today’s AMA (Ask Me Anything) question comes from Ryan in Los Angeles who asks:
What are the major components of a market feasibility study for senior housing and what do you consider strong indicators for a viable market?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking another look at interest rates. Global credit markets seem to be at odds with the Federal Reserve’s hawkish statements.
Jerome Powell announced on Wednesday another 0.25% interest rate increase in the federal funds rate. We heard the same messages yesterday that we heard back in December at the last rate increase.
The Fed set forward guidance for another rate increase at the March meeting, while at the same time stating that they are making decisions on a meeting by meeting basis. The terminal rate is forecast to be between 5% and 5.25%.
But the guidance prior to the announcement was already for a 0.25% increase at the Fed 1 meeting. The market had clearly priced that expectation into the market rates. In the day leading up to the announcements, the yield on the 10 year treasury fell even further to 3.415%.
The yield on the 10 year Treasury peaked in early November at 4.2%. Clearly we are in a rising interest rate environment. The Fed increases the rate at each meeting and with the Federal Funds rate in the range of 4.5%-4.75%, you would expect the yield on the longer term bonds to be increasing as well. But that is not the case. What on earth is going on?
Host: Victor Menasce
email: podcast@victorjm.com
Happy first of the month. On the first day of each month we review the book of the month.
It’s not often that we get to reflect on timeless lessons. But that is just what “The Obstacle is the Way,” by Ryan Holiday does. The opening examples in the book draw upon Marcus Aurelius and John D Rockefeller or General Ulysses Grant. The common characteristic of these three men and many others, was an almost fearless approach to obstacles that presented themselves.
This book is a reminder that some things remain true, no matter what society is experiencing.
The book is based on an ancient Stoic philosophy, as outlined by Holiday. It focuses on developing a process that allows us to turn these obstacles into opportunities, instead of viewing them as crises.
Host: Victor Menasce
email: podcast@victorjm.com
When you buy a property, you can expect a property tax re-assessment in many parts of the country. So relying on the backward looking property taxes of the property may not be indicative of what you would pay once you own the property. Performing due diligence means developing a realistic forecast of the property taxes once re-assessed.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are going to look at some of the changes underway in the world of banking. I believe that banks have learned a lot about their business processes over the past two years. The pandemic forced an acceleration of the transition away from performing transactions in the physical branch to performing transactions online. We’re going to look at one major bank Wells Fargo as an example of the changes that are underway.
Earlier this month, Wells Fargo told investors that it expects to cut expenses by an additional $3.2 billion this year after already trimming about $7.5 billion over the past two years.
I view Wells Fargo as one of the best banks positioned to benefit from higher interest rates. In fact, almost all banks will benefit from higher interest rates, provided the default rate remains under control. Defaults can have an outsized impact on bank profitability and can cause more harm than good as we saw in the 2008 financial crisis.
If I think about our own banking relationship with Chase, we have a business banker that we speak with regularly over the phone, but have never physically met in person. We took the time to open a new business account with them, a process that took several weeks. Since then we have opened many accounts with them.
We can initiate most wire transfers from an online portal.
Banks are also closing branches in order to respond to changing customer demographics and trends. Banks recognize that it is more efficient to concentrate a greater number of branches in densely populated urban areas. At the same time, banks have realized that many customers are now more comfortable banking from their homes or on their mobile phones. As such, many banks have responded by shifting resources to digital banking and away from physical locations.
The banking industry continues to consolidate. There were over 10,000 banks in 2006. That reduced to 6,000 by the end of the financial crisis, That reduced to fewer than 4600 in 2023.
We are seeing bank consolidation: Larger regional banks are merging with one another or taking over smaller banks in their regions to create stronger organizations with increased resources and competitive advantages. In cases where there is overlap, a number of branches are closing without losing customers. The overall operation becomes more efficient.
Host: Victor Menasce
email: podcast@victorjm.com
Levi Lascsak is based Dallas Texas where he has mastered the art of using Youtube's powerful search capability to have clients find him. Today is a powerful show that you will want to pay close attention to. To connect with Levi, visit passiveprospecting.com and register for an advance copy of his upcoming book.
Host: Victor Menasce
email: podcast@victorjm.com
Matthew Ryan is based in San Francisco where his firm specializes in developing co-living projects. Co-living is a product class aimed at the young professional who is seeking an affordable high quality accommodation in high priced markets. To connect with Matthew and to learn more, visit re-viv.com
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about how having a sewer pipe at the edge of your property may or may not be useful.
It’s a very common assumption that if the city services are available in the street, or perhaps nearby, you can have access to sewer services for your project.
Unfortunately, it’s not that simple. Most sewer systems are designed to be gravity fed. So in an ideal world, the sewage treatment plant would be located at the lowest point in the city and the sewer pipes would all flow downhill to the treatment plant.
Sadly, not all cities are convenient enough to make that statement a reality.
If a gravity fed system is not possible, then a lift station is going to be needed to pump the sewage uphill. Hopefully at that point, the difference in height will be enough for a gravity fed system to handle it from there.
Gravity fed systems need to flow down hill. So in a perfectly flat topography, your sewer pipe will have to get deeper, and deeper and deeper in order to maintain a gravity feed.
You might contact the city to gain access to the sewer service that is passing in front of your property. After all, there is a pipe only a short distance from your property line. Surely accessing the sewer service should not be a problem. Bu then the city engineer regrets to inform you that the sewer line doesn’t have the capacity to support the size of your proposed project.
You might be tempted to think, why can’t the city plan for growth? After all, just put in a big pipe and save yourself the hassle of having to upgrade the pipe in the future.
Host: Victor Menasce
email: podcast@victorjm.com
These days at our development company Y Street Capital, it seems like we spend every day in underwriting. We are analyzing potential new projects, re-analyzing existing projects, and then analyzing them again. Bond yields are changing, which means interest rates are changing again. Some lenders who had paused their lending programs in Q3 and Q4 have re-entered the market and are being more aggressive about getting deals done. Construction costs continue to fall, and we are constantly value engineering the designs to pull cost out of the projects without compromising the finished product. We are performing sensitivity analysis on half a dozen variables.
On today’s show we’re answering a simple question, “Does the real estate industry have a short attention span?”
So much of the market is guided by playing the comparison game. What did the exact same model of home sell for down the street? What are rents in the same building, or in similar properties in the same neighborhood? What cap rate are Class A apartment buildings selling for in the local market? There are so many comparisons to make.
When it comes to market conditions, we are programmed to think of comparison data as guiding fair market value.
But that raises the obvious question of “What is a fair comparison?”
Can you compare a three bedroom home and a five bedroom home? Not really.
Can you compare a 12 unit building and a 100 unit building? Not really.
Can you compare a 12 unit building and a 30 unit building? Well maybe. How far apart are they from one another. Are they of similar vintages? Assuming they’re relatively nearby, now you’re starting to get to a closer point of comparison, but not in absolute terms. Maybe you’ll compare them on a cap rate basis, or perhaps on a per unit basis, or maybe a per square foot basis.
But even if you get all of that data and convince yourself that you have a valid point of comparison, you have another problem.
The market has gone through so much change in the past year that it’s hard to look at market data that is more than six months old. Data from early in 2022, while not that long ago, was in a different set of market circumstances. Interest rates were still low. We were in the tail end of the pandemic, or so it seemed. We were in a different world. It seems a lifetime ago.
Host: Victor Menasce
email: podcast@victorjm.com
How is the US dollar still the world reserve currency?
Every year or two it seems like the US is running out of money again. Legislative gridlock, combined with spending money like drunken sailors leaves the population wondering whether those in Washington entrusted to govern the United States are really worthy of the honour and the responsibility.
The debt ceiling is coded into the legislation by design. The debt ceiling is designed to force a public legislative dialog about spending responsibly. Some would argue that it’s hardly been an example of responsible spending.
But somehow, The US has raised the debt limit 89 times since 1959. Wait a minute, do you mean to tell me that the US has raised the debt limit 89 times in the past 64 years? Yes, that’s right.
You’ve no doubt heard the expression “fool me one shame on you, fool me twice shame on me.” I’m wondering if there is an expression for when the government fools you 89 times?
Will we through a party when the debt ceiling is raised 100 times?
Somehow, US treasuries are considered the most safe and secure investments in the world. There is no collateral considered as good as US treasuries.
Host: Victor Menasce
email: podcast@victorjm.com
You know me as the host of the Real Estate Espresso Podcast. By day, I’m also one of the partners at Y Street Capital where we specialize in new construction and development projects across the US and Canada. We are observing that Investors these days are cautious. We agree that it make sense to be cautious. You want to ask tough questions whenever you are performing due diligence.
You really want to understand what it means to invest in a particular project from a market standpoint.
On today’s show we are talking about what strategies work in each economy.
When the market is hot and the tide is rising, it’s natural to focus on growth. Growth is going to give the best results. That’s true in real estate investing, and it’s even true in the stock market.
But when the market is contracting and the economy is hunkering down, the best results will come from focusing on value.
Value outperforms growth over the span of economic cycles. Why is that?
If you focus on value, then you will also benefit from the growth when it happens. You will get the double kicker of both value and growth. But if you’re focusing growth alone, then you’re going to get stuck when the market is contracting.
So what do we mean when we’re talking about growth and value?
Host: Victor Menasce
email: podcast@victorjm.com
We have heard of a debt trap. This is where the cost of servicing a debt exceeds the cash flow needed to service the debt. In those instances, some borrowers take on additional debt hoping for better days and hoping to outrun the bankruptcy.
States, cities and provinces don’t have the luxury of printing money. They need to live within their means, or at least within their ability to get revenue from taxation.
It’s no secret that companies and wealthy individuals have been leaving high tax states in search of low tax states. There is a well worn groove in the freeway from California to Texas and from New York to Florida.
Rather than try to create the incentives for businesses to move to California, the state of California is doing the opposite. They’re doubling down on the incentive for people to leave.
California lawmakers are once again considering a wealth tax. This is on top of the state surtax implemented recently which raises the state income tax level to 13.3%.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we're talking about the negotiating techniques for sellers who are looking to sell when few people are buying. George taught negotiation at the law school at New York University for over 20 years. His writings on negotiation are based on his course notes from those days. George has established himself as a world class authority in negotiation through his many decades in the practice.
Host: Victor Menasce
email: podcast@victorjm.com
Paul Kazanofski is based in Nashville Tennessee where he runs Revision Homes, a high volume house flipping and one of the premier custom builders in Nashville. On today's show we are talking about the state of the market and how the downturn is affecting people in the business.
To connect with Paul you can find him on LinkedIn.
Host: Victor Menasce
email: podcast@victorjm.com
What is the no-sale auto auction, and why do we care as real estate investors?
The world of real estate is highly dependent on borrowing and the liquidity and affordability that banks and other major lenders can offer.
But banks lend in multiple areas. They have consumer credit. They have subprime credit. They have real estate credit, automotive credit, commercial credit, and on and on.
The auto industry, like real estate is highly driven by credit markets. During the pandemic, dealers were getting credit authorizations for all kinds of insane financing.
A buyer with no credit would get approved for a loan to cover 100% of the value of the car, plus the sales tax, plus an extended warranty, plus rust proofing and pre-paid oil changes. By the time the buyer walked off the lot they had signed paperwork for a loan at 130% of the car’s value with a $1000 a month car payment. During the pandemic when they were collecting their stimi checks from the government and all staying home, not paying their landlord, all was fine. Some realized quickly that they could not afford the car payment and asked the lender for forbearance under the emergency covid legislation to protect consumers.
So the auto industry is sitting on a ton of bad loans that were originated during the pandemic.
Much of this is not being reported to the public. It’s like a game of hot potato with bad paper.
One out of every four is 30 days late. One out of six is 90 days late. These numbers are worse than 2008. The default rate in 2008 was 14% for cars. Today, the default rate across all credit ratings is 13.56%.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are going to take a closer look at AI tools that are making headlines. A couple of weeks ago I put out an episode on the OpenAI framework and the software ChatGPT which uses that framework as the underlying AI engine. In that episode I gave some live examples of questions and answers that I put to the software.
In that episode, I concluded that the results were underwhelming and no threat to us humans.
It turns out that my conclusions missed the mark in that episode. Nothing I said was misleading. But where I missed the mark was by asking the software some very simple questions.
If you ask an unsophisticated question, then you are going to get an unsophisticated answer. I suppose humans would respond in the same way. Ask a stupid question and you will get a stupid answer. Ask a better question and you’re likely to get a better answer.
Host: Victor Menasce
email: podcast@victorjm.com
According to an article published in the Bloomberg Law Journal last week, we are in store for a massive meltdown in the world of hospitality.
Just as it appears that travel is returning to normal, hotels are about to get slammed in the side of the head again. But this time its from their lenders.
As of December, close to $4.1 billion out of roughly $93 billion in outstanding lodging loans are delinquent, according to data from CMBS analytics firm Trepp Inc. It currently projects about $35 billion worth of those loans to mature this year.
According to the report, there are currently 155 loans secured by hotels that are in financial distress in the US. This number is expected to balloon as loans become due.
Those who are franchisees of major flags also have covenants for capital expenditures to keep the hotels looking fresh and meeting brand standards. These are hard requirements from Hilton, Marriott, and IHG. Many of the hotel operators were allowed to defer those capital projects during the pandemic because clearly they were in financial distress with the large scale lockdowns that were crippling the industry. Now those improvements are required to happen at a time when the cost of financing those capital improvements has more than doubled.
The hotel data company STR Global maintains industry statistics on hundreds of local markets. Recovery is underway when you compare 2022 and 2023 data with 2019. But averages are still below 2019 numbers in most cases. Parts of Europe experienced above 2019 occupancy for certain specific weeks, indicating strong leisure travel.
The real story is that despite the recovery, the Bloomberg law article is onto something. There will be a significant number distressed deals appearing in the market this year. If this is an area of interest, be prepared to jump in and perform your due diligence for the right assets.
The World Economic Forum opened its annual meeting on Monday evening in Davos Switzerland. This five day in person event is one of the global networking events of the year where you can rub shoulders with some of the most influential people in the world.
These folks hold sessions on everything from the economy to energy, to health care to climate change.
The output of the conference seems more like a highly choreographed Hollywood production than a conference designed to influence change. The documents are highly polished and extremely superficial in their treatment of the issues. The footnotes are filled with academic style references. But I found all of the papers I read so far lacking in substance.
On opening day the WEF published the Chief economists outlook for 2023. This 31 page document is based on a survey conducted of the chief economists in the months of November and December. So the outlook is pretty current in terms of the sentiment of these economists.
Remember, the WEF takes a global perspective, not just Europe or USA or Africa.
100% of the chief economists surveyed said that Europe is expected to be weak or very weak this year, and 91% said that the US is expected to be weak or very weak this year.
Host: Victor Menasce
email: podcast@victorjm.com
When you think of Elon Musk, we largely think first of Tesla, or PayPal, or more recently Twitter. None of these has the potential to materially impact the value of real estate. But SpaceX has changed the value of real estate in ways that are not showing up readily in the metrics. At least, you might not see the effect right away.
Today, a large percentage of the population have adopted high speed internet. If you’re going to work from home, and participate in your office culture, you need a reliable high speed internet connection.
Despite the fact that the internet has been around on a large scale since the early 1990’s, there were many areas that were underserved.
This fact has kept many people from investing in rural properties. Rural properties offer a number of advantages for some families. It offers the potential of lower property taxes, lower utilities costs for those relying on well water and septic. A larger land parcel offers the potential for a home garden and a higher quality of life than a home in the suburbs.
Starlink now has enough satellites in their low earth orbit mesh to supply a decent coverage and very respectable data rates. They have launched 3,500 satellites and just broke the 1M subscriber milestone.
Host: Victor Menasce
email: podcast@victorjm.com
Carina Guzman specializes in land development. On today's show we are talking about a 90 acre residential subdivision that is next to a ski resort. To learn more or to connect with Carina, you can find her on LinkedIn, or on Instagram at https://www.instagram.com/the_land_development_queen/
Host: Victor Menasce
email: podcast@victorjm.com
Aundrea Newbern is the Chief Operating Officer at Get Rich Education. She also runs several businesses including a property management company, and a crime scene cleanup company that is based in Detroit Michigan. It turns out the crime scene cleanup can be a valuable source of properties for investors. Who would have guessed? You can connect with Aundrea at https://www.facebook.com/aundreasells or visit getricheducation.com/course
Host: Victor Menasce
email: podcast@victorjm.com
Today’s show is a little bit of a retraction, or perhaps a refinement of something we have covered last year.
The US Federal Reserve had it right. The economists working for the Fed in 2021 suggested that the inflation we were experiencing was transitory. That was the word that they used. J Powell said it. Janet Yellen, Treasury secretary said it. Many including myself at the time didn’t believe it. In fact, in the end, even the Fed didn’t believe it and had to course correct.
On today's show, we're answering a question from Martin who is looking to underwrite a small development project using an existing structure as the basis for the new higher density building.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s show is the first in a series we are calling back to basics. Back to basics means getting clear on underwriting criteria. On today’s show we’re going to examine the interplay between your project approval criteria, versus your lender’s project approval criteria.
When you undertake a new project, how do you know it’s a good project?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re taking a closer look at what it takes for the Bureau of Labor and Statistics to declare their numbers for GDP, and ultimately when they declare that we are in a recession. Why is this important for real estate investors?
Well, interest rates keep rising because inflation is high and the economy is strong. The economy is strong is the part of that narrative that is continuing to fuel inflation expectations in the eyes of the Fed.
We know intuitively that the economy in Nebraska is different than the economy in California. So knowing that fact, we could conceive it possible that one state could be in economic expansion, while another is in economic contraction.
We’ve long said that real estate is hyper local. So too is the economy. Does the local state data give us any insight into economic contraction on a national basis?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are going to focus on the market for T-Bills to try and understand why there is an apparent shortage of this paper. Demand is exceeding supply. Why is that? It doesn’t make sense. Is the market saying that they want to US government to spend even more? Do they want to see even greater deficit spending?
The government holds a monthly auction for T-Bills and these notes sell in the open market to the highest bidder.
The highest yield paid in the Jan 5 auction was 4.1%.
The current RRP set by the Federal Reserve, which is supposed to be the floor set by the Fed at their last meeting, is 4.3%. But none of these T-bills sold at 4.3%. They all sold at a lower interest rate. There were sales at 4%, and the lowest sales were at 3.85%. So why would these bonds selling at auction be getting less than the coupon interest rate? Why would the buyers be willing to pay extra for these bonds and accept a lower interest rate?
Host: Victor Menasce
email: podcast@victorjm.com
Sam is based in NYC where his company is undertaking one of the most innovative coastal clubs that are actually floating private membership clubs. The first club will be located in Miami and you can learn more about the project at Arkhaus.miami.
Host: Victor Menasce
email: podcast@victorjm.com
Fred Moskowitz specializes is based in Philadelphia and specializes in buying notes from lenders. He's a real expert in finding notes that are being sold in the secondary market. To learn more, you can download some amazing material at giftfromfred.com, or connect with him directly at fredmoskowitz.com
On today’s show we are going to talk about one of my favourite real estate development strategies.
I call that strategy Buy on The Line, Move The Line. So what is that line? On one side of the line is a hot gentrified neighborhood. On the other side of the line is an economically depressed area.
Often, these lines get developed and moved. Over the course of time, a few properties get left behind. The net result is a form of Swiss Cheese. The question is whether the holes in the Swiss Cheese represent an opportunity or not?
In my experience, filling the holes in Swiss Cheese is more difficult than moving the line. The reasoning is simple. When you are surrounded by more expensive properties, those derelict properties take on the aura of being in a more expensive area.
The land value goes up because the properties have been improved all around them.
The reason the buy on the line strategy works so well is because when you are on the wrong side of the line, you are considered to be in a bad area. Bad areas are worth less. But you know that you’re going to improve the entire area and in so doing, you’re going to change the market perception of that location.
If you only do one or two properties, it won’t be enough to convince the market that the line has moved. But when you improve maybe 5-6 properties, or an entire block, the marketplace takes notice and says “Oh, the line has moved”.
Host: Victor Menasce
email: podcast@victorjm.com
We are starting to look back on the pandemic as one giant bubble. There was the stock market bubble, the lending bubble, the real estate bubble. The pandemic saw demand for certain products multiply. There was a shortage of hand sanitizer. These days, there are pallets on sale at the drug store and Walmart, a sign of unrealistic inventory building by retailers.
Clearing out those excesses will be painful. It will result in losses as those mistakes become visible.
Companies bulked up during the pandemic. They saw business booming and they saw the opportunity to take advantage of the disruption in the market created by the pandemic. The traditional bricks and mortar businesses suffered, and those who adopted new technologies and implemented new business systems would thrive.
Where department stores suffered, Amazon benefitted. Where restaurants suffered, Skip The Dishes and Uber Eats benefitted.
Home improvement stores did a booming business during the pandemic, and the supply chain disruptions were legendary. Lowes had 12.5B in inventory in 2019 prior to the pandemic. Fast forward to today, and Lowes has 19.817B in inventory as of October 31. That’s nearly $20B in inventory. Considering the annual revenue is $95B and 33% gross margin, that inventory represents about 120 days of inventory. That’s means three inventory turns per year. That’s low for a retail business. For example, Target usually has about 60 days of inventory. Yes, it’s a different business. Back in 2019, Lowes had no more than 90 days of inventory.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s show is another AMA episode. Today’s question comes from Paul who asks:
“I have always considered development projects to be high risk. How do you mitigate the numerous risks in a development project?"
Host: Victor Menasce
email: podcast@victorjm.com
Today’s show is a deep dive into the world of artificial intelligence. There are a lot of marketing agencies out there that are offering to write content for you for your website, or your blog. The problem with hiring someone to do this work for you is that they are being asked to represent you. But it’s rare to have a ghost writer capture your voice. A ghost writer is not going to be anywhere near the quality that you would get if you undertook the writing yourself.
That’s why it’s not a good idea to have a ghost writer write a book for you. Sure you can do it. Lots of busy people have successfully launched a book written with the help of a ghost writer.
But these days there is a new ghost writer on the block. This is the artificial intelligence bot. These learning software systems are getting better and better all the time.
You can expect that an increasing number of people to start hurling marketing messages at you using an AI tool.
On today’s show we’re going to look at what an AI tool can generate. I went into a tool that uses the OpenAI framework as the underlying technology. This is one of the most widely used.
Host: Victor Menasce
email: podcast@victorjm.com
Signs of recession are everywhere. These metrics have not been seen in a long time. We are generally conditioned to think of a recession as a negative thing. But frankly, it’s a necessary part of the cycle and as real estate investors we should actually embrace the recession.
Imports to the US are down 7.6% in November from the month of October. That’s a huge decline on the basis of a single month. We have been hearing for months now that retailers ordered too much inventory during the pandemic.
The rise in interest rates means that the cost of carrying that inventory is much higher than forecast at the start of the year.
There is a silver lining in a recession, the market for bonds will have correctly predicted a so-called Fed pivot.
Host: Victor Menasce
email: podcast@victorjm.com
Out book this month is called "Who Not How" by Dr. Benjamin Hardy. I’m a huge fan of his work. Benjamin Hardy has listed Dan Sullivan as the primary author even though Dan Sullivan didn’t write a single word of the book. Rather, Dan Sullivan is the curator and designer of many of the ideas that underpin the book. Not only is Ben an excellent writer, but his work is well researched and methodically organized. He has written other titles which we have reviewed on this podcast including “Willpower doesn’t work” and “The gap and the gain.”
Hoost: Victor Menasce
email: podcast@victorjm.com
This year was a year of managing the unexpected. Jan 1, 2022 was a day of optimism and a fresh start in a new year. The world was on its umpteenth wave of Covid. 0micron was the new word added to the vocabulary. The word endemic was being used and many countries around the world were loosening travel restrictions. I personally have not fully returned to the pre-pandemic average of traveling twice a month. But I did travel 10 times this year. It was well below my average. But it’s starting to feel more normal again. The travel industry struggled to cope with the return to normal travel demand. Business travel is still down. The airlines that only months earlier had furloughed thousands, went on a hiring spree and struggled throughout the year to attract enough staff to cope with the resurgence in travel. Hotels lacked the cleaning staff and stopped changing linens daily.
2022 was a year of adapting to change.
Little did we know that we would witness a war that would rival the atrocities of WW-II. Little did we know that the vastly outgunned Ukraine would fight back and hold its ground. Little did we know that a new cold war would be the new world order. Little did we know that the conditions for a potential world war could be be brewing.
Little did we know that the red hot housing market would turn in a matter of weeks. Little did we know that the inflation that was readily apparent would catch the ire of central bankers who would kick the economy in the teeth because when your only tool is a hammer, everything looks like a nail.
Host: Victor Menasce
email: podcast@victorjm.com
The problems at Southwest Airlines demonstrate what can happen when your systems break down. All businesses, including real estate investment business have systems. These systems are designed to have limits. When you go outside those limits, you can’t expect those systems to keep working.
For example, our investment management software is currently handling hundreds to low thousands of investors. We have no idea what would happen if the system was faced with millions of investors. I can’t tell you for sure, but I’m pretty certain our system would break down.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about what is coming in the world of energy. So why am I telling you this? This is, after all a real estate show. Well, wherever there is low cost energy, there is economic growth. Wherever there is economic growth, there will be population migration. All of this affects real estate.
It’s going to get a lot worse before it gets better. But the good news is that it will get better.
We have a global energy shortage. We think that energy is expensive at $1.50 per litre in Canada, or 1.70Euro per litre. That comes to about $7 per gallon in USD, and compares with $90 cents per litre in the US or about $3.60 per gallon. Naturally that price varies across the country.
Energy is what enables us to live our modern lifestyle. The amount of energy contained in a single litre of gasoline is equivalent to about 110 person hours of work if done by human labour. At a minimum wage of $7.25 per hour, that same output would cost about 1,000 times if performed by human labor.
The industrial revolution and the shift from bio-mass to coal, and from coal to oil is what has enabled our modern lifestyle. The fact that you can spend your evening watching a movie on Netflix is testament to the fact that energy has enabled our lifestyle.
We will see a drop in demand for energy during this current recession. It happens in every recession. There is a direct correlation between a unit of economic output and the consumption of an equivalent unit of energy somewhere in the world. These two are inextricably linked.
But once this recession shifts into recovery, we can expect to feel the full force of the energy shortage. We are past peak oil in the US. Can the US continue to produce oil for years to come? Yes, but the cost of extracting that oil will continue to rise. There will be increasing amounts of energy consumed in order to get at the oil which thereby reduces the efficiency with which we can produce energy.
Even with the most aggressive forecasts for penetration of solar, wind and hydroelectric, we will not produce enough energy to displace the decline in oil and coal output.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about one of the unwritten rules that influences the success of medical facilities.
In an ideal world, patients should be free to seek the medical care that is best suited to their condition. If they have insurance coverage, the insurer would pay the bill up to the limits of the insurance plan, and patients would get the best care possible.
On today’s show I’m going to introduce you to a term you might not have heard before. The term is adverse selection.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about how to set goals for the coming year. There are two types of goals that you can set. The first are attainment goals. These are the goals that have a specific outcome.
It could be something like “Buy a new house for my growing family by December of 2023”
Or perhaps
“Increase my income to $20,000 a month by the end of the year.”
Those are attainment goals.
Attainment goals, if well articulated can be powerful guideposts in helping you determine the thousands of day to day decisions that ultimately make up the next hour, the next day, the next week, and ultimately your life.
But there is a second type of goal that in my experience is more powerful than an attainment goal. That is the habit goal. Habit goals become part of you. They become you, rather than something that you do.
Host: Victor Menasce
email: podcast@victorjm.com
In the 1920’s stock market mania was in full bloom.
The stock market was so hot that companies were issuing public share offerings at an unprecedented rate.
In fact you didn’t even need an operating business to issue a public share offering in those days. The share offerings would sell out regardless making instant millionaires out of the company founders.
Here are a few quotes from those days.
"We will not have any more crashes in our time."
This was said by John Maynard Keynes in 1927, two years before the stock market crash which led to the Great Depression.
We will not have any more crashes in our time.
This was said by John Maynard Keynes in 1927, two years before the stock market crash which led to the Great Depression.
“I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future.”
- E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928
So fast forward to our modern era with our advanced digital society. In 2020 the special purpose acquisition company became a really popular vehicle. These have been around for decades, but have not been that popular. These blank check companies were created for the sole purpose of acquiring a private company and enabling it to go public using the funds raised during the IPO of the SPAC.
Forgive me if I’m the only one who thought this was eerily reminiscent of the 1920’s stock market mania.
Host: Victor Menasce
email: podcast@victorjm.com
Dr. Tom Burns is based in Austin Texas as one of the principals of Presario Ventures a private equity firm that specializes in construction of new apartments. On today's show we are talking about the current macro economic environment and how it's affecting new development projects.
To connect with Tom, visit Rich.Life or email him directly at tom@richdoctor.com. For those in the medical profession get a copy of his book "Why Doctors Don't Get Rich".
Host: Victor Menasce
email: podcast@victorjm.com
Today's show is an excerpt from the 2023 annual goal setting workshop. In this segment, we're talking about how to transition a goal into something tangible by putting a concrete plan behind it. Planning can be a daunting process. But it doesn't have to be. If you follow a few simple steps to avoid the largest planning mistakes, you can create the core a solid plan that you can execute.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a deeper look at what is happening in the world of short term rentals.
This industry has become so developed that there are specialists in virtually every aspect of short term rentals. There are products designed to automate so many aspects of owning and managing a short tern rental.
There are tools to manage help you integrate the calendars and portals associated with multiple booking systems, whether it’s AirBnB, VRBO, Booking.com, Home away or Expedia. These systems don’t talk to each other. So if a client books your property using Expedia, then all the other platforms need to be aware of the change in availability. There are tools to do that.
Many people whose homes were underwater in the wake of the GFC were based in Phoenix or Mesa or Scottsdale,
There are currently over 7500 rental listings in Maricopa county. That’s in addition to the 23,000 for sale listings. The sale listings represent 4.5 months of inventory and the average days on market was 56 days in November 2022.
There are 27 municipalities in Maricopa county. Based on this simple but very crude analysis I can confidently say that there are many thousands upon thousands of empty homes available in the Phoenix area in the middle of January for short term rental. That’s in addition to the 7500 rental listings and the 23,000 sale listings.
Let me get this straight. This is the time of year when the snow birds leave the cold and go south to places like Phoenix and Vegas and Florida to spend the winter. This is supposed to be the peak season for that market.
I’ve been saying for more than a year that I believe the short term rental market is getting overheated.
As always, real estate is hyper local. What’s true in Phoenix may not apply in Aspen or Raleigh North Carolina.
Analysis of the short term rental market in the Phoenix area shows that 65% of listings had less than 90 days of occupancy throughout the year. I may not know the specifics of these properties. But I can tell you with confidence that occupancy of less than 25% is not going to be enough to provide positive cash flow. I don’t care what you think the nightly rate is. Only 111% of properties had occupancy between 50% and 75%. Only 3% had occupancy above 75%. When I owned a portfolio of short term rentals on the edge of Banff National Park, our annual occupancy was near 80% throughout the pandemic. I always felt that 80% was a good number. But as I look at the statistics across multliple markets, I’m seeing that 80% was an outlier and definitely not the norm.
For this reason, I’m expecting to see a surge of second homes on the market, and eventually a wave of defaults on these properties. Many of these properties were secured with loans at below 3%. If forced to renew those loans today, they would be above 7%. These rates will put downward pressure on prices for sale.
Host: Victor Menasce
email: podcast@victorjm.com
As real estate investors we are often conditioned to focus on rates of return as the primary criteria for investment.
The past year has clearly adjusted investor expectations across the board.
So far the stock market is down 25% this year. The bond market has been a traditional safe haven. There is no safety to be found in the bond market either.
Our own criteria for investing has been steady for much of the past decade. Our aim has always been to create enough value that we can design an interim exit upon completion of the project. That means refinancing into permanent financing to recover the initial investment including the equity investment. The problem with that model is that the rise in interest rates has made all of these project debt coverage limited such that there is no path to a full cash-out refinance. The loan to value ratio for a refinance would have been at 75%. But today you would be lucky to refinance at 55%-60% LTV. That means tying up a lot of equity in a project for the long term which fundamentally changes the IRR and the rate of return to investors. Projects under these criteria would no longer meet our investment criteria. Many real estate investors and developers in North America have similar criteria. If you can design a project that allows you to pull your initial investment out within a year or two at the front of the project, then even a modest cash flow looks like infinite return once you have your money back.
Rising interest rates have attracted funds into short term government treasuries like US Treasuries, British Gilts, Canadian Bonds.
Many international investors are experiencing much higher yield in their home markets, but against the backdrop of falling currency valuations. For example, investors in Ecuador can earn 8.5% on their money. Venezuela can get 57.5% on their money. Turkey’s central bank rate is 9%, down from 14% earlier in the year. But the inflation rate in Turkey is running at 88% on an annual basis. The business owner can make enormous profits on a nominal basis. The question is, what are those profits in real terms? Who can really say when the ground is constantly shifting beneath your feet.
What about in Ghana where the deposit rate in bank accounts have been very steady at 7.625% for all of this year. Commercial lending rates have been pretty steady near 20%. But inflation has mushroomed from 13.9% at the start of the year to over 50.3% at the end of the year.
Business owners in all those countries and more are increasingly looking to opportunities in the UK, the US, and Canada. They are not looking for high returns. They are looking for safety.
They’re fine with five percent, or three percent, or even zero percent return on their money. Why? Because it’s not -50.3% or -88% or -15%.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about global debt and the multiple exit strategies from that debt.
Every stream of cash flow must have an exit strategy. When you go to the grocery store and put your groceries on your credit card, the institution who issued the card is lending you money. By the way, I don’t recommend you do this. The path to repaying that loan for most people is their employment income. If you’re being responsible with managing your debt, and have planned it out carefully, then you have a viable exit path of retiring that debt. Even though your groceries are going to cost you a bit more than they should, you can still buy your groceries.
All debt is a claim on future income flows.
The critical decision is to ensure you have debt that will self-liquidate. You have to be able to point to that consistent income stream that will take care of the debt without un-natural interventions and refinance activities. If you don’t have a dedicated income stream to repay the loan, then you’re taking from another income stream to service the debt.
As we go into an economic cycle where liquidity is going to reduce, debt is going to become more difficult to secure. This is because the quality of the collateral is going be become more and more suspect.
The exit from a loan can happen in one of five different ways.
- The loan gets paid down to zero and is fully liquidated
- The asset providing the loan collateral is sold and the loan gets paid off.
- The loan gets refinanced into a new loan, often for a larger amount.
- The loan gets modified and then liquidated or refinanced. A loan modification is different from a refinance in that it usually involves a partial write down or softening of the loan terms.
- The loan defaults and gets written off as a bad debt.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about one of the latest proposals to come from the securities and exchange commission. The proposed new rules which are outlined in a 490 page document that was circulating for comment since last year.
Somehow in the middle of the pandemic capturing headlines, this story seemed to fly below the radar.
Under the new rules, registered companies, that is, public companies would be required to make climate risk disclosures as part of the regular reporting to investors.
Let’s be clear. This proposal is one of the worst examples of bureaucratic overreach I’ve seen in a long time.
I’m going to quote directly from the draft rule.
The proposed rules would require information about a registrant’s climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition. The required information about climate-related risks would also include disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks. In addition, under the proposed rules, certain climate-related financial metrics would be required in a registrant’s audited financial statements.
The SEC in their 490 page document says that companies need to disclose the climate related risks and their greenhouse gas emissions for their own company and their entire supply chain.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about changes in Aging Services. The senior housing category is one of the hottest areas of real estate investing. Unlike regular housing that is just bricks and mortar, senior housing is a service offering built on a real estate platform.
A recent workshop hosted by Health Dimensions identified 9 areas for aging services evolution in the upcoming year. On today’s show we’re going to look at a handful of these areas. Later in the week, we will be looking at additional areas.
Host: Victor Menasce
email: podcast@victorjm.com
Tom Staub is based in Austin Texas where he is involved in large scale land development in outskirts of the city. These master planned communities offer features that are not found very often in typical suburban neighborhoods. To learn more, visit redoakvc.com.
Host: Victor Menasce
email: podcast@victorjm.com
Kevin May is the founder and CEO of Land Hub (www.landhub.com). His company specializes in land and only land. On today's show we are talking about how marketing land is different from other asset classes.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about inversions of all kinds. We have an interest rate inversion. That’s when short term rates are higher than long term rates. That’s the market signalling that they believe an economic slowdown is upon us and that central bankers will have little choice but to lower rates when the realization of economic contraction becomes apparent.
Higher interest rates have impacted returns in the stock market. They have caused prices to fall in the bond market which has devalued virtually all of the debt that has been issued in the past decade.
The real story is that the path to improved returns relies on timing a transient effect.
What investors really want to happen is for good quality investments to drop precipitously in value in the short terms. Those good quality investments will do well over the medium and long term. So the drop in value represents an opportunity for an entry point that will offer outsized returns.
It’s really as if the market is asking for a repeat of the GFC. The vultures can then swoop in and pick over the carcasses of these good quality, but slightly damaged assets.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are dissecting the latest rate 0.5% federal funds rate increase announced Wednesday by Jerome Powell, chair of the Federal Reserve.
We have become conditioned to believe that the Fed, acting as the central bank for the world’s reserve currency holds disproportionate power in the monetary system, and indeed in the global financial system.
Printing of money is inflationary, and the banks themselves print a lot of money. In many ways, the private sector prints more money than the Fed. That over-supply of money is actually the cause of inflation. So the question is whether interest rates and reducing the Fed’s balance sheet will be enough to reduce inflation. Price stability is the Fed’s objective.
The fact is, the US government is still spending well above its means. In fact the deficit is $250B a month.
As interest rates increase, so too does the deficit, despite all the rhetoric about wanting to stamp out inflation,
Today’s show is probably going to go down in history as one of the most important shows ever published on this podcast. That sounds like a bold statement. But the more I look at our global financial system, and out global monetary system, I’m increasingly convinced that there are so many time bombs out there, another financial crisis is inevitable. The only thing I can’t tell you is which pin will actually pop the balloon.
On today’s show we are talking about how the Fed, the all powerful Fed, is actually a minor player in the global financial system. In fact, the Fed is so far behind what’s happening in the financial world, that they are relegated to the role of janitor cleaning up the mess. When you’re at the grocery store and you hear the announcement calling for a cleanup in aisle 4, that’s the Fed. The jar of pickles has already smashed and the only thing to do is to clean up the mess.
Last week we reported on a story that came to light in the quarterly report of the Bank of International Settlements.
If you remember, the BIS reported 97T in off-balance sheet foreign exchange, currency exchange and Forward derivatives.
Because these are derivatives, they represent a contingent liability that theoretically have a low probability of triggering. According to GAAP, low probability contingent liabilities are not to be disclosed in the financial statements on the balance sheet.
We did experience a problem in 2007 and 2008 with another bunch of derivatives that were similarly off balance sheet.
We’re going to look at off-balance sheet practices because, just like 2007, just like Enron, these practices can be used to hide liabilities. Sometimes this obfuscation is legitimate, and in other cases like Enron, it’s outright fraud. Then there is a whole bunch that are in the grey zone.
I’m going to go out on a limb and state categorically that the next financial bomb to go off will come from an off-balance sheet derivative exploding.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we're coming to you live from the 2023 annual goal setting workshop. These few minutes extracted from 2.5 days will give you a sense for the factors that enable effective goal setting.
Host: Victor Menasce
email: Podcast@victorjm.com
On today’s show we are repeating words that have not been heard for nearly a decade. In the wake of the GFC, short sales, underwater mortgages were pervasive in some markets and made up a significant percentage of market activity.
Well according to a recent report from Black Knight, About 270,000 homebuyers who bought during the red-hot housing market this year already owe more than their house is worth. These market conditions are being compared with 2008 very regularly. It’s been nearly a decade since we heard the phrase short sale. It’s been nearly a decade since the term underwater mortgage was used frequently in a sentence.
Many of the same playbook techniques that were used in the wake of the GFC are now being dusted off. We won’t know how pervasive the damage to the housing market will be as a result of these interest rate increases.
Host: Victor Menasce
email: podcast@victorjm.com
Today's episode was recorded on-location at the Renault Winery in southern New Jersey. Josh and his wife Melanie rescued this storied property out of bankruptcy four years ago with a tentative mission of extracting value from a distressed asset. Fast forward four years, a pandemic, and an economic cycle and this property has been transformed into a legacy project befitting its 150 year history. On today's show we're talking about the journey that Josh has taken the organization, and the property to deliver an experience that is extraordinary.
To connect with Josh visit renaultwinery.com or the investment arm at accountableequity.com
Host: Victor Menasce
email: podcast@victorjm.com
Eric Weiss is a world renowned executive chef and sommelier. He has served as food and wine consultant to the white house for 15 years, trained the staff at major properties all over the world. To connect with Eric, visit servicearts-inc.com
Host: Victor Menasce'
email: podcast@victorjm.com
On today’s show we are talking about what impacting labor markets and how that can affect real estate.
In the food and beverage industry we’re seeing a massive shortage of workers. The question is, where did they all go? We saw in the most recent statistics for the past month a trend that has been underway for much of the past six months. In November, the US enterprise employment report shows that 263,000 new jobs were created and that unemployment remains at a low 3.7%. A large percentage of jobs hired were in the travel, leisure and hospitality industry.
What does that mean?
It means hotel staff, restaurant staff, retail staff, flight attendants have been hired in record numbers.
While we have seen major job losses in the tech sector at with 10,000 google, 11,000 at Facebook, Twitter of course, and major layoffs at Amazon.
In the past week alone some of the more notable announcements have been layoffs of 400 people at reverse mortgage funding, 1500 at H&M, Doordash, 1250, Global Foundries 800, Wireless Advocate, up to 1800 inside Costco Wholesale stores, Morgan Stanley, 1600, Blue Apron Holdings, 10% of corporate workforce. Intel corporation let go 300, 100 at corporate headquarters and 200 in Santa Clara. Hewlett Packard is expected to lay off 4000-6000.
I’ve only listed a handful of more notable layoff announcements in the past week. There are certainly many, many more. But frankly, having me list layoffs for five minutes will get boring. I think you get the point. So are these people showing up as unemployed? Well no, they’re not. Almost all of these will have received a severance package and they won’t appear on the unemployment rolls for months.
Many of the job losses are higher paying corporate jobs. Some of the job losses are in retail with H&M and Wireless Advocate. But most are high paying white collar jobs. The hiring is also happening in ways for restaurants to stay in business.
We spoke with a hotel owner this week who said that applicants for the role of dishwasher in the hotel kitchen were asking for $30 per hour.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about off-balance sheet financing. Increasingly, borrowers are seeking ways to hide their liabilities so as to appear financially stronger than they are in reality.
This represents a growing risk to the economy and financial as our debt laden world sinks deeper into the abyss of rising interest rates.
Let’s start with whether a liability needs to be disclosed on the balance sheet in the company financials or not. If not, why not?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about what is happening in the world of energy. There are so many moving parts right now that it’s hard to make sense of what is going to happen to energy prices, and oil prices in particular.
On today’s show we are asking the question as to whether investing in a REIT is the same as investing in real estate?
In order to answer that question we first need to unpack and define what a reit is .
A real estate investment trust is a publicly traded fund that is generally registered to be traded on a public exchange like the nyse or the Toronto stock exchange, and subject to a number of regulatory limits.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the money supply and whether we would be better off with a fixed money supply such as when the dollar was on the gold standard.
In a fixed money supply the economy cannot grow. In fact it is possible for commerce to be inhibited by a lack of money in the system.
Back in the 1970’s the Italian Lira was dropping in value. That meant that the coins in circulation were worth more than the face value of the coins. You could melt down the coins and sell the metal for more than the coins were worth. Coins virtually disappeared from circulation. In those days if you went to the grocery store and, you could expect to receive change in the form of postage stamps which had a face value. When the postal service could not keep up with the demand for stamps, the shop keeper would go to the shelf and grab a big bag of caramels or hard candies and give you a handful of candies as change. It was not very long before you could go to the store and buy a bunch of bananas and pay for it with postage stamps or caramels instead of paper currency or coins.
If you think about it, you don’t want commerce to be inhibited by a lack of coins in circulation. By extension a fixed money supply can result in an inefficient distribution of monetary resources. If I start hoarding cash and keep that cash out of circulation, I can create the exact same conditions as the coin shortage in its in the 1970’s. You don’t need to melt the coins to create the problem. Just keep the coins in a jar in your kitchen cupboard and you will create the same problem.
We have been programmed to think that government has a monopoly on the money supply. But as we will see, we have always had elasticity in the money supply. Let’s imagine a simple example where you or I can create money out of thin air.
Let’s imagine that you are an artist and you paint a painting using about $20 in materials between the paint and canvas. You put the painting on display at the local gallery and a customer comes in and agrees to buy your painting for $1,000. It’s a lovely painting and $1,000 seems like a fair price. But the customer confesses has they are a bit short on cash so you agree to extend credit to the customer. The customer gives you $100 in cash and you write up a loan agreement for $900.
Did you in fact increase the money supply by $900? That $900 now appears on your balance sheet as an asset and there is $900 as a liability on the customer’s balance sheet.
Government was not a party to the transaction. The central bank had nothing to do with the creation of the $900 that funded the painting.
Ok, so we have established that we don’t need government to print money. Money can be loaned into existence.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show, I'm coming to you live on location at the Norris Ranch on the outskirts of Colorado Springs. This is an extraordinary property that formed part of a much larger cattle ranch, originally close to 20,000 acres.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we are speaking with Joel Freidland. Joel is based in Chicago where he specializes in industrial space in the Chicago. Today's show is packed with statistics on the market and how to helps if you have multiple sources for capital. You can connect with Joel at britproperties.com.
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA episode.
Tony asks “I love your show and I wake up to your voice every morning. So much quality in a few minutes. My question is, given the changing market conditions, have you had to change your investment criteria? If so, how have you changed them? Are you willing to accept a lower rate of return?”
Host: Victor Menasce
email: podcast@victorjm.com
Our book this month is called “Iceland’s Secret “ by Jared Bibler.
Jared is an American who worked on Wall Street as an analyst and trader. In 2004 after several trips to Iceland, he fell in love with the country and eventually sought employment in finance. His first role in Iceland was developing software that was used for asset management. He was finding the software development role to be a back room effort with little human interaction.
After this, Jared took a role at one of the three large banks in Iceland on their trading desk. It was a role for which he was well suited. His Wall Street experience had prepared him well. Never mind the fact that almost everything was being done in excel spreadsheets when proper databases simply did not exist.
Along the way Jared observed financial irregularities which he dutifully reported to his superiors and was given assurances that they were being handled. But the evidence showed that they were being swept under the rug. These days in Iceland were heady days. Private jets flew in and out of the island on a regular basis. Construction cranes were everywhere. The number of new units far exceeded any reasonable demand from the local population.
Jared quit his job at the bank days before the entire financial system collapsed.
The Icelandic crisis of 2008 was an earthquake that levelled the financial fortunes of a whole country.
Jared found a job at the regulator and was put to work investigating what happened. In a temporary cubicle erected in the old lunch room at the regulator, he set about trying to find out what happened, who did it, and who needed to pay for it.
Six months into his new job, trading patterns for one of the banks on a single day showed what appeared to be unlimited buying from a single trader who bought all the shares that day in one of Iceland’s banks. It was a market with only one buyer. Further investigation showed the same pattern the day before and the week before and then the month before that. The pattern of unlimited buying had been going on for years and it involved not one bank, but all three of Iceland’s largest banks.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about what an inverted yield curve means for real estate investors.
The yield curve is making headlines. The Wall Street Journal reports that the yield curve has not been this inverted since 1981 and 1981’s recession pushed unemployment rates even higher than the 2008 financial crisis.
A yield curve inversion happens when short term rates are higher than long term rates. This is a bit like an atmospheric inversion. In an atmospheric inversion, the temperature at the ground is lower than the temperature up in the clouds. It can happen, just not very often. It’s not natural.
Just like the atmospheric inversion, interest rates will normalize eventually. One of two things will happen. Long term rates will rise to match short term rates, or short term rates will fall to match long term rates. We don’t know what the future will bring.
Host: Victor Menasce
email: podcast@victorjm.com
How close is the US to a debt trap? We are all accustomed to thinking in linear terms. But exponential growth is all around us. Exponential systems grow without bound until they collapse.
What is an exponential? It’s anything with compound growth. The only way for the collapse to be averted is for inflation to devalue the debt faster than the interest can accumulate. That makes it possible to issue more debt as a solution to lack of funds to service the debt.
On yesterday’s show we talked about the prototype of the US version of central bank digital currency. The digital dollar.
What if the roll-out of the digital dollar wallets also comes with it, the “investment” in US government treasuries?
It’s almost the perfect solution to the liquidity shortage. If there are not enough buyers for US Treasuries, why not offer those who have a digital wallet an incentive to keep their assets in a higher yielding account at the Fed? That higher yielding account to be backed by US Treasuries. How perfect. Instead of treasuries being purchased exclusively by rich investors, and a small number of institutional buyer, why not eliminate the friction?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about central bank digital currency. This is the so-called digital dollar.
Crypto currency started as a way to get transaction costs down to zero to enable micro-transactions online without the clearing costs of a Visa or Mastercard transaction. Now governments want to get into the game. There is a lot of opposition to digital currency from a privacy standpoint and rightly so. On today’s show we are going to examine some of the issues with programmable currency.
There is no question that governments have to respond to crypto currency or risk losing control of the money system. China has already implemented their system and the UK prime minister came out and declared his goal of making the UK the leading clearing house for settlement of digital transactions on a global basis.
The US is now playing catch-up instead of leading the world. With the US dollar as the world reserve currency, the US cannot afford to lose its lead when it comes to monetary matters.
The NY Fed is currently undergoing a trial of a prototype digital currency system and the trial is involving payment processors like Visa and Mastercard along with a few hand picked financial institutions like JP Morgen Chase.
Programmable money could be very powerful. That means extraordinary convenience, but also extraordinary risk.
Digital programmable currency is definitely in our future. As citizens, we could experience this as a futuristic dream, or a dystopian nightmare. Now is the time to start lobbying politicians for a privacy bill of rights surrounding financial transactions. Without those protections in place, governments the world over will use digital currency as a way to monitor compliance with preferred behaviours and ultimately to engineer society, culture, and politics.
Host: Victor Menasce
email: podcast@victorjm.com
Keith is a repeat guest on the show. He hails all the way from Anchorage Alaska where he invests, and he is also the host of the Get Rich Education Podcast. He has several resources to share with you at getricheducation.com/course.
Host: Victor Menasce email: podcast@victorjm.com
Derek Dombeck is based in Wisconsin where he is the principal at a private lender specializing in residential investment and small multi-family properties. His foray into lending was an accidental path that resulted from the financial crisis that started in 2007. Derek also has two books he'd like to share with you. To connect with him and to get a copy of his books, send an email to derek@bestreifunding.com
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about affordable housing initiatives. It’s no secret that housing in many major cities like Toronto, San Francisco, Vancouver, Los Angeles is increasingly difficult to find, and highly unaffordable.
In a free market, this is a function of supply and demand. Many of these cities have struggled with allowing new supply as a result of bureaucratic gridlock.
Some homeowners have added supply to the market by adding secondary suites, or accessory dwelling units. These are often a basement apartment in climates where homes have basements. Sometimes, it’s an attic apartment, or a rear apartment. In each case, the accessory dwelling must share the utilities from the main house.
A few years ago, a new classification of accessory dwelling unit was introduced. These coach houses, sometimes called a backyard tiny home, are separate dwellings that just like their attached counterparts must take their utilities from the main house.
The province of Ontario just introduced legislation that would allow for two accessory dwelling units on each R1 residential property for a total of three. You could have a basement dwelling unit or attic apartment attached to the main house, and a separate carriage home all on the same property.
This idea is that these units are among the more affordable units in the market and they would contribute supply at the affordable end of the spectrum. Allowing builders a free hand to add supply at the top end of the market does add supply, but doesn’t directly address affordability.
Accessory dwellings suffer from a few problems.
- There are not that many of them and many lenders and appraisers have a hard time valuing them. There are countless stories of lenders undervaluing them and requiring owners to bring a lot more cash to the table when funding these improvements.
- The cost of these units are often disproportionately high when compared with the cost of new construction to high volume builders.
Coach houses are not new. But they are new in the zoning code in many cities as they try to create incentives for affordable housing.
The latest startup venture to make headlines is called Samara and was started by Joe Gebbia, co-founder of AirBnb.
The Samara product is a modular build that can be assembled quickly on the site of a tiny backyard home. The focus initially is California.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about how to choose a property management company. Property managers come in all shapes and sizes.
There are those who have strong corporate systems and processes and are excellent at managing hundreds of units on a single property.
Then there are those who specialize in managing third party properties but do not dedicate staff to a single property. A single property manager might have a dozen or more clients.
There are those property managers who aim to maximize their income on the back of the property owner. These property managers charge extra for everything. You want a site visit? that’s extra. You want the property manager to call a handyman to repair a ceiling fan? There’s a fee on top of the handyman conducting the repair. You want the property manager to call for trash pickup when the bins are full, there’s a fee for that too.
Then there are the class of property managers who think and act like a property owner. They realize that the path to maximizing their own revenue is by maximizing the income for the property owner.
Sadly these types of property managers are in the minority.
Host: Victor Menasce
email: podcast@victorjm.com
Can the silent tax solve our national debt problem? What is this silent tax I’m referring to? It’s inflation of course. The debasement of the currency has been used for centuries as a way of creating budgetary flexibility when governments have political desires that exceed the piggy bank.
The ability to tax the population is limited by the tolerance of the population. Tax too little and you have ineffective government and anarchy. Tax too much and you have social unrest, and eventually violent revolution.
Let’s imagine for a moment that the government collects about 20% of GDP in tax. I’m just making up that number.
The model used by economists is often too simplistic to be an accurate reflection of the real world.
All of these economic models suffer from the same problem. They assume a fixed point of reference that is in reality never fixed.
Is your point of reference US dollars? Is your point of reference ounces of gold? How about 1BR apartments? Maybe you count your wealth in terms of bitcoin, or tons of copper, or barrels of oil.
What if your point of reference is Japanese Yen? Did your wealth grow or shrink this year?
If your local economy imports almost all its food and energy, as is the case in Japan, what do international exchange rates have to say about price inflation?
Some people ask how many cans of soup you can buy with your paycheck?
That might be your point of reference. Can you feed your family? That would be a good point of reference, at least until the manufacturer changes the size of a can of soup and you no longer have a reliable point of reference .
As real estate investors, should we measure our balance sheet in dollars? Maybe we should measure the number of two bedroom apartments we own outright? Would that be a more meaningful point of reference?
At the start of WW2, the US had a debt to GDP ratio of about 40% and by end of the second world war, the US had a debt to GDP ratio of nearly 120%. All of this happened in approximately 3 years. From 1960 until 1995, the US had deficit spending every year except one. Yet somehow, the debt to GDP ratio went from 120% in 1946 to 35% in the early 1980’s. What caused that reduction in debt? That’s right. It was inflation. Inflation devalues the purchasing power of those on fixed income, it devalues cash savings and it devalues debt.
So did the debt increase from 1945 until the early 1980’s, or did it decrease? I guess that all depends on your point of reference.
Host: Victor Menasce
email: podcast@victorjm.com
A lot has been said in very general terms about the looming energy crisis in Europe. Those of us who live in North America whether it’s the US or Canada simply have a hard time comprehending the scope of what is happening in Europe.
I have family who live in Europe and on today’s show I’m going to put a personal connection to an energy bill.
Most large apartment buildings in Italy have centralized heating that turns on at the end of November for the season. The fuel for heating is usually natural gas. When we are talking about electricity usage, we are talking about lights, refrigeration, the hot water heater, and any small appliances like toaster and microwave. Cooking in Europe is overwhelmingly done with gas.
The largest draw in the warmer summer months is air conditioning. During the rest of the year, the biggest consumers of electricity would be refrigeration and the hot water heater.
Europeans don’t usually use a dryer to dry their clothes. They typically hang them to dry on racks.
We are not talking about excessive electricity usage. The bill comes every two months. My cousin who lives in Rome recently received a bill for 1,400 Euros for a two month period. Rates had not even peaked yet in September although they did increase again in October.
Well, Italy’s regulator approved a 59% increase in electricity rates for the 4th quarter.
Some residents in Italy are making the decision to reduce their living space in their apartments and to only heat a single room for the winter.
We have a hard time comprehending the lifestyle choices that virtually every citizen in Europe is going to face this year. Personal consumption and spending is going to be dramatically impacted. Discretionary spending is going to be way down this winter. That means less travel, fewer meals out in restaurants, less new clothing, and so on. The prediction of recession in Europe this winter is an easy one to make. Many businesses will experience a drop in revenue, which will mean job losses, and further economic hardship. The impact will not be isolated to Europe. In our global world it never is.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re going to ask a few questions about the spectacular collapse of FTX. A lot has been written about FTX in the past week. My goal is not to repeat what you might have already extracted from the Wall Street Journal, Bloomberg, or any of a host of outlets that have covered the story.
The investigations will turn up numerous revelations in the coming weeks and months.
One consequence that I see arising from this debacle could be an entirely new regulatory regime. We have heard the White House talk about the need to regulate Crypto currencies.
What happened at FTX was not a failure of regulation. If the reports I’m reading are true, they committed Fraud. Fraud is fraud.
It’s like saying funds need more oversight because of Madoff, and companies need more oversight because of Enron, and the US dollar can’t be trusted because many of these frauds were denominated in US dollars.
Bernie Madoff conducted the largest Ponzi scheme in history with losses in the tens of billions.
Theranos CEO Elizabeth Holmes was just sentenced to a bit more than 11 years in prison for her role in the fraud at the blood testing equipment company. You don’t hear the White House saying that there needs to be more oversight of blood testing equipment. That’s because blood testing was not the essential cause of the fraud. The company falsified results and misled investors.
These frauds will increasingly be used as a pretext for a US government backed digital dollar where each transaction happens under the watchful eye of government. The loss of civil liberty that results from this kind of government invasion of privacy will have profound social consequences. Do you find it acceptable that every time you hire a private limousine, order a beer at a pub, or purchase birth control at the drug store, all of these transactions are on display and subject to government scrutiny?
We don’t need more regulation as a result of FTX. Every time a major fraud is committed, there is this chorus of demands for more regulation, for greater government oversight. We don’t need laws on top of laws on top of laws. Enforcement of the laws we have is the key. Madoff Securities LLC was investigated at least eight times over a 16-year period by the U.S. Securities and Exchange Commission.
Yet somehow they failed to catch what was a flagrant Ponzi scheme and a fraud on a massive scale.
George Ross is a repeat guest on the show. On today's show George is offering his perspective on Donald's bid for President. He knows the man perhaps as well as anyone having worked with him for over 47 years.
Host: Victor Menasce
email: podcast@victorjm.com
Steve Rozenberg is based in Houston Texas where he flies 777 for a major airline, and he also invests in real estate. We discussed the mindset of a pilot and how it makes him a better real estate investor. You can learn more or connect with Steve at SteveRozernberg.com.
Host: Victor Menasce
email: podcast@victorjm.com
Folks there are about six weeks remaining in 2022. I believe goal setting is a critical component of success. If you have not started planning for next year, you are probably going to start the year without a solid plan. If you’re planning in January, then you missed the starting gun. Every year, our team takes three days to plan the upcoming year. This year, we will be doing that work from December 9-11. It will be a face to face session held over those three days in Ottawa Canada. We have only a few number seats available for those who would like to participate in our planning process. This would be a seat at the table with our team as we develop our individual and personal goals for 2023. If you would like to spend these three days with us, send an email to goals@victorjm.com and we will send you information on how you can participate and work on your own goals following what we believe is a very solid process for goal setting. Send an email to goals@victorjm.com
On yesterday’s show we talked about the importance of learning from the GFC. It seems that the root causes of the financial crisis have been glossed over and not properly dealt with.
Ben Bernanke who was the Fed chairman at the time has gone on record and said that the scope of the subprime mortgage loans was not sufficient to explain the magnitude of financial destruction that took place during those years. He also went on to say that the Fed lacked the tools to effectively deal with the crisis.
The Fed stepped in to bail out some institutions. But the crisis did not appear first in the US. The cascade of dominoes started overseas and did not involve any US entities at first.
The first inkling of a problem happened on Aug 7, 2007 when trading in three funds based in Lichtenstein virtually stopped. These were money market funds, denominated in US dollars, trading in London and securitized a basket of assets that were considered to be high quality, on par with US Treasuries in terms of quality.
A credit bubble appeared in both the United States and Europe. This tells us that our primary explanation for the credit bubble should focus on factors common to both regions. Home prices in the UK, Ireland, Spain, France, Italy and Australia experienced similar effects to the United States. But as we discussed on yesterday’s show, Canadian real estate was largely unaffected by the financial crisis. So why is that? What was different?
Large financial firms failed in Iceland, Spain, Germany, and the United Kingdom, among others. Not all of these firms bet solely on U.S. housing assets, and
they operated in different regulatory and supervisory regimes than U.S. commercial and investment banks. In many cases these European systems have stricter regulation than the United States, and still they faced financial firm failures similar to those in the United States.
Did the Financial Crisis Inquiry Commission really get to the root cause of the crisis?
Hoat: Victor Menasce
email: podcast@victorjm.com
I live in Ottawa Canada, and I invest primarily in the US. This fact has given me a unique perspective on markets. I started my investing career by investing in my home market. I made my first investment in 2006. After that, you might remember there was this little event that started about a year later. The Great Financial Crisis had a global impact in many ways.
I saw the opportunity to deploy capital into markets that had seen a dramatic fall in price. I was still new at investing in real estate and I made a lot of mistakes in those days. Fortunately, prices were so depressed, that the market would eventually wallpaper over those mistakes. There were some powerful lessons from the GFC. What were they? Were the lessons global in nature or local?
Not everywhere was impacted equally. Some markets suffered more than others.
In fact, when real estate prices went down in Miami Dade County by 45.5% from 2008 to 2012, prices in Ottawa Canada went up 32.7% over that exact same five year period. In 2008 when prices in Miami fell by 28% in a single year, prices in Ottawa Canada went up 6.3%.
So the question is why was Ottawa Canada so stable throughout the great financial crisis?
If the GFC was all about subprime mortgages in the US, then why was the first bank to signal a problem on August 9, 2007, BNP Paribas, the second largest bank in Europe the one to come forward with a press release stating that they were having trouble valuing three funds that were on its balance sheet.
The first financial institution to collapse was Northern Rock, a bank based in the UK. But wait, this was a US problem wasn’t it? What does Europe have to do with it?
On tomorrow’s show we’re going to talk about what the GFC was truly about.
On today’s show we are talking about inflation and whether higher interest rates will even help.
When you listen to Fed chairman Powell speak, he spends a lot of time talking about inflation expectations. In fact, he mentions inflation expectations as being anchored in virtually every speech.
So what is this anchoring of expectations and does it even matter?
There was a paper published in May of this year by two economists who work for the Fed. Jae Sim and David Ratner wrote a paper entitled, “Who Killed the Phillips Curve? A Murder Mystery”. In order to understand the paper we first need to describe the Phillips curve.
The Phillips curve has longstanding model of inflation and employment, and perhaps the central model underpinning the Fed’s monetary policy. The experience in the last decade puts in doubt the stability and usefulness of the Phillips curve in predicting inflation and conducting monetary policy. First, the Phillips curve failed to predict the stable inflation seen in the aftermath of the Global Financial Crisis.
In my opinion, there could be several explanations for this.
- There is real inflation happening underneath the covers which is not being captured in the CPI metrics. That’s one possibility.
- The model for predicting the way inflation and the economy works is fundamentally flawed and doesn’t track the real behaviour of the economy.
A growing number of economists and commentators of different backgrounds have gone so far as to declare the death of the Phillips curve.
On today’s show we are asking the question “Are we in an orderly market?”
Market volatility can be a function of exaggerated trading activity. In extreme cases, it can be the result of market manipulation.
In the world of real estate, there are those market experts who are saying that we need to look at the long term averages. If you look far enough back you can construct a rolling average. This thinking says that over the long term, home prices cannot exceed an average price to income ratio. Things will return to normal.
If a household spends more than 30% of their household income on the cost of housing, then the cost is not sustainable. It’s not normal.
But if that were true, house prices in cities like San Francisco, San Diego, Toronto, Vancouver, New York should not be anywhere near the levels that have been present in those markets for decades.
There must be something else in play.
These experts will tell you that eventually, over time, the prices will revert to the mean. Prices might fall below the mean for a period of time, then exceed the mean for a period of time. But eventually, prices always revert to the mean.
I personally take issue with mean reversion theory. The problem with averages is that very few properties actually represent the average.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the importance of hiring the best engineers for your real estate development projects.
Engineering is not just about technical knowhow. Engineering designs are multi-dimensional. When you fix one variable, you can often break another. When problems arise in engineering it’s almost always a result of an incorrect scope, or an incorrect assumption or understanding of the design requirements.
When we hire engineers, the results are often mixed. There have been some painful lessons along the way. In all cases, we hired competent engineers. They understood the specifications and requirements of the city. At least we think they did.
So how do you evaluate an engineer? It’s a little like evaluating a pilot. If the pilot still has their license, there is almost nothing to distinguish one pilot from another. Virtually any pilot who is active hasn’t crashed. One pilot won’t get you there faster than another. The aircrafts pretty much fly at the same speed.
So too is the world of civil engineering. At least that’s how it appears from a distance.
Host: Victor Menasce
email: podcast@victorjm.com
All the way from Nashville, Tennessee, Leslie Anne Morris specializes in short term rentals in the Smokey Mountains. Today's show is a deeper examination of the laws of supply and demand and how choosing the best location is vitally important when it comes to short term rentals. Her website is JoshsCabins.com or InvestInthesmokeymountains.com where you can book a short term rental or learn more about investing in the area.
Host: Victor Menasce
email: podcast@victorjm.com
Matt Picheny is based in NYC where he started his career as a starving actor in live theatre. His journey into real estate investing is unique and inspiring. You can learn more and connect with Matt at picheny.com. Matt is also the author of the newly released book "Backstage Guide to Real Estate Investing".
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA episode (Ask Me Anything). Today's question comes from Collins
I’m the owner of a nice property on one of the main highways in an area of south Alabama that has sustained steady growth over the last 30 years.
In fact, the city recently placed a year long moratorium on development. I saw this time as an opportunity to achieve favorable zoning and have my land packaged for any would be purchasers or developers.
I am a “land dealer” in the IRS’s eyes so I’m taxed at ordinary business income levels on land sales… furthermore, a 1031 exchange is also not applicable to the circumstances on this property, and I’d rather not take the tax hit on an outright sale.
The restaurant chain, Five Guys, purchased a failed Pizza Hut not far from this location and they have signed a longterm ground lease with favorable payments and escalation clauses for the landowner.
Which leads me to my question…rather than going through the top 10 google results… how can I identify companies who may be inclined to enter a ground lease with me as the owner so I can create a stream of longterm recurring revenue? (LRR)
Big fan of the podcast!
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about what’s happening in the world of construction. The supply chain shortages of the pandemic are continuing as China pursues it’s zero Covid policy. New lockdowns have been ordered in Guangzhou, one of China’s largest manufacturing hubs. So much of what we buy is sourced from manufacturing in China.
Shortages are not only about materials. It’s also about labor.
There is no doubt that some trades people are busy with a backlog that stretches 18 months or more. These projects were committed in 2020.
But increasingly, I’m finding that lead times for both material and labour have shrunk to pre-pandemic levels.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the impact of construction cost saving on rental affordability.
The narrative among tenant’s rights groups is that landlords are out there just getting rich and exploiting tenants. Developers need to be building more affordable housing.
In Canada, the government in the province of Ontario has finally been recognizing that the cost of housing is linked to a few inexorable facts.
- The cost of rental housing is partly a function of supply and demand. If there are too many impediments to increasing supply, then the price of rental housing will go up.
- The cost of new construction that meets the building code is determined by the cost of materials, the price of labor, the cost of land, and the fees that governments charge developers for the infrastructure to support those projects.
Cities have been progressively implementing more and more bureaucracy when it comes to new development applications.
My home city of Ottawa requires a long list of deliverables. They require almost the entire project to be detailed. The city requires the envelope of the building. But not only that, they require shadow studies, wind studies, noise studies, traffic studies, utilities reports, school loading, public transit impact, bicycle storage ratios, parking ratios, amenities, meeting affordability criteria. The list goes on and on.
But it’s not just my home city. Many other cities with affordability issues have implemented similar hurdles.
Municipal impact fees can vary widely and they directly affect affordability. These fees are designed to pay for infrastructure like roads, schools, utilities, that are forced to expand as a result of growth. Our development company recently went through a detailed analysis of the relationship between development cost and rent. The results were surprising and so I thought they would be worth sharing with you, the listening audience.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about a shadow market that appears in the grey zone of the real estate market.
When a condo developer launches a new building, you often get speculators who make purchase commitments on newly released units. They believe these first units released into the market are the lowest price point and that all future sales for those units will be at higher prices. It is true, that many condo developers do indeed have a price escalation built into their pricing model. Buying at the very start of a project on the first of sales guarantees you the lowest price. In a world where prices only increase and never decrease, this is a great strategy.
Fast forward to 2022. There are a number of properties that are newly under construction, where the buyers purchased in 2018, 2019, and 2020. The market conditions have clearly changed and interest rates are much higher than at any time in the past decade. These speculative buyers had no intention of ever having to close on the purchase of these new units.
This is uncharted territory for buyers who never expected to qualify for a mortgage on these properties.
Host: Victor Menasce
email: podcast@victorjm.com
We are reading the headlines about layoffs that have started across corporate America. Twitter made headlines this week. But then anything involving Elon is making headlines these days. Even Facebook parent Meta is expected to lay off thousands after hiring nearly 42,000 employees since the start of the pandemic. Free cash flow at the company has fallen 98% in recent months.
This is not limited to the US of course. It’s happening globally. If the economy is so strong as we are being led to believe, then why are these layoffs happening? Is it going to get worse? If so, why would it get worse? Is it falling revenues? The answer is yes, partly. But that’s not the entire story.
On today’s show I’m going to show you a leading indicator that can help you anticipate layoffs. The evidence is plainly and publicly available for anyone to see, if you choose to look. There are literally thousands of proof points. But we only need to look at a couple to establish the connection.
What is not making headlines are commercial bank balance sheets. These balance sheets are actually sitting on much higher risk than we can readily see.
Credit is the engine of business. Almost nothing happens in business today without credit. Inventory purchases are made with lines of credit. Construction of new manufacturing capacity in order to re-shore manufacturing to protect against global geopolitical risk requires credit.
With the near doubling of interest rates, the cost of that debt service will be crushing for business. Lines of credit are variable rate. Large capital projects are often funded by bond offerings. But bond offerings in a rising interest rate environment are difficult to underwrite and even more difficult to fund.
Host: Victor Menasce
email: podcast@victorjm.com
There was a time when calling distressed home owners was a great way to find investment properties. Our guest this week runs a virtual assistant business with over 1,000 employees. On today's show we are talking about what makes for a successful hire when working with remote talent. To connect with Bob, definitely visit revaglobal.com.
Mike Ayala now calls Austin Texas home. He and his partner Andrew Lanoie own, manage and operate a sizeable portfolio of mobile home parks. To learn more and to connect with Mike, check out the Investing for Freedom podcast.
Host: Victor Menasce
podcast@victorjm.com
Today is another AMA episode (Ask Me Anything). William from Northern California asks,
I find myself coming across more development opportunities and I'm needing some better "back of the envelope" criteria to help separate the wheat from the chaff. Almost every deal requires spending some amount of pre-development money to bring the project into better focus. However, at some point you should be able to come to a go/no-go decision based on the numbers, after which you would kick the deal or renegotiate the price. hat does your "back of the envelope" criteria look like in order for you to proceed with a development project?
Do you look at the projected:
- Equity Multiple?
- IRR?
- COC return?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at the casualties of the latest Fed policy moves.
On Wednesday of this week, the Federal reserve announced another 75 basis point increase at the FOMC meeting. These meetings happen every 6 weeks. The next one will be in the middle of December.
We continue to experience a yield curve inversion where the short term interest rates are higher than long term interest rates. That inversion is even more pronounced than it has been in recent memory.
There is no question that the rates make a difference. Demand is being suppressed in numerous markets, even though the cause of inflation is the result of a decade of printing money, and most recently the showering of money across the population during the pandemic.
But inflation is not a US only issue. It’s a problem in Canada, the UK, Australia, Japan, Germany. It’s a global issue and it’s the result of the combination of supply shocks with the printing of money at an unprecedented level.
The question is, what are other countries doing? How are other central banks using monetary policy to combat inflation?
In my mind, Fed policy is disconnected from the global perspective. We need to listen to what Chairman Powell is say. The Fed’s governors are going to continue to raise interest rates until they see sustained tangible economic slowdown in demand. The floggings will continue until morale improves.
On today’s show we are taking a look at some leading economic indicators that may give us some clues as to what is happening in our economy, ahead of the Federal Reserve’s meeting this week. I’m a huge believer in the law of supply and demand.
In a world of short term business visibility, just in time manufacturing, it’s difficult to see supply gluts form until they’re upon you.
Supply gluts can happen quickly, and before you know it, you have an excess of inventory. The opposite can happen too. We saw shortages appear during the pandemic. These long supply chains are fragile.
Host: Victor Menasce
email: podcast@victorjm.com
Our book this month comes from Nassim Nicholas Taleb. He’s famous for his book “The Black Swan”. This book reshaped our culture’s thinking around rare but completely predictable events. His book, moved an entire generation of business leaders, and the title of his book The Black Swan has become part of the business vernacular. In fact, I would venture to say that most people who use the phrase Black Swan don’t really know what it means.
So when Nicholas Taleb wrote another book, I knew it would be well researched and well written.
The phrase “skin in the game” is one we have often heard but rarely stopped to truly dissect. It is the backbone of risk management, but it’s also an astonishingly rich worldview that, as Taleb shows in this book, applies to all aspects of our lives.
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA episode (Ask Me Anything). Paul from Northern Florida asks.
I would like to first thank you for your work on your show. Your broad range of subjects and guest has made this a daily must listen to program for me. So thank you again.
I would like to ask your thoughts on product research for new residential construction projects. While I am not a developer nor do I want to become one I am in the process of selling my business and I want to do a couple of projects. I would like to build a couple of new homes for my children and myself.
Over the years I have seen various products and systems used on shows such as This Old House and such. But when you would go to the local retail building supply retailers (Home Depot/Lowes) they would not have any knowledge of the systems. I have come to figure out sometime it is a regional product only. I live in Florida where temperatures are regularly 35c or 95*s and the humidity is very high. We have our own regional issues (hurricane wind speed requirements, mold issues, termites and such) and I know I am going to study building codes and practices to build something correctly. I have tried to gather information at non-retail building supply businesses as well as national construction trade shows but have been met with “you are not a licensed contractor” and we only deal with them. I have tried reaching out to the local regional builders association but they just refer you to a member that just wants to build the house and tend to lean on what is best and I assume profitable for their business. I can find basic stuff like ICF vs poured concrete, zip wrap vs traditional, various forms of insulating and thing like that but I want to dig further and see which is the most beneficial or how a new product may be a better fit. Since I am doing this for myself I don’t want to base things on cost alone or what is the cheap and easy way of doing things.
I will work with a licensed architect for the actual design and engineering aspects but I would like to do research and educate myself reasonably before I just randomly ask them for ideas. However, since I am not in the trade I am not sure where to find new product information or ideas that may be beneficial to my projects other than just searching on the internet for new building ideas. I would appreciate your thoughts and opinion.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show George and I are discussing maintaining flexibility in negotiation. At the end, George offers some advice on how to negotiate with politicians. We are so blessed to have George's advice. At 94 years of age, one of the wisest men I know.
Host: Victor Menasce
email: podcast@victorjm.com
Michael Coffee is with Stacksource.com, a fintech company that provides an automated and streamlined borrowing process for commercial real estate projects. The service matches the borrower with the lender that offers the best terms to the borrower's needs. You can find Michael on LinkedIn, or connect with him directly at michael.coffee@stacksource.com
Host: Victor Menasce
email: podcast@victorjm.com
Our world is very confusing at the moment. Whatever thesis you create, you can find the evidence to support your point of view.
Even a review of the headlines in the Wall Street Journal on a single day can be contradictory.
Apple reports record revenue. Amazon forecasts falling sales and the shares dropped 12% in after hours trading
US Gross Domestic product up 2.6% in the third quarter. Boeing reports a loss. Google reports falling advertising revenue. Facebook reports falling advertising revenue, Fedex reports falling revenue and suspends guidance.
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA episode (Ask Me Anything). Mike asks,
Hi Victor, I listen to your great podcast a lot and I notice that you and your company do a lot of development, which obviously effects and impacts the worlds environment that we all share. You seem like a very practical and good person, so I’m wondering what do you and your company do to make sure that your projects are sustainable and are not just hurting the environment?
Host: Victor Menasce
email: podcast@victorjm.com
As real estate investors we are very sensitive to interest rates.
Rates for permanent loans are indexed to the yield on the 10 year treasury and in some cases on the yield for the 30 year treasury.
But for short term financing like bridge financing or construction loans, these loans are indexed historically to LIBOR. It’s common to see a construction loan with a rate of LIBOR + 5.75% with a floor of, say, 8.5%. So what is this thing called LIBOR and why is it used to set rates for commercial bridge loans?
For more than 40 years, the London Interbank Offered Rate—commonly known as Libor—was a key benchmark for setting the interest rates charged on adjustable-rate loans, mortgages and corporate debt.
The important aspect of SOFR is that theoretically, it will be more difficult to manipulate because unlike the LIBOR, there’s extensive trading in the Treasury repo market. SOFR is based on data from observable transactions rather than on estimated borrowing rates, as is sometimes the case with LIBOR. That makes SOFR much more difficult to manipulate.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about a major development project that we have underway. We closed yesterday on a parcel of land consisting of 1783 acres on the edge of Colorado Springs. This property was part of a much larger property called the Norris Ranch that originally was close to 20,000 acres. There is a story behind Mr. Norris and the Norris Ranch. We purchased the property from Mr. Steve Norris, son of Bob Norris who died in 2019 at the age of 90. Bob Norris was a cattle rancher. Through an unlikely turn of events, Mr. Norris had an elephant on his ranch. Bob Norris was famous as the Marlboro Man, the public face of Marlboro cigarettes.
This project would not have been possible without forging a partnership with some very prominent families in the local Colorado Springs market. We have a strong vision for this project as an extension and growth of the Colorado Springs community.
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA episode (Ask Me Anything). Davindra asks
I am a long time listener of your RE espresso podcast and have thoroughly enjoyed your well thought out and efficiently delivered content. Time permitting, I had a question on the most recent podcast about potential scenarios for the economy. In the second scenario, you said, bonds would have a significant "run up" as interest rates stabilize. Can you explain what this means? I've been trying to wrap my head around the bond market but there are so many moving parts that affect it, and affect different maturation levels differently as well. If you can suggest a good primer on the bond market, that would be greatly appreciated.
Host: Victor Menasce
email: podcast@victorjm.com
Allison Williams is a lender with walkerdunlop.com. On today's show we are talking about financing for multi-family apartment assets. Today's points are timely and top of mind for many investors.
host: Victor Menasce
email: podcast@victorjm.com
Mikkel Thorup is based in Panama City, Panama where he helps people find a plan B residency in favorable locations. Many countries have programs that enable accelerated residency with investment in the country. You can learn more and connect with Mikkel at expatmoney.com. He is going to be hosting a five day conference in early November which you can attend for free. To learn more about the summit, visit expatmoneysummit.com
Host: Victor Menasce
email: podcast@victorjm.com
For the past several weeks we have been focusing on macro economic conditions. It seems that all markets, the stock market, the bond market, and real estate are being dominated by the macro environment.
Traditionally, we think of real estate as hyper local, and it is. A piece of waterfront property is going to be valued differently than the same acreage two blocks inland. But still the macro environment is dominating.
There are facilities available for banks that are in trouble to ask the Federal Reserve for help. These short term facilities are accessed through the discount window at the Fed and the what is called the REPO market. But REPO transactions are publicly visible. Banks are reluctant to use the facility because they’re effectively signalling to the world that they’re in difficulty.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about three different scenarios of central bank monetary policy and how that could impact the world of stocks, bonds, and real estate. I believe it’s important for investors to be able to have intelligent conversations with each other.
We are all investors. I know very few investors that invest exclusively in a single asset class. The question then becomes what is the most attractive investment to make in the coming market conditions.
Everyone is in search of safety in an environment where there is seemingly no safety to be found.
There is no safety to be found in the stock market. We are heading into a recession and the PE ratios are not showing enough of a difference in yield compared with interest bearing notes like treasuries. That says to me that the stock market still has a long way to go down now that yield in the bond market is rising.
The bond market has more downside in front of it as interest rates increase.
Real Estate has more downside in front of it as interest rates increase. We will see cap rates expand and we will start to see distressed assets appear on the market.
Keeping cash in the bank is a losing proposition with inflation running above 8.5%.
So what do you do? Where do you put your money?
Putting money in hard assets is usually a a good hedge against inflation. That includes real estate and certain commodities. But if we are heading into an economic downturn, commodity prices are likely to fall as demand falls. We probably won’t see the bottom in prices for gold, copper, silver for a while.
As interest rates rise, commodities like gold have not moved up much because they don’t pay a rate of interest.
It’s a real dilemma of where to place your money. In the absence of a safe alternative, more and more people are just dumping cash into treasuries. They yield is still negative compared with inflation, but it’s less negative than cash in the bank.
So let’s talk about three different scenarios.
In case #1: Inflation stays elevated and the Federal Reserve continues its unrelenting upward pressure on interest rates for the next 24 months.
In case #2: Inflation starts to show signs of moderating and the Fed decides to hold the line on rate increases to bring a sense of stability to money markets.
In case #3, We enter a steep economic contraction and the Fed pivots from QT to QE. They’re back to printing money and the treasury starts again with fiscal stimulus.
All three of these scenarios are highly plausible. If you wanted to argue for any one of these futures, you could find the evidence in the world to support your thesis. What actually happens will be the result of the complex web of headwinds and tailwinds.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at the the impact of the falling Euro on US real estate. A recent report by brokerage house Marcus and Millichap looks specifically at this question.
The Euro has fallen by more than 15% this year reaching a more than 20 year low in September.
Governments make decisions to be stimulative to the economy, or constrictive. In the US, the Federal Reserve is supposed to operate independently from the elected government and its mandate is to bring maximum employment to the nation and to maintain price stability. Since the start of the year, the Fed has increased interest rates five times so far this year and is on track to increase rates two more times before the end of the year. The Federal Funds overnight rate is currently between 3.25%-3.5%. But we expect that those rates will increase to more than 4.25% before the end of the year. In fact, with the latest inflation numbers, I would not be surprised to see interest rates hit 5% by the end of the year.
In contrast, Europe is in an economic crisis and an energy crisis. Having a war in your neighborhood casts a huge shadow over the entire continent, to say nothing of the human tragedy that the war is bringing to millions of people.
Governments in Europe have been trying to compensate for the higher energy costs by bringing fiscal stimulus to the population.
There are widespread protests in France over high energy costs. The French government has pledged 100B Euros to help ordinary citizens combat high energy prices.
This means deficit spending and increased debt levels in Europe. But when you look at monetary policy, the European central bank has only raised rates to 0.75%. So if you assume that within the term of the monetary instrument, say, the next 90 days, or even the next 365 days, you assume that neither the US, nor the European central bank will default on its notes, The US T-Bills are more attractive than their European counterparts. All other things being equal, there will be a flight of capital out of European bonds into US T-Bills. It’s that interest rate differential that is causing global investment dollars to flow out of Europe and into the US. The exchange rate between the currencies is merely a reflection of the supply demand situation.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking another look energy markets and how energy costs affect the price of virtually everything.
I’m completely in favour of the idea of transitioning from burning oil, gas, biomass and coal to cleaner forms of energy. In the US there are still over 1,000 active coal mines. This is approximately half of the number of coal mines that were in operation in the year 2000.
If you go back 15 years, western Europe produced more natural gas on the continent than was imported from Russia in 2021. They outlawed fracking, in order to help the environment and now find themselves having to buy natural gas from the US at a much higher price where fracking is the primary source of the natural gas. The energy security situation in Europe is a function of a series of policy decisions made over the past two decades, more than it’s the fault of Russia or any one nation.
Last week the OPEC+ cartel announced a 2M barrel per day reduction in production quotas. The reaction in the US was swift. Prices at the gas pump jumped almost immediately.
Many in the media have misinterpreted the announcement to mean that there will be a reduction of 2M barrels per day of oil production. The OPEC members have done little to correct the public perception.
The truth is, that the announcement was a reduction in production quotas, not production volumes. Even before the announcement, the OPEC+ member countries were producing 3.5M barrels per day less than the production quota.
So in theory, a reduction in a quota would have no impact at all on the actual amount of oil being exported into world markets by OPEC+. You have to remember that OPEC+ includes Russia.
Host: Victor Menasce
email: podcast@victorjm.com
Real Estate values are often driven by influx of job and influx of population. On today’s show we’re talking about the semiconductor industry and the $52B injection of funds that are wrapped up in the CHIPS act. This 1054 page document is filled with goodies for the tech industry. The recent export ban on advanced semiconductor manufacturing equipment and technology is aimed at slowing China’s ascent as a global technology player. The geopolitical instability and growing confrontation with China leaves the US vulnerable.
The CHIPS act has triggered several new announcements including facilities to be built by TSMC, Samsung, Micron, and Intel.
Samsung plans to build nine factories in Taylor Texas, and two in Austin. Micron has announced a new memory chip facility in the outskirts of Syracuse NY.
TSMC has plans for up to six factories at a location in Arizona.
Each of these facilities represent a lot of new jobs. These factories operate round the clock. But at the same time, I look at the capacity of each fab and ask the simple question, “Who will consume that many chips?”
Host: Victor Menasce
email: podcast@victorjm.com
Amy Johnson is a partner with Y Street Capital and is based in Salt Lake City, Utah where she specializes in development in multiple cities across the US. On today's show we are talking about the relationship between the developer and city officials and how the reality differs from the utopian view of simply following the planning and zoning rules.
Host: Victor Menasce
email: podcast@victorjm.com
Today's show is a live talk given earlier this week at the Ottawa Real Estate Investors Organization. We are talking about what you need to do as an investor to prepare for what's coming.
Host: Victor Menasce
email: podcast@victorjm.com
Buckle up folks. I know this is starting to sound repetitive. But interest rates are heading higher, whether we like it or not.
Our industry is incredibly interest rate sensitive, and the cost of capital is going higher.
There are several inflation metrics published by various government departments. There is the consumer price index, the producer price index, the core CPI metric which is basically CPI without the more volatile food and energy components.
The Federal Reserve looks at the Core CPI metric. Many had hoped, myself included, for a reduction in core CPI this month. Well according to the latest data from the bureau of labor and statistics, core CPI was up in September to an annual rate of 6.6% in September, up from a rate of 6.3% in August. This is the largest increase in Core CPI since August 1982.
When economists speak about inflation they make a distinction between cyclical inflation versus secular inflation. You will hear these terms cyclical inflation and secular inflation. So what do these terms mean? If you’re not an economist, or haven’t studies it, you probably have no idea what they’re talking about.
Cyclical inflation is temporary, it’s something that will sort itself out without a lot of government intervention. There are many examples throughout history of inflationary periods that resolved themselves with no central bank intervention. That’s because there was no central bank in existence in the 1800’s.
Secular inflation on the other hand is is basically creeping inflation that continues to persist over a long period of time. It becomes deeply entrenched in the system, the culture and the norms of the economy.
I personally would make the argument that because our CPI metrics have been manipulated to such a degree that even though the BLS has been claiming that inflation has been at or near their 2% target for much of the past decade, no amount of inflation is good. We have indeed been experiencing secular inflation for the past 100 years. To suggest otherwise is not being honest.
On today’s show we are talking about the market for sovereign debt and what it means for investors.
We have a severe interest rate inversion where short term interest rates are higher than long term rates. The obvious question is “Why is that a problem?”
If you think about what a market interest rate says to investors, it communicates a perception of risk.
In a natural environment it stands to reason that you could predict the next three months or the next year with greater certainty than you could predict the next 10 years or the next 30 years.
If that is the case, why are short term interest rates higher than long term rates?
Why is the market rate for the one year Tbill 4.28% whereas the yield on the 10 treasury is at 3.9% and the 30 year treasury is at 3.8%?
What does that tell us about market sentiment? It says that there is much higher perceived risk in the short term than in the long term.
On today’s show we are going to look at signs of contagion that are not making headlines, but I believe you need to be paying attention to.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we are looking at what is happening in the office market in San Francisco as a proxy for what might be happening elsewhere in the asset class. Spoiler alert: It's not pretty.
Host: Victor Menasce
email: podcast@victorjm.com
The velocity of money tends to decline in highly indebted economies.
The UK is currently one of those places that tried to use debt financing to restimulate economic growth. Instead, all they got was burnt toast, and you can’t unburn toast once it’s burnt.
Let’s step through a chronology of what has happened in the past two weeks in the UK and break down why this could have a cascade effect into global financial markets.
The UK has suffered a number of significant economic shocks. It started with Brexit and the flight of European headquarters to other parts of continental Europe. Then came the pandemic, then the supply chain disruptions, followed by a worker shortage, a food shortage, and now an energy shortage. It’s clear that despite very high price inflation, the UK is in economic contraction. Normally in a recession, the government wants to stimulate economic growth. But wait, stimulative policies can be inflationary and we already have too much inflation.
The government of Liz Truss proposed a series of stimulative tax cuts on the 23rd of September. After the financial markets reacted negatively to the announcement resulting in a drop in the value of the British pound, and an increase in the yield on the sovereign debt called the gilt. The finance minister doubled down on the announcement and the prime minister went on national TV on over the weekend to say that the government would not change course on the tax cuts.
The 180 degree about face came the very next day.
The volatility in the bond market is truly unprecedented in the UK and is on par with the volatility we saw in the US in 2008.
Host: Victor Menasce
email: podcast@victorjm.com
When you design a building, the goal is often to ensure you are meeting the building code. After all, the building code was developed with health and safety has primary goals.
In the world of senior housing, the building code is not nearly enough.
On today’s show we’re talking about how each second of every day in the United States, an older adult has a fall. So, for each step we take, someone aged 65 or older is falling. Currently, falls cost our health system $50 billion a year.
Host: Victor Menasce
email: podcast@victorjm.com
Patrick Soukup is an investor based in Fort Collins Colorado where he has a brokerage, a property management practice and a portfolio of single family and 1-4 unit rentals. Today's conversation is a refreshing take on how to generate cash flow using dollar cost averaging and conservative underwriting. To connect with Patrick you can find him on Instagram using his name.
Host: Victor Menasce
email: podcast@victorjm.com
Billy Keels is based in Barcelona, Spain where he lives with his family. Originally from the US, he continues to invest in the US. Billy is the host of the Going Long podcast. You can connect with Billy and learn more at firstgencp.com
Host: Victor Menasce
email: podcast@victorjm.com
The inflation metric is dominating today’s central bank policy which in turn is dominating the cost of capital as interest rates increase. The Federal Reserve is committed to raising interest rates until they suppress demand enough to see core CPI metrics average 2%, their stated target.
On yesterday’s show we discussed how the health care component of the CPI metric is calculated.
On today’s show we are talking about another fudge in the calculation of CPI. It partially answers the question of how Paul Volcker managed to tame inflation in the early 1980’s by pushing interest rates to 18%.
Prior to 1983, the true monthly cost of housing included the cost of capital in the measurement of inflation. If you have a variable interest rate loan on your house, and if interest rates rise, then your monthly housing cost rises with it.
This cost increase was reflected in the consumer price index. It all makes sense. Paul Volcker is largely credited with conquering inflation by doing the difficult thing and raising interest rates to 18%. It triggered a deep recession and caused massive economic pain and bankruptcies throughout the economy.
But if pushing interest rates to 18% was going to create inflationary pressures, how could higher interest rate actually reduce inflation? I’m glad you asked. It’s simple. Change the measurement to exclude that pesky interest rate from the consumer price index and now the problem is solved.
But what about the 65.5% of the people who live in owner occupied housing? How are their costs being reflected in CPI?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at the inflation index that is being used to determine interest rate policy. We live in a strange time right now where the Fed considers economic growth to be against their objective of taming inflation.
What’s normally good is bad, and what is bad is good.
The largest component of the Core CPI metric that the Federal Reserve uses to measure inflation is housing. It accounts for 40% of the Core CPI metric. On tomorrow’s show we are going to look deeper into the housing component of the Core CPI metric.
On today’s show we are going to look at the healthcare component which makes up 11% of the Core CPI metric.
We are used to getting newly updated inflation metrics from the bureau of labor and statistics every month for the previous month. But the healthcare numbers are only updated one a year. This happens every year in October. For the rest of the year, the healthcare component of CPI remains unchanged for reasons that I will explain in the next couple of minutes.
Now Healthcare makes up about 19.7% of the economy in the US. But somehow it is only reflected as 11 of the core CPI or a little over 8% of the full consumer price index. Part of the reason for that is that healthcare costs have tended to increase faster than many other segments of the economy. For that reason, there is a widely held belief that the weighting in the CPI is reduced in order to reduce the impact of those cost increases in the inflation metrics.
But healthcare is difficult to measure. Many people don’t access healthcare in the same way that they might buy milk at the grocery store.
There is a major insurance component in any healthcare discussion. But an insurance premium is not the true cost of health care. Each year, insurance premiums go up according to a prescribed formula. This is where insurance companies get their revenue and the only way to gauge the costs is to subtract the costs paid by the insurance companies and look at the retained earnings at the end of the year. This sounds convoluted, and it is. They are measuring the profit earned by insurance companies as a proxy for health care costs.
https://www.bls.gov/cpi/factsheets/medical-care.htm
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re taking a look at the aftermath of Hurricane Ian, a week after the event cut a path of destruction across the middle of Florida. I have spoken with several people I know in Florida who own property there and have recounted their experience in that harrowing day.
Beyond the immediate aftermath of the storm, and helping those who have lost their homes, the biggest question is on the future of the market post hurricane. Florida is no stranger to hurricanes.
There was Hurricane Andrew in 1992 which caused major damage and flooding in Miami and the Florida keys. That storm caused $25B in damage in those dollars. We learned a lot about critical infrastructure from that storm. The local telephone operators stored the battery banks which would keep the phone network running in the event of a power outage in the basement of the buildings. The flooding from the hurricane, flooded the basement and shorted out the batteries causing an even more widespread phone outage than merely the loss of electricity.
I used to own properties in Pinellas county and I spent several days shopping for property in Fort Myers and Cape Coral.
In the end I chose not to purchase. So many of the homes were too close to sea level for my comfort. The idea of a canal behind your home with your boat parked out back seemed appealing. But the reality of many of these properties is the network of man made canals is so extensive that you might have to navigate a few miles of canal before getting to the open waters of the Gulf. You would think that people would shy away from buying in hurricane prone areas. Did Miami lose population in the wake of Hurricane Andrew? Not at all. Back in 1992, Miami had a population of 4.1M people. Today, Miami has a population of 6.2M people. The city has added another 1.9M people in the 30 years since the hurricane. In fact, the population grew even in the year immediately following the hurricane.
How many of the homes in Florida are truly second homes is a topic of debate. According to state statistics, about 1.1M homes or about 14% of homes are second homes. I believe the real number is actually much higher. If you lived part of your working life in NY state or Mass which have very high state taxes, there is a large incentive to declare Florida as your principal residence and your vacation home is in NY or Connecticut or Mass.
There is no doubt that the real number of vacation homes in Florida is much higher than the official number. When I visit Palm Beach where my Aunt and Uncle used to have a second home, very few apartments have lights on in the evenings. That suggests to me that these apartments are vacant for a large percentage of the year.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about staff retention and how to address the staffing shortage that is plaguing many industries. Nowhere is worker burnout being felt more acutely than in the healthcare arena.
Whether we are talking about acute care that you would see in a hospital setting, or more chronic care like you would see in assisted living skilled nursing, worker burnout is a major issue.
Many of you know that I’m a part owner in a senior living and memory care development. Senior care is a service business, that happens to be built on a real estate platform.
The folks at Senior Housing News just published the results of a survey on workforce perspectives on the industry. Spoiler alert: People are burned out!
Host: Victor Menasce
email: podcast@victorjm.com
The Grand Banks is a continental shelf off the coast of Newfoundland that has centuries of abundant fishing in its history.
The cold Labrador current mixes with the warm water of the Gulf Stream. The water depth varies between 50 feet and 300 feet, very shallow considering the distance from shore. The mixing of these two ocean currents and the shape of the bottom lifts nutrients to the surface. The result was one of the most fertile fish habitats in the world. There was cod, swordfish, haddock, lobster, I grew up on the east coast of Canada and while I’m not into fishing, nor is anyone in my family, the port was only a few blocks from my house and we would go down to the port to look at the boats on a regular basis.
We regularly saw ships from Portugal, Japan, and Norway to name just a few. The local politics were often dominated by debate over fishing quotas. The argument was that it was unfair for Canadian vessels to be subject to quotas while ships in international waters could fish as much as they wanted. Eventually that debate was put to rest when the entire ecosystem collapsed and there were no more fish. There was an outright ban on fishing and now nearly 30 years later, the fish population is still a fraction of the population in the 1990’s.
Last month we had an entire week dedicated to the question of food security. On today’s show we are going to look at one of the richest ocean ecosystems on the planet.
The Galápagos Islands sit virtually on the equator and have been a territory of Ecuador since 1837. Despite being on the equator, the cold water Humboldt current brings nutrients for the Antarctic region up the coast of South America.
Combatting illegal fishing is a problem in the Galapagos as well.
In 2020 during the height of the pandemic, there were over 340 Chinese fishing vessels fishing in the region of the Galápagos Islands. Those 340 vessels logged more than 73,000 hours fishing in those waters.
The protected waters of the Galapagos are home to more than 20,000 species of wildlife.
Ships crossing the Pacific from China are not little rowboats with a single fishing rod. No these industrial ships are designed to harvest the ocean indiscriminately on a large scale.
The first warning signs of rapidly declining fish stocks in the Grand Banks of Newfoundland happened only about three years before the complete collapse of the fishery.
Host: Victor Menasce
email: podcast@victorjm.com
Kathy Fettke hosts the Real Wealth Show and Real Estate News and a new show on Bigger Pockets called "On the Market". She is co-owner of the Real Wealth Network and has been investing in portfolios of homes for more than 20 years. To connect with Kathy, visit realwealth.com.
Host: Victor Menasce
email: podcast@victorjm.com
Our book this month is by Peter Thiel, founder of Paypal, Silicon Valley entrepreneur and venture capitalist. For a business leader to have success in one company is rare, but multiple home runs is truly rarified air. So I had to read his book and learn from him.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the crisis of confidence in an entire nation.
The UK might go down in history as a case study in how not to handle a period of financial turmoil.
I am not one to dive into the political fray and point fingers at politicians. But this one was so egregious that it needs to serve as a cautionary tale to investors about what can happen when ignorant people are put in positions of power. That power can be put to enormous good when aimed in the proper direction. Equally, that power can truly mess things up when a politician or a public official does the wrong thing.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about how to prepare for a major storm event and equally important what to do in the aftermath of the storm even if you do not experience storm damage or flooding.
As we are recording today’s show, hurricane Ian has ravaged the western part of Cuba and is scheduled to make landfall on the west coast of Florida. About 2.5 million people are under mandatory evacuation order.
In hurricane prone areas, the cost of insurance can be a major issue for both residential as well as commercial property owners. We own property in Louisiana located 19 miles inland from the coast where we experienced two major hurricanes in 2020 only five weeks apart. We also have experience from Hurricane Harvey which flooded major parts of Houston.
These storms taught us a lot about storm preparation.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we're talking about a looming crisis in pensions that has not been reported widely in the mainstream media.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we're talking about how monetary policy is dominating business fundamentals.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show George demonstrates his extraordinary prowess in negotiation when speaking about controlling the pace of negotiation.
Host: Victor Menasce
email: podcast@victorjm.com
Bronson Hill lives in Los Angeles but invests in multi family apartments in Jacksonville, Florida. On today's show we're talking about the current market conditions and why he chose the Jacksonville market. You can connect with Bronson at bronsonequity.com where he has a free e-book entitled "How to use inflation to your advantage."
On today’s show we’re talking about how to rethink construction projects that might have made sense a year ago, but today’s higher cost, higher interest rate environment are looking questionable.
Costs are up across the board. The cost of capital has risen faster than the cost of construction and the compounding of those two makes for a massive increase in the cost of any new construction. Buyers are being cost conscious.
Purchase prices have already started falling and are likely to continue a downward trajectory for a while. Where they will bottom is unknown.
So if you have a project that looks like the costs are spiralling out of control, what do you do? Do you simply hang on and wait for better days?
That’s one option. But there might be additional hidden value that can be extracted. Maybe now is the time to consider value engineering the project. Value engineering is more than just being cheap, substituting less expensive components. It’s an exercise in making decisions that respect the original design sensibility, but actually save money.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the cost of home ownership and how the consumer price index fails to properly account for housing cost in its metrics.
Agency loans make up 70% of the mortgage market in the United States. These are typically underwritten by Fannie Mae or Freddie Mac as the guarantor of the high ratio loan.
The average down payment is 5%, as compared with the minimum down payment of 3% for the FHA 203B loan. These loans have a 30 year amortization. A year ago, borrowers were paying 3.25% for that loan. Today that loan is pricing at over 6.25%.
At the start of the pandemic the average house price in the US was $374,500. At the end of 2Q 2022, the median house price was $525,000.
So the average loan size increased by 40% from 2019 to today. But in that time, we also have a dramatic increase in interest rates. When you combine the two together, even if we neglect the other increasing costs, just the cost of capital has gone up by 112%.
A mortgage payment on a $374 home with 5% down is $1,548 per month. That same house having gone up 40% in the past two years at today’s 6% interest rate would cost $3,275 per month.
Now housing makes up 40% of the consumer price index. I honestly can’t figure out how the government is computing the housing contribution to the CPI. Rent is part of it, and home purchase price is part of it.
The true monthly cost of ownership has gone up by 112% in two years, and the increase in interest rates is responsible for more than half of that increase in cost. The rise in interest rates is supposed to reduce inflation, and here it looks like the opposite.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about the link between risk and reward. The conversation started over a lunchtime discussion in Dallas.
We’ve all heard the phrase “high risk, high reward”. The opposite side of that coin is low risk low reward.
On today’s show I’m here to tell you that there is no real link between risk and reward. The phrase which has been repeated so many times is utterly false and yet people repeat it like a law of nature.
Risk is risk, and reward is reward.
It starts with the notion of what is a risk.
A risk is anything that is not in your plan. The fact is, that risks can have significant impact, even if their likelihood of occurring is low. If that item is taken into account, and embedded in the plan, then by definition it is not a risk.
If the risks are already visible and the impacts can be quantified, then you can start to attach a risk premium to a plan or a project.
For example, if you have a loan that is secured by a mortgage in first lien position followed by a loan that is secured in second lien position, most would agree that the second lien carries a higher risk of default than the first lien. For that reason, the second lien position lender attaches a risk premium and charges a higher interest rate in exchange for accepting that higher risk. It follows that a borrower with a poor credit score should be charged a higher interest rate than someone with a stellar credit score. The higher interest rate is a risk premium.
The phrase high risk, high reward has its roots in that notion.
But you can’t make the inverse general argument. Nothing says that all loans in first lien position are lower risk than all loans in second lien position.
Host: Victor Menasce
email: podcast@victorjm.com
The National Association of Home Builders Housing Market Index was published on Monday of this week. The NAHB publishes a housing index that is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next six months as well as the traffic of prospective buyers of new homes.
We have seen a steady month over month decline from an index peak of 84 in December 2021 to 46 now in September.
Looking at the housing starts and the sales center traffic provides a forward looking view of the pipeline.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show I’m going to give you a historical perspective on behind the scenes trade that if it occurred as I observed, would have evaded international trade sanctions.
The cold war between NATO countries and the eastern bloc lead by the Soviet Union initiated in the wake of WW2, when it became clear the Stalin, while an ally during the war, was an ideological and military threat to western democracies.
For many years, the embargo on the Soviet Union was quite severe. The embargo on Eastern European countries was less stringent, in hopes of driving a wedge between the Soviet Union and its allies.
At that time, I was a young engineer at Bell Northern Research where I was responsible for the design of the central processing unit of the equipment that routed telephone calls within the phone network. My parent company, Northern Telecom manufactured and sold the telecom equipment that our team designed. We had developed the world’s first fully digital telephone exchange system.
Most of the sales were within North America, but we also had sales of our equipment all over the world. We had a licensee of our equipment in Turkey through a company called Netas Telecommunications. Netas supplied equipment to Turk Telecom which was the operator. But Netas also supplied and installed our equipment to other parts of the middle east.
Back then, it was illegal for under the trade embargo for world’s most advanced telecommunications equipment to be installed in Russia, or any of the Soviet bloc countries.
Host: Victor Menasce
email: podcast@victorjm.com
Billy Brown is based in Nashville where he runs a commercial lending business. But his real passion is golf. On today's show we're talking about the Gold Sanctuary, located at the epicenter of numerous high end membership golf courses.
You can connect with Billy at billybrown.me
Host: Victor Menasce
email: podcast@victorjm.com
Today's show is a live talk from the Secrets of Successful Syndication Conference in Dallas. Today is a case study that focuses on the troubles that investors are facing when transitioning from bridge financing to permanent financing.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about the driver for the value of real estate. Some people will tell you that location is the number one factor influencing the value of real estate. Size and features of the property might be another factor affecting the price of a new home. If we look back at the great financial crisis which started in 2008 and over a five year period decimated real estate, we can learn a number of lessons which would apply to today’s market conditions.
Last year there was the crowd that was arguing that inflation was going to be transitory. That’s been replaced with a variation on that theme. The inflation round of inflation which was caused by the emergence from the pandemic should peak around mid 2022 and then decline back to the 2% we have experienced over the past 25 years. The central bank playbook of the past 25 years appears to be the definition of normal. Whenever there is a problem, the central bank will step in, print some cash, buy some bonds, and all will be good. We just need to wait a bit more and interest rates will drop, the central bank will become stimulative again and we will enjoy another hit of the drug that the economy has become addicted to.
What if that thesis is incorrect? What if inflation was actually being held artificially low over the past 25 years by factors that no longer exist?
We need to understand why inflation was being held so low.
Host: Victor Menasce
email: podcast@victorjm.com
Today's question comes from Marc who asks: "I’m hearing from a few institutional investors that they’re not making any decisions for the next 90 days. Some of the investments they made in 2021 have run into difficulty and the investment committee is gun-shy about making any decisions about new projects in the current environment.
Given this feedback, Would it be unethical for me to discuss the project with other investors at the present time? Should I wait another 90 days for things to stabilize before holding any any investor conversations? Somehow just losing 90 days doesn’t feel like a good plan. What are your thoughts?"
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re taking a look at the effect of rising interest rates on virtually all real estate projects. On today’s show we are going to do some math so that you can see the impact on the underwriting of projects. It will clearly show why so many projects are getting cancelled in the current rising interest rate environment.
These numbers are coming directly out of our own underwriting tools and they are the result of what-if analysis that we have performed on several projects.
The real estate projects we’re looking at have fundamentals that are actually quite good. But we're seeing these interest rate changes and inflation as a math problem.
I’m seeing so many projects being cancelled at the moment as a result of the higher cost of capital.
We are entering a dangerous period. That means that there will be bargains on the horizon if you’re playing offence, and there will be pain on the horizon if you’re playing defence.
Notice that in this discussion, we have not even discussed whether market cap rates change. That’s because they’re irrelevant to the math when you’re debt coverage limited.
We have performed so many of these analyses over the summer that we can almost do the math in our head.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about what manufacturers look for when deciding where to locate manufacturing for their products
This decision usually comes down to four main factors.
- The availability of skilled labor at an acceptable wage.
- A plentiful low cost energy supply.
- A favourable tax structure
- Access to major transportation routes by rail, ship, and highway.
If you eliminate one or more of these four requirements that is enough to disqualify a location for manufacturing.
The latest geopolitical energy crisis as a result of the war in the Ukraine has caused factories in Europe to close. Some will not reopen. Germany has been a manufacturing powerhouse in Western Europe, despite its relatively high labour cost. The labour force is highly skilled with a strong work ethic. Historically Germany has enjoyed relatively low energy rates that have averaged about half those compared with the rest of Western Europe.
We are suffering a global inflationary phenomenon. The cause of this inflation was the global printing of money by central banks the world over.
This period we are experiencing is more analogous to the post war 1945 when the US was moving from war financing to business financing.
We all printed money while fighting the war on the pandemic. Now that the pandemic is over, it’s appropriate to tighten monetary policy
Inflation is the direct result of too much money chasing too few products and commodities. When that happens the price of those commodities gets bid up and that causes the producer price index to rise, the consumer price index to rise, and just about every price index to rise. You couple the money printing with very low interest rates and easy credit, and you get asset price inflation in the stock market, in real estate and even the bond market.
We have a global financial system where politically government don’t actually need to cooperate and often they don’t. But the monetary system does rely on central bank collaboration. If you look back over the period of the pandemic, central banks largely acted in unison. That might have been coincidence, but I believe that the European central bank and the Bank of England and the federal reserve and the bank of Japan were all in communication.
Fast forward to today and we have a major divergence in central bank policy. The federal reserve is tightening monetary policy and raising interest rates while the European central bank is now in a massive stimulus. The ECB had been raising interest rates slowly but in collaboration with the Fed to fight inflation.
Host: Victor Menasce
email: podcast@victorjm.com
This question comes from John who writes:
"I listen to your show all of the time. I have been studying macro economics hard for about 5 years. I feel very well informed and knowledgeable regarding the macro economic picture most of the time, Then I listen to you and I feel like a brand new apprentice. You are one the smartest people I have listened to. And I listen to a lot, including all rich dad advisors.
My question is this. I am a business owner in the United States teaching martial arts, with a primary focus on teaching children ages 5-10 years of age. I have several full time and part time team members. I am looking to expand my operation as we are very busy at our 1 location, to the point where we are busting at the seams. We have received top notch mentoring and they have provided us top notch systems. We have all of our systems down and are able to duplicate them with more locations and provide more opportunity. My concern is the constant attention on recession. I owned the business in 2008 and rode out the last major recession, but I was a business of 3 employees then. Today we are 15. I want to expand but have fears I am doing it at the height of the market, and that when I do pull the trigger the next recession will be close behind and then I won’t be able to pay my bills. This is the only thing keeping me from pulling the trigger and providing more opportunity and more jobs. Should I just go for it knowing that we know how to expand and duplicate our systems, or should I wait for a year and see what happens? I would love to know your thoughts."
Host: Victor Menasce
email: podcast@victorjm.com
Chris is the founder and principal at Harvest Returns, a Fort Worth based venture capital firm that specializes in agricultural investments. The company is an early adopter of new agricultural technologies and they have grown the company to the point where they are investing in advanced production methods that can apply equally in the warehouse environment as in the field. To connect with Chris and to learn more, visit harvestreturns.com
Host: Victor Menasce
email: podcast@victorjm.com
Inaky Strick is based in New Braunfels Texas. But before moving back to Texas, he specialized in selling investment properties in Belize at the amazing Mahogany Bay Village Resort. It was this experience that built both comfort and expertise in international investing. On today's show, we're talking about owning short term rentals in Tulum Mexico. To learn more or to connect with Inaky, connect with him on Instagram at Inaky_Strick.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about the art of negotiating minor zoning variances. Now let’s be clear, I’m not here to tell you that I’m the authority on successfully getting zoning variances. But I have a little experience on the topic and think it could be valuable to talk about some of the nuances.
Let’s be clear, zoning is a legal land use doctrine and like many things that are legal in nature, compliance with the law generally takes precedence over common sense.
Host: Victor Menasce
email: podcast@victorjm.com
Most business owners set goals at the start of each year. You had an intended plan back in January, a fresh start of a new year.
In our company, we do our goal setting in December.
So much has happened in the world in 2022. We had two more waves of the pandemic.
The world watched in horror as Russia invaded the Ukraine and brutalized the population and traumatized the world.
We experienced a runaway inflation, and rising interest rates. Many real estate investors had projects underway that got derailed by the increase in construction prices or higher interest rates or both.
So here we are, coming up against the start of the fourth quarter.
You have 90 days left in the year. Now would be a great time to ask yourself some insightful questions.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we're talking about the dangerous updraft of rising market conditions.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at the auto industry for any clues that might predict future impact in the housing market.
Whenever interest rates rise, we often see the impact in auto repossession six to eight months before we see foreclosures in the housing market.
Foreclosures are a judicial process in most jurisdictions which involves a much longer process than an auto repossession.
When researching this episode, I learned some pretty shocking statistics about the auto industry.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we are taking a look at what's happening to energy prices in Europe. We are very insulated in North America from the energy shock in Europe.
Host: Victor Menasce
email: podcast@victorjm.com
Scott Saunders has been working on 1031 capital gains tax sheltering and is extremely active in influencing the legislative process. To connect with Scott or to learn more, visit 1031exchange.com
host: Victor Menasce
email: podvast@victorjm.com
Paul Moore is the head of Wellings Capital where the company has launched its sixth diversified fund. To learn more, visit wellingscapital.com/resources where you can download white papers covering the different asset classes covered by the Wellings Capital funds.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at what is happening in global foreign exchange markets. It’s no secret that the US dollar has been very strong. This naturally has an impact on countries that have needs for foreign reserves.
The strength of the US dollar makes the cost of imports denominated in US dollars more expensive. It makes exports denominated in US dollars more profitable for local manufacturers.
A few weeks ago we reported on the problems in the European central bank and in the EU in general with sovereign debt starting to suffer a crisis of confidence.
Central banks all over the world are known to intervene and inject liquidity when needed to solve problems for their domestic banks when they run short of reserves, and in some cases foreign reserves.
But when central banks do intervene, like the Federal Reserve has been known to do, it sets off alarms through the global financial markets.
Interventions are an indication of the central bank attempting to fix a problem that has already happened. They’re not being proactive, only reactive.
Those transactions appear on the central bank’s balance sheet for all the world to see.
There is an increasing trend among central banks to perform these interventions in a clandestine manner so as not to cause panic in the financial markets. That means performing the transactions off balance sheet.
Host: Victor Menasce
email: podcast@victorjm.com
Our book this month is "The Intelligent Investor" by Benjamin Graham. This is not a new book. It was first written in 1949 and has been on Warren Buffet's recommended reading list for much of the past decade.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about how conditions are normalizing in the world of construction. After two years of absolute insanity in the world of construction, lead times and inventory seems to be much more sane. One of the contractors I spoke with today recently priced the wood framing for an apartment project at $20 per square foot on a turnkey basis. That’s inclusive of labor and materials. Earlier this summer, similar quotes were coming in at nearly double that amount or about $40 per square foot. Only a few weeks ago I was quoted 14 weeks for glass patio doors. Yesterday I was quoted 5-6 weeks lead time. I can tell you that we are approaching construction projects with a renewed sense of confidence. We are still shopping around for bargains. This is necessary at any point in the economic cycle. But it’s particularly important in today’s environment which has not fully normalized. But in all cases you need to make sure you are ordering products that meet your local building code. For example, some areas don’t allow the framelsss glass railings for balconies. Some products sold online for installation in the electrical system don’t meeting all of the specifications for the local electrical code.
Host: Victor Menasce email: podcast@victorjm.com
On today’s show we are talking about the ways a city can block your project from coming to reality.
Some people believe that once you have the correct zoning for your property, that’s all you need to submit your drawings to the building department for a building permit.
It turns out there are several other conditions that need to be met in addition to the basic zoning.
- Parking ratios
- Traffic load
- Utilities load for water, sewer, electric, gas and internet
- School capacity
- Fire code and access
You might have enough land to build your proposed building, and you might meet the zoning for your building. Of course you need to meet all the constraints for that particular building in terms of density, height, setbacks from the property line at the front yard, rear yard and side yards. But there is so much more.
We see so many projects being held up by cities much to the frustration of property owners. This is where a comprehensive understanding of the complete set of engineering constraints is so important.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the impact of the macroeconomics environment on the world real estate investing so much of what is happening in the economy is being dominated by the macro economic environment.
Host: Victor Menasce
email: podcast@victorjm.com
Trevor Oldham is the owner of podcastingyou.com, a podcast booking service where aspiring guests can get exposure by being booked on podcasts. Trevor brings the experience of being a show host, a show producer, and a show editor. The breadth of experience in all these roles makes for a good agent, knowing how to provide value to both the guests and the show hosts. To connect and to learn more, visit podcastingyou.com/realestateespresso
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we're taking a case study out of George's law school course on negotiation from when he was teaching at NYU. It's a case where he was negotiating on behalf of his client Sol Goldman with Bill Zeckendorf a well known and highly respected name in New York real estate.
Host: Victor Menasce
email: podcast@victorjm.com
Today and every day this week we are looking at some aspect of food security and the major shifts that are putting enormous strain on our global food supply. We are already experiencing acute shortages all over the world.
On Monday’s show we talked about how dietary preferences have increased the demand for grain on a global basis as more and more people shift from plant based diets to consuming more animal protein.
On Tuesday’s show we talk about how more and more farm land is being diverted from food production to growing for bio-fuels like Ethanol and biodiesel.
On Wednesday’s show we talked about how energy markets are effecting the supply of fertilizer and how fertilizer use is down 5% so far this year which is expected to have an immediate 2% decrease in food yields.
On Thursday’s show we talked about at what happens when there are food shortages. We start to see the rise of food nationalism.
On today’s show we are looking what happens when you shift your food production from using synthetic fertilizer to organic. We are looking specifically at Sri Lanka and the major impact it had on their national economy.
Don’t get me wrong. I love the idea of organic farming. I personally buy organically grown fruits and vegetables whenever I can.
The shift started in Spring of 2021 when Sri Lanka’s President Gotabaya Rajapaksa put a ban on agrochemicals. His goal was an ambitious one: to transform Sri Lanka into the first nation with 100-percent organic agriculture. Less than a year later, the country is left in an economic and supply shortage crisis as a result.
Host: Victor Menasce
Today and every day this week we are looking at some aspect of food security and the major shifts that are putting enormous strain on our global food supply. We are already experiencing acute shortages all over the world. If you like Chicken, then don’t try to order it in a restaurant in Singapore. If you like Dijon mustard, don’t try to order it in France.
On Monday’s show we talked about how dietary preferences have increased the demand for grain on a global basis as more and more people shift from plant based diets to consuming more animal protein.
On Tuesday’s show we talk about how more and more farm land is being diverted from food production to growing for bio-fuels like Ethanol and biodiesel.
On Wednesday’s show we talked about how energy markets are effecting the supply of fertilizer and how fertilizer use is down 5% so far this year which is expected to have an immediate 2% decrease in food yields.
On today’s show we are looking at what happens when there are food shortages. We start to see the rise of food nationalism.
The last time we saw food nationalism on a large scale was in the 1970’s. It’s a phenomenon that has historical precedence.
Today we already have about 20% of the world’s food supply under some kind of export restriction. There are numerous examples.
Some countries produce far more than they need domestically to serve their population. Other countries have very little in the way of domestic production of certain foods and rely almost entirely on imports for their daily food. A case in point is Malaysia which has halted its chicken exports in an effort to safeguard its domestic supply, which leaves people in Singapore struggling to find chicken as authorities suggest the public opt for frozen poultry alternatives.
Host: Victor Menasce
email: podcast@victorjm.com
Today and every day this week we are looking at some aspect of food security and the major shifts that are putting enormous strain on our global food supply. We are already experiencing acute shortages all over the world. If you like Chicken, then don’t try to order it in a restaurant in Singapore. If you like Dijon mustard, don’t try to order it in France.
On Monday’s show we talked about how dietary preferences have increased the demand for grain on a global basis as more and more people shift from plant based diets to consuming more animal protein.
On Tuesday’s show we talk about how more and more farm land is being diverted from food production to growing for bio-fuels like Ethanol and biodiesel.
On today’s show we talked about how energy markets are affecting the supply of fertilizer and how fertilizer use is down 5% so far this year which is expected to have an immediate 2% decrease in global food yields. That decrease in yield is in addition to the other factors that are already putting pressure on food supply. So we have not one, not two, but three factors negatively affecting our food supply. As we will learn on Thursday’s show, there’s more.
Host: Victor Menasce
email: podcast@victorjm.com
Today and every day this week we are looking at some aspect of food security and the major shifts that are putting enormous strain on our global food supply. We are already experiencing acute shortages all over the world. If you like Chicken, then don’t try to order it in a restaurant in Singapore. If you like Dijon mustard, don’t try to order it in France.
On Monday’s show we talked about how dietary preferences have increased the demand for grain on a global basis as more and more people shift from plant based diets to consuming more animal protein.
Over the past 30 years, the carbon neutral movement has been pushing the oil industry to an increasing proportion of bio fuels.
Every year, US farmers plant around 140,000 square miles of corn, 30% of which is used to produce ethanol. Between 1978 and 2018, the ethanol industry received a variety of subsidies totaling $86 billion dollars, more than both the solar and wind industry combined. Despite all this government support, ethanol is often a money losing proposition for farmers. It is also one of the least efficient ways to generate energy.
If you covered an acre of land with solar panels instead of growing corn, you would win by a landslide. An acre of Solar panels produce 70 times more energy than an acre of ethanol from corn.
But solar panels don’t need to occupy prime agricultural land. You can put solar panels in the desert where lettuce and tomatoes and wheat doesn’t grow.
Sadly we’ve created a situation where we have taken prime agricultural land and donated it to the oil industry instead of using it to grow food.
On today’s show and every day this week we are talking about food. You might be wondering what food and real estate have to do with each other. Hopefully by the end of the week, I’ll connect the dots for you in what is an extremely important topic.
Successful investing, just like in team sports requires a strong offence. But equally important and far less exciting is a strong defence. That conservative defensive posture requires an understanding of the risks.
We are hearing about how the war in the Ukraine is leading to food shortages all over the world. But I’m here to tell you that the seeds of food shortages have been building long before the war in the Ukraine. In fact, the conditions have been building for many years. On today’s show and all of this week we are going to look at different aspects of why we have food shortages.
If you go back to the 1980’s, our global population has been growing at about 1.5% per year. Our demand for agricultural grains has also been growing at about 1.5% per year roughly in line with global population growth.
But since 2000, the global demand for grain has been growing at about 2.5% per year, faster than the population is growing. So the question is why? Are we all just eating more? Are we all just going to get fat?
It turns out that in poor countries where per capita GDP is around $500 per year, the population largely subsists on a starch based diet consisting of rice and wheat based foods.
But in the most developed countries, we find that diet is largely based on animal protein. When all of a sudden, instead of $500 per capita GDP, you're up at $2,000 per capita GDP and then a $5,000 per capita GDP, you begin to actually want to consume a lot more animal protein. There are only a few countries that have managed to break above the $2,000 per capita GDP. The good news is that we have made dramatic steps to erase poverty in a number of countries.
Raising animal protein requires much more resources than growing plant based food. Cows for example consume 70% of the intake by foraging on grass that would not be suitable for human consumption. The remainder consists of grains. It takes 2.5 times the weight in grain to raise a single amount of meat. So as people in developing countries change their dietary preference to consuming more meat, the demand for grain is rising faster than the population.
Host: Victor Menasce
email: podcast@victorjm.com
Jonathan Cattani got his start as a stock broker in Salt Lake City. That lead to eventually reading Rich Dad, Poor Dad and pivoting into the world of real estate investing. On today's show we're talking about how to talk to investors in today's environment given all of the uncertainty that has been injected into the environment since the end of the first quarter.
To connect with Jonathan, visit investwithcattani.com
Host: Victor Menasce
email: podcast@victorjm.com
Jorge Newbery is based in Chicago Illinois where he runs a series of businesses connected with distressed loans. You can connect with Jorge and learn more about their platform at prereo.com
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about what’s happening in the RV industry. We’ve seen white hot demand for RVs over the past two years. The requirement to social distance and limit contact to those in your immediate household during the pandemic made camping vacations an ideal choice for many families. The industry has struggled to keep pace with demand during the pandemic. The combination of material shortages and labor shortages has left many manufacturers unable to keep up with demand. Some customers were left waiting for more than a year to take delivery of their new RV.
So why are we talking about RV’s on a real estate podcast?
If you buy an RV, chances are you’re going to need a place to store it. It won’t fit in your driveway, and even if it did, then your home owners association or your local bylaw probably has a restriction on keeping large vehicles in your driveway. If you’re in the storage business, then boat and RV storage is probably a component of your business.
Host: Victor Menasce
email: podcast@victorjm.com
On today show we were talking about whether we are about to experience another repeat of the 2010 and 2012 sovereign debt crisis having a ripple effect through global financial markets. There are clues of an impending crisis when you listen to the words of Christine Lagarde head of the European central bank.
This next crisis will also precipitate a change in foreign exchange markets. When countries experience a crisis of confidence, the release valve is the value of the currency in international markets. Some currencies are free floating. Some currencies are pegged to specific assets. Still others are pegged to other currencies. For example, we have 66 countries pegging their currencies to the US dollar. There are 25 countries pegged to the Euro. This is designed to stabilize exchange rates between trading partners.
We have some very powerful lessons in the 2008 financial crisis. But we are doomed to repeat those lessons if we don’t actually pay attention to what those lessons have to teach us and look at the root causes of what precipitated the financial crisis back in 2008. Many people think that you thousand and eight was only about subprime mortgages. But there had to have been much more to 2008 than just subprime mortgages. Why were banks in Ireland failing?
Europe is a funny collection of individual countries each being held together for a common monetary and economic system. But each of these countries are not created equal. It makes sense if you look through out history that bonds issued by one country are not necessarily of the same credit quality as the bonds issued in another country. We often hear about the north south divide in Europe. Italian credit is not of the same quality as German credit. Yet somehow we see that a very large percentage of the collateral being used in the repo market at the European central bank is comprised of Italian sovereign debt. In recent months this has peaked at 45% of all repo transactions.
Christine Lagarde recently went on record stating that she has anti-fragmentation tools at her disposal and she intends to use them. At the same time the head of Germany’s going to spank, the German central bank has publicly stated that he is not on board with the use of the anti-fragmentation tools.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about conservation easements. These are a poorly understood and rarely used asset type.
My friend Tom Wheelwright is fond of saying that the tax code should be viewed as a series of incentives. The portion of that tax code that extracts money from business, employees and the population at large can be described in a very small number of pages. The thousands of other pages enshrined in the legislation can be thought of as a series of incentives.
Conservation easements are one such incentive.
The idea is that governments like to see land protected in its natural form. This can sometimes be done through zoning. But zoning is not perpetual, and zoning can be changed. If you truly want to preserve land for ecological purposes in perpetuity, then you need a land use mechanism that is even stronger than zoning.
Enter the conservation easement. With a conservation easement, land is donated in perpetuity to conservation through a land trust.
Host: Victor Menasce
email: podcast@victorjm.com
On today show we are looking at whether the most recent economic figures are an indication of a trend, or a false flag? We are going to be looking at the inflation metrics and looking at the constituent elements to determine whether inflation has peaked. Will the Fed succeed in breaking the back of inflation or is inflation systemic at this point? Finally we are going to look at Europe and ask whether we are experiencing a global phenomenon and can the USA separate itself from the rest of the world in this regard?
The latest inflation numbers suggest that inflation in the US cooled from 9.1% in June to 8.5% in July according to the latest statistics from the commerce department.
There are two variables that the government will be able to influence. The first is energy prices. The second is cooling the real estate market which accounts for a 40% weighting of the consumer price index.
It’s been said that you can print money, but you can’t print food and you can’t print oil. Or can you?
Host: Victor Menasce
email: podcast@victorjm.com
Today is a part 2 response to last Friday’s AMA episode.
Last Friday Joseph from Boulder Colorado asked a question about systems and software for his company that almost accidentally got into the excavation business. For a complete context, you may want to listen to that episode first before listening to this one.
I was thinking some more about your question related to how you got into the excavation business. This episode is a bonus. It’s not answering your question at all, but is the result of thinking about how a simple business like excavation could become a sought after service, rather than just a low value subcontract.
Joseph, if you want to be in the excavation business, I would recommend that you consider having a differentiated offering. There is a concept in business called intentional congruence. Intentional congruence means offering products and services that are clearly distinct, but actually go together. It’s like cereal and milk, hamburgers and buns, popcorn and butter.
People who do excavation are merely digging holes. Digging holes is a commodity. Commodities are interchangeable and the winning bid always goes to the lowest bidder. That’s the preverbal race to the bottom. You calculate the machine time and multiply by the hourly rate.
But you want your offering to be differentiated in the market.
Host: Victor Menasce
email: podcast@victorjm.com
Mark Pattison is based in San Diego where he is engaged in development projects and a growing portfolio of multi-family apartments. On today's show we're talking about opportunity zones that can be a diamond in the rough.
Mark also hosts a podcast called the "Mark Pattison Show" which can be found on Youtube.
Host: Victor Menasce
email: podcast@victorjm.com
Brett is based in Sacramento California where he helps investors nationwide with tax deferral strategies using the Deferred Sales Trust. To connect with Brett or to learn more, visit capitalgainstaxsolutions.com
Host: Victor Menasce
email: pocast@victorjm.com
Joseph in Boulder Colorado writes:
Thank you for all you do. Your podcast is a real treat and we get so much from it.
At the beginning of the year, I wrote you an AMA about how to best serve our community, as an investor, after the devastating fires near Boulder Colorado.
The advice you gave in that podcast really spark my efforts towards helping the most amount of people and becoming a solution for the bigger problem. Instead of worrying about the market and rents etc. I decided to go out and create a private fire cleanup company using excavation equipment my partner and I had.
From this, we helped clean over 65 home lots and made a direct impact on getting our neighborhood back on its feet. Now that the fire cleanup efforts are over, this company, created basically from thin air is in a unique position to transition into digging and building foundations for the residential builders in the area.
Out of this sad event we are experiencing massive growth and booking several foundations already. My question is as we are growing our organizational capacity is being strained, what kinds of software do you as a developer use to keep it all together?
Particularly, around CRM, Project Management, Vendor and Supply Management, and Scheduling.
Our current systems are clunky and often leave us wanting more integration and streamlining.
Thanks again for your advice and how much you put out for the real estate investment community.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the most recent employment report that was published on Friday of last week.
You’ve no doubt heard the saying that you can use statistics selectively to make just about any argument. On today’s show we are going to take a more wholistic view of the US employment report and hopefully construct a more complete view of what we think is happening. Is the government lying? No, I don’t think so. But the conclusions being drawn are definitely the result of spin being put on the numbers.
In the July report it was reported that the economy added 528,000 job and 372,000 jobs in June. These are impressive numbers. The White House proudly claimed that all of the job losses from the pandemic had been officially erased from history. The unemployment rate was down to 3.5% and the economy is strong.
It turns out that the Bureau of Labor and Statistics actually publishes two different employment survey reports at the same time and they have significantly different methodologies and therefore different results.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about one of the patterns that has emerged with new home buyers.
The typical scenario with a new home or condo purchase involves signing a purchase agreement, several months, sometimes a year in advance of the actual delivery date of the finished product. There are a number of real estate closings scheduled for August and September this year when the actual agreement was made in the fall of last year. In some cases, the agreement was signed over a year ago.
So fast forward to today. Interest rates have increased. Appraisers are taking a much more conservative approach on the valuation under direction of the lenders. When they got to the closing and many buyers did not have a rate lock on their financing. They also didn’t have a bank appraisal to accompany the loan request at the time of purchase.
While the borrower may have qualified with the bank when they signed the deal, they didn’t have a commitment letter from the lender with which to close the deal.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about the new Inflation Reduction Act just passed by the US Senate and sent to the Congress for a vote. Anytime a piece of legislation comprising nearly $1/2T of new spending is tabled, I think it is worth spending at least five minutes on a podcast to analyze it.
The first thing you notice when you read the 755 page document, is that it has almost nothing to do with inflation. In fact, out of the 755 pages, the word inflation only appears 35 times in the entire document.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we're talking about the steps and implications of China's rise to commercial dominance and the possibility of international transactions being subject to Chinese central government oversight.
Host: Victor Menasce
email: podcast@victorjm.com
Kim is one of the principals at Iron Peak Properties where they specialize in multi-tenant industrial buildings. This is a narrow segment of the industrial space and one that offers strong resilience against economic cycles. To connect with Kim and to learn more visist ironpeakproperties.com.
Host: Victor Menasce
email: podcast@victorjm.com
Dave Dubeau is a real estate investor who also owns a boutique digital marketing agency. He has two different podcasts aimed at two different audiences. He uses a podcast to maintain a conversation with his clients and prospective clients.
His latest podcast is focused on training aspiring capital raisers in real estate how to raise funds. To connect with Dave visit raisecapital101show.com.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about who will want to sell in today’s environment. There are a lot of mixed signals happening in the market.
There are those who are acting as if nothing has changed in the last 120 days. On the other hand, there are those who absolutely know something has changed. We have entered into a completely different set of market conditions in the past 90 days. Interest rates have gone up and the cost of debt service has increased by nearly 40% in a very short time period.
I’m going to propose a thesis that is going to continue to keep inventories low in the coming year.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s question comes from Cody who asks:
I've assembled several adjacent acres consisting of multiple property types in a prime area. What's your experience in this? Is it better to develop the land complete and sell lots / pads or sell the assembled package to a developer?
I have more land banking experience than land developing experience, but how hard can it be and is it worth it?
This is a great question. I’m going to answer your question with a series of questions. It’s the answer to those questions that will ultimately help answer your question.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about a different form of counter party risk. When we speak about counter party risk, we are usually having a discussion about the balance sheet. One person’s asset is another person’s liability. The quality of the asset is strictly linked to the ability to service the liability.
But there is a second form of counter party risk that is not often talked about in the same terms. This form of counter party risk applies to the income statement. One person’s income is another person’s expense. If one party can’t afford to pay the expenses, then then the second party’s income is at risk.
This leads to the question of which assets have the greatest income risk in this stagflation environment. On today’s show I’m going out on a limb to talk about three different asset types that I believe are most at risk in the current market conditions.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we're talking about the mixed signals we're getting from energy markets. The narrative in the mainstream media concerning energy is outright misleading. It's a political narrative that is disconnected from the facts and the true supply / demand situation in the market. Since the economy is tied to energy, you need to pay very close attention to energy markets.
In their book, William Strauss and Neil Howe will change the way you see the world—and your place in it. The Fourth Turning illuminates the past, explains the present, and reimagines the future. Most remarkably, it offers an utterly persuasive prophecy about how America’s past will predict its future.
Strauss and Howe base this vision on a provocative theory of American history. The authors look back five hundred years and uncover a distinct pattern: Modern history moves in cycles, each one lasting about the length of a long human life, each composed of four eras—or "turnings"—that last about twenty years and that always arrive in the same order.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show George Ross and I are talking about negotiating in today's turbulent environment. He brings a perspective that few others have after many decades in real estate and having lived through numerous market cycles.
Host: Victor Menasce
email: podcast@victorjm.com
Today's show is a live talk on how to prepare for the upcoming downturn.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about the mental game of handling sticker shock.
It doesn’t matter how often I remind myself that a high quote from a subcontractor is nothing more than a high quote. I still experience an emotional reaction. It takes some time to work through all of the second guessing that happens when you experience sticker shock.
Am I out of touch? Is my budget at risk? Did I make a budgeting mistake? All of those self doubts are normal. Dealing with the uncertainty can be stressful and anxiety provoking. Do I work through the budgeting problem, or share it as a risk with the project stakeholders?
Through the process of value engineering, you will discover the true cost of the most efficient solution. These high quotes happen with alarming regularity. I’m not talking about the quote that is 5-10% higher than expected. I’m talking quotes that are 70%-100% higher than expected.
Host: Victor Menasce
email: podcast@victorjm.com
I listened to Jerome Powell’s entire remarks yesterday after the end of the two FOMC meetings which ended on Wednesday. Chairman Powell said some things in his press conference that were astounding.
But the most stunning statement from Jerome Powell was the flat statement the he does not believe the US is in a recession.
The official GDP numbers for the second quarter will be released today. We don’t know what those number will be. But J Powell also went on to say that GDP numbers are complex and they take a long time to get right because the US economy is so huge. They have a history of being revised a lot, and therefore we should take the initial numbers announced today with a grain of salt.
To help us all make sense out of this complexity, the White House put out a new blog post a week ago. The timing was excellent. It was entitled:
“How Do Economists Determine Whether the Economy Is in a Recession?” Let's look deeper at what they're trying to say.
Host: Victor Menasce
email: podcast@victorjm.com
The Wall Street Journal published an article this week in collaboration with realtor.com where they ranked 300 communities across the United States based on a set of criteria. The purpose of the ranking is somehow tied to their prediction of those communities offering the best rate of return on investment using a set of criteria that they applied to their methodology. The Wall Street Journal is widely read, and I have no doubt that this piece is going to be widely referenced by other reporter and perhaps your own investors as well. On today’s show we’re going to take a deep look at this report so that you are able to answer questions about the report.
To identify the top emerging housing markets, The Wall Street Journal and Realtor.com reviewed data for the 300 most populous core-based statistical areas, as measured by the U.S. Census Bureau.
The overall methodology explores two main areas: real-estate markets (50%) and economic health (50%). Those two areas comprise eight key indicators and the Wall Street Journal applied a weighting to each of the 8 indicators to come up with a metric and therefore a ranking.
We're looking at whether this ranking makes any sense.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about factors that could signal global instability and a crisis of confidence in our financial system. What happens if the Fed was to loosen monetary policy before actually beating inflation? This is a realistic scenario that many investors have been predicting.
The hope of many investors, those who are addicted to the loose monetary policy of the last decade, is that we return to the way things were. Asset bubbles feel good on the way up, and they feel terrible on the way down.
The past decade has represented a market distortion that has been promoted by central banks in Europe, the US, Canada, Japan. The list goes on and on. If the central bankers decide to pivot and lower interest rates, the likelihood is that investors in the bond market will not accept to lower interest rates.
You see interest rates are based on one principal factor and that is risk.
When the market yields on Turkish sovereign debt are higher than, say, German sovereign debt, it’s a reflection of the higher risk associated with Turkish government debt than German debt.
When the yield on Netflix bonds are higher than the yield for IBM bonds it’s a reflection that the market perceives higher risk with Netflix than IBM.
The bond market ultimately determines the yields in the market. If the Fed was to slow down their rate of interest rate increases before actually beating inflation, the bond market is likely to respond with a loss of confidence in the Fed.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about emotional investing. We are emotional creatures who often make emotional decisions.
The old adage is to buy low and sell high. But left to our own emotional devices unchecked, humans are inclined to buy high and sell low. Humans are motivated by both fear and greed when it comes to investing. These two emotions are naturally designed to protect us in the wild. But these two emotions are rather ineffective in protecting us against what happens in the market.
If you look at the statistics of what is actually happening in the market, the majority of investors buy high and sell low.
It doesn’t matter what the asset. It takes discipline to be counter cyclical.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s show is not what I was expecting to publish today. I’m here in the heart of Rome Italy. I’m one block from piazza del Popolo with its ancient Egyptian obelisk at the center of public square. It’s two blocks from Villa Borghese the gardens that were transformed by Cardinal Borghese in 1605 from a vineyard into a 200 acre park. The Spanish steps lead up to the entrance of the park. I came to visit my aunt of 97 years of age whose health was failing.
She didn’t have a specific life threatening ailment. But she was simply getting old and the body’s systems were not working like they used to.
The last family members to see my aunt were myself and her granddaughter. Nobody else got to see her in her final days. We grabbed a few slices of take-out pizza on Friday and ate in her formal dining room while she slept. That formal dining room was host to so many dinner parties over the years. Family dinners around the holidays, Friday night dinners with friends, dinners with some of Rome’s most notable people.
Those slices of pizza seemed insignificant at the time. In the scheme of things, those slices of pizza are still insignificant. Any significance to be attached to them are purely a story that I’m fabricating on my own.
Those slices of pizza will hold a special place in my memory forever, or for however long I have left on this planet.
I’m walking around her apartment. I sat down at the keys of her Steinway Grand Piano which she loved to play. I made a video recording of the last time she played the piano about six months ago. Even then, I had no idea of the significance of that recording.
Today will only happen once. So make sure to take the time and do what’s most important.
Take care of your health, hug your loved ones and tell them how important that are to you.
Host: Victor Menasce
email: podcast@victorjm.com
Garrett Moore is the founder and CEO of Agorus in San Diego where they have developed new technology to focus on new home design integration and new home construction automation. Today's show addresses the obstacles and the opportunities to improving the efficiency of the home construction process. To connect with Garrett and to learn more visit agorus.com
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about managing projects. In particular, there is a disease in project management which I call one week itis. This is where a project is delayed by one week every week. Today’s show is a cautionary tale in which I’m going to describe a project management failure that happened in our company. Now we did correct it, but not nearly fast enough for my liking. I’m sharing this failure so that you can learn from our mistake and hopefully you don’t repeat the same mistake.
It happens that in some cases a project manager takes a high initiative role in managing a project. That’s often what you want as long as they are doing a good job of communicating what is happening in the project.
But we had a situation recently when the project manager was in fact using that posture to protect their ego. In truth, we don’t fully know why they were acting this way. Here is the story.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about why you might want investor relations management software in your company.
Whenever you have a relationship with investors, there is a lot of information to manage and to distribute. You have a fiduciary duty to protect your investors and to keep them informed over the life of the project.
If you are using an exemption under securities laws, then there are probably a number of regulations to comply with the particular exemption.
If you have a lot of investors, then you can multiply all of those requirements by the number of investors.
If you have multiple projects then you can multiply the burden by the number of projects. That means project reports, financial reports, tax information slips, original signed syndication documents for each investor and all of the due diligence items that investors would want in their data room.
We implemented our investor portal more than one year ago. Up until that time we had been using a disintegrated set of tools consisting of docusign, Dropbox and a mailing list manager for sending investor reports.
After a year of using our investor portal, I can’t imagine going back to the way we did things before.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s question comes from Eric in Dallas Texas.
I am invested in a value add apartment building that closed in the first quarter of this year. It’s a C-class asset, purchased at a 5% cap rate. I am on a variable rate bridge loan and have not yet converted to permanent financing. I’m now thinking that I should have waited to see what happens in the market. I’m hearing that prices can be expected to fall in the near future. Did I over-pay?
What are your thoughts?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about regulation. Cities have a habit of making short term decisions to help citizens. But when they create an environment that discourages investment, they are making a long term decision to reduce supply in the market which ultimately causes rising cost of housing, the very thing that municipal politicians are trying to combat.
Money seeks the place where it is treated the best.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at why the housing demand in the market has defied demographic predictions. In the wake of the great financial crisis many demographers were predicting that the large detached homes belonging to the parents would become dinosaurs in the market.
A multi-generational household is defined as a household in which at least three generations of a family live under the same roof. Despite the recent growth, this style of living is really not new whatsoever. If you go back to the 1800’s this was extremely common.
Though many young adults dream of moving out of their parent's home to start life on their own, many more are now considering multi-generational living as the more realistic option.
This trend is growing especially fast as the high cost of homes in major urban centres continues to rise, and the pandemic causes many to reexamine their living situations.
A multi generational home is cheaper on a per person basis than two separate detached homes. But even more important for the younger generation is the financial contribution to the equity from the parents.
Host: Victor Menasce
email: podcast@victorjm.com
Brien Lundin is the chair of the New Orleans Investment Conference, the longest running investment conference in the world. He is also the editor and publisher of the Gold Newsletter. Brien is an expert in precious metals and commodities. On today's show we're talking about the economic cycle and how it is impacting our lives as investors.
Host: Victor Menasce
email: podcast@victorjm.com
Garrett Sutton is a corporate lawyer based in Reno Nevada. Garrett is famous as one of the Rich Dad advisors. His company corporate direct specializes in helping real estate investment companies with their corporate structures and maintenance of their corporate entities. He has a new book entitled "Veil Not Fail" which describes the pitfalls that can cause the corporate veil to be pierced thereby negating the limitations of liability that would otherwise be inherent in the corporate structure. You can get a copy of his new book on Amazon or wherever books are sold. To book a free 15 minute consultation with a paralegal, visit corporatedirect.com.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about the impact of changes in the currency markets on global economic stability. We have endured supply chain disruptions as a result of the pandemic over the past two years. What I’m about to share could have an even larger impact than anything we have seen in the past two years.
There is nothing that says the US dollar must have an exchange rate of 75 cents to the Euro, or the Canadian dollar should be 74 cents to the US dollar.
If the Euro is at parity with the US dollar, that’s not a problem in and of itself. The world is used to adapting to whatever becomes the new normal.
What the world has a very hard time with, are rapid changes. Those rapid changes seem to be everywhere.
Today for the first time in over twenty years, the Euro dropped below $1 USD.
Not only are we experiencing changes in currency values, we’re experiencing many of them at the same time.
We have seen what the strengthening US dollar has done to numerous economies around the world.
I’ve traveled to Japan so many times. The traditional simple math has been about 100 Yen to the US dollar. In fact, when you travel in Japan, they have a 110Y store. This is the equivalent of the Dollar store in the US. Some things transcend culture. But as of today, the change rate Yen reached 139 yen to the US dollar.
Big changes like this can affect the economics of contracts that span borders. Some of those contracts would never have anticipated a 36% swing in foreign exchange in less than 18 months. Some international trade contracts simply cannot be honoured at those prices, depending on how they were written. This is not an issue of manufacturing capacity. It’s an issue of profitable global commerce. These changes will create supply chain disruptions, the likes of which we have not been imagining or predicting.
When you conduct a historic retrospective about social unrest, about violent conflict within a nation, the vast majority of people never saw it coming.
In times of unrest, you see it first in the weakest nations first.
But now we have protests in Sri Lanka as people are starving and have no fuel. We are seeing protests expanding from Peru into Ecuador. There farmers in the Netherlands are protesting their government’s recent moves to tax farmers for the methane gas emissions from livestock. If the farmers refuse to sign up to new and draconian emissions standards which will effectively put them out of business, the government will seize their farms. If you had told me in 2019 that we would have protesters occupying my home city for weeks in the depth of the coldest days of winter, I would said no, that’s unimaginable. How many would have predicted the events of January 6 at the US Capitol? Yet, here we are. These are things that would have seemed unthinkable, but now are more obvious in retrospect.
En masse, we don’t have the economic adaptability to react to rapid change. If you can adapt to rapid change individually, then you are going to be ahead of the pack. But more importantly, if you can connect the dots and anticipate the links between all of those interconnected economic systems, you can be better prepared to adapt.
On today’s show we’re talking about the coming economic winter. The US Commerce Department reported new inflation metrics for the month of June, showing that inflation metrics are accelerating. The official current inflation rate is running at 9.1% in the US. In Canada, the inflation rate topped 7.7% in May and is expected to average 8% in the second and third quarter. Only a month ago, the bank of canada was predicting inflation would remain around 5.8%. Clearly that was incorrect.
This means that inflation is actually ramping up.
But we need to look deeper at the numbers to truly predict what is going to happen.
The Bank of Canada increased interest rates on Wednesday by 1%, compared with the 0.75% that had been leaked to the press in the weeks leading up to the announcement.
I’m going out on a limb and say that inflation is going to be even higher in the coming months than either the Fed or the Bank of Canada have been predicting.
We have some economists predicting that the fall in oil prices over the past two weeks will translate into lower inflation. I don’t agree with that assertion.
The reason that I’m not agreeing with economist predictions is that the producer price index is currently running much higher than the quoted rate of inflation. If the producer price index is running at an annual rate of 16.8%, does it make sense that inflation is only 9.1%? Those two numbers seem too far apart for them both to be correct.
On today’s show we’re talking about the rising risk of defaults in the US residential real estate market.
There is a real estate data company called ATTOM. They’re based in Irvine California. The specialize in correlating data from numerous sources to create data that is uniquely useful in ways that raw data might be more difficult to use.
They just issued a new report on distressed properties in the US and they’ve highlighted which counties in the US have the highest rates of defaults and foreclosures. This risk report shows which counties are at highest risk.
The report shows that New Jersey, Illinois, some of the inland counties in California are home to 30 out of the top 50 counties in the US most vulnerable to potential declines.
Eight of these counties are in the Chicago area, six are near NYC and 10 sprinkled through northern and central and southern California.
If you want to be ahead of the game in the upcoming downturn in the housing market, it might be worth researching those counties that are most at risk and putting your systems in place to capitalize on helping owners those markets.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about Inclusionary Zoning. This is a new term that you might not have heard before.
Inclusionary zoning is code for building affordable housing.
Many North American cities, including Vancouver, New York, San Francisco, and Boston have implemented inclusionary zoning. In fact there have been hundreds of inclusionary zoning initiatives around the world.
The City of Toronto has just implemented their inclusionary zoning rules and adopted the principles in their official plan.
According to the city, only 2% of the housing built in Toronto in the past 5 years has been affordable. That metric is not at all surprising given the cost of construction. As someone who underwrites these projects on a regular basis, there is no way to create new affordable housing without a builder losing money.
Unfortunately, this is one of those initiatives that simply erects another barrier to development. The net result will be even fewer new units constructed which will ultimately reduce the supply without addressing the demand side of the equation.
This is a selective tax on developers. It basically says, you rich developers are making too much money. So we’re going to tax you by forcing you to include affordable units.
But the problem with this thinking is that government can’t force developers to undertake a project. If the project doesn’t meet the financial metrics, then they’ll go develop somewhere else where the numbers make sense.
There is nothing forcing a developer to build in a specific location. If Toronto doesn’t make sense, a large developer like Minto will go build in West Palm Beach. It’s not like they haven’t built in West Palm before. City councils are constrained by municipal boundaries. Developers are not.
This seems like an initiative that is designed to get votes and win political points. Politicians want to be seen as doing something, anything even if the net result is zero.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at what is going on in global commodity markets to try and understand what it means for our economy and how it will affect the domino chain of interdependencies throughout our economy.
In the past two weeks we have seen a sharp drop in commodity prices across a wide range of commodities.
This includes oil, copper, steel, silver, cobalt, tin, nickel.
The broad interpretation is that these price drops signal the drop in future demand that will come from the current economic recession.
But we also need to look at the point of reference. These commodities are priced in US dollars. The US dollar has surged against many global currencies. The US dollar is now hovering at par against the Euro for the first time in nearly 20 years. The threat of energy insecurity in Europe is cited as the biggest factor. If Russia were to weaponize the sale of natural gas to Europe, it would negatively impact the economy in Europe in a significant way.
The Euro has fallen in value against the dollar by nearly 20% in the past year. So even if commodity prices were static against the US dollar, they appear to have gone up by 20% simply by virtue of being priced in US dollars.
Host: Victor Menasce
email: podcast@victorjm.com
Today's show was recorded live at the 20th annual Investor Summit on Sand on June 13 at the Mahogany Bay Village Hilton in Belize.
Host: Victor Menasce
email: podcast@victorjm.com
Gene Trowbridge is based in Southern California, and practices securities law across the US. He specializes in helping syndicators produce compliant offerings when real estate investors work with money partners. On today's show Gene talks about the most common rookie mistakes that are rampant in the industry. To connect with Gene, visit trowbridgelawgroup.com or call him directly at 949-855-8399.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about cost segregation, accelerated depreciation and ultimately paying taxes.
First of all, I’m not an accountant, and this show is not intended to be tax advice in any way. Always seek your own tax advice.
Most investors know that you can record a depreciation expense to recognize the wear and tear on your property. While this is not an actual cash outlay, it can be used to deduct against income and reduce the amount of tax owing.
But as a general rule, the depreciation on your building will be calculated over 27.5 years. Land doesn’t depreciate, so you can only depreciate the improvements.
But not all things wear out at the same rate. It’s often a good idea to look at depreciating your property in its constituent parts.
For example, you kitchen appliances have a different lifespan compared with the paved driveway. The electronic security system has a different life from the security fence. The key to accelerating the depreciation for those items having a shorter life is something called cost segregation. This is an accounting and an engineering exercise that allows you to break your property apart into its individual pieces and depreciate each of these pieces on their own schedule.
If it sounds like a lot of work, well, you would be correct.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the changes that are happening in residential real estate. What I’m about to share with you on today’s show is a stratification of the market into three main segments.
Now what I’m sharing is not a scientific study. It’s the result of observation. The observation has raised questions. I’m going to share a thesis that might explain what we are seeing in the market.
What I’m seeing from conversations with investors and developers is a stratification of the market. There are entry level homes. These are the homes purchased by first time buyers. The category of home could be a condo in a dense urban environment, a townhouse, a semi-detached, or a small suburban bungalow. The next level up are mid range houses having a two car garage and usually four bedrooms. Above that are the luxury homes.
What we are seeing is that sales remain brisk at the top of the market. Those who are sitting on a lot of cash are not fundamentally going to have their lifestyle affected by an economic cycle. They’re probably paying all cash for the property, and are not really affected by rising interest rates.
At the bottom of the market, sales also remain brisk. There are those who fear being priced out of the market. So they are buying whatever they can in order not to miss out on home ownership.
We are seeing the greatest pause in the middle market. These are the people who would make a move to a more expensive property as a want, but not a need. It’s purely aspirational. They don’t need a bigger place. Their existing home is meeting their needs. Perhaps they have a growing family and could use an extra bedroom or space for one more vehicle. But they can still make their existing property work.
We have seen sales in this middle segment drop significantly in the past month.
Home builders that I speak with are seeing dramatic reductions in traffic at their sales centres in June. June is usually a peak month for new home sales. One volume building I spoke with is experiencing an 80% decline in traffic at their sales center. Deliveries won’t be until the following year, but many buyers are taking a wait and see approach. New homes won’t rate lock for permanent financing until they’re within 30 days of closing. Buyers are not willing to take the interest rate risk that far out in time if they don’t need to move.
Many buyers will need to see a period of interest rate stability before making a blind commitment that could create financial stress.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about creating value with land. You’ve all heard the platitude: Location, location, location. Land value is definitely determined by location. But even more important than location is entitlement. When we look at land we are most concerned with three factors in addition to the location.
- Zoning
- Topography
- Soil condition
- Access to utilities
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re breaking down specifically how the low interest rate environment has translated into inflated asset prices in the stock market. Unless you’re deeply immersed in the system, it may not be obvious how and why that relationship has happened.
We’re going to connect the dots for you so that you understand how compensation structures are design in most public companies, and how those structures are being manipulated to maximize compensation for directors and officers at the expense of investors.
Let’s imagine that you are the CEO or CFO of a public company. You negotiated bonuses and restricted share grants that reward the officers of the company for improving the profitability of the company for shareholders. The key metric is the earnings per share.
In the good old days, company executives focused on growth of revenue and growth of earnings as the pathway to maximizing earnings per share.
But remember, we’re maximizing earnings per share. There are two ways to increase that metric. One is to increase the earnings. The second is to reduce the number of shares in circulation. If there are fewer shares in existence, then by definition, the earnings per share went up.
Of course by now, since the start of the year we are seeing that it takes more than share buybacks to sustain growth of share prices. Meanwhile these companies are now saddled with a lot more debt that they will need to find a way to pay back from future earnings.
When we say that so much of the money printed over the past two years went straight into wall street, this is what we’re talking about.
On today’s show we’re going to break down the lending market into its constituent components and examine each of them independently.
The lender is the loan originator who underwrites the loan. The loan servicer is the one who collects the interest. The Investor set an interest rate at which they’re willing to lend money and its up to the loan originator to find a borrower with the correct risk profile that meets the risk tolerance of the investor.
Investors in the bond market are also lenders. So when a bank lends money to a borrower, they have to be mindful of the bond buyer who is ultimately going to securitize the debt.
Back in the old days, banks would take in deposits and depending on the amount held in deposit, the bank would lend accordingly.
Over the past 20 years, we’ve seen an increasing amount of shadow banking. This is where banks sell their debt in bond offerings to the commercial mortgage backed securities market. This takes those loans off the bank’s balance sheet and allows the bank to originate more loans.
Banks make money on the differential between the interest collected on their loan portfolio and the interest paid to depositors, multiplied by the bank’s leverage. So for example if a bank charges 5% interest, and they pay 1% interest to their depositors, they collect 5% interest, multiplied by the bank leverage. If they must maintain 10% in reserve, then they collect 9 x 5% = 45%, and they pay out 1%, for a net profit of 44% of the funds on deposit. ‘
It sounds like a good gig and it is.
But the banks ultimately want to get these loans off their balance sheet so they can originate more loans. Why? Because banks get paid an origination fee, in addition to the interest rate. If they sign a 30 year loan, then those funds don’t become available for lending again until the loan matures. That means the bank gets to collect their origination fee once every 30 years. But if they sell the loan into a secondary market, they can put that exact same money to work again and collect a new origination fee in addition to the interest on the loan.
Private lenders are different from banks in that they don’t have leverage. They can only lend out money that they have in their immediate possession. These lenders lend to private equity firms, private mortgage investment corporations, and they purchase bonds.
Private loan originators want to keep their loans recirculating as well. The originator gets to keep the origination fee, and the loan interest gets paid to the investors in the mortgage fund. If the loan term is too long, then the originator stops collecting fees and eventually goes out of business. So private lenders like the shorter loan terms to they can continue collecting fees.
Here too, the interest rate is determined by the risk premium that is being attached to the borrower by the lender.
I believe we are about to experience another liquidity crisis in the US and elsewhere in the world. If you are unconvinced, then ask yourself this simple question. If the currency is being devalued at a rate of 8.6% per year, would you be willing to lend money to a borrower at 5%? No? How about 6%? How about 7%? Still no?
How high would interest rates need to be for you to lend funds to a low risk borrower on a low risk project?
You have probably figured out by now that the private lenders and investors are in search of higher yield in order to compensate for the high rate of inflation. So if private lenders are not injecting liquidity into the market, then the only lender left is the lender of last resort and that is the central bank.
On today's show, Rod and I are talking about the market inflection point we are experiencing. Rod is also hosting a three day bootcamp in Denver at the end of July. To learn more about this three day event, visit rodindenver.com
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we're talking about how to navigate the current economic uncertainty. George puts forth some risk reduction ideas that are pure gold. Listen to what he has to say.
Host: Victor Menasce
email: podcast@victorjm.com
Our book this month is called “Fed up” by Danielle DiMartino Booth. Danielle worked at the federal reserve bank of Dallas for nine years where she ascended to the inner sanctum of those tasked with crafting Fed policy.
Last month we reviewed Ben Bernanke’s newest book, “21st Century Monetary Policy “.
The contrast between these two books that deal roughly with the same historic timeframe is dramatic.
It was clear when I read Ben Bernanke’s book that there was some revision of history at play to better match Mr. Bernanke’s narrative.
Some of those revisions were laid bare in Danielle’s book.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at counter party risk. This is a term that every investor should be familiar with.
It’s an issue that we investors face on a daily basis. We are waiting for another transaction to close before a loan can be paid off. That’s counter party risk. We’re waiting for materials to arrive in order to complete a certificate of occupancy in order to switch from construction financing to permanent financing. That’s counter party risk.
Your cousin who you loaned $10k to lost their job and now you need that $10k for something else. That’s counter party risk.
Virtually everyone became familiar with counter party risk in the wake of the 2008 financial crisis, and again in the wake of the Greek Sovereign debt crisis that threatened to topple banks in continental Europe.
Here we are again.
Two weeks ago, crypto lending platform Celsius froze user accounts. The idea behind crypto is that if you are holding assets in your own wallet, then nobody can take them from you. But what happens if you are holding assets in a lending platform, or perhaps in the account at a crypto exchange? What happens if that crypto exchange goes bust?
Host: Victor Menasce
email: podcast@victorjm.com
In another sign that things are upside down in our current economy, rents are continuing to rise for single family homes. There is an acute shortage of homes for rent in a lot of primary markets.
You might be wondering what is behind that incredible metric. In fact, some tenants are in such an acute need for the rental property of their choice, that some tenants are offering above asking rent.
What we’re seeing are two separate economies. There are home owners who have cashed out, sitting on lots of cash. They can afford to negotiate with landlords and even offer above asking rent. Then there are the working tenants who are paying what they can afford based on their salary. The economic value proposition to these two tenants are vastly different.
Really strong tenants are appearing in the market and they’re paying top dollar. They easily qualify as tenants. They have 800 credit scores. They are spending 5% and sometimes less of their household income on rent. So when they offer above asking rent, they skew that market.
Host: Victor Menasce
email: podcast@victorjm.com
We real estate investors are entrepreneurs. Every time we purchase a new asset, it’s like starting a new business. But if we’ve done it before, that new business is more like starting a new instance of a franchise than an outright new business. There are systems in place, designed to replicate and scale.
Our commercial tenants are entrepreneurs. Some are starting new businesses. Well, thanks to Simon Black, he put a new report on barriers to business on my radar. This 144 page report was published in February of this year by the Institute for Justice. The authors of the report examined the difficulty in setting up a new business.
To better understand the local regulatory barriers entrepreneurs encounter, this first-of-its-kind study analyzes the rules, regulations, and requirements to start a business in 20 cities across the country. This report identifies and quantifies the regulatory hurdles entrepreneurs experience, while pointing to specific reforms cities can pursue to make it cheaper, faster, and simpler to start a small business.
The number of regulatory steps involved in opening a business is truly shocking. In Atlanta it takes 76 steps to open a restaurant and 68 steps to open a barber shop. Boston requires 92 steps to open a restaurant and 81 to open a barbershop. Phoenix requires 21 steps to open a home based tutoring business.
Our businesses don’t need government handouts with another layer of bureaucracy to qualify for the money. Our businesses need government to get out of the way and let commerce actually happen unimpeded by red tape.
Host: Victor Menasce
email: podcast@victorjm.com
We have seen a large decrease in the value of crypto-currencies. That’s both bitcoin, etherium and the thousands of other coins out there that make up the eco-system.
The question is, how has the crypto market influenced the labor market?
We know that in 2020 and 2021, government stimulus has created an incentive for people to collect a pay check and not work. That is reflected in the large reduction in workforce participation, and the huge number of job openings, particularly in the retail service sector including hospitality, food and beverage.
When those bartenders, waiters, line cooks were sitting at home watching netflix, they were also dabbling in bitcoin.
Several restaurant owners I’ve spoken with have witnessed a sudden and recent return to work from people who all of a sudden decided that waiting tables was not such a bad idea after all.
Is this a result of the combination of stimi-checks having dried up, and now crypto can no longer fund their lifestyle?
Host: Victor Menasce
email: podcast@victorjm.com
Dana Samuelson is a real expert when it comes to physical gold. On today's show we're talking about how physical gold can be an effective hedge against inflation. You can actually purchase physical gold from within the US at Dana's company American Gold Exchange. To connect visit amergold.com or email info@amergold.com.
Host: Victor Menasce
email: podcast@victorjm.com
Robert Helms is the host of The Real Estate Guys Radio Show, and the organizer of the annual Investor Summit, now in its 20th year. On today's show we're talking about how to make sense of the current economic environment.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about bad behaviour in the world of construction.
When you are building anything in the world of construction, whether it’s a light renovation or a high rise building, you will experience the full spectrum of responses from suppliers and trades people.
You would think that the best prices are found in the volume market and with those suppliers who serve the largest builders.
I believe that to be true. But the best pricing is truly reserved for those few large builders. I recently compared the pricing at a commercial lumber supplier with the big box stores.
It pays to shop around.
We have received a wide range of quotes for all manner of products and services.
We are experiencing all kinds of quotes that span the spectrum. Some of these are outliers that simply defy logic. It’s easy to wonder whether these quotes are the new normal. Am I out of touch, or is the architect out of touch?
It’s frustrating to waste time talking to people that are not a fit for your project. But the best thing to do is to let go of any emotional baggage associated with those interactions and not allow the memory to influence future interactions with high quality suppliers that you ultimately want to work with.
It is truly the wild west out there at the moment. You can expect to have to talk to more people than ever before in order to find subcontractors that you can work with. This will take more time. It will require you to dedicate more resources to shopping around than might ever have been your practice in the past.
On today’s show we are talking about my forecast for the stock market this year. Why are we talking about the stock market on a real estate investment podcast?
Many investors are investors first and real estate investors second. I happen to be one of those people who has lost faith in the inner workings of the stock market and am heavily weighted in real estate, but I’m not exclusive to real estate. I also hold hard assets like precious metals.
I don’t invest in the stock market because I understand it. I’ve been an officer of a publicly traded company. I’ve watched the CEO of my company go on Jim Cramer’s TV show and lie to the investing public. I’ve seen how little control the investing public has.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about the use of digital tokens for trading real estate.
Over the past week I had numerous discussions with people making investments to create a digital token platform that would allow for the derivative trading of fractions of real estate or shares in exempt market offerings. I personally know of at least five companies that are making investments to develop the token technology to trade in real estate and in securities offerings.
The theory goes something like this. Once real estate is carved up into tokens that can be as small as the mind can imagine, these fractional shares become liquid and tradable on a secondary market.
The technology allows for the transacting of tokens in the blink of an eye. The underlying technology can be used for anything. You can certify the authenticity of a token by virtue of the distributed nature of the way the token is created. There are literally thousands of copies of the token distributed across computers all over the world. This construct makes tampering with a token practically impossible since you would need to tamper not only with the local copy in your possession, but with the thousands of copies in existence whose whereabouts you have no idea.
What these tokens represent is a matter of definition. You could use them to trade baseball cards, concert tickets, works of art, a Rolex watch, literally any meaning you wish to attach to a token as a certificate of authenticity.
As someone with a technology background, I believe the underlying technology has a lot of promise to lower the transaction cost and revolutionize many types of commerce that don’t exist today.
The problem I see with tokenizing securities is that securities are governed by a complex fabric of securities regulations with multiple jurisdictions each of which can be slightly different. The issue of compliance requires using the existing rules and regulations. The securities Act of 1933 generally doesn’t allow for the trading of exempt securities, depending on the exemption. The requirement to comply with existing regulations means that the digital token system would need to parallel the paperwork required to comply with securities regulations. Until the SEC, and all of the state and provincial securities regulators recognize digital smart contracts that are possible using digital tokens, the benefits of digital tokens will be completely negated by the need to comply with existing regulations.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about a question that is on everyone’s mind. Construction prices are rising. Interest rates are rising. Not only are rates rising, but it looks like lender liquidity is shrinking. Rents are rising, but who knows for how long? Salaries are rising for now, but could flatten or even decline if we experience an economic downturn. Will that apartment project be affordable when it’s completed in two years from now? An economic recession seems all but certain. The question is, how do you underwrite a project in these market conditions when so many of the critical variables seem to be so uncertain?
I just came back from the 20th annual Investor Summit on Sand and these questions and more were the topic of seemingly every conversation whether it was over breakfast, or dinner, or late at night. Almost all of the 282 attendees are trying to make sense out of it.
We had Danielle DiMartino Booth, who worked at the Federal Reserve Bank of Dallas for nine years provide us with an insider perspective on the most recent announcement last week from Federal Reserve Chairman Jerome Powell.
If you would like to see a replay of her talk, click the link ---> https://fb.watch/dHcuFbbHe6/
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we're talking about energy insecurity and why we can expect to see continued high energy prices well into 2023.
Host: Victor Menasce
email: podcast@victorjm.com
David Morris is based in Birmingham, Alabama where he is part of the core team specializing in EQRP. They also have a construction manufacturing project that when completed will deliver high volume construction components into the home building industry. To learn more or to connect with David, email him directly at david@eqrp.co.
Host: Victor Menasce
email: podcast@victorjm.com
Axel Monsaingeon is based in Montreal Canada and is developing on Main Street in a small resort town North of the city. He purchased a building that burned to the ground a few weeks below closing and is dealing with the complexity of remediating what is now considered an environmentally contaminated site. Today's show is a lesson in what can happen when the unexpected happens. To learn more or to connect with Axel, visit realestateeffect.ca
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about shifts in economic data that are coming fast and furious. The economic indicators are changing faster than at any time I can remember. In fact there are so many things happening right now that it was somewhat difficult to decide what to talk about today.
We’ve just had a historic interest rate increase on Wednesday of this week. The words of Jerome Powell have been headline makers. They have been picked apart and analyzed. For me, the biggest tell in that story is that there were no questions in the question period regarding the housing market.
Sometimes these economic indicators are changing daily. But we’re not going to talk about the interest rate increase.
Instead we’re going to examine why The National Association of Realtors continues to assert that there is a shortage of nearly 6.8 million homes across the United States. In fact, this statistic has been quoted in the news for an entire year and is almost widely accepted as fact.
In fact that first report came out on June 16, 2021.
Since then, the association has continued the narrative that the nation needs another 6.8M units. However, these statistics fail to hang together when you look at the data on a local level.
The key to this story is understanding demographics.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at the question of whether value add strategies can be effective in an environment of rising interest rates.
This realization came from a discussion with Ken McElroy, legendary investor and principal at the MC Companies.
We went through a thought experiment about a simple value add project that would be representative of a typical apartment turnaround project.
Host: Victor Menasce
email: podcast@victorjm.com
The housing market has taken a huge hit this year as mortgage interest rates have surged and homeowners scale back on purchases.
The latest casualties in the property technology world are Redfin and Compass, which both announced layoffs today that combined amounted to about 920 people.
In a letter to employees and published on the company website, the CEO Glenn Kelman wrote and I’m going to quote a portion of the letter.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about about how to navigate construction debt in the current rising interest rate environment.
But before we talk about rising interest rates, we need to talk about the kind of debt you may want to use for your projects.
There are so many different types of debt. On today’s show we’re going to talk about the ones we like to use and which ones we use with extreme caution
We believe that in a rising interest rate environment, all borrowers need to be careful.
When people think of borrowing, the most common source is a bank.
In our experience, banks tend to have very narrow lending criteria. They are generally offering the lowest rates, but often have terms that are not a fit for your projects.
Host: Victor Menasce
email: podcast@victorjm.com
We’re going to look at a sale offer of a commercial office building and we’re going to dissect the viability of this offer.
The seller in this case is offering to sell a property that has an as-is appraisal for nine million dollars from a major brand name commercial brokerage house and appraisal firm.
The seller purchased the building a couple of years ago for 5 million dollars. He is willing to seller finance the building with $750,000 in secured debt and another $2.25M in forgivable debt that would be unsecured.
The offering prospectus has a plan to convert the building to residential, and the assertion is that the building would be worth $17M after the conversion is complete and leased up and stabilized.
The building is currently 50% occupied.
The question is whether this offer is a good deal?
Host: Victor Menasce
email: podcast@victorjm.com
Isabel is based in Phoenix Arizona where she owns and operates a portfolio of residential assisted living homes. She also runs the RAL Academy which has trained thousands of owners and operators how to develop and run successful residential care homes across the nation. To learn more, and to connect with Isabel, visit RALAcademy.com.
Host: Victor Menasce
email: podcast@victorjm.com
Noel Walton is based in Killeen Texas, home of the US Army's Fort Hood where he and his colleagues have formed "The Joint Chiefs of Real Estate" (JCORE). They are investing in multi-family assets and are bringing military discipline to the world of real estate investing. To connect or to learn more, visit jcoreinvestments.com
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about how this business looks easy from the outside. I had dinner with an investor last night and they kept marvelling at how easy we made these huge projects look from the outside. Well, I’m here to tell you that nothing could be further from the truth.
Today’s show is all about problems. Problems, problems, problems. They seem to be everywhere. Let’s be clear. This is not whining or moaning and groaning. Although to some, it may sound like whining from a distance.
Real Estate development projects are conceptually simple. But it’s the thousands of details and regulations spanning everything from design, to construction, to capital to entitlements and tax. Each of these steps represents an opportunity for a problem. On today’s show I’m going to just touch on a few.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about how to navigate economic cycles.
In a rising market, everyone looks like a genius. The rising tide lifts all boats and celebrations abound each passing month. Some of that is real wealth creation, and some is paper wealth creation that might take a very long time to realize.
We are absolutely in a destructive environment for many on a global basis.
At the same time as we are experiencing supply side shocks to the economy, our government and central bankers are trying to tame inflation by increasing interest rates to reduce demand.
An interesting thing has happened during this economic cycle in real estate. We have not lowered our standards for underwriting in order to meet the more competitive market environment. We know that economic cycles happen. The cause might be unknown. The timing is unknown. The depth is unknown. But you know that there will be an up cycle and a down cycle. Anything you do in the world of real estate investing has to be designed to span economic cycles.
When you buy a building and sign a loan agreement with a 25 year or a 35 year amortization, you know that there is going to be a recession during that period. There might be three recessions or maybe five recessions during that period. Nobody knows how many. But you had better design your project to survive those up and down cycles.
Host: Victor Menasce
email: podcast@victorjm.com
There are numerous articles out there in the mainstream media ranging from the Wall Street Journal to Fortune Magazine stating that we are now in a completely different market compared with the past two years. The articles then go on to assert that we cannot rely on historic data for comparable sales because the market conditions have changed.
On today’s show we are asking the question about whether we truly are in a new housing economy?
What methods can we use to determine property value?
If you ask any appraiser, they will assert that the traditional method of valuing property looks at a trio of methods.
- Comparable sales
- Replacement cost
- Multiples of net income
Professional appraisers look at all three of these metrics and then decide which of the three should take precedence in the specific circumstances for a subject property.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about leverage and the impact of rising interest rates on apartment owners.
Leverage in any transaction can be your friend and it can also bankrupt you.if you are over leveraged. Many investors have been betting on inflation continuing to rise uniformly across the economy.
When prices rise, then eventually wages will rise too in order to keep pace with inflation. Operating expenses will increase, but on average rent growth will outpace the rise in operating expenses.
But what about interest rates?
What if interest rates rise so fast that the result is negative cash flow?
Investors have bid up the prices of apartments over the past couple of years to levels that make no sense to me. We have read the reports of cap rates approaching 3.5% in many cities across the US including Austin, Denver, Nashville, to name just a few.
When interest rates are pushing 4.5-5%, then the bank is earning higher yield than you are as an investor. That is very reminiscent of the 2007-2008 timeframe. It’s as if investors failed to learn the lesson from the 2008 financial crisis.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are discussing a question that I get very frequently. So I’m not going to attribute the question to any single listener. The question is whether: A three story 30 unit apartment building with below market rent is a good purchase to reposition and increase rents up to market as a value creation play?
The theory is that the property has been mismanaged and that by making improvements to the property you can increase rents and therefore increase the value of the property.
The fact that the property has below market rents means that the building is very likely an older building. This means that the building is definitely going to be positioned as a C class building and it will be virtually impossible to position the building as anything but C class.
Host: Victor Menasce
email: podcast@victorjm.com
Emma Powell is based in Salt Lake City Utah where she runs a multi-family investment club that had its roots in the syndication business. Yo connect with Emma visit http://highrise.group. You will definitely want to hear this fascinating perspective on another way to participate in the world of large scale apartment investing.
Host: Victor Menasce
email: podcast@victorjm.com
Loe Hornbuckle is based in Dallas Texas where he leads the Sage Oak group of Assisted Living and Memory Care homes. Loe is a business partner of mine in the assisted living business and on today's show we're talking about the lessons learned between generations of new service offerings being introduced into the marketplace. The Sage Oak is hosting the grand opening of its newest campus in the North Dallas suburb of Denton Texas this weekend. To connect with Loe, visit goodhorncapital.com, or thesageoakcompanies.com.
Today's question comes from Atisha in Philadelphia.
I was blind-sided with the news that my recently bought two-family home is legally a SINGLE FAMILY dwelling.
I closed on the home in November of last year. It appraised for $300,000. I live in one unit and rent out the other on a short-term basis on Airbnb.
I now have to obtain a Limited Lodging License in order to continue renting on Airbnb. I went through the process in order to do so and was blind-sided at the L&I office with the news that the property I bought is not actually a multi-family home, but a single family home.
The seller applied for RM1 classification but never obtained any permits to do the work of flipping the home from single-family to multi-family. All of the work that the seller did to the property was done ILLEGALLY, without any approval or permits. I went through the process of purchasing this home; having extensive credit checks done on me, paying for home inspections, paying for appraisals and expecting the utmost due diligence from my lenders, the appraiser they hired, my title company and realtor.
Now, I am here today with the information that there was fraud somewhere along the line and I now cannot LEGALLY rent out my home for the purpose it was purchased.
I am kindly asking for your advice on what steps I need to take moving forward. I am in need of an attorney who will be able to fight on my behalf.
Atisha, I'm sorry to hear about your troubles. First of all, I’m not a lawyer and I don’t want to be in the role of providing legal advice. I can make an introduction to two lawyers in the Philadelphia are who I would trust to help you with issues of this sort.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about why interest rates will continue to rise until more people lose their jobs.
It sounds strange to say this, but the Fed wants to see people lose their jobs. On today’s show I’m going to describe why that is. On yesterday’s show we reviewed a new book written by Ben Bernanke, former chairman of the Federal Reserve.
It was only after reading that book that I fully understood the comments being made by current Fed chairman Jerome Powell. There are two mandates at the Federal Reserve.
1) Help the economy achieve full employment
2) Maintain stability in financial markets including price stability.
The second mandate really means managing inflation. It’s no secret that we are experiencing a global inflation phenomenon. This is not limited to the US.
But the theory is that when inflation becomes entrenched, then the expectation of inflation becomes much more difficult to overcome. The result is a wage and price spiral. We are now seeing employees demanding cost of living adjustments to cope with inflation. These adjustments were not happening on a large scale in 2021, but we are seeing both individual and collective agreements where employees are seeing wage gains in excess of 10%.
The theory goes back to the inflationary period of the 1970’s and 1980’s. In those days the expectation of inflation became entrenched in society and a wage and price spiral took hold. Prices increased and employees demanded higher pay in order to keep up. Higher wages would translate into higher expenses which drove higher prices in an endless cycle.
Unemployment is currently running at 3.6%. This is the lowest unemployment since the 1950’s. Unemployment below 4% is considered to be full employment.
So the economists at the Fed know that until unemployment jumps to maybe 5-6% we will continue to see an upward spiral on both wage and price growth.
The current chair of the Federal Reserve must be very guarded in their language. Their words have the power to influence the market in both the short term and the long term. But a past Federal Reserve Chairman is not bound by the same constraints. In my view, after reading Ben Bernanke’s book, I believe I understand the relationships that are at the core of the economic models they are using the to explain how our economy functions.
The Fed’s dual mandate is to deliver full employment, and to manage price stability. They must have both, not just one and not the other. If they have to sacrifice one of those two metrics temporarily in order to get both, I’m convinced that they will allow unemployment to rise in order to stop inflation.
Host: Victor Menasce
email: podcast@victorjm.com
I met G Edward Griffin about six years ago. He’s a documentary film maker who wrote the book “The Creature From Jeckyll Island “ This book is a historical account of the formation of the federal reserve back in 1913 and the clandestine manner in which the Fed was conceived.
As real estate investors we hear reports about the Fed and how it influences so much of our investment environment. There is no shortage of people opinionated about the Fed. But how many truly understand the Fed and how it operates.
So when Ben Bernanke, chairman of the Federal Reserve during the financial crisis of 2008 and it aftermath wrote a book about the Fed and his personal perspective on the way in which the Fed plays a disproportionate role in influencing our economy, I just had to read it.
I also decided that I would share it with you. I’m not here to say that I endorse or promote everything that he has to say. But he has a perspective on the Fed that few others do and I feel strongly that something so vital to the underpinning of our financial system is worth understanding.
The book starts with a historic perspective from inception and how the role of the Fed has evolved over the years, through the Great Depression, two world wars, the entrenched inflation of the 1970’s and 1980’s, the financial crisis of 2008 and now most recently the pandemic and an unprecedented period of financial liquidity.
Fast forward to the pandemic, and it’s clear that the Fed didn’t have the tools to help the economy directly from the disruption of the pandemic and the lockdowns associated with it.
The tools employed by the Fed are new. Lowering interest rates would not put food on the table for those people who were forced to stay home for months during the period of social isolation.
Ben Bernanke was not at the helm during this momentous time. But he still has relationships with many of the people who continue to be directly involved in the decision making. He understands what rules needed to change in order to attempt bringing stability to the financial system. He is very quick to point out where the Fed has made mistakes in the past and made economic matters worse instead of better. His perspective is current to today’s dilemma of how to fight the inflation that has surfaced as a result of overshooting the stimulus initiated to fight the pandemic.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at the question of whether globalization is dead. The conflict in the Ukraine has made it clear that some global supply relationships may be severed for years to come. The rise of China’s power and influence globally has given some reason to pause and question whether western countries should be manufacturing in China.
There is no question in my mind that globalization is changing, but the question is how?
If we look at the forces that affect globalization, they are best encapsulated in the concepts of the ground-breaking book “The World is Flat” by Tom Friedman. This book was originally published in 2005 before the advent of Facebook, or AirBnb, or Twitter or a host of things that we now take for granted. The trends he identified in that book have played out in a way that you would have think he scripted the outcome.
When we speak about globalization, we need to define it a bit better. Are we talking about finance, manufacturing, travel, real estate, agriculture, transportation, construction.
Historically, to act globally, you needed to be a country. Then as the industrial revolution progressed, you needed to be a company. Today, for the first time in history, it is possible for individuals to operate globally.
This a world where an entrepreneur like Elon Musk can subvert attempts by the Russian military to knock out the Internet in the Ukraine. Shortly after a tweet, there are hundreds of Starlink terminals in the Ukraine. Now there are more than 10,000 Starlink terminals and another 5,000 are on the way. More than 150,000 users from Ukraine are on Starlink on a daily basis.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about getting ahead of demand. We have seen many businesses anticipate continuing growth and no changes to market conditions.
It happens in virtually every Industry. Even the most analytical companies in the world can get it wrong.
We saw several retail giants experience adverse conditions in the past quarter. Walmart, Target and Amazon were the most visible of these announcements.
Amazon surprised Wall Street with its first quarterly loss since 2015. That happens when expenses exceed revenues. So how did Amazon get it wrong? Did they hire too many people? Did they make too many financial commitments?
The company has been expanding quickly making investments in expanding their fleet of aircraft with their growing captive airline called Prime Air. They have been growing their network of distribution warehouses and fulfilment centres all over the world. Some of these facilities are company owned, but in fact many are leased from developers who built these giant buildings to Amazon specifications.
It seems that Amazon’s construction of fulfillment warehouses has gotten ahead of current demand.
Amazon spooked investors last month after reporting slowing growth and a weak profit outlook that it attributed to overbuilding during the pandemic when homebound shoppers stormed online. At the end of 2021, Amazon leased 370 million square feet of industrial space in its home market, twice as much as it had two years earlier.
Host: Victor Menasce
email: podcast@victorjm.com
Fabian Fraser is a big city guy who moved to a small city and discovered opportunity for multi-family investment in unexpected places. On today's show we're taking a look at how affordability has pushed people to smaller communities where the vacancy rate has been very low and rent growth has been well above market averages. To connect with Fabian, email him at fabian@yadagroup.ca
Host: Victor Menasce
email: podcast@victorjm.com
Sandhya Seshadry is based in Dallas Texas where she specializes in repositioning multi-family apartment complexes. She too made the transition from the world of micro-chip design into the world of real estate investing. To connect or to learn more, visit multifamily4you.com
Host: Victor Menasce
email: podcast@victorjm.com
It seems like we can’t go more than a few days without talking about inflation or interest rates. On today’s show we’re taking another look at how interest rate policy can be effective at fighting inflation, and where higher interest rates will make no difference at all.
We keep hearing from the Federal Reserve board of governors that they will continue to increase interest rates until inflation is brought under control. It’s as if there is a scientific relationship between higher interest rates and lower inflation. On today’s show we’re going to look deeper at this question and see if we agree with that notion.
In my mind, Interest rates affect capital expenditures, and they affect the cost of financing operating capital. If interest rates go up, my costs go up as a business owner. It means that I may have less money to spend on my business for things like staff and labour. It means the cost of borrowing go up. The biggest costs for borrowing are on buildings, equipment and inventory.
In the broader economy, interest rates can also affect consumer spending on discretionary items. That’s partly why an increase in interest rates will cause a reduction in GDP and risks pushing the economy into recession.
The increase in fuel prices is a global phenomenon, that has more to do with global supply and demand, geopolitical factors involving Russia, and less to do with loose monetary policy by the Fed. Cheap money would theoretically help the oil industry increase production, but we have had cheap money and money printing for more than a decade and frankly that has not benefited the energy industry very much at all. So raising interest rates won’t cause the price of oil or natural gas to go down.
Some items in the economy can be considered highly inelastic with price. For example, if your distance to work is 20 miles, you are going to drive 20 miles to work, even if the price of gas goes up by 50%. This may reduce your spending elsewhere in your monthly budget. But if the Federal Reserve raises interest rates, you are not going to drive a shorter distance to work, and you are not likely to change.
To that extent, the change in interest rates won’t affect the price of energy. Since there is a direct connection between economic output and energy consumption, an increase in energy prices will always cause prices to increase across the board in virtually every sector of the economy.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re examining why the stock market has fallen so quickly. If you go back to 2008 and 2009, when the market conditions changed in real estate, why did prices seem to drop quickly?
It turns out that when you make a decision to purchase any investment, most investors have a due diligence process that they follow. In our case, our due diligence checklist consists of two checklists. The first checklist is designed to kill the deal quickly. If the deal isn’t dead after the first checklist, then the second checklist kicks in. There are a total of more than 50 items on the two checklists. For complex deals, there are additional checklists that need to be adhered to.
Making a buying decision requires a lot of work. It’s a slow process that takes weeks, and sometimes it takes months in order to get to the point where all of the criteria are met.
By contrast, when we make a decision to sell, there are only two questions to be answered:
How much will we get for the sale?
When will we get our money?
Both these questions are relatively easy to answer compared with all of the effort associated with a purchase. The net result is that a purchase happens very slowly, but a sale can happen very quickly by comparison.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are going to take a fresh look a money. It used to be the case that a nickel was a nickel was a nickel.
It was made of nickel. It was worth 5 cents and you could buy bubble-gum with it or take a short bus ride.
But today we are taking a dive into the various new types of currency that are in existence or being proposed.
These are new types of currency are all different.
First of all, the biggest question underlying any currency is trust. Currency ceases to be effective as a means of exchange or as a temporary store of value of the confidence is not there. There are numerous checks and balances that governments have put in place to instill that confidence. We can debate whether that confidence is deserved, but that might be a topic for another day.
We have cash dollars
Dollars in a bank account
Dollars in a payment account like Paypal or Venmo
Money market funds held by a major bank
Digital currency
Crypto currency
Stable coins
Programmable coins
If you are holding a $100 bill, you can go fill your gas tank with that $100 bill. We don’t need to spend much time on cash currency. But what about all these others? How are they different from each other?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at what is happening with construction materials and how this might affect construction projects that you have in your current plans for this year.
In the past two months we have seen lumber prices fall from their peak in March of $1,450 per 1,000 board feet to a new low of $667 per 1,000 board feet. Prices had dropped in April and then jumped back up to approximately $1,000 per 1,000 board feet in anticipation of the increased construction activity of the spring and summer.
The drop in prices is coming from a number of factors on the demand side of the equation.
New home sales are down across both the US and Canada. But the decline in housing starts is only 0.2%. That is not enough to cause a substantial impact on lumber prices. The major sell off in shares of national home builders like DR Horton and Lennar reflect an expectation that the combination of rising interest rates and rising construction costs will reduce demand for new homes.
Some builders have stockpiled materials in order to secure supply and as spot prices fall they will want to consume their own more expensive inventory and buy new inventory when the low priced material works it’s way through the supply chain.
I’ve had several discussions with contractors who have experienced massive scheduling problems as a result of material shortages of all kinds. The common lament is that they get booked for a job only to arrive onsite and experience material shortages. The sub trades are then left with no work instead of having too much work. Large scale projects are generally optimized to maximize the efficiency of the scarce resource which is human labor. But when the scarce resource is material and changes from one week to the next, it can cause delays all over the construction project. Scheduling of trades in this environment has become much more difficult and it’s common for a construction site to sit idle for weeks at a time.
If the foundation is done and you have the wood and the framing crew, you should be good to go. You might be tempted to think that you should be able to make forward progress on structural framing, but that is not the case. Let’s imagine for a moment that the scarce resource is roof trusses. If you are going to wait 12 weeks to get roof trusses, you have to wait to start framing your structure until you can take delivery of the roofing structure. You can’t leave a partially framed structure exposed to the weather for months. It will suffer damage from wind and rain and will not meet the specifications when you are done. You then face the more expensive demolition and rework.
Even if housing starts don’t drop at all, supply chain constraints elsewhere in the process are slowing the entire construction process, making it much less efficient than in the past. That inefficiency translates into a fall in demand for materials because houses and apartments are taking longer to build.
My prediction is that we will continue to see lumber prices fall over the summer months. Some general contractors are fully booked for 2022, and are accepting large scale projects for 2023. But then others are recognizing the inefficiencies inherent in the current situation and are willing to accept new projects on very short notice as gap fillers.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about resilience in our daily lives. This past weekend my home city of Ottawa Canada has a line of summer thunderstorms come through the region. It was a few degrees warmer than usual and a bit on the humid side. By mid afternoon the sky had darkened . Then all the cell phones started chiming a severe storm alert in unison.
Then suddenly this wall of wind hit thrashing the trees in all directions. Frankly, I’m surprised that the trees were left standing at all.
Naturally we lost power. After the storm subsided we drove around the city looking for a restaurant that had electricity. There were vast areas of the city with no electricity and a few intersections that did have power.
Let’s be clear. What happened is an inconvenience. We might be days without power. We have no internet connection at home and the local cell tower has exhausted its battery backup.
We will probably lose the content of our freezer in this extended power outage.
We rarely even think about food insecurity let alone plan for that risk.
But this year 2022 is a year like no other. We are emerging from two years of global pandemic and that feels awesome. But at the same time we have a devastating war raging in Europe. Crops that needed fertilizer this year didn’t get it.
Agricultural problems can’t be solved with money. If you and I were stranded on a desert island and if I have a case of bananas and you have $1M in cash, I’m rich and you are hungry irrespective of how much cash you have.
Food and fuel security are at the foundation of our western society. They are so foundational that they are taken for granted.
We talk about affordability when it comes to housing. The basic rule of thumb is that housing should not exceed 30% of household income.
We don’t even calculate the percentage of food as a fraction of household income. But there are parts of the world like the Philippines where for major portions of the population food makes up 70% of household income. A 10-20% increase in food price here in North America is an inconvenience and for some households it’s a problem. Nobody wants to pay $2 for a head of lettuce, or $5 for Broccoli. But if food makes up a large percentage of your household expenses, you don’t have much tolerance for inflation before your very survival is threatened.
We are already seeing social unrest in Peru, and Sri Lanka. The unrest was enough to force the resignation of the prime minister.
The food shortages that are forecast for later this year will be like watching a train wreck in slow motion.
I feel like I need to emphasize that I’m not a pessimist. If you have been following this show for a while you will know that I predicted the pandemic before it was mainstream news. I predicted the surge in inflation before the official reports. I predicted the fall in lumber prices before they happened. And I predicted the fall in the stock market. But with any of these predictions, it’s hard to know the precise timing. You can be prepared, or you can be surprised.
Brandon Schwab is based in Chicago where he specializes in boutique assisted living. We too are developers of boutique assisted living and it was good to compare notes. It seems that parts of the US are significantly under-served with this class of product. To learn more or to connect with Brandon, visit BrandonSchwab.com and you can set up a time to speak with him directly.
Host: Victor Menasce
email: podcast@victorjm.com
Tom Dunkel is based in Wayne Pennsylvania where he specializes in self storage turnarounds along the East coast of the US. This is an asset class that requires strong systems and his background in corporate mergers and acquisitions has proven to be a distinct advantage. To connect with Tom or to learn more, visit belrosestoragegroup.com. There is a free e-book on how to conduct due diligence available on the website as well.
Host: Victor Menasce
email: podcas@victorjm.com
On today’s show we are taking a look at how to fight inflation and the various efforts underway in Washington and other capitals around the world.
Yesterday the national association of realtors published statistics for home sales in the month of April. Sales in April slid 2.4% from March to a seasonally adjusted annual rate of 5.61 million in April. It showed the third month of decline in a row for volume of home sales. Year-over-year, sales dropped 5.9% (5.96 million in April 2021).
Federal Reserve chairman Jerome Powell has said earlier this week at the Wall Street Journal Future of Everything conference that the Fed was committed to fighting inflation through monetary policy.
He pointed to the housing market as evidence that interest rate policy was starting to work by cooling off demand for housing and with the hope and expectation that this will eventually result in reducing price inflation in the housing market.
He is correct that the cost of housing is very sensitive to interest rates and that raising interest rates will exert downward pressure on the housing market.
But where else in the economy will interest rates cool off inflation?
Elizabeth Warren has put a proposal for price controls forward as a way to fight inflation.
This approach has failed every time it’s been attempted in history. Justin Trudeau’s father Pierre Trudeau attempted price controls when he was Prime Minister of Canada back in the 1970’s. They didn’t work. They didn't work in Argentina, or for Richard Nixon.
But this time will be different. After all, we have the internet and electric cars and we are so much more sophisticated now so those lessons from history don’t apply to our modern way of life.
You see governments have control over very specific geographical areas. No single government has global control over markets. So if government attempts to control the market for wheat or oil or cars or housing, then business will adapt and shift supply to those locations where they can maximize their return on investment.
What happens in markets where governments introduce rent controls? Investors shift focus to areas where they can generate a profit. If government makes it unattractive to build or buy rental property in NY or California, then developers will shift their focus to Texas or Florida where they can be free from the chains of rent controls. In the short term, these controls seem like a good idea. But if you legislate businesses to lose money, then you pull supply of that product out of the market.
Eventually, an underground economy will form in response to the acute shortage of supply and push prices up anyway.
Some buildings that can’t make a profit will be converted to condo, which has the exact opposite effect. You see the government can regulate the price that a landlord can charge. They can’t regulate the supply of apartments. Therein lies the problem.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking at what is looming as a water crisis in parts of the United States.
It should not be a surprise to anyone that building a city in a desert is a bad idea.
We all need water to live and water shortages will forever alter the usefulness and value of real estate.
Many cities and towns in Arizona rely on groundwater for their primary drinking water. Some private wells compete with municipal water companies for the same resource.
In a rural area North of Scottsdale Arizona, residents in the area are being told that they will run out of water this December. Some developers have built new homes in the area and the municipal water district has refused new connections to the water supply. Some area residents have wells that are over 700 feet deep. Those wells are now dry. The Community of Rio Verde is facing an existential threat. Part of the problem is that the city’s infrastructure is 60 years old. It has leaks that result in the loss of about 33 million gallons of water annually. It will cost $130M in repairs just to stop the leaks. The city is looking for $130M in grant money because the city has exhausted their borrowing capacity.
Recent projections from water conservation engineers are suggesting that the Phoenix area will be uninhabitable by 2060.
The thing to remember, is that if water levels continue on their current trajectory, problems will arise long before 2060. We are already seeing water being cut off in the Community of Rio Verde Arizona in this year 2022. This will become increasingly common which will result ultimately in shrinking population. We have seen what shrinking population does to a city. You only need to look at Detroit to understand the impact.
As you look at investment opportunities, pay very close attention to the sustainability of city services.
Earlier this week we looked at the difference between an owner occupant versus an institutional owner. We asked if is it true that homes cost the same to operated regardless whether the owner is an individual or a corporate investor? We concluded that the costs were the same. On today’s show we’re asking whether institutions are driving the market and pushing people out of home ownership? Is the large scale purchase of homes by investors reducing home ownership rates across much of the country?
Is the middle class shrinking and are we indeed becoming a nation of renters instead of a nation of homeowners? Is the American dream, or the Canadian dream alive and well, or is it dying?
We’re going to look at some numbers from several states in the US to see what is happening in terms of home ownership.
The Federal Reserve Bank of St. Louis publishes some very useful statistics. There are regional differences in home ownership to be sure. On today’s show we’re going to look at those places where home ownership is the highest, and those places where it is lowest.
Host: Victor Menasce
email: podcast@victorjm.com
A number of people exited the workforce during the pandemic. That reduction in workforce participation is largely credited with the worker shortage. Some people chose to retire altogether. We have seen a big reduction in the participation in the workforce. People concluded that they were tired of their old jobs, they liked the at-home environment, and they would retire early.
The theory is that people in retirement spend less than at the peak of their career with kids and college and two cars, and sports.
There are a number of different calculations out there for how much money you need to retire. They’re all a variation of the net present value calculation.
But NPV calculations are complicated. Most people don’t know how to perform that calculation. To make it easier, some financial planners use simplified math. There is the 4% rule which is often quoted. That says that if you’re going to spend $x a year in retirement and you plan to retire at age 55, you should plan on spending no more than 4% of your retirement savings per year. But that’s a highly simplified calculation. There are a number of variables which can erode the value of retirement savings.
The first question is how much income can you expect your retirement savings to earn on an annual basis?
Many actuarial tables used by pension funds assume an investment income of 8% per year. But that income has been cut down in recent years as a result of a decade of low interest rate policy.
Many pre-retirees look at the value of their stock portfolio and calculate the 4% based on the value of the stock portfolio.
If you had a stock portfolio worth $1M, and let’s say that inflation was running at the government benchmark of 2%, and let’s say that you were earning a conservative 4% in your retirement account, you would need $1M to have your money last you all the way to age 90.
But there are a whole lot of assumptions in that amount.
When we see a pull back in hiring as companies experience a reduction in earnings, and at the same time you will also see a wave of people re-entering the workforce.
The Federal Reserve pointed to strong underlying economic metrics for their more aggressive interest rate policy. They pointed to strong ongoing hiring and historically low unemployment as to why they believe the economy has inherent robustness. But they have forgotten that the jobs picture is the result of years of loose monetary policy. The demand for employees and the shortage of workers is a direct result of the monetary policy. Asset price inflation is one of the reasons that there are so few workers.
Once people wake up and realize that their retirement is at risk, they will be forced to return to the workforce in large numbers. They will realize that not only will they need to get a job, but that the job market will quickly dry up when the economic downturn takes hold.
You won’t see this narrative in the Wall Street Journal. You won’t see economists from the Federal Reserve making this assertion. You won’t see members of Congress talking about this in the middle of a mid-term election campaign.
On today’s show we are talking about the merits of large scale landlords on the housing market. The affordable housing advocates are highly critical of institutional buyers removing inventory from the market by competing with buyers for single family homes. These big bad landlords are making huge profits on the back of these poor tenants.
As interest rates increase, it is true that many first time buyers will get shut out of the market at least for a while.
But if someone has the monthly income to rent, presumably that exact same property would cost the same amount of money to hold it if it was owner occupied versus owned by a landlord.
The intrinsic cost of a given property should be very similar regardless who owns it.
On today’s show we are looking that basic premise and asking:
1) is it true, or at least is it substantially true such that the differences between an individual buyer and an institutional buyer don’t materially affect the dynamics of the housing market?
Host: Victor Menasce
email: podcast@victorjm.com
Nathaniel comes from Los Angeles where he specializes in luxury properties in the celebrity segment of the market. On today's show we talk about how the celebrity segment of the market differs from other segments in the market. To connect with Nathaniel, please visit instagram and search for GetzelsGroup.
Host: Victor Menasce
email: podcast@victorjm.com
RJ Burr is with Panther Exploration, an oil and gas exploration company based in Bowling Green Kentucky. The entire Burr family are deeply entrenched in the oil industry. Today's conversation centers around the prediction that oil prices are likely to remain elevated for a long time. To learn more about the oil industry and to connect with RJ at Panther Exploration, visit panex.us
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about market valuation and the narrative that investors attach to prices. The daily headlines are about the latest stock market bloodbath.
We hear terms like bullish and bearish. Some people I know have earned the nickname perma-bear to somehow denote that they are biased towards pessimism.
The first part of this year has resulted in a tremendous amount of paper wealth destruction in the stock market and in the crypto currency market.
I simply don’t buy into the notion of bullish or bearish as a label that I would attach to myself.
Think about it this way. Imagine if you had a one ounce gold coin. If you wanted to trade that gold coin for two half ounce gold coins, that would be a fair trade. If you traded that one ounce gold coin for five 0.25 ounce gold coins you would be turning a profit of a 0.25 ounce of gold. In that trading scenario the frame of reference is ounces of gold and you either trade for a profitable amount of gold, a neutral amount of gold, or a losing amount of gold. It’s simple math. 1+1=2. 5-4=1. These are all within the grasp of any second grade student who understands addition and subtraction.
In today’s market, I’m seeing many cases where a single family home is selling for a substantial premium over what it costs to construct a replacement of that home. That valuation doesn’t make sense to me.
I want to see valuations grounded in tangible hard math that is grounded in a rationale. That rationale should be based exclusively on what the last trade price was. Too many markets are relying on the last trade price as the benchmark and for that reason we see words like bubbles being thrown around.
Does that make me a bull or a bear? I think neither narrative applies. I’m just pushing for a simpler time when value could be tied back to something tangible, rather than an arbitrary story.
On today’s show we talking about the impact of energy policy on housing. The fact remains, the US has underinvested in oil and gas since 2015. Despite the high prices currently in the market, the number of new wells being drilled is not quite enough to keep production levels constant on a year over year basis.
The US currently produces about 20% of the world’s LNG, and over the next 6-7 years that will increase to producing about 30% of the world’s LNG. That will make the US the dominant player. Even with that, the US will still keep the majority of it’s natural gas for domestic consumption. The constraint on liquefaction capacity will ensure that domestic prices for natural gas will still be lower than global prices for natural gas.
We still have 40% of the world’s energy being consumed by 15% of the world’s population. As emerging market economies grow, so too will their demand for energy.
There are a lot of movements across the political spectrum to invest in green energy technologies. I’m here to tell you that these will only truly win when the economics of energy efficiency.
When you can convince the guy on the streets of New Delhi with two bricks of coal that there is a cheaper alternative than cooking on two bricks of coal, then you have a realistic shot at true improvement of greenhouse gas emissions.
We don’t have viable sources to make up for the structural shortage we are experiencing globally at the moment, let alone displace oil and gas with green alternatives at a rate that will replace expansion of emerging market economies like China and India.
Energy prices have the makings of protests in Europe and these are spreading all over the world.
North Americans are the largest consumers of energy per capita in the world.
While the pain of $7 a gallon of gas is real in many parts of the US, we have not seen riots over this yet. But it’s possible. I believe that higher energy prices are here to stay for the foreseeable future.
Much like in the 1970’s when the US lost its dominance of the auto industry by resisting energy efficiency, we are at another inflection point where energy efficiency and energy transitions become important.
In the world of real estate, this is best addressed through design in new construction, but is difficult to retrofit to existing buildings.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s show is another AMA episode (Ask Me Anything). Today's question comes from John who asks:
I have an acquaintance who has a land assembly under contract that has development potential. The assembly consists of two properties on a main street with close proximity to a river. The property will need to be rezoned and I’m being told that the property will sell to a backup offer with someone else unless the current contract is completed. The timeline for waiving the conditions on the existing contract is too short to complete my due diligence. The property is in an amazing location and I’m scared to let this one go. At the current price, I think the property is a good deal. What are your thoughts on buying from the wholesaler?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about changing the use of real estate in the downtown core in many cities. It’s no secret that the world is swimming in excess office space since the start of the pandemic.
I’ve been involved in direct discussions on several major office buildings that are candidates for conversion to apartments.
A recent report from CBRE puts the amount of sublease space available for rent at 159 million square feet across the US. That's in addition to the 144M square feet of new construction in the pipeline and the 15.9% official office vacancy rate. On today's show we're looking at some of the variables in office to residential conversions.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we’re taking a look at the extent to which our housing market is completely addicted and driven by the availability of debt.
There are some powerful lessons to be learned from the financial crisis of 2008. It was the near insolvency of thousands of banks and insurance companies that precipitated a massive lack of liquidity in the lending market. The unprecedented bailout of banks and insurance companies by the federal government and by extension the federal reserve came with some very stringent underwriting criteria. On today's show we look at the market statistics from two markets and try to make sense out of the data.
Host: Victor Menasce
email: podcast@victorjm.com
Brian Scudamore is a living legend in the world of entrepreneurship. He's the founder of 1-800-GOT-JUNK, and WOW 1 Day Painting, and Shack Shine. His brands are world renowned in their segments. He has taken the ordinary and figured out how to create exceptional.
Brian recently wrote a new book called "BYOB, Build Your Own Business, Be Your Own Boss". It's a book designed to inspire those with an entrepreneurial bug how to build and scale a business. You can connect with Brian at BrianScudamore.com and you can buy a copy of his book anywhere books are sold.
Host: Victor Menasce
email: podcast@victorjm.com
Kim Radaker Bays is based in Dallas Ft Worth where she runs the Exponential Property Group having invested in approximately 10,000 apartments since inception a little over a decade ago. On today's show we're talking about managing risk in today's rapidly changing environment. To connect with Kim visit https://exponentialpropertygroup.com/ or email invest@exppg.com.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about how to design a product for the market when the spreadsheet is telling you otherwise.
We’re developing a storage facility in a tertiary market up in the Rocky Mountains. Most of the existing storage facilities in town are older and date back to the 1980’s and 1990’s. The newest facility was built in 2019. The market has very high occupancy and we see demand in excess of the existing supply.
The interesting thing is that none of the facilities are climate controlled. When we rely on a spreadsheet analysis alone we would come to the same conclusion that climate controlled storage would not make financial sense. There is considerable additional cost associated with insulating the space and then outfitting the HVAC infrastructure. The electrical requirements for the entire site would increase considerably and the additional revenue when balanced with the additional costs would not return additional profit to the bottom line.
We would be reaching the same conclusion that all the other storage facilities have. Climate controlled makes no sense.
But this is where market positioning becomes important. If you don’t want to be differentiated in the market, then it’s easy to treat your product as a commodity and play the same game as everyone else.
In a commodity market, all of the products are the same. They all offer the same value and the only differentiator is price.
One facility might be more conveniently located and will win the business. But apart from location, these facilities are completely interchangeable. Will someone drive an extra mile to save $20 a month? Some will, and maybe some will not. It’s the race to the bottom.
But if someone has prized possessions that they want stored in a climate controlled environment, they will pick you and only you if you are the only one offering that in the market. There is a real benefit of being in a category of one, rather than just one of many.
They will call you first. They may ultimately not choose the climate controlled storage unit. But they still will call you first. That is a tangible marketing advantage that is otherwise intangible in a spreadsheet.
Customers may choose a small climate controlled storage locker for those few prized possessions and keep the remainder of their items in a non-climate controlled locker. There are opportunities to bundle two lockers in a packaged offering that other facilities don’t have.
When you build a building, you are not just undertaking a bricks and mortar exercise. You are designing a product for a specific customer. Product design involves thinking through the product usage from the customer’s perspective.
On today’s show we are talking a deeper look at the rising interest rate environment and making sense of the current market conditions.
Yields on the 5 and 10 year treasury have advanced faster than the actual rate increase. Bond investors are clearly looking into the future and trying to telegraph the destination of the rate increases the Fed has planned over the next two years.
The rise in rates has already decreased demand for debt in the residential market. As we reported yesterday, the demand for residential mortgage loans has already fallen by 33% as reported by Wells Fargo.
But we need to distinguish between the residential homeowner mindset and the investor mindset.
The residential homeowner is focused on ensuring expenses are minimized and cash flow is strong enough to afford the daily necessities and perhaps a few luxuries. This is analyzed simply, crudely as a snapshot is time. Is the cost of home ownership below 30% of households income? Yes or no.
But as investors we take a step back and look over a longer time horizon.
If borrowing costs are at 5% and inflation is currently running at 8.5%, then we are actually experiencing a period of negative real interest rates. The value of that loan is falling with each passing month.
If these inflation rates remain elevated for any sustained period, borrowing makes a lot of sense as an investor. The interest is deductible on an investment property and the lender is actually putting cash in your pocket each month. I realize that there is no actual cash transaction happening. But if you are repaying the loan with future dollars that are worth less than today’s dollars, and the interest rate is less than the rate of inflation, the bank is virtually giving you free money for the entire time that inflation remains elevated above your interest rate.
Host: Victor Menasce
email: podcast@victorjm.com
When I was a teenager growing up, my parents used to listen to the nightly news on the radio at 6PM every day during our dinner hour. That was in the late 1970’s and early 1980’s. Inflation was out of control. There was fuel rationing across the US and lineups around the block to get fuel from the few gas stations that had any. I was accustomed to hearing news of labor unions going on strike in search of higher wages.
On Sunday of this past week, 15,000 construction workers in the city of Toronto went on strike bringing the entire construction industry to a stop in the city of Toronto and many other parts of Ontario.
But the problem is not confined to Canada. In the middle of April, 600 Kansas City-area construction workers went on strike to demand substantial wage increases after rejecting a contract proposal from the Builders Association, a construction trade association.
The purpose of highlighting this is to help you see around corners. Trends start slowly at first in isolated cases, then spread. Those first cases can be a canary in the coal mine, an early warning system for similar situations emerging elsewhere in the economy.
Host: Victor Menasce
email: podcast@victorjm.com
You own a property that has been performing reasonably well for a number of years. But let’s face it, a few things have happened in the past 24 months. We’ve gone through a protracted pandemic, we have experienced supply chain disruptions, and a substantial period of very high inflation.
It’s probably been a while since you refreshed the entire financial model for that property since you acquired it a number of years ago.
In fact, you have probably evolved your spreadsheet for your financial model since you first went through the underwriting process for the property.
The question is simple, if you were to analyze that same property today with today’s market conditions what has changed?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about how to time the market. This is a question that I often get from listeners. It’s also an argument that I hear from those who see value in staying invested in the stock market. They say that all you need to do is time the market. There are two aspects to timing the market. There is the month to month timing and then there is the real-time minute to minute market timing.
The pandemic changed a lot of things in our society and business. After two full years it’s easy to conclude that the current situation is the new normal.
Just as quickly as things changed at the start of the pandemic, things can change again. That doesn’t mean a return to 2019. Things never go back. There will be a new normal. It means that you as an investor need to make a bet on those trend level changes and time the market accordingly. Some have argued that if you got out of the market in 2020, as many advocated, you would have missed the pandemic induced fall in the market, but then you would have also missed the nearly two years of run-up in the stock market. Clearly the first quarter has been less than stellar in the stock market.
Host: Victor Menasce
email: podcast@victorjm.com
Given the momentous global geopolitical changes that have become apparent this year with the invasion of the Ukraine, I felt it was important to study these relationships so that I would see the world from a more informed perspective.
I want to be clear, I’m not a conspiracy theorist. I don’t seek out doomsday scenarios.
Our book this month is called “War Without Rules” by retired Brigadier General Robert Spalding. Robert Spalding was the China advisor to the Joint Chiefs of Staff.
The book is an in depth analysis of the Chinese war manual called Unrestricted Warfare that was written in 1999 by two colonels in the Peoples Liberation Army.
“The only rule in Unrestricted Warfare is that there are no rules.”
The book is the key to decoding China’s master plan for world domination, which has been progressing more steadily and successfully than most Americans realize—even accelerating in the reign of Xi Jinping.
There are too many examples from this book to mention in a five minute podcast episode. This book “War without rules” by Brigadier General Robert Spalding has brought a lot of seemingly innocent world events into sharp focus.
I believe that this book is an absolute must read for anyone invested in preservation of liberty and democracy in our world.
Host: Victor Menasce
email: podcast@victorjm.com
Brandon Cobb is based in Nashville where he specializes in affordable new home construction. Affordable housing is a topic that is making headlines almost daily. To connect with Brandon visit hbgcapital.net where you will find numerous resources that you may find helpful in your investing journey.
Host: Victor Menasce
email: podcast@victorjm.com
It’s official. The economy is shrinking
The Commerce department announced yesterday that the economy shrank 1.4% in Q1.
This is no surprise. If you’ve been listening to this show for a while, you know that I have been calling out the economic contraction for some time. Do I have any special powers? Do I have a crystal ball?
The answer clearly is no. All I’m doing is paying attention to metrics that are clearly visible in the economy that are highly correlated to economic activity and are leading indicators of GDP and inflation.
You too can be days or weeks ahead of the headlines before they are announced in the official statistics, and before they make the front page of the Wall Street Journal.
This is a simple exercise in connecting the dots.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s show starts with the story of Deborah Hodge who recently married her cat, India, in a loophole scheme to avoid rental restrictions, which have barred Hodge from bringing animals into the unit. The 49-year-old woman from London devised a plan to marry her cat after already having re-homed three previous pets due to landlords who rejected pet owners from their properties. The single mom of two (humans) now hopes her show of commitment will prove to property owners that India is more than just an animal.
Beyond the extreme measure of marriage, The question of animal rights is large and complex and varies by jurisdiction.
Does a tenant have the right to have a pet living with them? If yes, then are there any limits on the type of pet? Most pet owners have the traditional cat or dog. But where is the line of acceptable? Is it ok to have a tiger as a pet? How about a Wolf? What about a rattle snake or a Python? Pythons that have escaped from pet owners have infested the Everglades and affected the entire ecosystem.
A parakeet is probably fine. How about a rooster or a falcon?
Many landlords charge additional fees if you have a pet. The purpose of these fees is to cover the cost associated with the additional damage that pets are presumed to cause. Above and beyond the additional damage, pets can interfere with the lives of neighbours. Is it Ok for a tenant to leave their dog out on the balcony barking for hours?
The rules vary by jurisdiction. Some cities have implemented local bylaws governing pets.
A study of recent data on pet damage shows a surprising fact. Pets actually cause far less damage statistically than children. Not only that, you can increase your revenue with pets in a way that you cannot with children. In my opinion Landlords should be embracing pets as an additional source of revenue and where necessary put the policies and cleaning that will keep a top quality rental property in top condition.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about more signs of economic slowdown. Last week I made the assertion that we are already in economic contraction and further postulated that because we are in an inflationary environment, we are in fact experiencing a period of stagflation.
The signs of this phenomenon are mounting and on today’s show we are going to take a look at some of the company financial reports and guidance from the first quarter that clearly point to the thesis of a slowdown. We have publicly reported data combined with direct supply chain data that paints a picture that is dramatically different from the headlines of the past year.
When evaluating a thesis of any kind, you need to guard against what is called confirmation bias. This happens when you go looking for evidence to support your thesis. There is such a wealth of information, much of it contradictory, that you can usually find evidence to support your thesis if you look hard enough.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the long term implications of the home affordability crisis. Ownership of real estate is expensive and the cost is rising faster than incomes are increasing.
Back in the late 1970’s when had the last major bout of inflation, there was a massive erosion of household purchasing power. Single income households were common back then. But as prices increased, it became necessary for many households to rely upon two incomes. It used to be the case that the average person who worked in a trade or a factory or a school teacher could afford to buy a detached single family home.
A lot has been written about the erosion of the middle class.
That begs the obvious question. If an investor can build that townhouse and rent it to a tenant who can afford the rent, why is that same home out of reach for the tenant to buy?
The answer is simple. A commercial portfolio borrower will be able to afford the equity to build rental properties, whereas many individual borrowers lack the means or the discipline to save the funds for a downpayment. That gap on the equity side means the demand for purpose built rentals will continue to grow.
Host: Victor Menasce
email: podcast@victorjm.com
Any time there are changes, there are winners and losers. Is there an anti-globalization trend?
On today’s show we are talking about globalization. We have experienced nearly five decades of globalization. Commodities like oil, wood and minerals have long trades globally. The most visible signs of the globalization trend was the rise of Japanese cars in global markets in the 1970’s. At the time, made in Japan was synonymous with cheap and poor quality. But Japanese industry embraced the work of Edwards Deming, a graduate of Yale university who pioneered many of the concepts that form the foundation of modern quality management.
Japanese cars came to symbolize higher quality and lower cost than the domestic counterparts. The barrier to overseas production was broken and companies all over the world embraced the idea that the combination of low cost labour and quality control systems would unlock the key to global competitive advantage.
Years later, labour cost in Japan are too high and many Japanese products are manufactured in lower cost geographical areas.
I’m not here to argue for or against globalization. We live in a globalized world. But we have experienced some of fragility that has been built into these incredibly long and complex supply chains. We have seen major vertically integrated companies unable to ship products to market due to disruptions in supply chains.
Business has responded with the only short term fix possible. Build inventory of just about everything in the entire supply chain from raw materials to finished products. Faced with the choice of higher inventory carrying cost or being unable to ship products, companies chose to build inventory.
But what about now? Are some companies opening local manufacturing?
We are not here to comment on whether the experiment in globalization has been successful or not. Any time there is a change of any kind there will be winners and losers. The name of the game is to pay attention to what is happening and capitalize on the trends as they emerge.
If a company is in need of long term logistics space, can you solve that problem for them? If a company is in need of manufacturing facilities locally, can you solve that problem for them?
If a major manufacturer sets up shop in town, they will fund their primary facility. But what else do they need? Do they need supporting businesses? Do they need services like cleaners, accountants, equipment maintenance, local transportation, corporate housing, hotels? What do they need?
Do those new residents require additional services? Do they need more storage? Do they need more medical office? Do they need more car washes? When the line at the car wash is 45 minutes long for most of the weekend, would another car wash make sense? In a globalized world, a portion of your shopping can arrive on your doorstep. But your storage facility, your dentist, your hair stylist, your neighborhood restaurant, still needs to be in the neighborhood.
On today's show we're getting George's perspective on how to evaluate investments, independent of what's happening in the current market conditions. I was not expecting his answer, but it makes sense. At 94 years of age, he's one of the wisest men I know. Enjoy...
Host: Victor Menasce
email: podcast@victorjm.com
Jake Marmulstein is the CEO of Groundbreaker in Chicago, Illinois. This software company develops and markets an online platform for syndicators to manage their marketing, customer relationships, and investor relations. Anyone who has investors needs a platform like this to present a professional system for the breadth of activities related to investment management. To connect with Jake and to learn more visit groundbreaker.co
Host: Victor Menasce
email: podcast@victorjm.com
If we have learned anything in the past two years, it’s that our world is interconnected more than ever before.
Countries that are close trading partners are rarely insulated from each other. In Canada we have a saying that when the US economy sneezes, Canada catches a cold.
We’ve talked extensively on the concept of counter party risk on this show.
Back in 2010, many European banks, particularly in France and Italy were on the verge of insolvency as a result of exposure to Greek sovereign debt. In the end, European and foreign investors solved the problem by lending Greece even more money. They kicked the can down the road and averted catastrophe, but didn’t really solve the problem.
Let’s put this in perspective. Greece is a tiny country, despite holding a large place in world history. The total population of Greece is only 12M people, and about 4M of them live in Athens. Compared to the population of the entire European Union, Greece is a rounding error. At the time, some of France’s largest banks were leveraged more than 30:1, meaning they held deposit reserves of 3-5%. These banks had approximately 3% of their balance sheet exposed to Greek sovereign debt which by itself would be enough to sink some of France’s largest banks.
The question is, how many other countries out there have gone through economic disruption over the past two years, are facing crushing levels of inflation, and are at increased risk of default?
The question is which country is going to run into trouble first, and then what will the cascade effect be of that counter party risk when the dominos start to fall over. Will it be Greece? Will it be the UK with debt at 345% of GDP, or maybe the republic of Ireland with debt of 700% of GDP? We are fixated on the balance sheet of the Federal Reserve. That’s important to be sure. But the next financial crisis will be the result of a weaker economy having a cascade impact on the rest of the world.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s question comes from Chris in NYC. He writes:
What are your thoughts in today's market on taking on bridge financing when acquiring a multifamily asset that has a CapEx renovation plan?
My team is finding ourselves having to go this route either because A) the assets we're finding & underwriting have a DSCR that's not at levels to support traditional debt sources or B) the property owner's T12 clear enough.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show I'm making what I believe is a convincing argument that our economy is in recession despite what governments are calling a growing economy. Let me know if you agree with the thesis of my argument.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about how to understand what the published measure of gross domestic product and how we measure inflation. Both are in fact misleading the voting public.
The concept of gross domestic product is easy enough to understand. You add up all of the economic activity in a nation, and now you have the gross domestic product. Pretty simple. But not necessarily easy to calculate.
Host: Victor Menasce
email: podcast@victorjm.com
Today's question comes from Marc in Montreal who writes:
We own a midtown Strip Mall where there is an adjoining property worth $1.3M which has 18 parking spots. It has a restaurant on the property that will be shutting down in 6 months due to retirement. A developer has an offer on the land for $2M, and would probably let me purchase it for $2.1M. Our strip mall has long term leases in an aging building. I see a scenario where a Land Assembly could convert it all to a 3 storey mixed use building with underground parking that would surely yield profit above and beyond both projects. What are the possible short term or long term strategies that we could take with this project?
I am considering a multi-phase project whereby I tear down the restaurant, build some commercial units, move my commercial tenants there, then tear down HALF my existing building, move some of my tenants there, and then the last Phase? 3 Phases, and every tenant ends up moving. After the last Phase, I simply fill the remaining spaces.
On the 2nd and 3rd floor, I would have residential units. Either Condos or rentals. Is the extra $800K to purchase the corner property worth it? I am not sure exactly how to do a napkin calculation on this, but I imagine price per square foot to build minus price per square foot to rent is the way to go, minus all kinds of carrying costs and commercial tenant improvements.
All of the commercial tenants have different long term expiration dates on their commercial leases, ranging from 7-15 years.
Let me know if you have any thoughts.
Host: Victor Menasce
email: podcast@victorjm.com
Today's show is a replay of an extraordinary conversation with Hollywood icon Lisa Haisha. She's an actor, a producer, a coach, a real estate investor, an entrepreneur. There are so many powerful lessons in today's conversation that I felt it was worth sharing again.
Host: Victor Menasce
email: podcast@victorjm.com
Jake Harris is based in Sacramento California. From there he is active in real estate projects across the nation. On today's show we're talking about his new book "Catching Knives". It chronicles understanding the difference between buying a bargain versus buying a disaster. You can order a copy of the book or connect with Jake at his website catchknives.com.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about what we can learn from the Boy Scouts and the Girl Guides.
I was speaking with an investor this week who was placing an offer on an 80 unit apartment complex in a small town. We’re talking a town of 6,000 people where the nearest population center is four hours away. This investor is looking at this small town 9.5 hours from where they live.
I asked why they were looking at this small town and the answer was that the apartments were inexpensive enough that they should generate cash flow with relatively high leverage. She thought these apartments were a bargain.
So I asked a simple question:
The Boy Scouts have Apple day every year when they fan out across the city and sell apples. Where should the boy scouts choose to sell their apples? Should they go to the most affluent part of the city with the highest income, or should they go to the most economically depressed part of the city to sell their apples?
The Girl Guides sell cookies every year. Where should they aim to sell their cookies? Should they go to the most affluent part of the city with the highest income, or should they go to the most economically depressed part of the city to sell cookies?
The answer was obvious. The scouts and girl guides should go to the most affluent part of the city to sell the apples and cookie. So I asked her why? Why should the boy scouts and girl guides go to the most affluent part of the city to sell apples and cookies?
The answer was not that surprising either. She said, there is more money. They will sell more apples. In some case, they will get donations, and some people won’t even take the apple. In those cases it’s as if they sold the same apple more than once.
The next question was revealing. If you would go to the most expensive part of the city to sell apples and cookies, why would you treat real estate any differently?
Host: Victor Menasce
email: podcast@victorjm.com
Today’s question comes from Carlos in Los Angeles
We are planning a 57-unit development student housing project at USC. We are now considering a relatively new product called C-PACE financing. The C-PACE financing + senior construction financing would achieve 85% Loan To Cost ratio at a blended rate somewhere in the 6% range.
Are you familiar with the C-PACE product and in your opinion what are the pros and cons of using it?
Host: Victor Menasce
email: podcast@victorjm.com
The Federal Reserve has signaled that they’re going to be increasing the rates in 0.5% increments at the upcoming rate setting meetings. The market accordingly has priced in 0.5%, 0.5%, 0.5% for the next three meetings instead of ¼ ¼ ¼ as had been the previous guidance.
Over the past two years, the biggest buyer of US Treasuries has been the federal reserve itself. In addition to the rate increase, the Fed is also pledging to reduce its balance sheet by $95B a month each month. Of that, $60B will be in US Treasuries and $35B will be in mortgage backed securities.
The reduction in mortgage backed securities will mean that banks will have fewer places to sell their loans to get them off their balance sheets. That might result in a lower liquidity mortgage market in addition to higher interest rates.
The US Federal debt is over 28.4 T in debt. The vast majority of that printed in the past decade. That comes to $86,000 in debt for every man woman and child in the US. That comes to 137% of GDP.
US Treasuries are issued by the Department of the Treasury, under treasury secretary Janet Yellen, who used to be Fed Chair in the Obama administration.
So far at interest rates near zero, servicing that debt has not been a problem. But let’s imagine if interest rates were to increase to 6%. That’s not so far fetched when you consider that inflation has been running above 8%. If that were to happen, in a matter of a couple of years, nearly 50% of the US debt would reprice at a much higher interest rate. In fact 72% of US debt would reprice within 5 years. Let’s imagine that in a few years time, the cost of servicing the debt rises to 6% of the roughly 30T in debt. That means spending nearly 2T in just interest payments. Well the entire revenue for the US government was only just over 4T last year. They spent 6.82T. All of this was funded by the issuance of treasuries.
The biggest customer for those treasuries was the Fed itself.
Now if the Fed is going to shrink its balance sheet as publicly stated, they are going to be retiring debt from the Fed’s balance sheet. Not only is the Fed not going to be buying more of the US debt. But they are now net seller’s of debt into the market in direct competition with the Treasury to place those bonds. The Treasury is having to sell bonds their bonds at lower prices, which means higher yield in order to compete with this new competitor selling into the market.
If the stock market crashes, then it may change the dynamic. In the event of a stock market crash, we will get some amount of flight into the supposed safety of the bond market.
If the stock market crashes, then the Fed will worry about a recession. That would precipitate a reversal of policy at the Fed.
If the bond market crashes, causing rising rates across the board, then a stock market crash is inevitable. The Fed and other central banks will continue to raise rates, and we will see rising yields until we see a bond market crash, or a stock market crash.
Fed policy has played a major role in market liquidity over the past ten years and the past two years in particular. The financial markets are behaving like a drug addict, completely addicted to the next hit of crack cocaine. But like any addict, the hits need to be more and more potent to have an impact. If you remove the injections of cash, then the markets go through withdrawal.
We still have inflation. We still have high interest rates, and we still have economic contraction.
I defy anyone to make a case with confidence that 2022 will be a year of economic growth. We have continuing supply chain disruptions due to the pandemic. We have rising interest rates. We have runaway inflation. We have war induced global supply chain disruptions.
For this reason I predict a stock market crash, recession, and a reversal of monetary policy.
Today's question comes from Mike in Pennsylvania. He writes:
Hi Victor,
Thank you for your daily podcast! I find your show format insightful and your perspective extremely helpful.
Our family has decided to sell a vacation rental we own on the coast of North Carolina that we purchased almost ten years ago. The market there is extremely hot right now and we are ready to exit at this time for several reasons.
We expect to sell for almost triple what we paid in 2013, which will leave us with a sizable capital gain tax bill unless we find a tax-favorable alternative way to invest the proceeds. I am concerned we may not be to able find and close on a new property for a 1031 tax exchange fast enough.
Any thoughts on 1031 or opportunity zone funds? How would you consider handling this?
As always...I look forward to hearing you on the Real Estate Expresso podcast!
Mike
Mike. First of all, thank you for the kind words, and this is a great question.
This past week, the Federal government in Canada took the step of temporarily banning foreign purchase of residential real estate for two years.
It’s no secret that real estate markets in Canada have been hot, much like in many markets in the US.
On Today’s show we’re looking at housing with non-resident ownership, and whether the temporary ban will in fact have the desired impact of lowering home ownership costs for ordinary citizens and residents.
The foreign ownership ban is one of several measures introduced in the budget last week aimed at making housing more affordable.
In my view, this new regulation is a decoy. Inflation is the result of printing money. Rising prices are the symptom of inflation. Just like a fever is a symptom of the flu. You can try to treat the symptoms, or you can attempt to address the root cause.
The root cause of rising prices is lack of supply and strong demand. But the lack of supply is overwhelmingly governed by very slow and bureaucratic approval processes that can in many cases take years to see a project fully approved.
Artificially eliminating demand may have a small temporary impact. But then we will experience a surge in demand once the ban is over.
Government simply will not admit its role in inflation. It’s too convenient to blame others. They’ll blame the grocery store for high food prices, and the gas station for high gasoline prices. They won’t say I’m Sorry Mr and Misses electorate, we screwed up. We printed too much money. It’s easier to blame all those foreign buyers who have no vote for Canada’s domestic problems.
This move is taken straight out of the playbook from George Orwell’s classic novel 1984. When there is a problem domestically, the playbook says you need to take aim at a foreign enemy and that will unit the country against the foreign enemy and deflect attention from the real issue.
Host: Victor Menasce
email: podcast@victorjm.com
Mark McGuire is based in Westchester Pennsylvania where he specializes in acquiring and improving self storage assets across multiple states. To connect with Mark, visit investingwithmark.com.
Host: Victor Menasce
email: podcast@victorjm.com
Alexandria Ali hails from the Pacific NW where she is a real estate investor and a practicing nurse. Not only is she a practicing nurse, she is a traveling nurse who provides relief to hospitals that are searching for staff to manage staffing shortfalls. Today's show is a follow-on to last week's show where we were talking about the crisis in healthcare staffing.
To connect with Alex and to learn more you can reach her directly at alexandriaroseali AT gmail.com.
To infinity and beyond. That’s the line from the famous Pixar movie “Toy Story”. Here in the West we are concerned with climate change and the impact that our relentless consumption is having on the planet. We’re talking about some finite resources on our planet.
But we have a moral dilemma. Those countries who are living with first world luxuries are consuming more than their fair share of energy. In fact, we have 40% of the world’s energy being consumed by 15% of the world’s population.
So why are we talking about energy? After all, this is a real estate podcast. Well it turns out that energy and a few other critical resources are the underpinning of the entire economy. For every unit of GDP, there is a corresponding unit of energy consumed somewhere in the world to product that economic output. It’s everywhere. Energy affects the production of food. Without burning of fossil fuels, you can’t manufacture synthetic fertilizer. Without fertilizer, agriculture yields would be 50% or less than they are today.
We can expect to see the linkage between energy security, cascading to food prices, and eventually food insecurity in many parts of the world. One of the principal inputs to fertilizer is ammonia. Back in 2020, the European spot price for ammonia was around 200 Euros per tonne. Today, that same metric ton of ammonia is pricing at 1450 Euros. Ammonia and lots of energy is critical to the nitrogen component of synthetic fertilizer.
Brazil is getting its last wave of much-needed fertilizer from Russia before supplies plunge due to the Ukraine war, potentially hurting harvests in the biggest grower of crops from coffee to sugar to soybeans.
A fertilizer shortage in Brazil could result in smaller harvests and higher food costs globally, given the importance of the South American nation to world crop supplies.
When you look throughout history, every time there has been a spike in energy prices, it leads to price increases in food, which leads to food insecurity, which ultimately leads to social unrest.
The armed conflict is making headlines. Interest rates are making headlines. What’s not making headlines is the impact to global food security from the conflict. The reality of globalization is that the world is far more interdependent than it has been at any time in history. The impact of these disruptions will be far greater than ever before.
Host: Victor Menasce
email: podcast@victorjm.com
A Bay Area startup just received a $300M funding round at a $3B valuation, triple its value from eight months ago.
San Francisco-based Remote Technologies Inc. helps businesses manage onboarding, payroll, benefits and other services for foreign workers that they hire, whether they are contractors or full-time employees. Remote solves those problems by becoming the employer of record for its customers' employees in every country where it operates.
This is a real estate podcast. You might be wondering what a tech startup in Silicon Valley has to do with real estate. Real estate is hyper local. Employment is generally hyper local, at least for certain types of work. But as the pandemic has shown, there is a large percentage of the economy that can be conducted remotely.
The company has customers in serving customers in 70 countries today and has a goal to be operating in 100 countries by the end of the year.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re taking a closer look at what’s happening in the world of senior housing.
The folks at Fannie Mae recently published a market update on the sector which we look closely at. We also follow the daily updates at Senior Housing News which report both trends and news in the sector.
We saw a rapid deterioration in senior housing occupancy since the start of the COVID-19 pandemic. Senior housing fundamentals began to improve in the middle of 2021, with the industry experiencing a strong occupancy rebound, according to multiple sources that we track.
Back in 2015 senior housing occupancy averaged about 90% nationwide. Developers started building more supply in anticipating of growing demand from the aging baby boomer population. At the start of the pandemic, occupancy had fallen to 87% on average with a 90% occupancy in independent living and 85% in assisted living.
Along came the pandemic and occupancies fell to 75% in assisted living and 82% in independent living. But that’s just an average.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about market psychology. There are two principal emotions that drive investment decisions, fear and greed. Fear and greed usually sit at opposite ends of the spectrum when it comes to decision making.
Greed propels people forward. Fear usually holds people back when making investment decisions.
If you’ve been listening to this show for a while, you’ll know that I’m a proponent of buying hard assets. Top of the list of hard assets is real estate. We’re talking income producing real estate.
But there are other hard assets that are also worth investing in. That can include commodity metals like copper, and precious metals like platinum, silver and gold. Gold has typically been considered a safe haven in times of uncertainty, and a hedge against inflation.
Examination of commodities as hard asset investments should not be limited to gold. If we look at other commodities that have industrial applications like copper, we see rising global demand for the product and finite supply.
Host: Victor Menasce
email: podcast@victorjm.com
Russia took a clever step last week to evade global sanctions, by attempting to peg its currency to gold.
Starting this week, the Russian central bank will pay a fixed price of 5,000 roubles ($52) per gram between March 28 and June 30, the bank said on Friday. This is below the current market value of around $68.
Economic sanctions have rarely worked in changing behaviour of governments. Sanctions have made things difficult for the population in Cuba, Iran, Venezuela, North Korea and countless others. But those governments are still in power. Economic sanctions will not topple the Putin regime either.
But Russia is rich in resources, resources that first world countries are dependent on. In response to escalating sanctions from the West for Russia’s invasion of Ukraine, Moscow said that "unfriendly" countries could be required to pay for Russian gas in rubles or gold.
Host: Victor Menasce
email: podcast@victorjm.com
Bascal Korkis hails from Tampa Florida where he specializes in in-fill redevelopment. On today's show we're talking about the application of Web 3.0 technologies to real estate.
To connect with Bascal, you can find him on social media and at korcf.com
Host: Victor Menasce
email: podcast@victorjm.com
Josh is based in Fort Lauderdale where he is part of the investor relations team for legacy-group.co. The company has invested heavily in Columbia where they are currently the #2 producer of specialty coffee in the nation with over 5,000 acres of coffee plantation under management. To connect with Josh, visit their website at legacy-group.co or email directly at investor.relations@legacy-group.co
Host: Victor Menasce
email: podcast@victorjm.com
Our book this month is by famed hedge fund manager Ray Dalio.
His observation is that every major surprise in market conditions had not been witnessed in his career as a trader on the floor of the NY Stock Exchange, nor had it been witnessed at any time before in his career.
But that doesn’t mean it was a first time event. If you bother to look back through history, these same events have occurred numerous times.
. In his research, Ray researched the cycle of 10 cycles of world dominance involving the rise and fall of a great power. These transitions usually last about 150-200 years with transition period that last between 10-20 years. These transition periods are usually marked with a lot of conflict. The outgoing powers don’t go down without a fight.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about a new report from commercial brokerage house CBRE on the state of cap rates across the United States. It comes as no surprise that cap rates have been compressing. Everyone knows that there is too much money in the system chasing yield.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s question comes from Gonzalo in NYC
First I’d like to thank you for all your insight and knowledge you share on your podcast and in your book. It’s both informative and inspiring.
I exited a bridge loan 2 years ago in the middle of the pandemic. Because of the pandemic, one of the banks requirements was to hold a cash reserve of $110k. I agreed with the understanding that the funds would be released after 12 months or once the pandemic was over. Although there hasn’t been any late or missed payments the bank requested to see income/expense report for the last 3 months. I shared the info with them which included several of the units being on Airbnb. I have abided NYC rent guidelines and have been doing 30 day minimum ONLY. The bank now refuses to release the funds stating that I am in default because I am Airbnb’in.
I was totally unaware of how the Bank would scrutinize my loan. Ideally I would like to continue to use Airbnb as it yields higher income.
Some useful facts
- 16 unit rent stabilized building
- 10 year fixed rate
- Prepayment penalty on the loan
Can you offer any advice on what course of action would be best to take! Thank you in advance for your help.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s question comes from Wayne in Mississippi
I’m observing that the share prices for national home builders like DR Horton and Lennar are both down 29% and 28.5% respectively from their highs in December. Both companies are competitors and their stock prices seem to be tracking one another. They’re both well managed companies with a strong pipeline. What is behind the share price drop? What does it tell us about the housing market going forward? How will this impact us as real estate investors?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a look at what might be a looming crisis in health care. For years, many states have been facing a nursing shortage and it is only expected to get worse. It is predicted that the United States will need another 203,700 new RNs every year until 2026 to fill openings over the next few years.
According to a new study, fully one third of nurses plan to quit their jobs by end of 2022. There are a lot of reasons for this. Later This week we will also speak with a nurse who forms part of the army of people who have heroically put themselves in harms way during the pandemic.
As real estate investors we can play a role in helping solve some of the issues that are affecting nursing shortages, including the lack of affordable housing.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we're discussing the parallels with the expansionist violence the world witnessed from 1939-1945. George was a teenager at that time and joined the army at the end of the war. Some investors have used the recent invasion of the Ukraine to pause their investment strategy as a result of the elevated uncertainty caused by the war. George offers his perspective.
Host: Victor Menasce
email: podcast@victorjm.com
Our guest this weekend is Arleen Garza from San Antonio. On today's show we're talking about the evolution from C-Class to B-Class to A-Class and most recently development. Love hearing about this journey to connect with Arleen, visit ReepEquity.com
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about an issue that surfaced after closing on a parcel of land. What we have experienced can happen on virtually any property, anywhere. Today’s show is being shared to help you strengthen your due diligence.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we're talking about a generic, nondescript townhouse selling for $191,000 above asking price in multiple offers. This is not a unique property, but yet the mismatch between demand and supply. How do we as developers make sense of market valuation as we plan for future market pricing upon completion of projects? Will seller's market conditions continue? For how long? What will be the impact of higher interest rates? Is this a bubble?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about the risks of community opposition in a development project. Sometimes these stories are so outlandish that I have to share them with you.
The project in question is located at 450 O’Farrell Street in San Francisco.
The development team behind the derailed group housing project in San Francisco’s Tenderloin district is suing the San Francisco Board of Supervisors over its decision to vote down the project in October, according to a complaint filed in the U.S. District Court of Northern California last week.
The San Francisco planning commission had previously approved plans to construct a 13-story group housing on top of the site of the pre-existing church. Once completed, the building would include 316 new apartments, a new church facility, and ground-level space for a Christian Science Reading room. The project was sponsored by the Fifth Church of Christ, Scientist. This project is located less than one block from the SF Hilton located near Union Square in SF. I’ve stayed at that hotel numerous times and walked past the Church frequently, distinguished for its Roman style columns.
The lawsuit, is the latest development in the 450 O’Farrell saga. The approximately half-acre site's redevelopment into housing and a new church was first conceived by the church back in the 1980s, according to the suit. It began the formal application process for a residential development in 2013, and ultimately proposed the 13-story, 316-unit iteration of the project in 2020.
The project underwent three revisions and was delayed half a dozen times before ultimately receiving Planning Commission approval in June 2021. The commission’s 4-2 vote to approve the project prompted outcry from Tenderloin community groups, which argued the project failed to address the neighborhood’s need for more family housing.
The insanity is that the proposal is adding more housing which is needed. The opposition seems to be discriminatory in that group housing would discriminate against people based on income. In my opinion, this is clearly in violation of federal statutes.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about when to take your chips off the table.
We have seen a significant run up in prices over the past two years. The upward pressure seemingly has no end in sight. Yet we know intuitively and as students of history that the party is likely to come to an end. Will there be better purchase prices in the future? It’s hard to say.
There is a school of thought that says you should never sell income generating real estate. In an inflationary environment, the properties will continue to appreciate and that value increase goes to the benefit of the equity holder.
Inflation always has the same effect. Inflation is the devaluation of the currency which wipes out the purchasing power of those on fixed income. It wipes out savings and it wipes out debt.
So if your cash is tied up in hard assets like real estate, which is protecting your money from inflation, why would you ever sell?
It turns out that there are a few reasons to sell selectively and we are going to look at those reasons on today’s show.
Host: Victor Menasce
email: podcast@victorjm.com
Many cities are looking hard at how to regulate vacant properties. On today's show we're looking at the issues related to this type of government initiative.
Host: Victor Menasce email: podcast@victorjm.com
Daniel Apke is based in Tampa Florida where he focuses on acquiring land on a large scale in multiple states. On today's show we're talking about the systems that David uses to conduct a high volume of acquisitions.
To connect with David and to learn more, visit landinvestingonline.com.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we're coming from a live event at the Real Estate Guys Secrets of Successful Syndication conference in Dallas.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about open banking. If you’re in the banking industry and you’re part of their software development teams, you know all about open banking. But if you’re just a bank customer, you probably have not heard about this.
Open banking is a set of protocols and application programming interfaces that allow for third party financial technology companies to interface to customer data in a controlled way. This allows for partnerships with the bank to offer a wider array of product offers.
There are initiatives in the UK, Europe, Canada, and Australia. Strangely, the US seems to be lagging the rest of the developed world in these initiatives. On today’s show we’re going to look at what is happening in Canada, which appears to be near the forefront of these initiatives on a global basis.
You can think of new entrants in payments, banking, lending. Could we see Apple Mortgages, where you can apply for a residential mortgage directly from your iPhone? I believe the answer is yes.
What is open banking?
Essentially, open banking refers to the opening of internal bank customer data and processes to other parties through digital channels.
Some of the people I speak with foresee Apple Mortgages in the future. I’m not sure I want Apple to be my lender, but if they make it easy enough, maybe there will be a segment of the population who would be open to getting a home loan by interacting with their phone.
While FinTechs have been around for years, they played at the fringes of the banking system. If given access to the banks’ data, processes and infrastructure would help them build products and services on top of what already exists. Technology giants are also likely players in a world of open banking. I believe the banks could be among the biggest winners of open banking if they, too, seize the opportunities it creates.
There are many potential applications of Open Banking. In one example, participants could use transaction data to assess the credit worthiness of businesses and consumers beyond solely relying on traditional credit bureau checks or financial statements. This would have the benefit of providing good quality information to a potential creditor without the negative credit rating impact of a credit inquiry to a rating agency.
Of course, any discussion of opening up banking records brings questions of privacy and security. The standards for access to records along with making the systems secure is of paramount importance.
Ensuring that the third parties who gain access to your financial records maintain security that is equal or better to the bank’s systems becomes paramount.
Host: Victor Menasce
email: podcast@victorjm.com
There is no question that interest rates are going to rise. If you have refinanced since the beginning of the year, you have already experienced this.
The bank of Canada has raised interest rates already by 0.25% in the past month and the US federal reserve announced a 0.25% increase on Wednesday. This is the first rate increase since 2018.
The question is, what is the real economic situation and more importantly, what are the geopolitical factors that will affect our business in the coming months and years.
The biggest wild card is China. Days before the invasion of the Ukraine, China was seen as partners with Russia in a friendship that knows no limits.
Philosophically, Russia and China see the west as an ideological adversary.
Last week I spoke with a business owner who sources 100% of his product manufacturing in China. In his words, “There was no other option.”
Our world is fully interconnected and that economic interdependence is supposed to bring global peace. For the past 50 years the world has seen a period of relative peace.
Wars between major powers have been limited to proxy wars. Each of these wars has resulted in failure for the super power that has attempted to subject the country to their will.
The US failed after 20 years in Vietnam. Russia failed after 10 years in Afghanistan. The US failed in Afghanistan. The US has largely failed in Iraq.
The question is, what would happen if your primary supply chain was to be severed for the next 10-20 years. What would you do?
If your business relies upon construction materials, what would you do? 90% of the hardware for doors in North America is manufactured in China. Most of the sinks, toilets, plumbing fixtures, electrical outlets and switches all come from China.
We have learned that in a matter of days, the world order which we have relied upon and taken for granted for decades has been upended.
The question is whether the central government in Beijing would risk their own economy by having an economic confrontation with the west.
It seems too far fetched to consider.
This next period is going to test policy makers and economists. The traditional theory is that an orderly economy will go through natural cycles of expansion and contraction. This is the result of the lag between reactions to changes in supply and demand.
When the variables are simple, expansion of supply, versus short term demand, the economists levers of interest rates and liquidity are an effective tool for accelerating or cooling the economy.
It takes an artificial disruption to create an economic contraction at the same time as a cash surplus creates inflationary pressure.
We have just gone through four cycles of artificial economic disruption as a result of the pandemic. China has implemented another series of strict lockdowns in order to stem the spread of the more virulent 0micron variant. This will disrupt the supply of manufactured goods from China yet again, putting more price pressure on manufactured goods and increasing lead times.
We are now going through another round of economic disruption as a result of the invasion of the Ukraine.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the world reserve currency. The USD became the world reserve currency in the wake of the Second World War with the international treaty signed in the mountains of New Hampshire called the Bretton Woods accord.
This three week conference had 730 delegates from the 44 allied nations in 1944. It established the rules for international movement of money.
At the time, the US had by far the largest gold reserves of any other nation, and it made sense that the US dollar was the most trusted of all the currencies in the world.
By 1971, the US was printing more money than they had gold to back the currency. Richard Nixon went on national TV to announce that he was temporarily suspending the gold backing of the USD to protect the economic stability of the world financial system.
The response to this move was the OPEC oil embargo where the OPEC member nations decided that they didn’t want to be paid in Monopoly money and they were accustomed to being paid in gold.
Eventually, Henry Kissinger struck a deal with Saudi Arabia that if OPEC agreed to trade exclusively in USD, then the US would forever protect the political, military and personal safety of the Saudi Royal Family. That agreement meant that the USD position as the world reserve currency would be secured for at least another 50 years.
It meant that if Italy buys oil from Nigeria, that transaction would be in USD, even if the US was not party to the transaction.
In order for a currency to be accepted as a reserve currency, it has to be globally accepted by almost all of the world’s major players.
Fast forward to the year 2022. Russia has invaded the Ukraine. Russia is now the subject of economic sanctions and the nation has been cut off from the world financial system. But clearly Russia will continue to ship oil, natural gas and wheat and other commodities around the world to whom ever will buy it. But now, it’s pretty clear that those transactions will probably not be denominated in USD.
Which countries are going to be the most likely purchasers of Russian oil?
Yes, that oil will probably sell at a discount to the rest of the market. But someone will eventually buy that oil. We can expect China, India, Pakistan, and a number of African countries will be buyers.
Hang on a second. When you put Russia, India, China, Pakistan together, trading in oil, outside the USD, you have nearly half the world population now buying oil using something other than USD.
At that point, the USD will have lost its standing as the world reserve currency.
Host: Victor Menasce
email: podcast@victorjm.com
The pandemic has challenged a lot of assumptions about both markets and demographics. We used to assume that school enrollment would remain stable according to demographics, and would continue to grow if population was growing.
But even as the pandemic is clearly winding down, we are seeing school enrollments fall in many parts of the country. Remote online learning has been very hard on children. It has damaged their academic development, and it has damaged their social development. The reliance of electronic learning has kept kids glued to electronics for more hours of each day, and more than ever before.
It used to be the case that real estate values were often influenced by school districts. The better the rating of the schools in the area, the more desirable that district would be from a real estate perspective.
We have seen falling enrollment in schools over the past two years. Part has been due to the pandemic. Parents have seen how their children have struggled. It’s been difficult monitoring online classrooms. In the end, for many it’s been simply easier and more effective to home school rather than try to oversee engagement in online learning.
Of the roughly 3.5 million full- and part-time public school teachers, more than one-third, or 38%, said that working during the pandemic has made them consider changing jobs.
At the college level, even more — about 55% — of faculty have seriously considered changing careers or retiring early, according to a separate report from Fidelity Investments and The Chronicle of Higher Education.
We are about to experience major churn in education.
On today’s show we’re talking market distortions, inflation, and the coming recession. The headwaters of a recession can be found in a cycle of inventory hoarding. So on today’s show we’re going to look and see if the conditions exist for inventory hoarding or not.
On March 7 we talked about derivative markets and the impact that they can have on the real value of the underlying assets.
We talked about futures markets and how these paper derivatives can be very helpful for those who have a vested interest in commodities prices to hedge against changes in commodities prices.
After all, business leaders, just like investors, want to bring predictability and certainty to their business.
In a world where currency is being devalued, it makes sense to put money into hard assets. If you’re in business, then buying inventory with today’s dollars makes sense before prices rise. The commodity will be a better store of value than the cash.
If you are in construction, and you have seen a nearly 25% increase in the price of paint in the past year, then stocking up on paint that you will use anyway seems like a good move. You doubt the price of paint will fall, so why not buy an entire year worth of supply? How about two years of supply? If you can borrow funds for your inventory at less than the expected price increase, buying now makes sense. If you are relying on nickel, then it makes sense to hedge futures and build inventory in nickel at prices you can handle. If you need lumber, then buy lumber as much lumber at prices you can tolerate as possible.
But when the market demand peaks, and consumers no longer see the need to build inventory, they will start consuming inventory rather buying from the supply chain. At that moment, demand drops like a stone, and prices fall dramatically. This dramatic swing in demand will trigger the next recession, which will be wider, deeper and longer than anyone expects. We need to be careful during this next period to know the difference between true market demand and shadow inventory in the hands of end customers.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show, we're in front of a live audience at The Real Estate Guys Secrets of Successful Syndication Conference in Dallas. Today's talk is a case study on the value multiplier that can be possible with the combination of annexation and entitlement.
Host: Victor Menasce
email: podcast@victorjm.com
Josh McCallen is the CEO of Accountable Equity, the owner of the Renault Winery and a new property located on Kent Island, a few minutes from Annapolis Maryland. Josh and his team specialize in renovating resort properties and transforming them. His track record includes beach front resorts, hotels, and most recently, properties that cater to weddings and special events. To learn more visit accountableequity.com.
Today’s question comes from Vishal in Canada.
Can we touch on the flight of capital to US from Canada of wealthy families? If not, would you mind letting us know of what you think is happening and is it real or too far-fetched a possibility?
Are you worried that we may come to a point where investments and wealthy family offices shy away from Canada? Your thoughts are always enlightening and call for some thinking on our part, so let us know in your views in a podcast episode.
Vishal, this is a great question. The article in the Financial Post speaks about Having assets in safe jurisdictions outside your country of residence is part of the solution for long-lasting wealth. If you are a student of history, governments have a history of confiscating wealth. I don’t see this as a Canada US issue at all. From that perspective, I disagree with the article. I see the problem as more general.
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Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about using data to drive business decisions. Perhaps the best company in the world for using data driven decision making is Amazon.
But what do you do when the data exists? You’re hoping to try something new in the market that hasn’t been done before, or if it has been done, you don’t have access to the data because it’s proprietary?
Well, it would make sense to run an experiment on a small scale to collect the data and then use that data to plot their next move. Amazon announced the closure of numerous recently opened stores. Does this mean that their recent foray into physical retail was a failure? Or were they simply running a data gathering experiment?
Host: Victor Menasce
email: info@victorjm.com
On todays show we’re answering a listener question that is a very common question. On today’s show rather than answering the question directly, this is the synopsis of a conversation that I had with this developer. I’m often approached by people who own land they would like to develop, or by those who want to operate a highly specialized event space for hosting wellness retreats.
This listener is looking at developing a large acreage North of Palm Desert California. This is the place that has become famous for the massive Coachella music festival that in recent years has attracted close to 250,000 people for those few days a year.
The developer I spoke with this past weekend desires to develop a wellness retreat on the acreage. The proposed project would consist of high quality amenities and the short term rentals would be made from factory built structures and assembled onsite. Part of the concept is to have short term rentals on the property. Short term rentals are typically not branded properties. This means that you are going to likely rely upon a platform like VRBO or AirBnB to market your property on a nightly basis. As the name implies, this area is a desert. The average rainfall in Palm Desert is about 6” of rainfall per year. This can range from a low of 3” per year to 10” of rainfall per year in a record year. All of the moisture from the pacific gets deposited in the mountains before reaching the far side of the mountains, which is why we have a desert on the inland side of the mountains .
When I am presented with any concept for a new project, I always ask the same questions. It doesn’t matter whether the project is located in the core of a high demand high density city, or in a rural location. All real estate has to follow the laws of supply and demand. There are examples of properties that have been developed in remote locations that have been successful. But there are even more examples of those that have failed. I’m simply not a believer in taking those types of speculative risks. I want to see demonstrable demand. That means examples of comparable properties.
The problem with property in this location is the lack of municipal services. Specifically we’re talking about water and sewer. The lack of services is probably enough to kill any opportunity of developing anything of substance in this location. The area doesn’t get enough annual rainfall to develop a sustainable reliance on an underground aquifer. In recent years, the sustainability calculations for using groundwater have become much more conservative. Calculations that were commonplace 30-40 years ago have been shows to deplete the water table and many locations have run dry.
Today’s question comes from Adam. I’m looking to reposition a four unit apartment building. The construction budget is $60,000 and we have a quote from a contractor. Construction material and labor prices seem to be changing regularly. The building is currently vacant and the longer I wait, the larger the negative cashflow will eat into the viability of the project. The property is a C-Class property and I’m trying to figure out how to finance the construction with a bridge loan of some kind. The property has an existing mortgage on it, and the after repair value should be high enough to support the increased loan amount.
The building is 110 years old and we will be replacing kitchens, bathrooms, and a total of 60 windows. We will be redoing the electrical panels, but re-using the existing aluminum wiring.
I’m concerned about a hard money lender wanting to charge too much for being in second lien position, and the bank financing has several years left on the loan with a pre-payment penalty which I don’t want to pay. The pre-payment penalty would increase the cost of the project and impact its viability. How would you suggest that I finance this project?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re taking a look at markets that operate purely like their functioning primary markets, and comparing them with the secondary markets. Primary markets are essentially what it sounds like. If you want to buy tomatoes, you go to the farmer’s market and you buy tomatoes for dinner, and the price for tomatoes is the price you pay. This is a simple primary market.
Many markets operate this way, including real estate. There is a primary market, and that’s all.
But when we are dealing with commodities that are used in the supply and manufacture of other derivative products, there are often secondary paper markets that can often be larger in dollar volume than the primary market.
Host: Victor Menasce
email: podcast@victorjm.com
Addam Hooper is the CEO and founder of RealCrowd.com. On today's show we're talking about multiple product offers being managed before you have a failure of complexity.
To connect with Adam, reach out at info@realcrowd.com or visit realcrowd.com
Host: Victor Menasce
email: podcast@victorjm.com
Ryan Webster is based in Iowa, but invests in several stable markets of the South East. You can connect with Ryan at EquityYieldGroup.com
Podcast: Victor Menasce
email: info@victorjm.com
On today’s show we’re talking about pragmatism.
It’s easy as real estate investors to be idealistic and come up with solutions that are innovative and best in class. On today’s show we’re talking about a number of examples where complexity, or cost often force a simpler solution.
For our first example, we are talking about a commercial property that will house a restaurant. In commercial applications, we know that garbage containers that are recessed into the ground have several advantages. #1, they are barely visible at the surface. #2, they control smells much better. #3, can hold more than an above ground solution. Today we learned that if we need to dig a hole to semi-submerge these trash bins, we will need an environmental assessment, and an archeologist to oversee the excavation. But if we use surface containers and a wooden fence around it, we don’t require any such approvals. Since trash handling is not truly a first order value added component to the commercial product, the added bureaucracy is preventing the better solution from being implemented.
In our second example, we’re talking about a design that was completed with input from the client, but with no input from someone who understands cost effective construction. We had to spend a few hours value engineering features out of a property that did not need to be introduced.
These are the types of tradeoffs we are examining on a daily basis. We’re not a general contractor. We hire general contractors. But unless you are willing to immerse yourself in the decisions that are being made, you will become the victim of decisions that are made for you. Sometimes those decisions will get you a finished product, but at a high cost and often with high complexity.
On today’s show we are talking about how interest rates are going up. It’s pretty clear that rates need to increase, but not for the reason that the central banks are publicly stating.
The window continues for you to acquire debt under favourable terms. But that will not last forever.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about security. We all know that thefts can and do happen all over the country with alarming regularity. Sometimes, the thief gets caught in the act. But that’s pretty rare. A smart thief is pretty adept at doing their business when people are not looking.
So we have learned to invest in security systems. Cameras can be one of the best tools in seeing what happens.
But these are complex systems that you can’t just forget about and hope they will cover you when a theft does occur.
There is a tradeoff in all of these systems. On today’s show we’re going to look at some of those tradeoffs.
Host: Victor Menasce
email: info@victorjm.com
On the first day of each month we review the book of the month. In order to be considered for book of the month, a book has to meet a simple criteria. It has to be impactful enough to change your life or your perspective on the world.
Our book this month is "Traction" by Gino Wickman. This book is an operating system for your business. We have been using it at the core of our business for two years. I can tell you without hesitation that our business has improved in terms of clarity and execution in that time.
Host: Victor Menasce
email: podcast@victorjm.com
Investors love things to be predictable. They want their investments to deliver above average returns with the safety and predictability of a government bond.
But then the world experienced a pandemic, followed by a deluge of printed money, followed by supply chain shortages, followed by inflation, followed by labor shortages, followed by an unprovoked war in Europe by an imperialistic dictator.
We have not even begun to understand the impact that the conflict in the Ukraine will have on global supply chains that are increasingly intertwined. The belief was that the best way to prevent war was to create economic interdependence. This doctrine has been at the center of much of Europe’s attitude toward Russia in the wake of the cold war.
That now appears to have been a strategic error. The new world order has been disrupted and we are now closer to World War III than at any time since the Cuban Missile Crisis.
Host: Victor Menasce
email: podcast@victorjm.com
Omar Khan is based in the Toronto suburb of Mississauga where he invests in commercial real estate in Hamilton, Ontario. The greater Toronto area remains one of the fastest growing communities in North America and affordability is driving people to the extremities. To learn more, connect with Omar at Omar@thetatradingco.com.
Host: Victor Menasce email: podcast@victorjm.com
On today’s show we are putting aside the usual weekend interview to talk about world events. This is not a political show, and I don’t intend to turn it into a political show.
But it’s an important moment in world history and I feel like I need to say what is on my heart. We are witnessing war on the European continent involving an imperialistic power for the first time since the 1960’s. War is hard to justify under many circumstances. Sometimes you see a war of liberation where an oppressed people rise up to find freedom. We have seen this pattern before. We witnessed the Hungarian Revolution in the 1950’s. We witnessed the Soviet army invade Czechoslovakia in 1968.
This is a war of aggression and of domination. This is the kind of war that the free world needs to wake up and oppose. You cannot appease a dictator.
In the eight years that have passed, Ukraine has lost the Crimean Peninsula to an illegal Russian annexation. The Kremlin has instigated a war in the east part of the country called the Donbas region, where thousands of Ukrainians have been taken captive and tortured, and some 14,000 killed in a war that serves no purpose. And now Mr. Putin has launched a full-scale invasion of Ukraine.
So what can I do? What can you do?
As real estate investors, we own real estate. We own space that could be used to temporarily house refugees coming from Ukraine. We could partner with organizations that are sponsoring refugees to find safe havens.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about doing business with people who are not real.
We had a recent interaction with a seller who turned out to be a liar. Sadly, these situations exist with alarming regularity. The property in question was based in Houston. Since we are in Texas, we will call the Seller Bubba.
I’m instantly suspicious when someone is using a gmail address or a Hotmail address. When that happens, it suggests that the person is not really serious about being in business. They can’t afford the $6 a month to go out and get a properly hosted email address with their own internet domain.
When we arranged a site visit, he refused to give us the address and decided to cancel the meeting and meet the seller himself without us. It’s clear that he doesn’t have the ability to close on the purchase.
So we conducted the most basic of due diligence on the internet. The wholesaler had no website. They had a linkedin profile and an Instagram account.
The only indication that this wholesaler was involved in real estate was a single video on his Instagram account.
Well the information in the Instagram video did not match what we were told in person. It turns out that the property doesn’t have direct access onto a public right of way. It would require an easement from the church next door, or access through another property that the seller owns.
The wholesaler went on to brag about how he was going to wholesale this property and earn a six figure income for flipping the contract to a buyer. Then he also went on to say more about the buyer. He described the buyer as an 88 year old man who owned a lot of real estate, restaurants, apartments, and that frankly he was a tired landlord.
The best part was that he was expecting to get the property locked up under contract very soon.
But wait a minute, he had just told us before he recorded the video that he had the property under contract.
When we confronted him about cancelling the site visit with our team, he proceeded to blame our team for not being trustworthy. He attacked our team members character.
I wish we could do more to protect hard working people from these kind of business predators.
I actually have no problem with working with professional wholesalers. The emphasis is on the word professional. They can be a source of great deals. I’ve bought two deals in the past year from wholesalers, and they have been rewarded handsomely.
Fakes show up in all industries, and I suppose real estate is not immune. When you perform due diligence, make sure you perform due diligence on the people who make representations. You never know what you might find.
On today’s show we’re talking about predictions. Predictions are rare for me. I don’t make them often. When I do, it’s because the data is clearly pointing to something that I can see that may not be obvious.
Earlier this year on January 4, I predicted that the pandemic as we know it would end by the end of February in North America and Western Europe.
I also predicted that oil would hit $100 a barrel by the second quarter.
So the question is, what was I seeing in the data a few months ago that made those predictions seemingly accurate?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re going through the thinking process of how to assess whether you are evaluating a viable project or not. This was a property that we got under contract because it looked like it had potential at first.
In this case we were presented with the opportunity to convert an assisted living project in Utah. The facility lost its operating license and our analysis is that assisted living projects in this particular submarket have a hard time financially.
The individual suites could be repurposed as apartments and an apartment conversion initially looked attractive on the surface. But the problem is that there is insufficient parking for an apartment building. People residing in AL don’t drive, so there is not much parking. In fact the parking ratio is approximately 1/3. We would need to add more than 40 parking spaces to have a viable apartment conversion.
We spoke with the city and they would have been supportive of an apartment conversion. They agreed that we needed more parking and assembly with one of the neighboring parcels would be essential to creating sufficient parking.
We looked at a hotel option. The suites were well suited to a hotel offering. But unless we could assemble a neighbouring parcel and build at least 40 more parking spaces, the project would not be viable as a hotel.
In the end, we decided to pass on this opportunity. It was looking like it was going to be a forced fit to make the property work physically. Even if we undertook the effort to convert the building to meet the minimum criteria as apartments or a hotel, it would still be a poor quality apartment building and a poor quality hotel. Neither of these screamed that we should go forward.
We get a regular flow of opportunities like this crossing our desk. Do we feel bad about spending the effort? Not at all. This is part of the process of finding that rare subset of projects that ultimately do meet our criteria.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about stress.
The dictionary defines stress as
“a state of mental or emotional strain or tension resulting from adverse or very demanding circumstances.”
I personally find that definition to be rather useless. Using a related word, or a synonym to describe a word is not very helpful.
So I have developed my own practical definition which I think is more useful.
"Stress is that emotion we experience when there is a gap between expectation and reality."
Host: Victor Menasce
email: podcast@victorjm.com
Today’s show is a commentary on the highly publicized Freedom Convoy protests that have gripped my home city of Ottawa Canada for the last 23 days.
What I’m reporting is my own opinion based on my own observations and from first hand conversations that I have had with people who have attended the protest.
In our culture we seem to have a need to simplify and reduce issues to a binary choice.
You are either good or bad, friend or enemy. You either agree or disagree. Things are black or white with no room for grey.
What I have observed in the news media is an attempt to select the subset of the facts that support their desired narrative. Virtually every news outlet I have seen is guilty of the same process, irrespective of which side of the argument they are supporting.
Some have said that if you support the protest then you are anti science and anti vaccine.
I’m pro vaccine and anti mandate. I believe that it was in most people’s best interest to be vaccinated earlier on in the pandemic. But as we have learned, the vaccine does not prevent the spread of the disease. It reduces the severity of the symptoms in those who are vaccinated. If people choose to not be vaccinated, even though it would be in their best interest, that is their prerogative in a free society.
I had a friend who chose not to get the vaccine, and sadly he is no longer with us. I believe he made a poor choice. I’m sad that he is no longer living as a result. I’m sad for his family and for all of his friends. But I defend his right to make a choice.
So I reject the reductionist argument that if you are anti mandate, you are automatically anti vaccine and anti science. I’m completely pro vaccine and pro science, just anti mandate. It’s not very complicated to keep those two ideas in your head.
Host: Victor Menasce
email: podcast@victorjm.com
Steve Beattie is the founder of Breathing in Nature. It sounds strange to say it, but Steve will teach you how to breath. Today's show is not about real estate, but how you can access you own internal faculties to achieve higher performance and greater health. Steve is a certified Wim Hof method trainer. Wim has become famous for breaking numerous world records for sitting in ice baths for hours at a time. Wim has climbed Mount Kilimanjaro wearing only a pair of shorts. He has ascended into the death zone on Mount Everest wearing only hiking boots and shorts. The breathing techniques that Wim and Steve teach enable incredible performance. To learn more, and to connect with Steve visit breathinginnature.com.
We took a large portion of our team at Y Street Capital through a full day workshop on how to breath.
Host: Victor Menasce
email: podcast@victorjm.com
Scott Meyers is a specialist in storage on a national basis. Not only is he an investor, he is an educator as well. You can connect with Scott and learn more at selfstorageinvesting.com
Host: Victor Menasce
email: podcast@victorjm.com
Hi Victor,
How does an investor or property owner identify the best use and development potential or highest long-term cash flow opportunity for a particular property?
Last year, we purchased a 2 acre piece of land with over 400 feet of commercial road frontage in one of the fastest growing areas in the country. Comps in the area show anywhere from $8.00 per sq foot (for vacant parcels with less road frontage) and up to $30.00 per sq foot on outparcels for a nearby Publix grocery store currently under construction opening this Summer.
Certainly not a primary or even secondary market… but perhaps tertiary since it’s outside of Mobile, AL in the path of growth! Nevertheless, the opportunities are vast and perhaps endless.
In what direction should we look to best determine the land’s most lucrative use?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show I’m going to share what I learned in my meeting with the Mayor. This was a quick trip down to Lake Charles Louisiana for the sole purpose of having lunch with Mayor Nic Hunter and the City Administrator. Three other team members came to the meeting from Dallas and Houston. We had two bankers travel several hours from Baton Rouge and New Orleans. This one hour lunch meeting involved a lot of travel for a lot of people.
Much as we have been making do over the past two years with zoom meetings, we have also experienced incredible delays with city officials taking a long time to respond to simple queries. It has become clear to me that the act of jumping on a plane to meet someone face to face has the human effect of elevating you in importance.
When they know that you traveled an entire day for the sole purpose of meeting with them, they will meet with you. You will become elevated in their priority. The Mayor needed to go to the State legislature to argue for additional money for storm recovery. The would have impacted our meeting. But because he knew we were all traveling from out of town to meet with him, he re-arranged his schedule and turned an afternoon meeting into a lunch meeting. We became a priority to him.
For those of you who know me, you know that I have a technology background. I am an early adopter of new technologies and am an advocate of technologies. I regularly spend half of my day or more in zoom meetings. I’m here to tell you that traveling to meet people face to face will be the new super power in 2022 and beyond.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s question comes from Aaron in Dallas
I’m 32 years old and currently working as a physician assistant in the emergency room, but I have been wanting to do real estate investing full-time for the past three years. I have saved a few hundred thousand and want to invest it real estate and be an active full time investor however I know that a lot of this industry takes experience since deals are hard to come by which has led me too seek an internship with a seasoned real estate investing organization. Currently I live in Dallas, Texas, but I am even up for moving if it would be strategic to have a “boots on the ground” representative in a specific market for an investment company. I have a great deal of respect for you and this may be a stretch but would even be curious about what you look for in an intern.
Any words of wisdom or guidance would be greatly appreciated!
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about overshoot. Overshoot is a phenomenon that exists in all kinds of systems. Overshoot exists in physics. Overshoot exists in individual behaviour. Overshoot therefore exists in markets.
What is this overshoot that we’re talking about? Imagine if you were driving down the highway at high speed and the sign for your turnoff was only visible after your exit. Most people would miss their exit. That’s why there are plenty of signs leading up to your exit, telling you to prepare to get off the highway. Then the designers of the highway add a special lane to help you slow down for your exit so that your exit is nice and orderly.
If there were no signs, then the exit would be chaotic. People would slam on the brakes. They would try and back up into oncoming traffic to get off the highway. Or if they get off at the next exit, they’ve clearly got some ground to make up. They overshot the exit.
Overshoot happens because of momentum, and because the signs appear too late.
So what does this have to do with real estate?
Overshoot can happen in real estate markets too. There is a shortage of supply in the market. So builders construct lots of new houses. They continue to sell well. Builders keep building and building and building. By the time the signs start to appear that the market is over-supplied, the market is already over-supplied.
The greater the lag time between the decision to start construction and the market data, the greater the amount of overshoot.
Host: Victor Menasce
email: podcast@victorjm.com
On January 31, the European Supervisory Authority which oversee the European Banking Authority, The European Insurance and Pensions Authority and the European Securities and Markets Authority issued a position paper. The body issued a Joint European Supervisory Authority response to the European Commission’s February 2021 Call for Advice on digital finance and related issues.
This 109 page document outlines how the regulator is concerned with the rapidly evolving picture of distributed financial services. The regulator is used to financial transactions flowing through a manageable number of relatively centralized institutions like banks, brokerage houses, and publicly listed stock exchanges.
In the 109 page document, they don’t do much except wring their hands in worry over something that has been rapidly becoming mainstream over the past five years.
So what does this all mean? It means that the EU is playing catch-up, as are governments the world over.
We have seen governments very slow to respond to technology. It’s taken nearly three decades since the advent of the internet for governments to even figure out how to get major platforms to collect sales taxes.
It’s easy to assume that new technologies that are not covered by regulations will be exempt from regulation.
Jerome Myers is based in Greensboro North Carolina where he coaches students from across the country in how to grow their real estate investment business.
To connect with Jerome, visit JeromeMyers.co
Host: Victor Menasce
email: podcast@victorjm.com
Preston Walls grew up in a real estate family. Today, he builds medium sized apartment buildings in the heart of Seattle. Preston takes a hyper-local perspective to real estate and continues to thrive in an otherwise difficult market. To connect with Preston visits WallsPropertyGroupRE.com.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re going to look at the insanity of cause and effect relationships that are being promoted in our economic system.
I’m an engineer by training. When you look at systems in the physical world, they follow the laws of physics. Galileo understood these principles at an early age when he dropped two cannon balls of different weights from the leaning tower of Pisa. To everyone’s shock and amazement, both cannon balls landed at the same time. Back in those days, Galileo experienced political pressure and division. But the physics didn’t care about the established power structure in the community.
I’ve had a number of podcast guests and listeners ask about what it takes to be a guest on this show.
On today’s show we’re going to look at two aspects of podcast recording. What I’m going to talk about is equally applicable to a radio show or even video. We are talking about audio quality. I’m often approached by real estate investors to be a potential guest on this show. I would say that I average about 2-3 requests per day to be a guest on the show. I reject the vast majority because I don’t think they would be a good fit for you, the listener.
Our listeners are sophisticated investors. Many of you are experienced apartment investors. Some own thousands of units. We have listeners who are investment bankers. We have lenders. We have people who are architects and engineers who work for some of the major commercial builders around the nation. You are not a rookie audience.
We are not the “We buy houses” crowd who are out there sending thousands of mailers hoping to close a tiny percentage of distressed home owners. In order to be a guest, you have to have a message that is relevant to our listeners. That’s a given. Next you have to be able to deliver quality audio.
On today’s show we’re going take a deep look at audio quality. I want you to hear the difference between a professionally recorded and edited show, versus one that has been thrown together. When you are listening to a show with high production values, you don’t notice the audio quality. It is effortless to listen to even in a wide range of environments.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re taking a look at housing sentiment. The folks at Fannie Mae conduct some of the best research in the nation. The just published their housing sentiment survey for January 2022 and the results show some interesting feelings about real estate. The survey consisted of 1006 households from Jan 3 to Jan 24.
The home sentiment purchase index has a number of components.
They look at questions like
Is it a good time to buy?
Is it a good time to sell?
Will home prices go up, down or stay the same?
The survey looks at job security and whether people are concerned about
Respondents also predicted their expectation for home price increases and rental price increases.
Host: Victor Menasce
email: podcast@victorjm.com
This question comes from Jen in Bulgaria. She asks,
I’m preparing to close on a house purchase that forms part of an attached dwelling. The basement apartment is a separate apartment and the lady who lives in the basement has been there nearly 50 years. The attic space which forms part of the main house is a third level. Legally, the attic space is written in the deed as a shared space. This means that the basement apartment has a partial claim to the attic space which is not truly connected to the basement. Think of it almost like an easement.
We want full access to the attic space for living space and don’t want the risk of the lady in the basement making a claim to it. Would you take the risk of asking her to sign a release? She is probably unaware that she even has a theoretical claim to a fraction of the shared attic space.
The lady in the basement is probably interested in selling her flat in a couple of years.
How would you handle the situation?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about a relatively new environmental standard that is increasingly being referenced by government in order to qualify for certain incentives. That standard is called the 2020 Enterprise Green Communities.
This standard is being adopted if you want to take advantage of affordable housing credits or affordable housing funding in most states of the country.
Host: Victor Menasce
email: podcast@victorjm.com
Our guest today hails all the way from Austin Texas where his team invests in commercial office, retail, and shopping centers on a national basis. On today's show we're talking about the focus for thriving in the current pandemic-adjusted market conditions. To connect with Ben or to learn more, visit hjhinvestments.com.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show I'm speaking with Las Vegas financing broker Beau Eckstein about the Commercial PACE program which provides leading specific to energy efficient buildings. To learn more or to connect with Beau, visit beaueckstein.com.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re taking a look at Canada. There was a recent prediction of market collapse of 10%-20%. The prediction came from Canada’s top bank regulator. We also have bureaucrats and politicians out there blaming house flippers for the run up in property prices.
So we’re going to take a deeper look at how real estate markets work and see if we agree with the head banking regulator. While the example we’re looking at is in Canada, the same thinking can be applied to your local market conditions.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about the shift that is taking place in the world of banking.
The landscape in banking varies widely in the US. There are a handful of big banks and still a whole lot of smaller banks. Banking in the US has undergone a tremendous amount of consolidation. Before the financial crisis in 2008, there were over 10,000 banks. Over the past decade, that number dwindled to about 6,000. As of today, the FDIC lists 4,982 banks in total.
Many of these are small community banks with only a handful of physical branches. Some were forced into consolidation after the banking regulator determined that the weaker banks were too thinly capitalized in their stress tests.
There is a difference between banks. Many depositors choose their bank based on convenience to the closest physical branch. Some depositors choose their bank based on incentives like a free toaster to open an account. Others choose the bank based on the fees charged on each account.
We like to use smaller community banks for borrowing against local real estate projects. The executive team and loan committee understand the local market better than the large national banks. These smaller banks have a bit more latitude in their lending criteria. When you deal with a large national bank like Wells Fargo or Chase you are just a number and their policies are often dictated by market conditions in other cities that don’t actually apply in your city.
But I’m also here to tell you thank banking is about to undergo another major transformation. Some banks choose to grow organically. Others choose to grow through acquisition.
TD, which is a Canadian bank is increasingly a major player in the US market. Most American clients don’t even know that TD stands for Toronto Dominion Bank. TD announced in their latest investor disclosures that they plan to hire 2,000 software developers this year. That’s on top of the 350 software developers that were hired in 2021.
When you consider the full cost of investment in that large a software development team, you are looking at more than $500M dollars per year. TD is consciously making a decision to add $500M in operating expense to annual budget. Said differently, they’re choosing to remove $500M in profit from the bottom line return to shareholders on an annual basis. That’s a massive investment.
What will they be doing with all these software developers? Listen to find out.
On today’s show we’re talking about how demand patterns will change in the wake of the pandemic. How will our world be different post-pandemic. Will people want to dine out the way they did before?
I just spent a month in Mexico at a resort with incredibly beautiful restaurants. I have to say, I really enjoyed eating out in restaurants after nearly two years of not experiencing restaurants.
Like anything, there will be a transition. But transitions always come in waves. Transitions are started by the innovators. These are the folks who are blazing a trail before anyone else is even aware that an option exists. These are next followed by the early adopters. These folks love to try things that are new.
The next major group are the early majority, followed by the late majority, and then finally the laggards.
This adoption curve applies to virtually anything. It applied historically to the radio, then television, video tape recorders, digital cameras, cell phones. It applied to travel by steam ship, air travel and it will apply to space travel.
The adoption curve applied to buying groceries online. It applies to electric cars. The adoption curve applies to working from home. The adoption curve applied to using credit cards for purchases.
Today that same curve will apply to changes in the way people travel. The way people choose to live.
When you look at the adoption curve, it looks like a letter S. Adoption is slow at first and then accelerates through the middle, and then finally takes a long long time to reach the remaining holdouts in the population. I still know a few people who don’t own a cell phone. But not many.
The question is whether you are dealing with a fad or a trend? A fad will achieve market prominence and then fade.
Are electric cars a fad or a trend? Are Cruise ships a fad or a trend?
How are these trends or fads related? Is your real estate capable of providing rapid charging for electric vehicles? Do your buildings have secure e-commerce delivery lockers? Homes in the old days used to have a locker for milk delivery next to the front door. Fascinating that the same concept is being reincarnated a few decades later.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re taking a deep look at the book “Rocket Fuel” by Gino Wickman and Mark Winters. In addition to being book of the month, this is a book that we use deeply within the operation of our business. We hold regular weekly and quarterly meetings. The conduct of those meetings is framed through the teachings of this book, along with two other books.
Not only that, we have undertaken a book study within the leadership team of our assisted living business. The various construction managers, regional executive directors for each site, and the CEO of our operations company are all participating in the book study.
The way we conduct the book study is by reviewing one chapter each week together on a 30-45 minute zoom call. Each of the members of the team shares what they internalized from that chapter and how the teachings of that chapter apply to our business.
If you haven’t undertaken a book study, this is another way to consume content that involves internalizing the book’s contents in a meaningful way.
So let’s dig into the book Rocket Fuel. The title might seem a little obscure. The idea behind the title is that rocket fuel is made up of two vastly different elements, hydrogen and oxygen. By themselves, hydrogen and oxygen don’t have huge energy potential. But in combination, the results are extraordinary. So what does this obscure analogy have to do with business?
In companies that have visionary leadership, many of them fail because they lack the leadership to execute. At the other end of the spectrum, companies that focus on execution alone and lack vision also underperform. Those companies that achieve escape velocity are those that have a visionary leader, and an integrator. These are different skills and the magical pairing of these two attributes in two top leaders are the key to enable breakthrough performance.
Host: Victor Menasce
email: podcast@victorjm.com
The day was Black Monday, October 19, 1987. I remember it well. I was 24 years old and I was responsible for the management of the investment holding company that my mother had left behind when she died. I was only 18 years old at the time of my mother’s death. I knew very little about investing back in those days. I studied a lot and fortunately during those five years from 1982 through to 1987, the market conditions were very forgiving and it was had to make mistakes. But October 19 and the days that followed were very scary for a young 24 year old fund manager.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we're talking about how the rising price of energy could impact real estate investors. I love George's wisdom and perspective.
Host: Victor Menasce
email: podcast@victorjm.com
Ryan Barone is based in NY where he is specialized in developing software to help landlords and tenants with the application process. He is the CEO of RentRedi.com. Today's conversation is filled with insights on the tenant application process.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we are looking at two real estate portfolio failures where the principals naively thought they were getting good legal advice. Sadly, I see these situations very frequently.
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA episode (Ask Me Anything). Keeler writes:
Hello, what are your thoughts are with 3D printed concrete houses? I have dreamt about starting a company and mass-producing rentals and for-sale homes ever since being in the trades. Building custom homes, schools, apartments over the last 5 years I've seen how slow buildings take to be built, especially when there are better and faster options.
I believe that they are going to take the market by storm. At least in the warmer climates, they are quicker turnaround, durable, slick, different, and cheaper to make than the wood-framed houses with fewer people involved.
Do you think the average purchasing public, renters, investors, or developers might turn their nose at such an idea as a concrete house built in a couple of weeks?
Any considerations that you may be a roadblock?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re answering a second part to the short term rental question from the students at Virginia Commonwealth University and their Professor Joe Ridpath.
It is true that short term rentals are attracting attention from amateur investors. The promise of a higher average rent compared with the traditional unfurnished lease makes for a stronger business case.
But as with anything in the economy, you need look at the business case through the lens of supply and demand.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re going to pick apart the Wall Street narrative. In the world of stock investing, there are two schools of thought. There is a portion of the market that buys a stock on the basis of fundamentals. Fundamentals means, is the valuation for the company cheap or expensive based on its ability to generate earnings. What are the earnings multiples? In essence, what is the cap rate?
Host: Victor Menasce
email: podcast@victorjm.com
Today’s show is answering a question for the students at Virginia Commonwealth University and their professor Josh Ridpath who has been using the Real Estate Espresso Podcast for course content in their program. Professor Ridpath writes:
“My students found your content on the inflationary pressures of the shipping bottlenecks and increased prices for packaging eye-opening.
Among my students, several of them only thought of real estate investing through the lens of Airbnb. I don’t have much experience in short-term rentals. Still, I thought it might make an interesting episode to make a quick comparison between the breakdown of income and expenses for a single-family home used as a traditional rental vs. a short-term rental. A lot of them only see the higher revenue on a nightly basis and have no basis for things like vacancy, management fees, and cleaning that isn’t typical in a traditional rental.
Thanks for all of the great content.”
Host: Victor Menasce
email: podcast@victorjm.com
Jacob Garza hails all the way from San Antonio, Texas where he owns and manages a portfolio of approximately 2,800 apartments. Jacob got his start as a founder of a property management software company before selling the company and transitioning into owning apartments. You can learn more and connect with Jacob at jacob@jacobgarza.com or you can visit his website at reepequity.com.
Host: Victor Menasce
email: podcast@victorjm.com
Jenny Blake is the author of the upcoming book "Free Time: Lose the busywork, love your business". On today's show we're talking about a few of the central ideas in the book and about some of the factors that are limiting for business owners. Loved this conversation with Jenny Blake.
To order an advanced copy visit http://itsfreetime.com/book
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA Episode (Ask Me Anything). Today's question comes from Joe who writes.
"I live outside Boulder Colorado near the small town of Superior/Louisville. We had just experienced a devastating fire that destroyed over 900 homes. This comes at a time when inventory, for sale and for rentals, is at an all time low with massive demand (~0.3 months supply in Boulder County). As a Realtor and landlord in the area, I am seeing my colleagues raising rents over 30% and removing homes previously listed on the market only to put them back up at 20% higher values a few days later.
I understand the relisting homes at a higher price, as an agent we need to do what's best for our clients but as a landlord I am debating with myself on what our responsibilities to the local community to try and maintain a reasonable increase in rent and not try to gouge people in this hard time.
I'd love to hear your thoughts on how we as investors can approach the unique surge in an already tight real estate market.
Thanks for all your work on the podcast my wife and I listen every morning as part of our routine!"
Host: Victor Menasce
email: podcast@victorjm.com
Today’s question comes from Evan who writes.
I have 3 rental properties and a primary residence that we'd be looking to retain and rent. Like a lot of people we're looking for a bigger house and bigger yard out in a charming suburb. I don't really know how to think about it though. It's much easier to crunch numbers on rental properties than it is a primary residence. On the one hand you have to live somewhere and real estate can be a great asset class and store of wealth, on the other hand it's a big expense and generally cash-flow negative. How do you look at buying a primary residence? Is this crazy housing boom we're in now a good time to buy? Is it only going to get crazier?
Host: Victor Menasce
email: info@victorjm.com
On today’s show we’re going to look at what’s happening in monetary policy and how that will affect the stock market in the coming weeks and months, and how this could affect investment psychology and some of the factors that could even trigger a recession.
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA episode (ask Me Anything). Today’s question comes from Anna who asks,
“Thank you so much for all of your production and insight into real estate investing. You are highly regarded in the real estate investing realm.
I have been trying to get into real estate investing for the past 2 years and seeking to do exactly what you did (make a hard left turn from my current career to full time real estate investing). I know you discuss the importance of the following 3 principals for getting into real estate investing: the right knowledge, the right mindset, and the right environment. I feel like I have grown a lot in gaining the right knowledge and mindset, but I feel like I have had trouble getting into the right environment. I know of real estate investing associations, but unfortunately I have found them to yield little fruit, maybe because everyone seems to have jumped on the real estate investing train and trying to rub elbows with the right people is like trying to find a needle in the hay stack.
Maybe you could explain your personal experience with how to get into the right environment and how your experience in the mid 2000s compares to today. Any suggestions for how you would coach yourself today to solve the right environment principal?”
Host: Victor Menasce
email: podcast@victorjm.com
We are continuing our series on the evolution of the internet with Web 3.0. Every Monday in the month of January we are covering a different aspect of the new distributed internet, which most people associate with crypto-currencies like Bitcoin.
On today’s show we’re talking about virtual land on the internet. There are a number of startups that are creating virtual worlds. There is a big bet being made that virtual reality will move out of the early adopter phase into becoming more mainstream.
Facebook is placing a large bet on these virtual worlds, and they even changed the name of the company to Meta to reflect their bet on the metaverse. The internet has evolved from text to images to video. But video is not the end of the line. There is a far more immersive experience possible, whether it’s a real live video connection, like we experience today on zoom, or a virtual reality platform.
The Meta product is called the Sandbox. All of the items inside a metaverse like land, furniture, avatars, clothing, artwork are made up of tokens. In the language of web 3.0, these are called non-fungible tokens or NFT’s. The first of these worlds is a game called Horizon Worlds.
Some skeptics think there is no intrinsic value in these virtual systems. But that ignore the economic value of the entire gaming industry. The gaming industry is well established and clearly worth millions. Most of the advanced games on consoles like the Xbox or the Playstation have some version of an immersive virtual reality experience. But the spoils go to the platform owners and the software developers. These are relatively closed systems and the concentration of wealth is in the hands of a few. Web 3.0 hopes to democratize that. I personally have my doubts that it will happen.
There needs to be interoperability between different platforms. You need to know that you own your avatar, and your tokens not the platform.
Today the largest truly decentralized metaverse is on a platform called Decentraland.
This is a virtual world with avatars that you can use to explore the locations. You can buy real estate in these worlds and you can resell the real estate. Like in the real world, you can visit places.
Host: Victor Menasce
email: podcast@victorjm.com
Yep, I'm going to be out of circulation for a few days. I've tested positive and am in an isolation area at a resort in Mexico.
Dr. Neel Chadha is barely 30 years old, works full time in his medical practice and has developed his first senior housing facility as a side hustle. On today's show we're talking about his journey as a first time developer, and as a first time operator of a senior housing facility with several areas of specialty including assisted living and dementia care.
This conversation is packed with powerful lessons.
Host: Victor Menasce
email: podcast@victorjm.com
Today’s show is a search of quality real estate news in the mainstream media. I suppose it’s also a critique of the Wall Street Journal. I’ve been reading the Wall Street Journal since I was a teenager. Yes, I know that sounds completely weird. As a teenager, I would go to the news stand and purchase the physical paper. Even if I was traveling in Europe as a kid, I would buy both the FT and the WSJ and the differences between the US edition and the European edition of the WSJ were readily apparent. I would also regularly buy the Sunday edition of the NY Times. I loved the fact that the NY Times Sunday edition was so thick it would take me an entire week to go through it.
But today, much as I appreciate some of the reporting in the WSJ, I have to give them a failing grade for their real estate section.
I went in search of more mainstream publications hoping to find something meaningful on real estate. Forbes Magazine, owned by publisher and libertarian Steve Forbes, sadly had little more to offer. Their real estate page was filled with stories of luxury properties. One article talked about exploring Paradise Valley, Arizona’s most expensive zip code.
I know that the Forbes Council on Real Estate has some esteemed members. But somehow the access to this talent has not translated into meaningful content in the publication.
The Financial Times doesn’t have a real estate section at all. Their reporting of economic and stock market news rivals the quality of the WSJ. But again, no commercial real estate news.
Even Bloomberg News doesn’t cover real estate. The latter is not that surprising because Bloomberg has its roots on Wall Street having developed the industry’s fastest trading terminals for market traders.
The 0Micron variant is not serious enough to bring the world to a halt.
That is, except for one thing. Because this virus, barely more virulent than the common cold has been sequenced, it carries with it the dreaded Covid-19 brand name and therefore this is a disease that must be stopped at all costs.
The problem is that it can’t be stopped.
The World Health Organization came out publicly and stated yesterday that they expect 50% of Europeans to become infected with Covid-19 over the next several weeks. It’s actually astounding that the WHO is so far behind in reporting what has been evident for more than a month.
Over the next two months we will continue to experience supply chain shortages across a wide array of products. China has shut down major regions to limit the spread of the disease as they prepare to host the winter Olympics. Further supply chain disruptions will result from China’s attempt to create a Covid free environment for the Olympics. This means that we will see rising prices as customers compete and bid up the price for increasingly scarce supply. But at the same time we will see a decline in GDP. This gives rise to the so-called stagflation that rarely occurs, but is theoretically possible whenever there is an artificial constraint on economic output that hampers the functioning of a free market economy.
We are certain to see Q1 as a quarter of economic contraction. The big question is whether this will persist beyond first quarter.
If you remember earlier last week I went out on a limb to predict that we are likely to witness the current outbreak of 0micron as the end of the pandemic within a matter of weeks. I predicted that the pandemic as we know it will be behind us by the end of February. I am standing by that prediction.
But that doesn’t mean we won’t experience economic hardship during the next two-three months.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about the importance of market segmentation. Because real estate is not easily moved, the supply and demand picture is hyper local. That means each real estate product has a radius where the demand is real. Outside of that radius and the demand could fall off significantly.
In real estate we tend to segment the market according to asset class. We look at demand for residential, for apartments, for office space, for retail space and so on. But that’s far too simplistic an approach. The analysts quote the market vacancy rate. But frankly that’s a useless metric.
How does that break down when you compare new construction, versus older properties? How does vacancy compare in 1BR apartments versus 3BR apartments? How is the vacancy in studio apartments? What is the vacancy in short term rentals? The generalization provides zero insight to the specific question you are interested in answering.
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA episode (Ask Me Anything). Today's question comes from Kevin who writes:
"Your podcast has been great. It has really challenged my thinking in a lot of ways. I particularly call back to (and continually share) the podcast you did talking about opening a restaurant and how much thought you put into the dishes. This way of thinking is a lifestyle and something so much more than dishes, its about details mattering in everything you do and sending a message to those around you that they matter. Thanks for that insight.
If I can add, you are an investor in multiple countries and I aspire to do the same. I am wondering how you think about currency and functioning in multiple countries. Do you try to hold fiat in multiple countries or do you pull your profits home to your home currency? Do you try to time exchange rates? Do you try to hold foreign profits in something like gold or do you find safety being diversified in multiple fiats?"
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are continuing our series on blockchain in real estate.
There are dozens of articles on new blockchain startups to watch. Some are focused on crypto currency. A few are focused on real estate.
Many of these companies seem to exist for the simple reason that they are a blockchain solution.
When it comes to looking at any company, I always ask the same three questions.
What problem is being solved that doesn’t have a good solution today?
Is this a problem that people are willing to spend money to have solved?
Are they willing to buy the solution from you?
On today’s show we are going to look at several of the real estate blockchain startups through the lens of these three questions.
Host: Victor Menasce
email: podcast@victorjm.com
Kent Ritter is based in Indianapolis, Indiana where he invests in medium sized multi-family apartment assets. This is a different take on value add investing where Kent is successfully bucking the conventional wisdom. To connect with Kent or to learn more, visit kentritter.com.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re taking a closer look at modular construction and we’re going to be live on location at a modular construction plant.
Modular construction comes in two principal methods. The first is where the manufacturer complete entire modules of the buildings. These modules are fully finished. They are fully painted, with flooring, utilities, and even the appliance fully installed and strapped in place to prevent them from shifting during transportation.
Since these boxes can often be transported hundreds of miles from the factory to the final construction site, they have to be of extremely high build quality and extremely rigid so they don’t have lots of cracks in the finishes happen during transportation.
The site work for these projects consists of the foundation and the rough-in of the utilities to a single connection point through a centralized utilities duct. The extra lengths of pipe and wires are all coiled up to enable the plumbers and electricians to complete the final utility connections in the basement level.
The cost of modular box construction is usually on par with stick build. The savings come from the fact that the work performed in the factory environment is much more efficient from a labor standpoint. They don’t need licensed or unionized trades for the factory work, and the most expensive trades like plumbers and electricians are only needed for the final service connections.
The total cost of construction involves adding together the site work with the factory construction and the much higher transportation cost for the finished boxes. These will be wide loads and will often require a carefully planned route with special permits and sometimes police escort. You will require heavy cranes on site for the final assembly of the modules.
The second form of modular construction consists of panels. These panels can be flat packed on a flatbed truck on put in a shipping container. Transportation is much simpler. But understand that this form of assembly is much further from completion. You’re basically accelerating the framing portion of the construction. Everything else, the utilities rough in, mechanical systems like heating, ventilation and air conditioning all need to be installed onsite. The construction follows the usual permit process with all of the inspections happening onsite with the building inspector. There will be a foundation inspection, framing inspection, a rough-in inspection, insulation inspection and so on.
The main benefit for panel construction is by saving time onsite. You get a much higher quality assembly. You don’t need very heavy equipment. Most of the onsite assembly can be done with a boom truck or even a forklift. This can be particularly important if you’re trying to build new construction in the winter months. If it’s -20 degrees outside, you can’t always count on the framing crew to be super careful with their measurements, ensuring the proper spacing of fasteners. You tend to get a bit of chain saw carpentry happening. When measurements are not accurate, then you will have gaps in the building envelope because things don’t fit together properly and the insulation of your property will be compromised.
On today’s show we’re onsite with Dylan Sliter at Deka Pro Panels in Almonte Ontario. I’ll warn you in advance that we are in a very noisy factory environment with plenty of pneumatic tools firing in the background. So the audio quality is not the best. But we will be doing a small walking tour of the factory environment.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are looking in detail at the minutes of the latest Federal Reserve board of governors meeting to try and make sense of what the guidance means for us as real estate investors and developers.
Host: Victor Menasce
email: info@victorjm.com
On today’s show I’m going to answer a question that I’ve received from several of our listeners in recent weeks.
I’m not going to attribute the question to any one person.
The basic gist of the question is “How do you do it?” How do you come up with so much highly varied content on a daily basis? A lot of the content has been clearly researched and was not just off the cuff verbal opinions.
So the basic question is how do I come up with this wide array of content?
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA episode (Ask Me Anything).
Today’s question comes Karen.
I have a property that has a proposed road allowance on the city plan. The city has not yet forced the road to be built, nor have they expropriated the land for the road. I want to consider subdividing my property for a small residential subdivision and to get the property rezoned for residential from agricultural. I’m concerned that agricultural land will be worth less than residential land in the event of an expropriation. Residential lots that are builder ready are selling for $150,000 a lot in my area. What would be the best way to preserve the value of my property? How would you advise me to proceed?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show I’m going out on a limb to give you information about the pandemic that is not making headlines. This will help you with your business planning for 2022. I want to be clear that I’m not a doctor and I’m not providing medical advice. I’m merely reporting the results of scientific studies that have been released for publication and are currently undergoing peer review. Once complete the peer review process, this information would be officially published whereas today it’s available as a pre print paper. You can draw your own conclusions about what this might mean for the course of this pandemic. There are numerous public health and governmental bodies sounding the alarm over 0Micron. This pandemic has taught us that anything is possible.
First of all, the 0Micron variant is vastly more transmissible than its predecessors. You have been hearing that in the news for weeks. But the good news is that it is producing much less severe disease than it’s predecessors.
We also know that if you have antibodies to one of the previous variants, you are not protected from catching 0Micron.
The big question is whether antibodies from 0Micron will protect you from Delta, and that is what this study looks at. It was conducted by the Africa Health Research Institute in Durban South Africa. A number of institutions participated in the study. I’ve included the link to the paper in the show notes.
https://www.ahri.org/wp-content/uploads/2021/12/MEDRXIV-2021-268439v1-Sigal_corr.pdf
We have already seen that the existing vaccines do not provide any antibody immunity against the 0Micron variant which is why many people who have been fully vaccinated are getting 0Micron.
What they did is that they took samples from newly infected people at the onset of symptoms when the number of antibodies to protect against the virus is low because they have not yet been developed by the body’s immune system. We are not talking about Tcell immunity, but antibody immunity. The researchers measured the immunity from the initial sample against 0Micron and against Delta and then compared with a second sample taken 14 days after the onset of symptoms when presumably the body would have generated enough antibodies to fight off the disease.
The question is whether the antibodies produced by 0Micron protect against Delta? That is what they looked at in this study.
On today’s show we are talking about the next great innovations in internet applications. In fact every Monday in the month of January we will be talking about some aspect of these new technologies.
There is a disproportionate amount of venture capital being focused on blockchain technology. This is not only in Silicon Valley, but in Singapore, London, New York, Berlin, China and India.
When we think of blockchain, images of crypto currencies like bitcoin and etherium come to mind. We’re not talking about digital money today. We’re going to look at how this next wave of digital applications are going to differ from the last generation.
Today’s internet based applications are centrally hosted. There is a relationship between the host server and the client device which these days is usually a mobile device or a laptop computer.
Most of the processing is happening in that centralized data Center. Applications like zoom which is in wide use are actually hosted by Amazon web services.
These so-called Web 2.0 services have been concentrated In a handful of companies. We are talking about Google, Facebook, Amazon, Twitter. Microsoft continues to have a strong presence.
The biggest difference between a centralized application and the blockchain is that the blockchain applications have their processing distributed among the clients. The idea behind this so-called Web 3.0 and the 2.0 is the centralized versus distributed processing.
The hope and the promise of these distributed applications is that they don’t require a data Center in order to scale. It means that the adoption of new applications can be democratized.
Bob Couture lives in Los Angeles and invests in the North East. Not a typical situation. This is a fascinating story of remote investing with a twist. There are some excellent lessons on the importance of team in today's conversation. To learn more or to connect with Bob, he can be found at cp-propertygroup.com
Host: Victor Menasce
email:podcast@victorjm.com
Our book this month is a paradigm shift in a way of thinking that is deeply engrained in our society.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about a new trend in protectionism that has been brought about by scarce resources around the world. I predict new waves of political protectionism happening all over the world as scarce resources become more vital.
In an effort to bring more control the a country’s economy, governments sometimes interfere with free markets. This can sometimes bring more security to a country’s critical resources. On today’s show we’re talking about a wave of protectionism that is not making headlines, but is sure to figure largely in the weeks and months to come.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re taking a retrospective look at this most unusual of years 2021. The purpose of a retrospective is to extract the lessons that these memories can bring us.
If you’re a lifelong student, then everything that happens can be framed in the context of learning.
Sometimes, we humans get stuck in a defensive loop. It’s hard to admit mistakes. It’s hard to truly take responsibility for things that are seemingly out of your control.
If 2020 was a year defined by uncertainty and surprises, then 2021 became the year where we learned to live with uncertainty and surprises.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we're looking at the changes that have taken place in the past few months in rent growth, rental concessions, and interest rates. It's a bell-weather of changing market conditions.
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA episode (Ask Me Anything). This question comes from Stephen. He asks,
I am looking to develop a small build to rent community of 30 townhouses on a leased property. I’m just getting started in development and wanted to start small. By leasing the property, I can reduce the amount of equity required to complete the project. The land is already zoned residential, and I should be able to build the desired density with the current zoning. Does this strategy make sense? How would you advise me to proceed?
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA episode (Ask Me Anything).
Mark writes:
I plan to build 12 townhouses in two sets of six. I’m wondering if its worth looking into setting them up as condos with an association instead of just long term rentals. I have experience with long term rentals but have never set up anything like condos. The real estate market looks like it would support selling the condos. Any advice?
Host: Victor Menasce
email: podcast@victorjm.com
Brian Briscoe was a US Marine Lieutenant Colonel who is now a full time real estate investor. On today's show we're talking about the skills bridge program that exists to help military personnel transition from service life to the private sector. Similar programs exist in both the US and Canada.
To connect with Brian and to learn more, visit fouroakscapital.com.
Host: Victor Menasce
email: podcast@victorjm.com
This is the December 25 edition of the show. Merry Christmas to all our listeners of the Christian faith.
On today’s show I’m doing some gratitude work. I was taught this by my good friend and mentor Kyle Wilson. Kyle is a past guest on this show and he’s best known for being founder and CEO of John Rohn International where he was Jim Rohn’s business partner for 17 years.
There is no doubt that many of us lead stressful lives. My definition of stress is very simple. Whenever there is a gap between expectation and reality, that can be a source of stress. There is no guarantee of stress, only the possibility of stress. If there is no gap between expectation and reality, there can be no stress. Stress lives in the gap.
Stress can evoke other emotions like anxiety or fear.
But as 2021 draws to a close, I choose to focus on gratitude. It turns out that you can’t be grateful and anxious at the same time. It’s not physiologically possible.
Kyle taught me the exercise of writing down 20 GREAT things from 2021. Writing 20 great things is different that simply saying what you’re grateful for. It’s more specific, more tangible.
Otherwise you can simply fall into the trap of generic things like “I’m grateful for my health. I’m grateful for my family.”
Take the time to write for yourself 20 great things that happened this year. It’s a more specific form of gratitude.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about math. That’s right math. We humans are used to linear thinking. It’s how many of us interact with our physical world.
When you double the distance, it takes twice as long to get there. If the price goes up by a dollar, you need to take one more dollar out of your wallet. This is all linear thinking. This is the way we are used to seeing the world. We are not accustomed to thinking of geometric functions. Geometric functions accelerate. These are functions where the number in the exponent is greater than 1.
Your parents no doubt taught you about the power of compounding. They probably used the example of compound interest, and how over time, with the power of compounding, you can multiply your earnings.
We humans are really terrible at understanding this. Most people don’t save money because they can’t see the tangible benefit in the short term.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show, we are talking about buying in a fringe area. Today’s show is cautionary tale. As you know, I’m a proponent of the buy on the line, move the line strategy. That line exists in nearly every city in North America. On one side of the line is a hot neighborhood. There are expensive properties, desirable amenities like coffee shops and art galleries. On the other side of that line, you’re in the hood. You’re in an area where people on social assistance reside. The property values between these two areas can vary dramatically, even though they’re only a short distance apart.
This strategy is based on the notion that you can redevelop just on the wrong side of the line. When you do, now the line is on the other side of your property. Which means you can go do it again and again and again. You can literally move the line. But for a line to move, the line needs to be arbitrary. If the line is a school district, or a municipal boundary or a railway line, that boundary is going to be a lot more difficult to move.
If you go too deep into the hood, then you will probably fail. You won’t get people to bridge the gap to the hot neighbourhood.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about how the current labor shortage is affecting the world of employment, and therefore by extension the world of real estate.
We’re still in the middle of a pandemic. But despite the historically low unemployment rate, we have a labor participation rate of 61,8% that is is down sharply from pre-pandemic levels.
If you go back to the 1960’s we had labor participation rates below 60%. But at that time, many women were not in the workforce and stayed at home as homemakers. Labor participation peaked around 2000 – 2001 at 67%. Participation has fallen over the past 20 years to about 63.5%, and before plunging below 60% in the height of the pandemic.
The people who are no longer in the workforce still need income to live, and a place to call home.
You’ve seen the help wanted signs all over. You see the recruiting signs at big box stores, restaurants, grocery stores, retail shops. The signs are everywhere.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about another spike in lumber prices that will affect housing starts and renovations all over North America.
Anyone who has built anything in the past year has suffered the sticker shock of high lumber prices. Prices back in May of 2021 peaked at over $1,700 per thousand board foot. That measurement is the commodity price for softwood lumber on the futures exchange.
Much of that price increase was driven by the pandemic and the labour shortages caused by the pandemic. Sawmill capacity was reduced during the pandemic which contributed to the shortage in the Spring of 2021. Capacity utilization of the sawmills peaked at 90% in the US in May of this year and at 88% in Canada. As demand and prices dropped in the summer, sawmill utilization fell to 80% in the US and 70% in Canada as builders used up their inventories of materials.
About 30% of the softwood lumber used in US construction comes from Canada. Almost half of that amount or 14% of the US total supply comes from British Columbia.
The month of November saw torrential rains in the interior of British Columbia. These storms exceeded previous rainfall records and created severe local flooding. That flooding washed out roads and disrupted transportation across the entire province of British Columbia.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we're taking a close look at why the supply chain disruptions are not being solved.
Host: Victor Menasce
email: podcast@victorjm.com
George is a repeat guest on the show. He's spending time in Delray Beach to get some warm weather instead of being hunkered down in NYC. On today's show we're talking about how to underwrite in the current environment.
Host: Victor Menasce
email: podcast@victorjm.com
Galen Hair is based in New Orleans, Louisiana where he specializes as an insurance litigator. On today's show we're talking about how to figure out if your insurance policy is worth the paper it's written on. To connect with Galen or to learn more, visit InsuranceClaimHQ.com.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about interest rate fundamentals.
Some people come from the school that interest rates are set by central banks. While central banks play a leadership role in rate setting, they don’t actually set the interest rates. Those rates are set by the open market, irrespective of what the central bank dictates. On today’s show we’re going to look at examples which will hopefully prove that and what that means for real estate investors going forward.
When you are in the design and development world, the challenges are daily and the rewards are infrequent. Well, today was one of those days when I got to go to sleep feeling accomplished.
Yesterday, our project, The Sage Oak of Lake Charles was announced as the national winner of the 2021 Senior Housing News Architectural Design Award competition in the Memory Care category. As a developer, I’m thrilled to be part of this team effort to bring this ground breaking project to fruition.
A project like this is truly a team effort. I’m going to thank a whole bunch of folks who helped bring this project to fruition. In so doing, I’m certainly going to miss some who are worthy of mention. I’ve got to start with my partner Loe Hornbuckle who developed the expertise as an operator at a very high level. It was his brainchild to create refine the values the underpin the Sage Oak product offer. I’d like to recognize the architecture firm of Greenfield Lawson in New Orleans, the general contractor of Donahue Favret also from New Orleans, Valerie Malone and her interior design firm at Quill Design in Cambridge, our partners Pam Abide and Sharon Foreman at New Orleans Equity Partners, our supportive lender at B1 Bank, Dave Zook and the whole team at the Real Asset Investor, our expert staff under the leadership of Executive director Jeremy Fruge, and the entire staff at Sage Oak. When you walk in the door, after you take a temperature test, you can really feel the positive energy in the doors. You are the reason that we’re ahead of our occupancy projections this early into the startup cycle.
We don’t build these projects to win awards. We’re not out there playing the comparison game. We build these projects to create a great product in the market that solves a real need. Where design competitions are useful is in looking at what other leaders in the industry are doing and helping to calibrate what best in class looks like in the industry. We’re not going to stop innovating, improving, strengthening the product offering for the new buildings that are under construction in other locations. Even as winners, we see room for improvement. Most of the time, those improvements are small details, like better positioning of a shower head in a shower. But we’re thrilled to receive the honor and recognition that comes from being the winner of this year’s award.
Getting products from A to B has always been an issue for anyone in business. It used to be the case that you had to buy products through a channel. In the good old days, stores like Sears, Kmart, Walmart and Bloomingdales were the channels of choice. Today, businesses all over are taking advantage of new channels. Channels that didn’t exist a few years ago are dominant.
For home furnishings, Direct Buy, and Wayfair are growing quickly. The Ottawa based company Shopify is also playing an important role in the transition from the bricks and mortar retail channel to the e-commerce economy. Shopify now hosts more than 1.2 million ecommerce stores on its platform.
While Amazon is the largest channel for e-commerce, it charges a hefty percentage for retailers who can often double their net profit margins if items a sold and shipped through their own channel.
Last week, commercial brokerage house JLL gave its updated guidance for the industrial sector for 3Q 2021. On today's show we're taking a closer look at the data.
On today’s show we’re talking about uncertainty. We can all agree that not everything in life is predictable. Life is full of surprises, some of the pleasant, and some of them not.
It’s been said that a confused mind doesn’t buy. That’s particularly true in the world of investing. Investors seek clarity. Things that are too complicated, have too many variables, or have large unknowns are off the table.
Investors are a special breed. Professional investors are relying upon their money working for them. Professional investors truly attempt to quantify what their money will do.
Investors hate uncertainty. Anywhere you see uncertainty, you see falling prices. Who would buy real estate in the Ukraine right now? Who would buy real estate today and take a variable interest rate loan? Anyone with a brain knows that interest rates are heading higher, but how much higher?
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA episode (Ask Me Anything). Today's question comes from Matthew.
Victor!
Your podcast provides a wealth of knowledge. I really appreciate your honesty and insight into this industry. I was curious if you had any episodes about your opinion of the type of real estate investment, other than REITs, that allows the least maintenance involved to keep the business operating/most passive income. I know there is no completely passive business out there but was just curious your thoughts of what will produce the most juice for the least amount of squeeze. I am looking to become an active investor in some type of real estate, and I have educated myself in various types of real estate including single-family, multi family, leasing farmland, self storage, short term rentals, etc. but would like to know what season investors such as yourself think about those investments that are easiest to operate for the long haul with less chance of burnout. I realize that hiring a team to help support the investor is going to be essential but are there investments that you feel have the least amount of moving parts/least complex?
I know this is a vague question and probably provokes you to ask me multiple questions but was just curious your thoughts.
Any insight you have would be much appreciated!
Blessings,
Matthew
Well Matthew, this is a great question.
As you correctly mentioned, all types of real estate investing have an active component. You’re describing the style of investing that most closely aligns with your lifestyle design.
Money comes in one of three different methods.
1) Earned income – this is active income
2) Residual income
3) Capital Gains
Your question is really centered around minimizing that first type of income, the earned income and maximizing the residual income or the capital gains.
On today's show we're coming Live from Banff in the Rocky Mountains and we're talking about the dynamics of short term rentals.
Scott Carson is an expert in buying distressed loans and engineering value improvements to these loans.
You can connect with Scott at WeCloseNotes.com. Or you can sign up for a complimentary seat at their weekend note closing workshop at noteweekend.com where you can attend the workshop for free with the promo code "victor".
Host: Victor Menasce
email: podcast@Victorjm.com
On today’s show we’re talking about underwriting multi-family apartment deals. Earlier this week I attended a presentation from the CEO of a software development company that had developed tools for real estate investors to analyze the investment quality for multi-family apartment deals.
The software seemed fairly sophisticated and capable of analyzing a number of scenarios.
But if you remember last week I spoke about software tools on December 2. The episode was called Wasted Software. In that episode I spoke about the software making assumptions about your business process.
Well, this particular software was making an assumption that I fundamentally disagree with, to the point where I would outright refuse to use the software.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show, we’re talking about a topic that is near and dear to my heart. This week and all week, my company is offsite working on goal setting. This is a process of values clarification and values alignment. Once you’re clear on your values, then setting goals is much easier. But along the way, you might discover that you’re not living your life in alignment with your values.
This is a deep introspective process that requires heavy lifting. In that process you can learn things about yourself that sometimes it’s difficult and painful to confront.
Anytime we confront something that fundamentally challenges core beliefs, there is a natural human process.
The first step is denial. No way! That can’t be true about me. You don’t understand.
Then when the truth is inescapable, the next step in the process usually involves anger. Some people stay stuck in a loop of anger and denial and never move past that step. The third step in the process is moving to acceptance. Once you are at acceptance, you have a chance at growth or transformation which is the final step. But moving from acceptance to transformation involves work. It requires an inherent desire to grow, to become aware of blind spots and eliminate those blind spots.
We all have them. By definition, you can’t see yourself the way others see you, because we don’t spend our entire lives looking in the mirror. Those rare people who do spend all their time looking in the mirror are self absorbed and hopelessly ineffective at much else.
If you’ve been listening to this podcast for a while, you’ll have heard me say that you require three things to accomplish anything in life.
1) Knowledge. There are many people who focus all their energies on taking courses and getting more information. If more information was the differentiator, then everyone with a smartphone in their pocket with instant access to virtually all the world’s information would be excelling. So clearly that’s not the ticket
2) Emotional fortitude. You often hear people talk about mindset. Not to downplay this aspect. Mindset is important. Having the emotional drive and the emotional fortitude to overcome the difficult moments you will encounter along the way is absolutely important. But it’s not enough. You need a third element,
3) You need to be in the right environment. Its that third element which is the game changer, the secret to superior performance.
Environment is the game changer. I often get questions from aspiring developers, and from listeners to this podcast. How do I find the right environment?
I’m here to tell you that you might find the right environment. The perfect environment for you definitely exists out there. But no one environment will fulfill all your needs in every dimension of your life.
You might find an existing mastermind group full of people who are smart, driven, generous, uplifting, and encouraging. But if you don’t, then go create one.
Central governments have become experts at coming up with good excuses for doing the wrong thing. On today’s show, we’re talking about the impact of a changing world order and how this will feed further inflation and the possibility of economic collapse. The global geopolitical landscape is changing as China’s ambition to become the dominant global empire will change global trade, Russia’s ambitions to regain the Ukraine as subject territory, and more instability is brewing in the middle-east.
I’m not talking about any of this to dive into politics, but to highlight the impact of these forces on Investors.
Wars are inflationary. If you look back through history, governments have the world over have used armed conflict as a justification for emergency spending. But these days any emergency is sufficient justification to print money.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about how to secure product in a time of scarcity. Supply chain disruptions are happening all over North America right now.
This is affecting everything from electrical switches to plumbing fixtures to windows.
Several window manufacturers are quoting 16-20 weeks lead time. Subcontractors are busy and scheduling the labor component is also challenging. Construction projects can’t sit exposed to the elements waiting for windows and doors. The envelope of the building must be completed fairly quickly otherwise you risk weather damage. So you have to carefully schedule the project so that it doesn’t stall midway through construction.
So how do you secure your supply when many components in a construction project require custom manufacturing. You don’t necessarily have the luxury of component substitution. You’re going to commit to a single manufacturer and you will be at the mercy of their lead time.
A single critical item on the critical path to completion can increase the cost of your project significantly.
Host: Victor Menasce
email: podcast@victorjm.com
As investors we’re on the lookout for assets that escalate in price over time. If that price escalation is predictable, then you have the makings of a sure fire investment.
Many investors take the stance of looking retrospectively and attempt to use history as a predictor of future performance. Imagine looking at the chart of a commodity like copper or gold or lumber or platinum. You would see a general long term upward price pressure, largely driven by devaluation of the currency. But short term supply and demand fluctuations dominate those trends. You see price spikes followed by periods of depressed prices that can last a decade or more.
Some have argued that the path to increased value is scarcity. Remove supply from the equation and prices increase as long as demand remains strong.
There is a relatively new product designed to create financial incentives to reduce pollution and green house gasses. Governments all over the world have introduced a tax of sorts on carbon emissions. This tax is in the form of carbon credits. I know, there are some purists out there who will argue that there is a difference between a carbon tax and a carbon credit. These carbon credits can be purchased and traded on the open market.
Virtually all companies will eventually need to purchase carbon credits so the demand for the product is virtually assured.
Host: Victor Menasce
email: podcast@victorjm.com
Dr. Allen Lomax is the host of the Steed Talker Podcast. On today's show, Allen is the host of the show and I'm the guest. We're talking about how to create opportunities at will.
email: podcast@victorjm.com
Cody Bjugan is based in Scottsdale Arizona where he specializes in land entitlement nationwide. His education company vestright.com is entirely dedicated to value creation by converting raw land to land entitled for development. You can learn more by downloading his white paper at vestright.com/land101.
host: Victor Menasce
email: podcast@victorjm.com
You might own a parcel of land free and clear. You have a construction project planned for your property and you know that you will have to eventually get a construction loan. Securing a construction loan can be a lengthy process and it’s tempting to get start the construction before you get the loan in order to save time.
But contrary to what might seem like common sense, this time saving tactic could ultimately cost you time and delay your project significantly.
Host: Victor Menasce
email: podcast@victorjm.com
We often business owners buy a software package or subscribe to a software service and then fail to properly integrate it. The software is sold on the basis of offering a solution to a problem.
But there is a fallacy in this way of thinking. Software can only implement a business process. Sometimes the software assumes a business process that doesn’t match the business process in use in the business. When that happens, the software will go unused. The purchase of the software might create the false illusion that the problem has been solved.
You can sometimes adapt your internal business process to match the process that is assumed in the software. If that meets your needs then everything will work out fine. But as is often the case, the assumed process in the software doesn’t quite match the process required by your business. This can be seductive because it looks like your system almost works. But something that almost works doesn’t work in practice.
Our Book of the Month is called "$100M offers: How to make offers so good people feel stupid saying no." By Alex Hormozi
The core of the book is based on the notion of making Value-Driven vs. Price-Driven Purchases
You can grow your business by three axes, more customers, selling more value, and getting them to buy more often.
The simplest way to increase the gap between price to value is by lowering the price. It’s also, most of the time, the wrong decision for the business. Getting people to buy is NOT the objective of a business. Making money is. And lowering price is a one-way road to destruction for most — you can only go down to $0, but you can go infinitely high in the other direction. So, unless you have a revolutionary way of decreasing your costs to a fraction of the competition, don’t compete on price.
Today is another AMA episode (ask Me Anything). Today’s question comes from Carl in Austin.
I’m looking at a mobile home park with quite a bit of vacancy and am wondering if its possible to put RV’s on those spaces. What are some of the considerations that I should be aware of?
Carl, this is a great question. First of all, I’d like to address why I might be qualified to answer your question. I happen to own an RV Park that is currently about 50% RV’s and 50% mobile homes.
In order to answer your question, there are two things you will need to consider.
1) Is what you are proposing allowed in the zoning for the property?
2) What upgrades will be required in order to physically accomplish what you’re proposing?.
On today’s show we’re talking about the hidden taxes that result from printing money.
Those who have studied history will know that any time you debase the currency by printing, it has the effect of destroying the fabric of a society. This has happened throughout history time and again. While the rate of inflation has been somewhat low over the past decade, we’ve been living with it. But we’ve also gone through two major movements that have caused a reduction in costs.
The first movement has been the technology revolution. If you think back to the 1980’s, even the most basic of personal computers was priced at $4,000. That was a huge sum of money at that time. It was the equivalent of two months of salary at that time. Today, you can buy a much more powerful computer for under $1,000. Each generation of technology innovation has in fact lowered the cost of many durable goods and lowered the cost of many capital expenses.
The second movement has been the globalization of manufacturing. In the 1970’s, most manufactured goods were sourced locally in the same country. China was still a captive economy. Japan was the first country to start exporting manufactured goods in a large way. Today, most of our consumer goods are made in low cost geographies in Asia. Manufacturing was outsourced to Japan until Japan was too expensive. Then manufacturing was moved to Taiwan until that was too expensive. Then manufacturing went to China in search of lower cost labor. With its vast population, China seemed like an infinite pool of low cost labor until costs in China went up. Manufacturers then went to Malaysia then Thailand and the Philippines and Vietnam and India. Today, Bangladesh supplies more than its fair share of clothing. We kept driving down manufacturing costs with access to lower cost labor. But eventually, that band-aid solution eventually runs out when there is no more cheap labour left to exploit. We are not there yet. There are a lot of people still earning a lower wage than in the west. But it will happen eventually.
When you have inflation, there are six hidden taxes. But these taxes don’t apply equally to everyone in the economy.
1) There is a transfer of wealth from the lender to the borrower.
2) Some Assembly Required
3) Government is the biggest borrower of all. See #1.
4) Capital Gains Tax on assets priced higher due to depreciating currency.
5) Understating CPI means less money for entitlement programs
6) Holding bonds on central bank balance sheet skews market forces for interest rates.
On today's show we're talking about how to ensure your construction site is 100%, perfectly level. The tools that surveyors use are also readily available and can save your project and save you money. You don't need to be a licensed surveyor to use them. We often use these tools to double check the work performed by a surveyor and ensure no mistakes are made.
Host: Victor Menasce
email: podcast@victorjm.com
Jim Pfeifer is based in Columbus, Ohio. He has transitioned from being an active investor to being a passive investor. Today's show is a lesson in self awareness and how to design your own personal investing philosophy around your own strengths and weaknesses.
To learn more, connect with Jim at leftfieldinvestors.com.
On today’s show we’re going to take a look at a day in the life of Victor. A number of you have asked questions about how I spend my day. So I’m going to outline my day, chosen at random.
Today was not a fully typical day because it was US Thanksgiving which meant that our US team was out of the office and our Canadian team was still hard at work. But in essence, today was like any other day, filled with communication with team members and suppliers.
Host: Victor Menasce
email: podcast@victorjm.com
Happy Thanksgiving to our US listeners. On today’s show we’re preparing for 2022. I find that towards the end of the year people often get an uneasy feeling that there are only a few weeks remaining in the year. Many of the goals that were set at the beginning of 2021 remain incomplete.
You might be traveling home to visit family, unsure of how to answer the question – How has your year been?
This is a time when you might be thinking about the upcoming year, wondering when you will find the time to set goals for the upcoming year. If you’re like most people, you won’t set any goals at all. After all, if you don’t set goals, you can’t fail.
I take the time to set goals every year. In fact, most years I host a transformational goals retreat which we hold on the beach in Mexico on the Mayan Riviera. But this year we decided instead to host a corporate retreat where we will spend four full days on goal setting and planning for our organization. This will set us up extremely well for next year. In preparation for those four days, there is a bunch of work that we will be doing.
You can’t go into goal setting, at least you can’t do it effectively with no preparation. On today’s show we’re going to talk about the first step in preparing for goal setting for 2022. The first step is to run a retrospective.
If you're serious about achieving your goals, I can recommend two different programs.
1) The Real Estate Guys host a live event in Lake Las Vegas in the first week of January. I've attended personally and it's excellent.
2) Michael Hyatt has an excellent online program called "Best Year Ever".
Both these programs are excellent and I highly recommend them.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about the evolution of many cities. You will find pockets of development outside the urban core. These pockets are disconnected from each other in one very important respect. They don’t have city supplied utilities.
The cost of extending roads, water, sewer, electricity, internet, gas can be incredibly high. You might have two similar sized properties with the same entitlements. One has utilities at the property line. The second has the utilities a mile away. The cost of ripping up the streets and laying the new infrastructure can be prohibitive. I recently went through a costing exercise for one of our projects. The real cost of each foot of roadway is not the expensive part. Bringing the utilities to your property from far away is by far the most expensive. In the language of developers, we call these “offsite improvements”. Offsite improvements are among the most painful expenses for a developer. They ultimately are donated to the city. If the city is sympathetic, they will give you a credit against property taxes or a credit against development impact fees for any offsite improvements that you make. But in a lot of cases, you end up making those improvements at your own cost for the benefit of the city and other developers that come behind you.
Just how much can those costs add up to? On today’s show we’re going to construction a budget per linear foot of roadway that you can use to estimate the cost of those offsite improvements.
On today’s show we’re talking about how the pandemic is affecting business development. Business development relies heavily on personal interaction. Markets don’t buy, only people buy. Relationship building is a key component of business development in any industry. That’s particularly true in the world of real estate investing.
We recently conducted a survey of approximately 400 members of our local Ottawa Real Estate Investors Organization. The basic question was whether people feel ready to return to live in person events?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about when to fire a consultant.
You hire consultants for specific expertise in a narrow domain. These folks are supposed to be subject matter experts in their area. There can be upwards of twenty of these consultants involved in a major project.
The consultants we most often associate with a project include
- Architectural
- Environmental
- Geotechnical
- Civil
- Wind
- Noise
- Mechanical
- Structural
- Elevator
- Electrical
- Planning consultant
- Window washing design
- Building envelope
- Mature tree consultant
- Appraiser
- Ground water or riparian rights
- Heritage
- Traffic studies
- Landscaping design
- Energy efficiency
- 3D rendering artists
All of these people are subject matter experts and could have specific deliverables to your project.
That’s a lot of people to manage who ultimately don’t work for you directly. These experts are working simultaneously for multiple clients, on multiple projects. Some of their other clients have their own schedule deadlines and there is no guarantee that you will come out on top of a priority decision is made. Usually the hiring process for these consultants is based on referrals. The architect can often be a primary source of introductions to these consultants. If there is a pre existing working relationship, that can often be a strong endorsement of a particular consultant.
When there are so many specialized disciplines, the odds are that you will eventually encounter someone you will need to fire. How and when to make that decision is critical in a project.
Host: Victor Menasce
email: podcast@victorjm.com
Ken Gee is based in Cleveland Ohio. But his business today is focused in Northern and Central Florida where he buys and repositions apartments. Over the past several years, he has amassed a portfolio of approximately 2,000 units. On today's show we're talking about strategies that work in today's environment.
You can connect with Ken at kripartners.com. Download a copy of his free e-book on value add investing at kripartners.com/ebook
host: Victor Menasce
email: podcast@victorjm.com
On today's show, I'm speaking with George about the impact of inflation on predicting the financial performance of a multi-family apartment project over a multi-year window. This has become more difficult since we've seen inflation jump to above 6% in the past few months.
On today’s show we’re taking a deep look at the 1970’s inflation narrative and seeing if there are any history lessons for us.
This past weekend, Treasury Secretary and former Federal Reserve Chair Janet Yellen was on PBS Face The Nation.
The discussion centered around inflation.
Back in the 1970’s the politicians blamed the consumer for inflation. Politicians blamed union leaders for demanding higher pay. The White House blamed the middle eastern nations for holding back oil. In fact, the OPEC nations didn’t want to be paid in Monopoly Money. They were used to being paid in a gold backed currency. They trusted the US dollar. But when Nixon took the dollar off the gold standard and started the slippery slope of printing more money than could be accounted for, the OPEC nations quite rightly concluded that they were being cheated by being paid in a devaluing currency. We now know that the inflation was not the fault of OPEC, or the unions, or greedy businesses. It was the result of grave mistakes that were made in central bank monetary policy. That was the cause then, and it’s exactly the same cause today.
On today’s show we’re talking about rent growth. There are rising rents in many submarkets. For those who own their own home, they’re probably glad that their housing costs are fixed.
We have seen near record setting price increases for single family homes in many major markets across the US. The fact is, you can’t have price increases in the housing market and then experience no effect in the rental market. The two markets are not strongly linked together, but they are not completely isolated from each other either. If the cost of owning a new single family home goes up, you will also eventually see those costs reflected in the rents.
This dynamic environment has made it difficult for apartment investors and developers to forecast their business plans. If rents increased 20% in 2021, what should they forecast in 2022? Historically, widely accepted inflation metrics used a 2% escalation for rents over the past decade. What should you put in your numbers for 2022? Would you use the 6.1% CPI that we have experienced so far in 2021? Should you use zero? Should you use 2%? You can make an argument for any of those choices. But they will all be incorrect.
Host: Victor Menasce
email: podcast@victorjm.com
Today's question comes from Vishal in Ottawa. He writes:
"As you know I am long time listener and fan of your podcast. Earlier in previous episodes you have mentioned of the growing concern of price increase of natural gas due to various changing conditions. How do you perceive this in light of the information contained in this article in Forbes Magazine entitled Could U.S. Natural Gas Prices Crash?
Published on November 9. Do you still believe we will see the price increase?"
Vish, this is a great question.
My discussion of natural gas prices was within a context. The author of the article is taking a slightly different US centric view of supply and demand. Everything the author says is accurate from a US centric perspective. Prices will fluctuate in the short term based on supply and demand, and the size of the local inventories. As I’ve said, the local price for natural gas is a function of transportation. Natural gas is incredibly inconvenient to transport. Approximately 10% of the US production is being exported in LNG form through sea ports along the Gulf Coast, principally Corpus Cristy in Texas and Lake Charles, Louisiana.
Right now, the price differential between gas on the beach in Louisiana, versus gas on a ship destined for Spain or China is at an all-time high. We’re paying about $5.50 per mmbtu in the US for natural gas, and Spain is paying over $30 per mmbtu. The cost to transport the gas from Louisiana to Spain is about $1.50. So the profit margins for those in the LNG business are astronomical.
Host: Victor Menasce
email: podcast@victorjm.com
Today's show is a look at some egregious abuses of the protections being afforded to residential occupants. All of the examples come from the State of New York. In the worst case, a homeowner who defaulted on his loan in 1998 and lost ownership of his home through the foreclosure process in 2000, was finally evicted 23 years later.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re taking a closer look at the supply chain disruptions that are making headlines. The situation at the Port of Los Angeles has gotten worse, not better. There are currently approximately 110 ships waiting at anchor for a berth to unload their cargoes.
There are other sea ports in the US. Why don’t these ships divert to other locations like Houston Texas, Tampa Florida, Savannah Georgia or Newark New Jersey?
The simple answer is money.
Host: Victor Menasce
email: podcast@victorjm.com
Kevin Shtofman is based in Dallas Texas. On today's show we're talking about the backlash against student housing as an asset class and how that backlash may be appropriate in some cases and an over-reaction in others.
You can connect with Kevin on LinkedIn.
Host: Victor Menasce
email: podcast@victorjm.com
Eddie Speed is a specialist in Notes. He started buying notes in the 1980's, and today is focused on a particular segment that is largely overlooked. You will love this contrarian strategy.
To learn more, visit noteschool.com/getstarted
Host: Victor Menasce
email: podcast@victorjm.com
Today’s show starts with a disclaimer. I’m not a lawyer and today’s show should not be construed as legal advice. Always seek advice from a lawyer who is competent in that specific area of the law.
On today’s show we’re talking about something that I see frequently. It’s increasingly common to see sponsors of an investment opportunity to be marketing on the Internet or in social media.
Many jurisdictions have strict rules against solicitation for investment.
Host: Victor Menasce
email: podcast@victorjm.com
Today's question comes from Luc in Ottawa. He asks "I've just purchased my first investment property. I'm looking to grow. What should I be focusing on?"
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about a twist on a strategy that we have been using for close to a decade. If you have been listening to this podcast for a while, you will have heard me talking about the buy on the line, move the line strategy.
This approach is an exceptionally good way of creating value in the market. What we mean by this strategy is to exploit the many dividing lines that emerge in real estate sub markets where on on side of the line there is a hot expensive neighbourhood and on the other side is an economically depressed area. Often these lines are arbitrary. They exist for no particularly good reason.
If you redevelop on the wrong side of the line, then guess what? The line has moved and is now on the other side of your property. Because there are no comparable properties on the poor side of the line, you will get a valuation similar to the hot neighborhood next door.
Today I want to revise the description to include one very specific special case.
If the line is a municipal boundary and the city is a growing city, you might want to consider property that is just outside the municipal boundary. If the city has a history of annexing land and growing its boundary, this can also be another opportunity to create tremendous value.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about another constraint in the world of real estate development and construction.
The labor shortage that is making headlines is being experienced across the entire construction industry.
That is particularly being felt in many of the support services that assist builders. Any construction site will require some basic services including safety fencing and portable toilets.
Something as simple and commodity as portable toilets has become incredibly difficult to source. As a developer, you would never even pay attention to that, or imagine that toilets would be a constraint. Well it turns out that on one of our projects, we had three companies in the past week decline to provide the service to our projects because they were not taking on any additional business from now until well into the new year. They were completely short staffed and could not handle any additional business. It took no less than 6 phone calls to find a single company that would provide a portable toilet to a construction site. This is shocking. A portable toilet is a requirement for a construction site. The building inspector will shut you down if you don’t have one.
We had several other suppliers of construction equipment decline our business. They simply didn’t have the staff to take on additional work.
How do you solve it? Listen and find out.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about managing your supply chain. There’s no question that some suppliers are having trouble keeping up with demand. Some channels are simply fully depleted. Almost all real estate investors at some point are buying construction materials, either directly, or indirectly through a subcontractor. When buying through a subcontractor, you often pay more because the subcontractor is simply passing the cost on to the end customer. If prices are elevated, then you can feel the full impact of those higher prices, even if the various supply chains are inefficient. Subcontractors have next to no incentive to shop around for low prices.
As a developer, you are faced with several difficult choices. Do you allow your subcontractors to quote and then purchase materials, or do you take on that procurement function in-house? If you decide to assume responsibility for purchasing materials, what supply chains do you want to utilize?
Sanchoy Das is a processor of Industrial Engineering at the New Jersey Institute of Technology. On today's show we're talking about global supply chains and how to manage the impact of disruptions.
You can connect with Sanjoy at das@njit.adu.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are taking a close look at one of the most insane ideas to hit the market this year.
In a bull market, everyone looks like a genius. But there is a cautionary tale here. Don’t ever mistake intelligence for luck in a bull market situation and that seems to be what Zillow has done over the past year with its Zillow Offers business.
Let’s recap how Zillow offers was supposed to work.
Zillow was using their really sophisticated software algorithm that produces the Z-Estimate to find value in the market. Zillow got into the house flipping business with Z-offers. The idea was that Zillow would buy properties in the open market, conduct a very light rehab, and then sell them in the open market for a profit.
They were not going to be creating much in the way of real value, as a stated objective of the program. So the only way for them to generate a profit would rely upon buying properties at a discount to the market value.
What Zillow would do is they would look at comparable properties in the market and then buy those it considered to be a bargain based on its algorithm. What could go wrong? Listen to find out.
Host: Victor Menasce
email: podcastg@victorjm.com
On today’s show we’re talking about artificial deadlines. These types of manipulations exist all over. They’re designed to create a sense of urgency to cause people to act. One of the sources of competition for someone’s action is simply doing nothing. Often doing nothing is the default. The world of sales and marketing is full of techniques designed to cause a buyer to act now.
You have no doubt seen the call to action on the website. It says, “Call now” or Act now, or Order Now.
The most common technique is called FOMO, and acronym that is short for fear of missing out.
That’s why Black Friday Sales are effective. Black Friday only comes around once a year. Why could there not be a Monday sale, or a December 12th sale?
Because if they made the reason truly arbitrary with no plausible excuse, then the manipulation would be exposed for what it is.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re taking a look at what’s happening in the travel sector. Many real estate investors, even large commercial real estate investors own portfolios of rental properties and portfolios of short term rental properties. This can mean short term rentals in the core of business district, or it can mean a ski chalet in the mountains or a cottage on the lake. All three of these are going to be affected by the dynamics of global travel.
Travel is starting to rebound on a global basis. It is a nuisance to spend a few hundred dollars on covid tests in order to board an aircraft. Airfares were low in the summer in an effort to bring people back into air travel. But rising fuel prices and the financial pain of the past 18 months means that airlines have to charge more in order to survive.
Hotels have struggled with incredibly low occupancy throughout the pandemic. But here too the numbers are improving.
Several of the largest hotel brands Marriott, Hilton and Hyatt reported their numbers for Q3. Occupancy rose 23.4 percentage points from 34.8% in Q3 of 2020 to 58.2% in the third quarter of this year. While occupancy may be up, nightly rates are still low as hotels try to compete for too few travelers. The folks at Hyatt reported their financials yesterday. Their revenue per available room is down 31.8% compared with 2019, which is slightly better than the industry average which is still down 35.5% compared with 2019.
Host: Victor Menasce
email: podcast@victorjm.com
Today's question comes from Ken in Idaho.
I have a property that is zoned rural and I’m considering developing for residential and I understand that I need a zoning change in order to build what I want. But I’m confused about terms like the official plan and the neighborhood plan and how they affect the zoning. The property needs to be annexed into the city to get the residential zoning. I’m also told that even though I’m in the county, the county road at the front of the property will also need to be annexed into the city and affect the development. Hoping you can clarify what I need to do?
This is a great question. This is a complex area. It’s made complex only by the layers upon layers that can come into play.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about what’s happening in the world of industrial real estate. In the past week, the brokerage firm Marcus & Millichap published 44 market reports on industrial real estate for Q4.
This is one of the largest and most comprehensive segment analyses I have seen. On today’s show we’re going to dive into a few of those markets to contrast what is happening.
Our book this month is "The Goal" by Eli Goldratt. This book was originally published in 1984 and was the groundbreaking book on the Theory of Constraints.
The book is written as a narrative surrounding a manufacturing plant manager named Alex who moves to a small town to take over the management of the plant. But the plant is struggling. Deliveries are late, the plant is losing money, and customers are unhappy. Senior management is threatening to shut it all down in less than 3 months if things don’t improve. Along the way, our hero encounters a scientist named Jonah who leads our protagonist through the thinking process to discover the principles that lead him to solving the problems that are plaguing his organization. In the story, Jonah clearly sees through all the talk of efficiency and correctly identifies the business is in trouble.
The problem is that the business is being measured against the wrong goals.
By focusing on efficiency and lowest cost per component, inventories were building in virtually all areas. Work in process inventory was growing, finished goods inventory was growing, but still shipments of some products were continually late.
The theory of constraints centers around practical methods for identifying solutions to business problems by deciding:
- What to change
- What to change it to
- How to cause the change
The specific book I’m recommending today is the first in a series of books that apply to theory of constraints to specific business problems. This first one is a manufacturing plant. But the method can be applied to project management, and to sales, and retail management. The theory of constraints is a universal way of thinking that can be applied to virtually any business problem.
Host: Victor Menasce
email: podcast@victorjm.com
Arjan Erkel is based in Rotterdam. His story is one of the most powerful stories of overcoming adversity. While on a mission with Doctors without Borders, he was taken hostage and held in captivity for nearly two years. He is an extraordinary person who has truly embraced life and is making things happen.
He is also a founder of an organization combatting human trafficking called Free A Girl. So far, they have liberated more than 5,000 from sexual slavery. To learn more or to contribute, visit freeagirl.org.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show George and I are talking about current events and the impact to real estate investors.
Host: Victor Menasce
email: podcast@victorjm.com
There is always something, some constraint, holding back progress. On today's show we're talking about how the Theory of Constraints can be game changing. Today's show is also a prelude to the book of the month coming up on November 1.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about how to hire. I can tell you that I’ve hired hundreds of employees over the years.
We have recently brought several new members into our team and have focused on hiring for character. You can’t train character. People either have the kind of characteristics and attributes that will mesh with the organization or they don’t. You can’t train people to be committed. They either have that or they don’t. I’ve found that whenever there was a bad hire, it’s because we focused too much on skills and not enough on attributes.
I’ve heard from so many that hiring is difficult this year. I see the help wanted signs everywhere. I have no doubt that for tasks with low personal development and low impact, hiring will be difficult. There continue to be a lot of people out of the work force. Many of these people are those who have chosen to stay home for family reasons.
If you want to be hiring in 2021, consider that you need to offer more than just an hourly rate. You may want to consider engaging the heart, mind, and personal growth of your new team members.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about the anxious buyer. The anxious buyer is desperate to get a deal done. They are usually lacking local relationships in the market and are trying to buy using the public MLS. They’re hoping to get a deal, but are finding the environment too competitive.
The anxious buyer behaves like the last waffle is about to disappear from the breakfast buffet. But the truth is, there is probably another pan of waffles in the kitchen and a fresh batch will appear in a few minutes.
The truth is, the marketplace is truly an all you can eat buffet of opportunity.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about mineral rights. When we buy property, the mineral rights are usually part of the property itself. However, this is not a given. Often the mineral rights are separated from the property and can be subdivided in any number of ways.
For example, you might separate the oil and gas rights and sell those separately from the property to one entity. You could sell the water rights separately. You could sell the coal rights, and the gypsum rights. You might sell the remaining mineral rights to another party. There is no specific rule that says you have to do it any one way.
We are involved in the due diligence on a property where the title report consists of 259 pages. Buried deep in those pages are references to dozens of documents contained in the county records that grant certain rights to the holder.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about the short term energy crisis that has gripped much of Europe and parts of Asia. You might be wondering what energy has to do with real estate. But the economy is inextricably linked to energy, and real estate is inextricably linked to the economy.
We have to remember that we are in the shoulder season between the extremes of summer heat and winter cold. This is the time of year where air conditioners are largely turned off, and heating systems have yet to be switched on for winter.
So why are we in such an energy pinch?
It turns out that energy producers scaled back production during the pandemic. We had such a glut of fuel in 2020 that for a short time, oil prices even went negative as oil futures contracts expired and the owner of the contract had no place to store the oil they just purchased. Global oil storage was at capacity. People were buying or renting rail cars and oil tankers just to have a place to temporarily store their new purchase in the face of collapsing demand and prices.
Fast forward a year and global supply chains are out of balance. This includes the energy supply chain. On top of that, unusual weather patterns in Europe reduced the production of renewable energy. Rainy weather in parts of Europe reduced the output of solar systems at the same time that the usually windy North Sea was calm. The massive wind turbines that dot the waters in the North Sea sat idle, shifting demand to the conventional fossil fuel methods of power generation.
The problem with wind and solar power is that it helps reduce your average production of energy from fossil fuels, but you still need to supply peak energy the old fashioned way.
Dan Haberkost specializes in development land. Based in Colorado Springs, he finds distressed development projects and resurrects them. This weekend we're talking all about land. Often finding deals means looking off the radar and allow the crowd to keep doing what they're doing.
Our guest today is Peter Badger with Farm Folio. Peter describes a unique offering in the market that seems aimed at reducing the risk associated with investing in agricultural real estate. They have vertically integrated the entire supply chain and eliminated the middle-man. Today's show is a unique perspective on agricultural land.
To connect with Peter, you can email him directly at peter AT farmfolio.net or visit farmfolio.net.
On today’s show we’re talking about the transition from rural to suburban. We have several projects underway that are making that transition from agricultural land into urban subdivisions.
When we think of suburban streets, we often think of tree lined streets with curbs and sidewalks. What we don’t see all the utilities that are buried beneath the ground, each with their own infrastructure.
The planning process requires careful attention to each of these. Because they’re hidden, they’re largely taken for granted by the public. But as a developer, each of these require careful planning. The cost of most of this infrastructure is born by the developer and usually dedicated to the city or the utility.
In a rural setting, most houses are nearly off-grid. The only true requirement is for electricity. Water usually comes from a well on the property. Wastewater is treated locally using a septic system. Stormwater management relies on surface drainage and gravity. Internet relies on wireless or satellite solutions. Heating is either provided by electricity or by large cylinders of propane gas that get refilled a couple of times a year.
On today’s show we’re going to construction a budget for the cost of servicing a typical suburban lot and compare that with the cost of a typical rural lot with well and septic instead of municipal services.
So here are the 11 services that are required in almost every setting.
1) Electricity
2) Water
3) Sanitary Sewer
4) Storm water sewer
5) Optical Fiber which has largely replaced telephone
6) Cable TV
7) Natural Gas
8) Street lighting
9) Fire hydrants
10) The road
11) Sidewalks
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about how to qualify a waterfront property as having potential for development.
This show was the result of several inquiries from a friend who is looking to build a waterfront permanent residence on a desirable body of water near a major city.
Waterfront properties have a reputation for being expensive. These properties are in short supply compared with inland properties and they typically sell at a premium to the market. It’s easy to understand why, if you love the water. Many of the existing waterfront homes were built at a time when less regulation existed.
Today, protection of inland and oceanfront waterways has quite properly brought additional regulation in order to protect the local ecology and wildlife.
Gone are the days when you could bring in a few truckloads of sand and voila you have an instant private beach. Those types of shoreline modifications were common 50 years ago, but are prohibited today in most areas.
There are nine considerations that are specific to waterfront properties that inland properties generally don't have to deal with. On today's show we review all nine of these specific items.
Today is another AMA episode (Ask Me Anything). Our question comes from Magin who writes.
I have 3 young adult sons (18, 19 1/2 and 21). I'm proud to say They are interested in investing and are all participating in the upcoming Real Estate Investor Summit in June 2022. I have no doubt that all three of my boys are going to be "rock stars" when it comes to investing! That being said I was wondering as well connected as you are, if you could recommend some "low entry" investment opportunities for young adults? Of course they would all need to do their own due diligence.
Thank you so much for your podcast!
Magin, this is a great question.
We’re going to brainstorm a few ideas on today’s show on how that might be possible. What I’m about to describe probably doesn’t exist. If it does, I haven’t heard about it. But we are literally having a live brainstorming discussion on the air and maybe you will discover some fatal flaws in these ideas. Ot maybe it will stimulate additional ideas that you could implement yourself.
Today’s question comes from Paul in our own development team. Paul asks,
When is the right time to hire more people, either inhouse or as consultants to manage projects in order to save time and gain leverage within the business?
Working directly on projects has given me such a huge education The value to me in personal growth in doing those projects directly has been huge.
I can’t help but wonder that if we had hired a local consultant, would we have experienced the same bureaucratic delays and maybe had fewer iterations of the design?
Paul,
This is a great question.
This is the classic insource versus outsource question that companies the world over deal with on a regular basis.
In my view, if the goal is to grow the capability within the organization, you can’t accomplish that with rented talent.
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA episode - "Ask Me Anything". Tom Blake asks,
“First things first, your podcast is fantastic.
What are your two favorite creative transaction strategies that maximize the likelihood of finding a win/win outcome between you (as purchase, partner, option holder, etc.) and owner, and why?”
Tom, this is a great question.
If you were to take a class in creative strategies, you would find that seller financing probably tops the list of strategies that are routinely taught in the world of investing. There is no doubt that seller financing is a powerful and effective tool.
But before discussing a strategy, I want to get at the root of why you would want to employ a particular strategy.
Many rookie investors have not mastered the art, legalities and the science of raising capital. So they resort to seller financing because it makes the problem of raising capital and qualifying for bank financing much easier. If a creative strategy happens to save us the effort of raising capital, then great. But that’s not a major factor in our decision making.
When we look to get creative it’s because we’re trying to solve a problem, specifically in the area of risk. On today's show I lead you through a thought process of how we approach creative transactions.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re re-playing a recording with special guest Gene Guarino.
If you’ve been listening to this show for a while, you’ll know that we are developers of assisted living facilities. Gene was the founder of the residential assisted living academy which has served as a source of momentum in the development of the residential assisted living product in the marketplace.
Sadly, Gene Guarino contracted Covid-19 several weeks ago and this week Gene Guarino lost the fight against that infection and is no long with us.
Today’s show is a replay of an earlier interview with Gene as a tribute to him and for all that he’s done for the world of senior housing. Gene you will be missed. Here’s my conversation with Gene Guarino.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show I'm coming to you live, at street level, in central Rome. We're talking about how things are different here in Italy compared with the US and Canada.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re answering another listener question.
Emilio from El Paso Texas writes,
I continue to enjoy your podcast every morning. I want to ask you if you had any references that you could share regarding how to adequately price an option to buy a piece of land. Any help would be appreciated.
Emilio, this is a great question.
Let’s define first what we mean by an option. An option is quite simply a contract where you the buyer have the choice to buy a property, and the seller has the obligation to sell the property to you if you exercise your option. But if you don’t exercise the option within the option period defined in the contract, the contract is cancelled.
There are several ways you can structure an option in order to meet your specific needs as a buyer.
Depending on the nature of the project, you may require more or less time to exercise that option.
The terms that will be acceptable to both buyer and seller are a function of the amount of time you want the option to remain in effect.
In a lot of cases, if that conditional period is short, in the range of a few weeks, maybe even a couple of months, you might pledge a fully refundable deposit. In that case, you are getting a completely free look.
But if you’re looking for a longer time period and the seller actually wants to sell the property, then they will likely demand a higher payment in exchange for the uncertainty in the sale of the property.
I often see contracts written where there is a refundable conditional period of say, 90 days. That’s a free option. You might then negotiate a few extensions into the conditional period where there could be a hard payment paid to the seller in exchange for the extension.
Look at the contract from the seller’s perspective. They have to endure the uncertainty of the property not selling at all, and in the meantime, they’re barred from selling the property to anybody else who might come along with a firm offer. Most sellers are uncomfortable with that uncertainty. So if they are going to endure that uncertainty they will want to be compensated for it. As a minimum, you want to figure out what the holding cost would be for that period of time and consider offering an option consideration that would cover the holding cost. At least the seller’s holding cost goes to zero and the impact of continuing to own the property would go to zero.
It all comes down to understanding the seller’s needs and negotiating a win-win deal between you. There is no one set formula.
Host: Victor Menasce
email: podcast@victorjm.com
Today's question comes from Chris in Florida who asks,
I’m considering a property South of Houston for an industrial equipment storage facility. The address was located in the email. I have a good understanding of what that segment of the market needs, but have limited knowledge of the Houston area.
Chris, this is a great question.
The specific location that you’ve highlighted is not a good location in my opinion. It’s too far South West of the city and is at the edge of the urban developed area. It’s not on the way to anything. It’s about a 15 minute drive from the nearest freeway which connects Houston and Galveston.
In my opinion, owners of industrial equipment will not want to add a half hour round trip to the daily movement of equipment to be that far away. The additional cost of fuel will erase any savings that might be possible with the lower cost real estate at the extreme edge of the urban boundary.
It’s true that there is no zoning regulation in the Houston area. That means that you can literally build anything anywhere. But the lack of government restriction doesn’t mean that your product will be economically viable in any location.
On today’s show we’re talking about the acute shortages that have been created by the massive shift in our economy over the past year.
I hope to convince you on today’s show that the price inflation we are experiencing is not temporary.
Host: Victor Menasce
email: podcast@victorjm.com
Globalization has made it possible to squeeze inventories down to nothing. Just-in-time delivery means these hyper-efficient, hyper-optimized supply chains can deliver the promise of owning no inventory and still meeting customer demand.
Offshoring was the name of the game. First, Japan was the manufacturing location of choice. When Japan was too expensive, companies moved production to China. When China was too expensive, production moved to the Philippines and Vietnam.
All of this worked, until it didn’t.
The supply chain disruptions have shown just how many links there are in that supply chain and how many opportunities exist for delay and outright breakdown.
Host: Victor Menasce
email: podcast@victorjm.com
Today we are talking about the state of assisted living across the nation.
The mere mention of the terms senior housing, and assisted living generates a reaction from most investors. The natural reaction is to say something like “Oh senior housing is a hot area. There’s a lot of money to be made in assisted living.” That’s the urban wisdom.
Beneath the surface, the reality is more complex. In most primary markets, the entire assisted living industry had built ahead of the demand with the expectation that demographics and the aging baby boomer population would catch up and bring additional demand in the coming decade.
There are not too many industries where you can increase supply a full decade ahead of demand. That can be an effective strategy for grabbing market share. It can also be a recipe for financial failure.
On today's show we segment senior housing into specific vertical specialties and see which ones are working and which ones are not.
Stacy Rossetti travels the country with her family in an RV and acquires distressed storage facilities in secondary and tertiary markets. She does it the old fashioned way, over a cup of coffee with the owners. These tired owners invariably just want out of the day to day of running a small business.
There are so many ways to invest in real estate. Lifestyle design can be at the heart of your personal investing philosophy. To connect with Stacy and to learn more visit StacyRosetti.com
host: Victor Menasce
email: podcast@victorjm.com
Every calendar quarter we take an entire day with the leadership team offsite to work on the business. This is an opportunity to pause and take stock of where we are and make course corrections if necessary. On today's show we're reviewing a snapshot of the past 90 days and getting input from members of the leadership team.
Do you take the time to implement a culture of continuous improvement?
On today’s show we are talking about the land lottery. Now I’m an investor at heart and I’m not a fan of gambling.
When we think of a lottery, there is a low cost to play the game and the potential payoff is huge. Naturally the odds of winning are low. But emotionally the payoff is so large that many people still choose to play the game. The expectation value is high enough that people see value in spending a few dollars even if statistics says they should not.
Ok so we know what a lottery is.
What does this to do with land? The value of land is directly a function of what you can do with it, combined with the demand for the finished product in that location.
Land can be worth only a few thousand dollars an acre if all you can do is grow grass on it. But it can be worth a few thousand dollars per square foot if it is in the highest demand areas of New York, London or Paris.
Land is land, but you can transform land into that winning lottery ticket through the zoning and entitlement process. But unlike a real lottery, you don’t put any investment in a piece of land that has a low chance of being improved.
Imagine if you could take a look at all the lottery tickets and discard the ones you know are not winning tickets. Now you are left with the ones that will at least win something.
I don’t know if I’m over stretching this analogy. Maybe I am.
On today’s show we are talking about adapting work habits when you travel.
This month I’m spending the entire month away from home and will be working from the beautiful ancient city of Rome.
Working on a different time zone means that I have the mornings to myself and am able to get those focus tasks done without interruption while everyone is still sleeping in North America. Meetings don’t start before 3PM for me which is 9AM east coast time. The most difficult thing to manage is the time zone to the west coast, where we have at most one hour of overlap. 6PM in Europe is 9AM in California and Washington.
If I don’t establish boundaries, then the temptation exists to work at all hours of the day.
You might be wondering how the Evergrande debacle in China happened. I’ve been to China and observed first hand how commercial construction is broadly undertaken.
Once you understand what I have seen first hand, it’s little surprise that there are issues.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about getting trapped in the wrong orbit.
Now I realize that when I use the word wrong, it sounds like I’m making something right and something else wrong. What that really means is getting trapped in an orbit that’s different from what you might have intended.
This type of thing happens all the time in all kinds of industries. It stems from having imprecise goals. That lack of clarity can be a trap.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about the most boring of bureaucracy and how it’s designed to help you with your due diligence. A few months ago, we spoke about a particular disease called versionitis. This is when the version of a document is out of date and you make decisions based on an out of date or unofficial version of a document. There can be only one golden copy of a document, just like there can be only one copy of your passport.
That’s incredibly important in the world of real estate investing. That’s why the county recorder office has only one job to do. Their job is to maintain official records.
Host: Victor Menasce
email: podcast@victorjm.com
Andrew Abernathey got his start in real estate at a young age. Today, he is the principal in several hundred million dollars worth of self storage. On today's show we're talking about the state of the storage industry and gaining some insights into how this segment can operate.
To connect and to learn more, reach out to Andrew at http://www.andrewabernathey.com/
Host: Victor Menasce
email: podcast@victorjm.com
Gary Boomershine made the decision to cut the ties to real estate in an expensive primary market in exchange for a simpler setting. On today's show we talk about that move and his predictions for the next period in this unprecedented wave of uncertainty.
To connect with Gary, visit realestateinvestor.com. To get a copy of his upcoming book, visit realestateinvestor.com/growth.
Host: Victor Menasce
email: podcast@victorjm.com
Why do we need an org chart? Does it really help bring clarity? It might impress customers, but does it really inform who is doing what functions?
The book this month is "Holacracy: The new management system for a rapidly changing world." by Brian Robertson.
host: Victor Menasce
email: podcast@victorjm.com
This question comes from Jeremy in Virginia. He asks, “I’m working on a concept for a light industrial warehouse building on a property that has some environmentally protected zones. The properties on either side are developed and are zoned light industrial. In addition, there is a tremendous amount of development in the immediate area.
I think the main reason this property hasn’t been developed is the presence of the wetlands on the property. Would you consider developing it, and if so under what conditions?
Host: Victor Menasce
email: podcast@victorjm.com
Amazon has made a few headlines with the opening of bricks and mortar stores. Amazon is getting retail real estate. The move by Amazon has been seen as a vindication for traditional retailers who are saying “You see, retail is not dead”. Even online Amazon is coming back to retail.
Some people are confused by Amazon and what makes them so successful. It’s not that they’re an online store. They won’t be successful because they have a retail channel. That didn’t do it either.
The thing to remember is that Amazon is a digital startup company. Amazon still behaves like a startup despite its massive size. Amazon is a software company that is not constrained by the history. It’s competitive advantage is that they’re willing to make data driven decisions.
Host: Victor Menasce
email: podcast@victorjm.com
Economic downturns put entrenched players with market share on the defensive. They experience a drop in revenue and are doing everything they can to hang on financially. Those who can go on the offensive can acquire great business opportunities. Everything seems to be on sale. That’s what it was like in the wake of 2008. The pandemic however, did not create those conditions in a broad sense.
On today’s show we’re talking about the economic impact at an airport.
Host: Victor Menasce
email: podcast@victorjm.com
Even though the pandemic is coming to an end, many restaurant owners are having a hard time hanging on. On today's show, we're taking a look at whether restaurants are a worthwhile venture.
Host: Victor Menasce
email: podcast@victorjm.com
Neal Bawa is the CEO of Grocapitus Investments. On today's show we're talking about the moves in the industry to make real estate more liquid. While the pieces are not all in place yet, Neal makes a compelling argument for where the industry is headed. To learn more about Neal, simply search for his name and you'll find numerous videos and webinars. You can also connect through his investment firm grocapitus.com
Host: Victor Menasce
email: podcast@victorjm.com
Today's show is a live talk from Dallas on a specific case study of a recently completed assisted living project. This talk is viewed through the lens of product design. We often think we are constructing a building. In truth, we're designing a product. This is a subtle but important distinction.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about the connection between energy prices and construction decisions.
We typically make design decisions for new construction based on an economic break even analysis.
In an environment when gas prices have doubled in the past year, and energy prices in Europe have increased 40% in the past two weeks, there can be a significant impact on the time to break even. If you cut the time to break even in half, maybe it changes the conclusion.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about global economic warfare. I’m here to tell you that interest rates are being artificially held down, but that we will see an end to that in a matter of weeks.
The tools that governments use to stimulate the economy are becoming less and less effective. In essence, central banks and governments are out of ammo when it comes to influencing the economy.
Host: Victor Menasce
email: podcast@victorjm.com
What's it like to invest in China? There are plenty of risks investing in the US. But China has a special breed of risks.
Canada held a Federal Election yesterday. Real Estate issues were front and center. But none of the parties seemed to be truly addressing the root cause issues. This was dog whistle politics at its best. Create a diversion that makes for good press coverage without actually doing anything.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about peril of thinking small. To be fair, the thinking is that the path to growing big was to start small and grow from there.
This past weekend I was at a conference in Dallas where I heard a similar question over and over again.
Host: Victor Menasce
email: podcast@victorjm.com
Travis Godon comes from Ely Nevada, a small town surrounded by miles of open space. Travis has leased thousands of acres of land for solar farms. This is a different kind of land development opportunity that is not that common. But the opportunity is sizeable and of growing importance.
To connect with Travis, you can reach him on LinkedIn.
host: Victor Menasce
email: podcast@victorjm.com
Today's show is a recording of a talk on how to raise capital at a live event at The Real Estate Guys Syndication Conference in Dallas Texas.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about how to handle delays. Whether you are stuck in traffic, your flight was canceled, your supplier just told you that that a critical component is out of stock or a ten minute appointment is going to take a month, delays seem to be pervasive.
Delays cost money, real money.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re continuing our series on inflation. Do far this week we’ve studied what the real rate of inflation is, why our governments have got themselves into a debt trap, and what people on fixed incomes are facing in an inflationary environment.
Today we’re looking at what you can do as an investor to protect yourself against inflation.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show the focus is what people on fixed incomes will do in the face of inflation.
Most people in the general population don’t have the entrepreneurial skills to design their own income streams. If they experience a loss of income, the tools at their disposal are limited. They either continue their lifestyle by going into debt, or they cut expenses.
Increasing debt is a temporary solution employed by many. But this too has the effect of running out of eventually forcing financial belt tightening.
We will see several forms of household cost reduction.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re continuing our series this week on inflation. On yesterday’s show we talked about the debt trap that countries find themselves in. On today’s show we’re talking about how in my opinion the numbers being stated by governments around the world are vastly underestimating the actual rate of inflation.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re taking a deeper look at inflation. Inflation is in the news these days and with good reason.
This week we’re taking a deeper look at inflation over the course of several shows. On today’s show we’re going to talk about the very first impact, the wiping out of purchasing power for those on fixed income.
So what happens when inflation gets out of control? People on main street suffer the most. There are three impacts of inflation.
1) It has the effect of wiping out purchasing power for those on fixed incomes
2) It has the effect of wiping out savings
3) It has the effect of wiping out debt with fixed interest rates.
In an inflationary environment the underground economy flourishes. There are numerous examples of this.
Robert Helms is the host of The Real Estate Guys Radio Show. He's also a developer with a rich history in developing all kinds of projects both in the US and internationally. On today's show he's sharing the story of how Mahogany Bay Village, a Hilton Curio Collection Property came into being.
You can learn more about Robert at realestateguysradio.com
Host: Victor Menasce
email: podcast@victorjm.com
Tim Milazzo is the founder and CEO of StackSource.com. This financial technology company (fintech) seeks to revolutionize and simplify the world of commercial lending. His team is investing to making intriguing advances in the realm of commercial loans. To learn more you can visit stacksource.com.
On today’s show we are talking about the danger of predicting the future. But we may be on the edge of a cliff that few people can truly see coming.
It was only a few weeks ago that economists were predicting continued economic growth into the fourth quarter. Kids are returning to school, life is getting back to normal, and the economy should generate about 750,000 jobs in the month of August. But when the real numbers were tallied, the number of jobs created was 1/3 of the gain expected.
On today’s show we’re talking about a question that is on a lot of investor’s minds. We keep hearing from the Federal Reserve and government officials in the Treasury department that inflation this year, while elevated, is expected to be transitory. That is to say, it’s temporary. We have seen rents increase, sale prices increase sharply in response to low supply of housing.
When it comes to certain commodity prices, we’ve seen prices rise and later fall based on short term supply and demand dynamics in the market place.
Rents have a general tendency to stick. They tend to rachet upwards. Even older buildings tend to increase rent, but more slowly. Unless a building is truly an inferior quality living space, you can expect to see rent increases approaching the market average.
The rising cost of land and the rising cost of construction are the major factors that drive higher asking rent for new buildings.
Host: Victor Menasce
email: podcast@victorjm.com
Today El Salvador was the first country to adopt Bitcoin as a recognized currency.
But this takes us back to the fundamental question of what is money? Why would a country adopt a currency that is as volatile as bitcoin? It’s not an effective store of value, and its usefulness as a means of exchange is improving all the time, but is still difficult.
El Salvador made the announcement in June a crypto currency conference in Miami to adopt bitcoin as an additional currency. The President of El Salvador said that the reason for adopting crypto was the short term benefit of creating jobs and provide financial inclusion to thousands of people outside the formal economy.
The country has been using the USD since 2001. Before that, the local currency was called the Colon which had been in use since 1892. But when El Salvador adopted the USD in 2001, they didn’t remove the Colon as a valid legal tender.
The majority of citizens are opposed to having their wages denominated in bitcoin due to the extreme volatility of the currency against the USD and other major currencies. There is real fear that the purchasing power can be eroded overnight. Furthermore, while you can pay your taxes in bitcoin, so far, the Salvadoran government has said that taxes will be calculated in US dollars
El savador is a poor country. There is a large percentage of the population that don’t own a cell phone, and many who do own a cell phone cannot afford a data plan. So using a digital wallet without a data connection is clearly problematic.
So when I hear the president of El Salvador speak, what I’m hearing is that they are having a hard time even observing the economy. Much of the economy is happening in cash, with no income reporting to central tax authorities. It’s hard to tax transactions you can’t see. Is the person bartering a chicken for a basket of mangos going to pay tax on the sale of the chicken? I doubt it. If they’re paying in cash in US dollars, are they going to inform the tax authorities?
At 11:01 AM yesterday, lightning struck one of our assisted living care homes and started a fire. The building was empty at the time of the incident and had only received its operating license a couple of days earlier.
On today's show we're talking about how you can use every single event that happens in your business as an opportunity for continuous improvement, to create a learning culture.
Host: Victor Menasce
email: podcast@victorjm.com
Today is another AMA episode (ask me anything). This question comes from David in Belize.
David asks,
I have several companies ( broker, agent, syndication, gift shops, personal properties) and starting a few others. ( Nowhere near your scale for now 😊)
I know you have several Companies/Projects going on i.e., farm to table restaurant, Philly construction, several projects in Louisiana ( RV park, multi fam, retirement homes). You always talk in your podcast about having calls to your teams.
My question is, how often do you have these meetings with your team(s) (Zoom or call), 1x a week, 1 time a day? Every 2 weeks, etc.???
How long do these meetings last?
How do you balance your family/free time?
Chris Widener is an internationally recognized keynote speaker and author. He has authored more than 22 books. On today's show we're talking about his history as an author and a speaker.
Chris is passionate about our culture and has become politically involved lately. At the Real Estate Espresso Podcast we don't endorse any political party and remain agnostic. Heck, I'm Canadian and don't even get to vote in a US election.
I have several of Chris's books on my shelf and you can find them anywhere books are sold. You can connect with Chris at chriswidener.com or learn more about his events at americanfreedomtour.com.
Robert Helms is the host of the Real Estate Guys Radio Show, now in its 25th year. Robert is a developer having developed projects all over the country and internationally. He hosts numerous live events on an annual basis. But after 18 months in the pandemic there is a certain amount of fatigue with virtual events. On today's show we're talking about the transition back to live events.
Robert will also be hosting the Secrets of Successful Syndication in Dallas on September 17-18. To learn more, send an email to syndication@realestateguysradio.com.
This is another AMA episode (Ask Me Anything). Today's question comes from Joseph.
"Hey Victor;
Looking for another perspective. New tenant in SFH, I’m covering the lawn care. Tenant claims the hub cab on the car was broken by the gardener, pictures of location of vehicle and possibilities leave this situation extremely unlikely. The gardener tried to reason w/ the tenant and they are demanding he replace the hub cap. The cost of the hub cab on eBay is from $30 to $60 shipped.
I am cautious about honoring something that seems very unlikely and then opening up other situations.
Looking at it from the tenants perspective, and if they truly believe this happened, making good could go a long way.
I was considering crediting the money to the gardener and let him pay the amount as the “good cop” and then handle any more issues down the road, if any; taking previous concerns in to consideration.
What thoughts do you have?"
Joseph,
This is a great question. It falls into the category of how to handle any request from a tenant. This is encountered often in the world of property management. But the very name property management is a misnomer in my opinion. The property is an inanimate object and therefore can’t be managed. What you do influence is the tenant relationship.
I personally favour the approach you suggested in your question. By having the landscaping contractor pay for the damage, you are staying out of the dangerous waters of reimbursing the tenant for damage, even if you fund the landscaping contractor.
At the same time that you tell the tenant that you have contacted the landscaping contractor about the damage, take the opportunity to ask if everything is in working order at the property. That changes the posture from reactive landlord to proactive landlord. In the same conversation, let them know that you will be sending someone to change the air filters.
When tenants feel like they are getting ripped off by their landlord, they will often find hidden ways to get even with you. They may create artificial maintenance problems to see if you are responding to their complaints.
But if you are proactive and you demonstrate that you are proactive, it has a tendency to change the dynamic.
Today is another AMA episode. This question comes from Jasdeep in N. Michigan. I’m going to summarize a very lengthy question.
We acquired a hotel from an absentee owner who had allowed the hotel to fall into disrepair over the past 20 years. The property had become a blight in the city. We are experienced hotel owner operators. We had a hard time finding a contractor to take this project. We did ultimately hire a contractor who acted unprofessionally and eventually worked to sabotage the project. In the ensuing dispute, the contractor caused city inspections resulting in a red tag being placed on the building, revoking the certificate of occupancy, and filed a mechanics lien on the property in excess of $400,000. They even contacted the local press who wrote a defamatory article on the hotel.
I would truly appreciate any thoughts you may have on our situation.
Jas this is a great question. There are a lot of moving parts to the situation.
There are really several different directions that we can take this discussion.
1) What were some of the root cause failures that seem to have happened in this case?
2) How to fix the situation from where you are now?
3) Where are there possibly remaining blind spots?
Host: Victor Menasce
email: podcast@victorjm.com
Today’s show we’re reviewing the book “The Hard Thing About Hard Things” by Ben Horowitz.
Ben Horowitz, is the cofounder of Andreessen Horowitz and one of Silicon Valley's most respected and experienced entrepreneurs, offers essential advice on building and running a startup—practical wisdom for managing the toughest problems business school doesn’t cover, based on his popular ben’s blog. Ben Horowitz and Marc Andreesen worked together in the early days at Netscape. They were truly among the founders of the modern day internet.
While many people talk about how great it is to start a business, very few are honest about how difficult it is to run one. Ben Horowitz analyzes the problems that confront leaders every day, sharing the insights he’s gained developing, managing, selling, buying, investing in, and supervising technology companies. Ben is one of the few people that truly speaks to the unspoken issues that entrepreneurs deal with.
On today's show we're taking a look at uncertainty. You can take any headline and dive deep on the uncertainty that abounds. No answers. No recipe. Today's show is a prelude for September 1, where we review the book of the month.
Today is another AMA episode (Ask Me Anything). Johnny writes:
I've become increasingly interested in key Pennsylvania cities as new markets to invest in for rental properties. The cashflow an investor can achieve in cities such as Philly, Allentown, and Pittsburgh seem sustainable and appealing given the cost to purchase properties.
One factor I'm also considering - and I would value your take on - is whether the US will experience an increase in domestic steel production. Looking at larger geopolitical issues, it seems that the US will need to achieve far less reliance on countries such as China for key materials such as steel. Are these areas positioned for a boon in manufacturing? That can make all the difference in discerning an investment opportunity that has a 10-15 year span.
Thanks!
Host: Victor Menasce
email: podcast@victorjm.com
Tim Lyons is a NYC Fire Department Lieutenant, Emergency Room Nurse, and real estate investor. I've known Tim for several years and observing his journey has been wonderful to watch.
Tim has jumped into the world of multi-family investing and syndication. He forms part of a portfolio of over 1,000 units. You can connect with Tim at citysidecap.com.
Sharad Mehta is the CEO and founder of RESimpli, a software system designed to provide an end to end solution for residential real estate investors. You can connect with Sharad at his website RESimpli.com.
Today’s show was inspired by a simple statement. The statement was made by Adam Grant, who is a psychologist and author who is currently a professor at the Wharton School at the University of Pennsylvania where he specializes in organizational psychology.
I’ve read several of his books and his latest book entitled “Think Again” was our book of the month for March of this year.
Sometimes you hear a statement so profound that if you’re not paying attention it can pass you by. This statement by Adam Grant literally stopped me in my tracks. It was about 6AM and I was listening to a podcast as I waking up. I’m going to paraphrase what he said so it won’t be a direct quote.
Adam said, the reason mature companies do so much better than startups is they can focus on the hard things associated with optimization. Startup companies are so focused on the hard things associated with launching the business.
I heard that statement and had a moment of penetrating clarity.
On today’s show we’re talking about design and dimensional constraints when you’re designing a living space..
Most people have a hard time looking at a set of plans and visualizing their furniture in that space. This is a process that comes with practice.
The most important room in a house to design well is the kitchen. In today’s homes, with the cost of construction, space comes at a premium. When you consider the utility of space, you have to consider how much real space is required for walking inside a home. If the spaces between elements are too small, even a large room can feel crowded.
On today’s show we’re going to give you a design idea to solve the problem of a room that is a bit too small.
On today’s show we’re going to take a look at the new infrastructure bill that was just enacted in the United States and take a peek at some of the implications for real estate investors.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show Debbie from Pennsylvania asks about buying property at tax sale.
Host: Victor Menasce
email: podcast@victrjm.com
On today’s show we’re talking about whether inflation can breed demand for more real estate.
This year has seen dramatic increases in prices for real estate across the US and Canada.
In 94% of the metro areas in the Us, prices are up more than 10% from a year earlier. Nationally, prices are 22.9% from a year earlier. Many are decrying the affordability crisis. But it is a free market. There is clearly excess money sloshing around in the system.
So the question is, how many people will attempt to tap into their newfound equity? We’ve heard a lot about how the refi market is extremely hot in 2021. I predict it’s about to get even hotter. The refinance activity is going to continue for the next year, as long as interest rates remain low.
This means that there will be even more money sloshing around in the system, looking for real estate to buy. When there is more money than product, there is upward pressure on prices. This is the very definition of inflation. It’s the inflation of the money supply that is core inflation. The rising prices are merely the symptom.
Nicky is the author of a brand new book called "The Power of Connecting." On today's show Nicky shares a bunch of surprising facts about social isolation.
You will definitely want to reach out and connect with Nicky at ecircleacademy.com.
We're talking all about data center investing on today's show with David Liggitt. Based in Dallas Texas, David is directly involved in helping data center investors with site selection and the numerous criteria that make for a great data center location.
You can connect with David at DataCenterHawk.com where you can get more information about trends around the world.
On today’s show we’re talking about a couple of very specific things you can do as an investor to save money in your construction projects.
If you’re going to save money, you need to be willing to make decisions. But often the people on your team are not offering up the suggestions with which to make these decisions. If you don’t know what to look for you need to become knowledgeable in the types of materials that are in short supply.
We have several construction projects underway and there is a distinct shortage of supply for roofing trusses and floor trusses. If you’re involved in wood framed construction, there are a few choices on the types of products you can use.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re taking a closer look at market analysis to really understand what some commentators are saying.
We’re seen stock market analysts try to explain market behaviour with mathematical equations. They think up fancy terms like “technical analysis” to describe market sentiment and they distinguish the market behaviour from fundamentals.
They even start to give the market a personality. These mathematical models get refined over time and become more and more accurate at describing past behaviour until you see a surprise event which is not described in the equations and then the model doesn’t work anymore. We’ve seen the models fail to predict virtually every major stock market event.
Well now, this same kind of flawed analysis is making its way into the world of real estate. I’m bringing this up because when analysts use equations and show sophisticated looking graphs, the seem smart and these analysts gain a following.
Host: Victor Menasce
email: podcast@victorjm.com
On the first few days of this week we are talking about what kind of amenities today’s buyer is looking for.
When I say buyer, we could be talking about a single family home, a condo, or an apartment. All three are your target buyer. All of them will look at your amenities and often make the decision to buy or rent based on the features and amenities.
On Mondays show we focused on single family homes. On yesterday’s show we talked about condo amenities and on today’s show we’re talking about apartment amenities.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show and for the first few days of this week we are talking about what kind of amenities today’s buyer is looking for.
When I say buyer, we could be talking about a single family home, a condo, or an apartment. All three are your target buyer. All of them will look at your amenities and often make the decision to buy or rent based on the features and amenities.
On yesterday’s show we focused on single family homes. On today’s show we’re talking about condo amenities and on tomorrow’s show we’re talking about apartment amenities.
On today’s show and for the first few days of this week we are talking about what kind of amenities today’s buyer is looking for.
When I say buyer, we could be talking about a single family home, a condo, or an apartment. All three are your target buyer. All of them will look at your amenities and often make the decision to buy or rent based on the features and amenities.
Amenities are difficult to value because they don’t show up in the market data. Even if the amenity has value to some of your clients, you would conclude that it has zero value simply by looking at the data.
On today’s show we are focusing on amenities for single family homes that are selling in today’s market. Tomorrow we will focus on condo and Wednesday’s show will focus on apartments.
So the question is, what amenities would buyers value in a single family home in today’s market?
Host: Victor Menasce
email: podcast@victorjm.com
Amy Johnson is a developer based in Salt Lake City, Utah. But her development projects are geographically dispersed across several communities. On today's show we're talking about the challenges of getting projects approved in multiple communities.
You can connect with Amy at Infiniterealestategroup.com
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we're talking with George about whether the threat of litigation is higher when building condo's versus other asset classes.
Host: Victor Menasce
podcast@victorjm.com
On today’s show we’re talking about how business travel is different during the pandemic.
There is a lot that can be accomplished using a video conference. To be sure, we hold zoom and team meetings daily. Sometimes, even hourly. But I was using video conferencing daily and often hourly before the pandemic.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about a major supply chain disruption that is going to affect the entire construction industry.
James Hardie Building Products is one of the largest manufacturers of cement board exterior siding. Their products are used extensively in residential construction and in multi-family apartment construction.
The company has been struggling to meet demand for product for much of the past year. This past week, the company wrote a letter to all of its customers with some rather shocking news. I’m going to read the majority of the letter to you and then discuss what it means if you have a project that is in need of exterior siding products.
You’ve probably heard the phrase that the only winners in a dispute are the lawyers. Sadly, that’s often the case in today’s litigious environment. Well, on today’s show we’re talking about a court proceeding that our team has been peripherally involved with, where we received the judgement today.
Host: Victor Menasce
email: podcast@victorjm.com
Global shipping prices hit another all time high this week. The proliferation of the delta variant of Covid 19 has slowed the turnaround of containers around the world, further amplifying an already acute shortage.
China has experienced major floods along their southern coast which further delayed the shipment of goods.
Global shipping is now fully disrupted. Shipping rates this week hit $20,804 for a single container transiting the Panama Canal to the US East Coast. At this time last year, that same container would have cost under $2,000.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about how sellers mislead buyers with amazing regularity. It’s understandable. They want to sell. Once the decision to sell has been made, the seller often feels a tremendous psychological pressure to eliminate the uncertainty of the sale.
Sellers want to bring certainty to the situation. Will it sell? When will it sell? How much will it sell for? All of these questions remain open until the transaction completes. The seller will often resort to manipulating the buyer in order to bring closure to the sale.
Host: Victor Menasce
email: podcast@victorjm.com
Kyle Wilson was the founder and President of Jim Rohn International. He has worked with some of the most iconic speakers in the world including Brian Tracy, Les Brown, Mark Victor Hansen, Zig Ziglar, Glen Morshower, Roger Love, Darren Hardy, John Assaraf, Denis Waitley and many others. Today's conversation is a masterclass in developing powerful relationships.
On today's show we're sharing a little about one of our upcoming projects. This show was recorded live on location and highlights the vision we have of the project. To see a few photos of this amazing properties visit "lacommune.ca".
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about how to know what your soil can support.
When you are looking to build, the composition of the soil underneath the surface can make a massive difference in the cost of a project.
On today’s show we are going underground, literally.
Host: Victor Menasce
email: podcast@victorjm.com
On today's show we uncover a future defect with a property. The ability to see into the future as part of due diligence is critical. This is a real life case study that fortunately averted a disaster.
Host: Victor Menasce
email: podcast@victorjm.com
This question comes from Joseph in California.
Hey Victor;
Love your podcast. I have real estate as my primary source of retirement income, so building that portfolio of properties I intend to hold is something I want to do aggressively and smartly. We have $100K to move forward with another property or properties, though the prices are making me shy of moving forward. I’m sensing waiting till the “fenzy” calms down; will make smarter use of money. Even if the interest rates go up a little. I know your crystal ball is broken currently, nor are you here to give me specific personal guidance. I was wondering if your thoughts align with mine. Listening to Robert Kiyosaki; he seems to be waiting till a downturn to start buying. My thoughts are interest rates can always be adjusted after the purchase, though purchase price can’t.
Victor; is my aggressive patience warranted right now?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re taking a closer look at what’s happening in the world of industrial. This is a summary of the findings from some new industry reports on the topic.
The growth in e-commerce is fueling the demand for more industrial and more warehouse space across the nation. Chicago Houston and Dallas account for nearly half the new additional 310 million square feet of space in the past 4 quarters.
The major transportation hubs have already attracted a lot of investment in industrial space. The opportunity lies in three main areas in my opinion.
1) There is opportunity in secondary markets that have largely been overlooked.
2) There is opportunity in specialty space such as refrigerated warehouse space. This is to give perishable products in the supply chain more flexibility to optimize their business operations in less expensive space than retail space.
3) Sale leaseback deals for both manufacturing space and logistics space for medium sized manufacturers.
Host: Victor Menasce
email: podcast@victorjm.com
The housing industry is about to experience a wave of turnover. The Federal moratorium on evictions that was put in place by the CDC came to an end on August 1. Some states and cities still have local regulations in place which may further protect tenants from eviction.
I’m going out on a limb today to predict that as the moratorium on evictions is lifted we will see a game of musical chairs are tenants in arrears scramble to find new accommodations. In the process, we will experience a wave of emergency repairs to rental properties putting further pressure on the construction supply chain.
Host: Victor Menasce
email: podcast@victorjm.com
Our book this month is "Time Smart; How to Reclaim Your Time And Live A Happier Life" by Ashley Whillans.
The title might imply this is yet another time management book. This is not a time management book like so many out there.
We are a generation of over-worked, over-stressed, rushed maniacs. In 2012, a study found that 50% of working Americans were “always rushed” and 70% never had enough time.
Instead, it examines the decisions that each of us make with respect to time. But the root of those decisions is often found in the headwaters of the value judgements that we each make with respect to time and money.
Some people are financially poor. Some are time poor. Many are both. There are lots of people who have ample cash, but are still time poor. If you’re listening to this podcast, chances are high that you’re in that last category.
Host: Victor Menasce
email: podcast@victorjm.com
Seth Teagle is based in Columbus Ohio where he manages a portfolio of over 600 apartment units, mostly for his own account. He discovered along the way how execution and scalability are linked together. Such a great story.
To connect with Seth reach out to him at seth@thestreamgroups.com
Host: Victor Menasce
email:podcast@victorjm.com
Today is another AMA episode (Ask Me Anything).
Karla writes:
Please share your thoughts on the ideal number of doors in each class asset from the business and administration perspective for a multifamily investment. It would be helpful to know the criteria to determine the number of doors.
Host: Victor Menasce
email: podcast@victorjm.com
This question comes from Rod in the State of Ohio
In a past episode you discussed everyone being on same page (Literally) from a document version standpoint. You were evaluating different services and options at that point. Wondering if you could share your results of your analysis of your New System and any thoughts of why you chose a specific system for your needs.
We love your Podcast and Thank You for all that you do…
Host: Victor Menasce
email: podcast@victorjm.com
Today is an AMA episode (Ask Me Anything) Today’s question comes from Chris in Philadelphia. He writes:
"I love your RE Espresso podcasts--short and packed with info. Thank you for making these! They're perfect for my 10min walk to the office.
I recently listened to an episode you did with a fella from Greensboro, North Carolina, and you mentioned this market was heating up. I was delighted to hear that from you, as this is a potential market my partner and I have identified for multifamily investments.
I know the criteria we used to narrow down on this market, and I'd be happy to share if you'd care to know; but I'm also curious if you could share with me how you drill down on markets, and why specifically you believe Greensboro NC is heating up? I desire to learn this from you, the seasoned investor, to see if we landed on this market for all the wrong reasons, or to confirm that we are doing our due diligence correctly."
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re taking another look at the prospects for the office segment. This is brought to you as a result of new report published by brokerage house Marcus and Millichap.
The report tells a tale of pain and opportunity.
Roughly 90 million square feet of new inventory is expected to be added to the market. These projects were started before the pandemic. As you know, once a project starts, you need to finish it. Markets that welcomed the most inventory were led by New York with 6 million square feet, followed by Chicago with 4.3 million square feet and Dallas-Fort Worth with 3.8 million square feet.
While the addition represents about 1% growth in the overall office square footage, the vacancy rate market wide is currently at 16% overall. But the hardest hit properties were those in the urban core. San Francisco had the biggest jump in vacancy to 18.4% as 14 million square feet were vacated.
To download the full report, here's a link to get it.
https://www.marcusmillichap.com/research/special-report/2021/07/office-midyear-outlook
On today’s show we’re talking about your property, and where your rights end.
If you happen to own a factory that borders on the Hudson River and you dump millions of gallons of toxic material in the river, most people would agree that those affected should have the right to make an argument that they’re being negatively impacted and you should stop. That’s pretty clear. In fact, the government should step in for violating environmental regulations. That too is pretty clear.
But if you build a house in a neighbourhood, should the neighbours who did not make an investment in your property get to dictate what you do on your property?
In an effort to prevent neighbours from arguing with each other over aesthetics, cities have created rules in the zoning code. These are the same rules that the neighbours who live next door and across the street have to live by. It becomes a difficult argument that a rule was good enough for you, but is not appropriate for the neighbour.
The grey zone is when variances are involved.
Host: Victor Menasce
email: podcast@victorjm.com
Mark Khuri is based in Bend Oregon where his company SMK Capital invests in projects all over the country. On today's show we take the journey from active investor to fund manager.
You can learn more and connect with Mark through his website at SMKcap.com
Host: Victor Menasce
email: podcast@victorjm.com
Brent Bowers specializes in land. But not just any land. Listen to today's podcast for a unique strategy on how to make land into a cash flowing asset.
To learn more, you can reach out to Brent at thelandsharks.com
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about the gold rush that happens in virtually every new market innovation. We saw it with the railway, the automobile, radio, television, personal computers, the internet, and now in Cannabis.
When a new market is developing there is a major opportunity for new entrants to grab market share in a growing market. When you layer growth upon growth you have the potential for hyper growth. These market conditions have attracted entrepreneurs since the beginning of time.
If you’re a student of history, you will see a familiar pattern. There is a rush to entry, with a brief period of healthy growth, followed by market saturation, followed by consolidation as weaker players are forced to close. Only after the maturation of the second wave of growth in the market do companies experience sustainable business.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about the importance of digging deep in due diligence.
Investors are no strangers to maximizing value. Sometimes value creation happens through genuine means and other times it happens through manipulation of the system.
We all know that there is a link between income and value. The math is pretty simple. You take the net income after expenses and divide that number by the market cap rate for comparable properties to calculate the value. Pretty simple and pretty bullet proof objective method for calculating the value.
But what happens when properties are difficult to lease?
But then the landlord offers a leasing incentive. Maybe they offer 13 months for the price of 12. Maybe they make the first month free and then offer to start the lease in month two. But still the landlord took the money up front as a security deposit and then transferred the funds from the security deposit account to the rental account. From the market perspective, it still looks like a 12 month lease. The tenant got an 8% discount on their rent for the year. But it doesn’t appear anywhere. The accounting records for the business look like the landlord got full rent for a 12 month lease. The 13th month appears off the record.
Host: Victor Menasce
email: podcast@victorjm.com
I’m continually presented with projects that propose density that is close to or just at the threshold of the allowable density for a particular property use type.
But in the real world, these levels of density are rarely achieved. When you layer the real constraints on a project, the density achieved is often much less. The promise of high density creates unrealistic expectations in the eyes of the land owner. They think their property is worth far more than its true development value.
On today’s show we are going to talk about the top 5 constraints that chip away at density.
- Parking
- Green Space Amenities
- Roads, fire department access and multiple points of entry
- Height Restrictions
- Storm Water management
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we are talking about inflation and the hidden tax that can impact investors.
If you have been listening to this podcast for a while, you will know that we don’t adhere to the typical mainstream media definition of inflation. The correct definition of inflation is the inflation of the money supply. All the extra currency in circulation has the effect of pushing up prices as businesses and individuals bid up the price of goods and services.
Inflation is often compared with a hidden tax.
Governments prefer this hidden tax because when you go to the grocery store and pay $6 for a head of lettuce, most people blame the grocery store and not the government for the high price of lettuce. It’s politically more palatable.
After all, if the government wrote you a check you would probably celebrate, rather than criticize the government for printing more money.
But apart from the hidden tax, there is a very real tax. The real tax is capital gains tax on the sale of assets. When the value of your property goes up because of inflation, and then you are subsequently taxed on the capital gain, there is a double taxation of sorts happening.
A discussion of investment returns cannot be complete unless you take tax consequences into account.
Host: Victor Menasce
Email: podcast@victorjm.com
In many cases, the news is not new enough to be news, and it’s not old enough to be history. It falls into a no-mans land of random useless data.
I’m struck by how often the news media are out of step with what is happening in the world of real estate investing.
The front page report is simply out of step with what is actually happening in the market. Unless there is an ambulance chase involved, the news media are not up to the minute. In fact, they're often weeks behind.
Host: Victor Menasce
email: podcast@victorjm.com
Justine Picard comes to us from Gatineau, Quebec. She joined our development team a few months ago in an internship role. On today's show we're talking about what it means to intern in a business, and what types of engagements work and those that don't.
Host: Victor Menasce
Email: podcast@victorjm.com
On today's show we have repeat guest George Ross. George has been a real estate lawyer at the highest levels. We are talking about whether to take the gamble and acquire in today's market, versus being patient and waiting for better pricing.
Host: Victor Menasce
email: podcast@victorjm.com
When you look at demand for housing, you often hear the statement “Everyone needs a place to live “.
That’s true. But if we go back to the financial crisis and look at the counties in the US that had large numbers of foreclosures, a disproportionate number of those foreclosures were in fact on second homes.
The outsized number of foreclosures in Miami Dade county and Broward county were among the highest in the country. Maricopa county which comprises the municipalities of Phoenix, Scottsdale, Mesa, Tempe, Glendale, over 20 municipalities in all had some of the highest foreclosure rates in the country.
What distinguishes these locations is that a large proportion of these residences are in fact second homes. In moments of financial distress, people will sacrifice their second homes to protect the family homestead. That makes perfect sense. Most rational people would do the same thing.
On average, prices fell about 33% as a result of the financial crisis. But prices in Maricopa county fell an average of 56%. A disproportionate number of these properties were second homes. There was a similar phenomenon in Las Vegas and in south Florida and Orlando.
We are not accustomed to managing price volatility. In the moment, the heat of the current market conditions, the price today seems to make sense. At least it’s possible to explain why the price is what it is. But with the wisdom of hindsight, it’s easy to see how distorted the perspective can become for periods of time.
Host: Victor Menasce
email: podcast@victorjm.com
episode # 1279
Back in the day, houses were built to last hundreds of years. My family owned a 13 century farm house in Tuscany. It is still standing. The house that my father grew up in on the island of Rhodes dates back to the time of the Knights of St John. We estimate that the house he grew up in was built in the late 1400’s. It’s hard to wrap your mind around a house that old.
If the useful lifespan of a modern building is 70 years, you can expect that many of the buildings constructed in the 1950’s will be need to be redeveloped in the near future. Some of those buildings built in the 1960’s will need major retrofits or will need to be demolished. It all depends on how the buildings have been maintained. Even some 1970’s buildings are looking pretty tired at this point.
Building obsolescence does not appear in any of the analysis that I’m seeing reported in statistics. It's almost impossible to get statistics on demolition permits. How much new product will be needed to replace existing buildings that are ready for retirement?
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re talking about a mistake we made in a site plan development. It’s an opportunity to learn from our mistake.
We thought we had done everything correctly. We had designed a subdivision that we thought complied perfectly with the zoning requirements with zero variances. I can tell you that it is pretty rare to have a project of any size that has zero variances. But our goal was and still is to have zero variances. When you are complying 100% with the stated rules, then you eliminate reasons for a politician or a bureaucrat from saying no to your proposed development plan.
It happens that you sometimes get an answer to a question from a public official that can lead you down an incorrect path. I’m not blaming that public official. Maybe we misunderstood the guidance.
I actually don’t think we misunderstood. But I have to assume full responsibility for the project. I can blame them for telling me something incorrect. But it doesn’t help.
Today's question is another listener question. We're talking about investing in the self storage asset class.
Host: Victor Menasce
Email: podcast@victorjm.com
On today’s show we are talking about businesses with no exit plan. I’m not talking about weak businesses. I’m talking about businesses that are vibrant thriving businesses. But they are closing. No, it wasn’t because of the pandemic. It wasn’t because the business was going bankrupt. It’s because the owner wants to retire and they had no succession plan.
On today’s show we are going to take a look at two of these businesses. Both are healthy businesses. But they don’t know how to exit. In the end, they will probably just quietly close their doors if they can’t find a buyer.
Host: Victor Menasce
Email: podcast@victorjm.com
Danna Olivo is an expert at responding to requests for proposals. We're talking about the business development function within the world's major architectural, engineering and construction firms. There is a process to responding well to requests for proposals and requests for quotation, whether in the public sector or the private sector.
To learn more reach out to Danna at marketatomy.com.
Mike Morawski has a cautionary tale and some life lessons to share. He made some fundamental mistakes at the height of the 2007 real estate mania and paid a heavy personal price for those mistakes. Listen to today's powerful conversation. To learn more, visit mycoreintentions.com and you can download a free copy of his book "Exit Plan" at mycoreintentions.com/exitplan.
On today’s show we’re talking about a shift that is taking place in the restaurant business. It would seem that converting a restaurant kitchen to a ghost kitchen would be a fairly easy transformation. It turns out that it’s not that simple.
I know of several chefs that are aiming to buy a commercial kitchen in order to satisfy the growing demand for their catering businesses. We're talking about how best to create a ghost kitchen. A world of opportunity exists for the enterprising real estate investor who seizes the opportunity.
Host: Victor Menasce
email: podcast@victorjm.com
On today’s show we’re going to focus on smaller resort towns. People want to visit the idyllic resort towns of Banff, Aspen, Vail, Sun Valley. The problem is that the most profitable real estate to develop is for the owner occupant, and the vacationer. Why would you build affordable housing that gets you $1.50 per square foot in rent when you can build a hotel room, or timeshare that rents for $2.00-$3.00 per square foot. A myopic developer will choose the higher value real estate every time. But the problem is, people won’t come and occupy those pricey ski chalet’s if there’s nobody to serve dinner at the nearby local brewpub, or stock the shelves in the local grocery store. Many of the service jobs in these small but affluent towns are going unfilled.
host: Victor Menasce
email: podcast@victorjm.com
Today’s question comes from Chris in Long Island.
“I’m having a hard time getting offers accepted. I’m seeing so many people closing deals on social media. We keep getting outbid. What am I doing wrong?”
Chris this is a great question.
I can’t say that you’re doing anything wrong. The worst thing you could do is pay too much for a project simply to get the short term feeling of accomplishment that you got a deal closed. If you paid to much or bought the wrong project, that feeling of accomplishment will be terribly short lived and you will spend months or even years trying to recover from having made a poor decision.
I can guarantee you that hardly anybody is posting on social media that they cancelled a contract, or that they got outbid, or that a project got delayed because of an issue with title insurance or a lender.
People tend to post their successes only. You don’t see the majority of the projects that don’t see the light of day.
One of the most successful investors I know looks at hundreds of deals before pulling the trigger on a handful. Even then only a small percentage of those will actually close.
It’s a bit like playing the comparison game with photos in a magazine. You don’t see that the model is wearing makeup, that the photos have been modified in photoshop. That extra bit of flabby skin on the back of the arms have been slimmed down and eliminated to appear thin and toned.
The problem is that when you play the comparison game, the comparison is against a magazine cover that is not real.
Host: Victor Menasce
Email: podcast@victorjm.com
On today's show we're talking about long term investments in downstream energy projects and the impact on local real estate.
Host: Victor Menasce
Email: podcast@vicotrjm.com
On today’s show we’re talking about forecasting your business if you're investing vacation rentals.
Host: Victor Menasce
Email: podcast@victorjm.com
Frank Furman is the co-founder of padsplit, dedicated to workforce co-living. It's a model that puts together properties and working people looking for a more affordable housing option. Based in Atlanta Georgia, padsplit is active in multiple markets across the US. Residents pay a weekly rate by the bedroom with a one month minimum, with full access to common amenities. On today's show we talk about the challenges of managing this non-traditional model from both an investor and a resident perspective. To learn more, visit padsplit.com
Ramsey Blankenship is investing in syndications while on active duty in the US military. Currently based in San Diego, or wherever in the world duty calls. On today's show we're talking about scaling your business and creating revenue streams to buy back time.
You can connect with Ramsey at realfocus.org.
On today’s show we’re talking about delays of all kinds. I’ve been in several conversations over the past few weeks in which lenders have notified us of delays in processing paperwork. The same is true of zoning applications before the city. Even delivery of certain construction services are being impacted. What’s the reason?
Labor shortages.
Host: Victor Menasce
Email: podcast@victorjm.com
Our book this month is definitely worthy of the book of the month criteria. It's written by a gentleman who I had the honor of meeting about a month ago. The book is called, “Why the best are the best.” By Kevin Eastman.
Kevin has dedicated most of his working life to the sport of basketball. The pinnacle of his career was at the top of the coaching organization for two teams in the National Basketball Association. He was the assistant coach for the Boston Celtics when they won the NBA championship in 2008. Kevin was the assistant coach and Vice President of Operations with the Los Angeles Clippers.
When I spent time with Kevin Eastman I was struck by his ability to distill big ideas into very simple and clear beacons of light that can serve as a north star for those times in life when one is pulled off course.
How often lengthy explanations and excuses can be cut off with a few choice words that bring the ego back to earth.
Kevin is a life-long student. This is a phrase that I hear often. I suppose there are those who truly believe that they’re being a student. But Kevin is a student every spare second of every day. He speaks of a work ethic that is the work ethic of champions. But it’s one thing to say the words. It’s quite another to truly embody those words.
In Kevin’s world, success lies in simplicity, confusion lies in sophistication.
At the core of success are three elements:
1) the work that goes into it,
2) the mindset that must be turned into habits and
3) the execution discipline.
It’s not about what the words will do for you. It’s about the what the words will do to you. If you’re not changed by the words, then the words have no impact.
The core of the book are 25 words. That’s it, only 25 words. You could think of the book like a dictionary of a mere 25 words. But unlike the Oxford dictionary which takes a word and provides a couple of sentences to define that word, Kevin takes an entire chapter to define a word.
On today's show we're connecting the dots between what's happening at the Federal Reserve and real estate prices. Prepare for some new headwinds in the market.
Real Estate markets across Canada have slowed dramatically in recent weeks. This is due to a regulatory change. Markets around the world can learn by watching what is happening in Canada.
Host: Victor Menasce
Email: podcast@victorjm.com
On today’s show we are talking about confronting a difficult decision and an iconic building that nearly failed.
We take it for granted, waiting for the elevator in the lobby. By the time we are walking around the perimeter of the building taking in the spectacular views, we take the structure of buildings for granted. The floor beneath your feet feels as solid on the second floor as on the fifty second floor or the 92nd floor.
Sadly, the world witnessed the collapse of a 12 story building only a few days ago. 12 story buildings are commonplace. They’re a dime a dozen. How could a 12 story building fail?
On today's show we are talking about an iconic building rising more than 900 feet in the air that almost failed. But they fixed the problem.
Lisa Hylton was trained as a CPA and spent the first part of her career at PWC, one of the big accounting firms, helping institutional investor clients with accounting. Today, she's a fund manager with a focus on multi-family value add projects. Based in Los Angeles, she works with multiple operators in multiple markets. To connect or learn more, visit lisahylton.com
Jerome Myers is based in Greensboro, North Carolina. On today's show we're talking about organic growth from an epiphany. This is such a great story.
You can connect with Jerome at jeromemyers.co.
Yesterday in the early hours of the morning, a 12 story condo building in North Miami Beach collapsed. The security video footage from the neighbouring complex shows what appears to be a spontaneous event. It will take a long time and a detailed investigation to determine the likely cause. It’s possible the true root cause may never be discovered. On today’s show I’m going to play armchair engineer and speculate on what might have contributed to the catastrophic failure of this building.
It’s entirely possible that there was more than one failure. Each failure by themselves might not have been enough to cause the building to collapse. But in combination, the structure was weaken enough in key places that all it took was a catalyst. Think of a pin popping a balloon. It takes a very small amount of energy in the right place to pop a balloon.
Buildings next to the ocean present special problems. The way these concrete buildings are constructed relies upon two materials working together to keep the building and all of its spans standing upright.
Host: Victor Menasce
Email: podcast@victorjm.com
On today’s show we’re talking about assisted living. But not just any assisted living. This is a project that I’m directly involved with. Our Grand Opening party is happening tomorrow at Sage Oak of Lake Charles. It’s located in Lake Charles, Louisiana. This 80 bed facility aims to redefine how assisted living care is delivered in the marketplace. This is culmination of about three years of work. As always, this is a team effort, none of which would be possible without the extraordinary efforts of all the core team members.
Host: Victor Menasce
Email: podcast@victorjm.com
On today's show we're talking about how you would go about evaluating whether an architect is the right fit for the job.
Host: Victor Menasce
Email: podcast@victorjm.com
Magin asks,
With all of the uncertainty in the world I am fearful of the inevitable "Bail-in" from the banks. We are always told to keep "dry powder" ready for future opportunities. Is there another institution where one could safely Store "easy to deploy currency?"
Magin, this is a great question. On today's show we're going to answer how you can protect yourself from the bank treating your like an unsecured creditor.
Host: Victor Menasce
Episode: 1225, season 4, episode 173
Email: podcast@victorjm.com
On today's show we're talking about the coming shortage of oil production and the implications on foreign real estate investment. The link is not obvious to the uninitiated, but it is real.
Host: Victor Menasce
Episode: 1254. Season 4, episode 172
Email: podcast@victorjm.com
David Wood is a relationship specialist who helps business owners and entrepreneurs restore focus and balance in their lives. After 15 months of our lives being turned upside down due to the pandemic, many are struggling to get back into balance. David Wood is showing up at a time when he's needed most.
We often speak about "The elephant in the room", that giant unspoken problem that is accepted. But the elephant isn't the only animal in the room. What about the mouse? Do you even notice the mouse?
He's the author of the book "Name That Mouse". You can connect with him at namethatmouse.com and participate in his kickstarter campaign that is currently underway.
Melissa Johnson comes to us all the way from San Antonio Texas. On today's show we're talking about the systems and staffing that it took for her to scale the business.
You can connect with her at TheMelissaJohnson.com.
Today's question come from Aaron. He says:
"Hey Victor!
Thank you for all your wisdom and insight. I consider you the “Real Estate Yoda.” I was curious if you have any previous episodes or other resources about investing in farmland/Rural Land/timberland. I have heard about leasing farmland, but I do not know much about it. Farmland seems like a safe investment through economy recessions as people still need food. For example, possibly buying large acreage (50-200) not far from a major metropolitan area that has high potential for appreciation; maybe it’s highest and best use is leasing it for farmland until one or two decades down the road when maybe its highest and best use is commercial or residential development. Any idea how far away it's safe to own and lease farmland that is several hours drive/airplane ride away? Just curious your thoughts about investing in those types of real estate.
Thanks!"
Host: Victor Menasce
Email: podcast@victorjm.com
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On today's show we're talking about the latest wave of supply chain disruptions and what is behind them. Hint: It's not what you think.
Host: Victor Menasce
Email: podcast@victorjm.com
On today's show we're talking about how social proof plays an important decision in many buying decisions. But the question is, do online reviews truly constitute social proof? Are online reviews subject to large scale manipulation and therefore massive distortions of the public's perception? How can you determine what is real and what is not?
Host: Victor Menasce
Email: podcast@victorjm.com
Today is part 2 of yesterday's "Ask Me Anything" episode. This question comes from Ney in Ecuador. He asks,
I've been thinking of creating a Real Estate Investors Association. We don't really have them in Latin America. Is there a blueprint to do this?
On yesterday's show we talked about the structure for a REIA or investment club. On today's show, we're talking about an entire year's worth of ideas for the speaker topics you may choose to schedule.
Host: Victor Menasce
Email: podcast@victorjm.com
This question comes from Ney in Ecuador.
Ney asks.
I've been thinking of creating a REIA. We don't really have them in Latin America. Is there a blueprint to do this?
On today's show we're talking about several different business models for creating a real estate investment association or club.
Host: Victor Menasce
Email: podcast@victorjm.com
Chris Miles is based in Salt Lake City, Utah when he manages a portfolio of income properties. On today's show we're talking about the merits of active versus passive investing.
You can connect with Chris at moneyripples.com
Chris is also the the host of the Chris Miles Money Show which can be found on most podcast platforms.
Michael and Suzy are based in Cambridge in the UK and managing their real estate portfolio in Tulsa Oklahoma. So many people assume that real estate investing must be done locally. This dynamic team are proof that everything from acquisitions to management can be done at a distance with the right team.
You can connect with Michael and Suzy on their website at adventurousrei.com/info
On today’s show we’re talking about the real estate required for renewal energy. There are significant narratives about the need to transition from carbon based energy sources to renewable energy source. Renewable energy sources fall into three principal categories
1) Hydro-electric
2) Solar
3) Wind
But we’re also talking about how the increase in the use of solar and wind power will also require an equivalent production capacity of natural gas or other carbon based generation. This may sound counter-intuitive. But when you understand how renewable energy sources work, you will quickly understand how the renewable resources will require a complete duplication of the power generating capacity.
I’m a huge fan of solar energy. I love the idea that you can get energy for free just by sitting there in the sunshine. I have solar power on my boat and I love that I rarely have to plug into shore power. But the problem is that the math doesn’t add up when you try to extend the renewable argument on a national or global scale.
The problem with solar and wind energy is that they only operate on average between 10-30% of the time. They reduce your average fossil fuel consumption, but you have to design the entire electrical system to handle the peak consumption, not just the average. When it’s dark and it’s hot and there’s no wind, your electrical system still has to produce enough power. If it doesn’t, then you have large scale outages which can take days or weeks to recover from. You have to assume that at least part of the time the solar and wind infrastructure are contributing nothing to the network. It’s as if they don’t exist.
So you must have a completely parallel system to produce power that is not relying on renewable forms of energy.
Even assuming that you could cover an area the size of the state of Texas with solar panels, you would need to replace that area with new panels every 25 years. In addition, you would still need to maintain a fossil fuel infrastructure for those times when the sun is out of view and the wind stops blowing. If you replaced an area the size of the state of Texas with solar panels, you can imagine the impact on wildlife and ecosystems by essentially paving over that much wilderness. You can’t relocate that much wildlife successfully.
I believe there is a real estate play in the realm of renewable energy. This is an area that will increase in importance in the coming years. But the projections of replacing a large percentage of fossil fuel consumption with renewables in the next 20 years are wildly optimistic and are simply not supported by the scale of investments that are being contemplated. Too much of the near term narrative is really about arguing over who gets to pay and who gets to keep the carbon credits. Carbon credits don’t help the environment directly. They don’t result in any reduction in carbon consumption. The natural environment is not a party to our financial system. When an environmental argument gets reduced to a fight over money I start to lose sight of how we are going to replace our carbon consumption.
On today’s show we’re talking about the discipline of performing your due diligence in underwriting and budgeting.
I had the experience earlier this week when I received a construction estimate from a major, very experienced general contractor. This particular GC does several billion dollars a year in new construction. They have a top notch team and they have top notch systems internally. The number was much higher than our budget allowed for. If the estimate was true, we didn’t have a viable project. Naturally our team leapt into action to try and understand why the numbers were so high. We scrutinized all of the assumptions. This involved examining specific line items against the benchmarks we have for similar projects. For example we had a budget estimate of $19,000 per condo apartment for plumbing. It’s not as if a condo has more sinks or toilets or pipes than a rental apartment. There is still only one sink in the kitchen, one dishwasher. Why was this line item so high? Was there a technical requirement to use copper for water and cast iron for sewer? After further review, no the plumbing pipes could be plastic and the sewer pipes could be PVC or ABS. It turns out the GC had assumed higher end finishes for the fixtures in the bathrooms, but in reality there was no justification for the cost of plumbing to be so much higher than expected.
There were several line items like this out of several hundred detailed line items. The General contractor provided their internal material take-off tool to help us understand how the estimate was put together.
A phone call ensued in which we outlined our assumptions for the level of finishes, types of windows, amenities and so on. On that basis, the GC took the feedback and a few days later they came back with a new estimate. This new estimate was slightly below out budget. The initial reaction by most of the team members was one of relief.
It’s amazing how it’s tempting to feel good when someone tells you what you want to hear. When you hear the right answer the curiosity to dig deeper often dissipates. But a good number is every bit as dangerous as a surprising number. It deserves every bit as much scrutiny as before.
It’s not because the cost of drywall went up by 10% that the project will be over budget. In my experience, there will be a fundamental assumption error in the project. That’s where the big errors creep into a budgetary estimate. It’s because a line item was zero when it should have had another number.
Even when the number is what you’re expecting, it can have mistakes. You can have a situation where two errors cancel each other out and hide the mistake.
We took the time to scrub the numbers. Here too, we found problems in the estimate. This time, the numbers were too low. That situation is just as damaging, perhaps even more damaging than the reverse situation. But I have to say it took a lot more energy to muster the motivation to scrutinize these numbers that looked so much more attractive. But as soon as we found the first problem, the motivation was there to keep digging and make sure we understood the budget estimate fully.
It takes a lot of energy to check everything for safety. It take diligence. As humans it’s exhausting to be on high alert all the time. So instead of performing due diligence on everything, most people have adopted a check for comfort as a proxy for due diligence. If they feel comfortable then they don’t bother looking any further. You don’t walk around the house checking if all the windows are closed at night. You do a simpler check. Are you comfortable? Is the house drafty? If you don’t feel a draft you don’t check the windows. A check for comfort is used instead of a check for safety.
Anthony asks
Real Estate is a game of big numbers. Amassing enough capital can be challenging and time consuming. If you only had $100,000 to invest, how would you do it?
Anthony,
This is a great question. Rather than answer the question directly, I’m going to give you some things to think about. I’m going to raise more questions that I’m going to answer. Before we even talk about what to buy, you need to answer the first question which is whether you want to be investing actively, or investing passively. In the case of an active investment, you’re doing the asset management, which means you’re overseeing the construction management by hiring a general contractor, you’re overseeing the property management by hiring a property manager, you’re performing all the analysis on the property and securing any debt on the property.
The other option is for you to invest passively in someone else’s project. In that case, you’re likely going to be part of a syndication, or perhaps you can invest in someone else’s project either through a joint venture or a tenants in common structure. From a legal standpoint, you probably want to ensure that if you’re going to be investing in someone else’s project, that they are following the securities regulations that prevail for where the project is located, and for where you are located. When there are multiple jurisdictions involved, the syndicator may need to be in compliance with multiple sets of rules.
If you’re going to be investing passively, then I would recommend that you spread your cash between two projects that meet your criteria, and that you don’t deplete your cash position down to zero. Always ensure that you keep some cash in reserve. These projects could be strong cashflow projects such as a self storage project, or perhaps an apartment syndication. But more important than the deal, you need to perform significant due diligence on the sponsor.
If you’re going to be a more active investor, then you want to pay attention to the kind of asset you intend to buy. That means the location, the profit potential for the deal, and the risk of the deal going sideways on you.
In today’s market, there’s very little of quality that you can buy for $100,000 that will create a significant income stream.
The key to accomplishing more in real estate is leverage. Leverage comes in several different forms. The traditional form of leverage is to go to a bank, borrow funds, secure the funds against the real estate and bring your equity to the table. If you do that, you might be able to use your $100,000 along with, say, $400,000 of the bank’s money for a total of $500,000.
Then the asset you’re buying has a cost of $500,000. The problem is that you’re out of cash and if the property has a problem, you need to find more money somehow to solve the problem.
A small project of only $500,000 has the drawback of being a small project. It’s not large enough to attract the kind of top talent that you want to be managing your real estate investment.
So my recommendation is that you find a partner who has sufficient cash to bring the majority of the equity to the table. Let’s say that you bring $100,000 and the other partners bring $900,000 in equity to the table. You’re leveraging your equity. Then let’s plan that the equity will also get leveraged with some debt, where you bring $4,000,000 in debt to your $1M in equity. Now you’ve purchased a $5M asset with your $100,000.
You might only own 10% of the $5M asset instead of owning 100% of a $500,000 asset. Why would you choose to do one versus the other?
On today’s show we’re talking about how rising real estate prices can kill a rental market, but create an opportunity for new products in the market that might defy conventional wisdom.
There’s no question that many different folks are struggling with the changes that have taken place in the market in the past year. Some have lost their employment. The incredibly low inventory of single family homes has seen prices shoot up across many markets.
This is particularly true at the entry level of the market where first time home buyers are bidding up the price of entry level homes in order to overcome the fear of missing out on home ownership altogether as prices increase out of reach of some buyers.
Many growing markets are also experiencing a shortage of rental housing. But some of these homes are too expensive to put into the rental market.
So there is financial incentive for owners to remove rental stock from the market and move it into the owner occupied segment of the market. They can get a financial win simply by listing the property on the market. As soon as that happens, there is one less property for rent in the market which reduces vacancy. The smaller rental supply pushes up prices for rental homes, until a new equilibrium in found. But in some ways, no new equilibrium truly exists. This is because the numbers don’t support creation of new rental stock at relatively low rents. Given the choice of building a rental building or a condo building, the economics don’t support a rental building.
The net result is the most successful developers look for the combination of demand in the market combined with the ability to buy in that market segment. Even the home owners who would like to sell are saying that they can’t sell because they have no place to go.
So if you have a client with a 4 bedroom house in the core of the city and they still want to live in the same area, how do they cash out of their existing home and move into something smaller, but not something so small that they can’t live their lifestyle. Someone downsizing from a 3,000 SF home will not likely move into a 700 SF apartment, where the bedrooms are 10 feet or less in size. You can’t even fit a dresser in the room with a queen sized bed.
So for this specific client, the condo’s need to be at least 900 SF, and in many cases ideally 1,300-1,700 SF. They can afford the larger units because they’re downsizing from a much larger house.
On today's show we’re talking about when an approval is not really an approval.
You think that once you’ve got your zoning approval, or a development agreement with the city for a particular property, you’re good to go. The vast majority of the time, that’s the case. But in the rarest of instances, you can experience a reversal of that approval.
I’m increasingly of the opinion, that these occurrences are in fact not that rare. Why would I say that? Well, because it has happened to me on one occasion so far in my career and I know of it happening one two other occasions to friends of mine. Then there are the highly publicized cases that make the headline news like the property at 200 Amsterdam Avenue in NYC.
That case was a 52 story residential tower in Manhattan. The developer received it’s building permit after a lengthy process with the board of standards and appeals. Local residents objected to politicians after the building was already under construction. A court case followed and NY State Supreme Court justice W. Franc Perry ruled that the developer had improperly deceived the zoning department when it applied for the 52 story tower. The court ruled that the building was illegally high and ordered the illegal floors already constructed to be removed. That would mean demolishing about 20 floors of construction. The ruling was appealed and the appeals court countered that the state Supreme Court should have deferred to the BSA’s “rational interpretation” of zoning regulations.
You’re a real estate investor, a developer, or merely a purchaser of a new unit in a project that is to be built. You expect that when the city says yes, they mean yes.
In the latest incarnation of a municipal flip-flop, we have a new development subdivision held by one of our team members. There is a signed development agreement. But in the past three months the city has changed their zoning code and eliminated the R4 zoning from their code. The approved site plan would not be approved if we applied today, but the application was started before the change in the zoning. We had been told that the application would be grandfathered. So the application continued and the engineering of the entire plan was completed assuming the building permit would be approved with the final zoning plat approval. The last step in the process to seal the deal is a vote by city council to ratify the signed development agreement.
But somewhere along the way, the lawyers for the city reviewed any new development agreement that didn’t comply with the new zoning to see if there was a mechanism to terminate the agreement. Indeed the city fully intends to terminate the agreement. This will require a redesign of the subdivision in order to comply with the new zoning density.
The approval process is not straightforward. As we reported a few weeks ago, the city of Caldwell in Idaho is implementing a moratorium on new development applications for 120 days. The risks are not only achieving your desired plan, but time. Time delays are routine in the zoning process and as we have seen, even after all the approvals are granted and the project is under construction, it’s still possible for obstacles to appear.
It is for that reason that in our development applications we aim whenever possible to submit an application that complies fully with the zoning and has zero variances. If we’re going to ask for a variance, it’s got to be for a really good reason. It won’t be to get an extra 5%. It’s not worth risking the entire project for such a small gain.
If there is a variance to be granted, you have to ask a simple question. What does the community get as a benefit as a result of granting the variance? If the only benefit is that the developer gets to make a bit more money, then that may not be good enough a reason. There has to be a win for the community.
Billy Brown is based in Nashville. On today's show we're talking about taking chips off the table to ensure you have a strong cash position going into the next economic cycle. To connect with Billy, visit https://theinvestorscapitalgroup.com.
Kevin Brenner is based in Washington DC where he is still on active Air Force duty. He's launching his first real estate investment fund and on today's show we talk about the merits of the fund model versus the individual investment. To learn more, reach out to Kevin at risewithnimbus.com.
Tom asks,
First of all, thank you for your dedication to provide as much value as you do on such a remarkably consistent basis. I own a portfolio of multi family properties with about 2/3 debt and 1/3 equity. Almost all of my net worth is in my real estate holdings. The way I see it, I am long economic growth and inflation. I’d like to buy a hedge so that if we get hit with a contraction or deflation or spike in cap rates that decrease values, the hedge pays off. How would you - or do you - hedge? Which financial products would you consider?
Tom,
This is a great question. I’m hearing a couple of assumptions and questions wrapped up in your question. The first is that we could see a market down-cycle at some point in the future.
The challenge with pure hedge investments is that they tend to be short term. I’m thinking of options to sell shares in the stock market. That’s a traditional hedge. But you need to time the market pull-back correctly for that to work. Unless you have a strong analysis team and have developed an expertise in hedging, it’s very difficult as a short term strategy. Longer term hedges are more moderated in approach.
I think the basic premise of using inflation to give you leverage is sound. We have gone through nearly a century with no sustained reversal of inflation. If you’ve been listening to this show for a while you know that inflation can be your enemy or your friend, depending on which side of the trade you are participating in. Inflation devalues the purchasing power for those on fixed income, it devalues cash savings and it devalues debt. Inflation results in higher asset prices for real assets which provides an effective hedge against inflation.
Your strategy is the right one in my opinion. In this instance, leverage is your friend. It means that even in an environment of slower economic growth, or perhaps economic stagnation, if inflation continues, the benefit goes to the equity side of the equation. You don’t want to be so highly leveraged that you build a house of cards.
The most important thing is to protect your assets. The first step in doing that is to convert your debt from recourse debt to non-recourse debt with the longest possible term. This may sound like a small point, but it’s not.
Recourse debt has a personal guarantee associated with it. While you’re probably investing through a corporate entity, you probably have personally guaranteed the debt. But if the debt is non-recourse debt then you get to keep the asset on your personal balance sheet, and you don’t need to report the debt on your personal balance sheet.
You also want to maximize your cash position by maximizing your leverage. Once you’ve done that, you can purchase additional inflation hedges. I’m thinking specifically of gold. When I say gold, I’m talking about the physical metal.
Gold is a very liquid asset and it’s also a pretty good store of value. It’s an effective hedge. The critics of gold would say that gold doesn’t cash flow and therefore they don’t consider it to be a very good investment. They would say that gold goes up and down and that investors pile into gold during times of economic worry. Investors largely ignore gold in the good times.
You would like to use cash but your cash is tied up in gold and in properties. So you go to your cash rich uncle, or cash rich lawyer and negotiate a low interest loan where the lender holds the physical gold as collateral. The lender is completely secure in their loan. They’re holding highly liquid collateral. There is no need to qualify the borrower since this is an asset based loan.
The market has created a lot of value for equity investors lately. Some are using it as an opportunity to take some chips off the table and hold them in reserve for future opportunities when they arise. I personally think that gold is a good hedging strategy when kept as a liquid borrowing tool.
On today’s show we’re talking about a disease that is rampant throughout the world of real estate investing. This disease is everywhere and it is the source of millions of dollars in lost revenue and increased expenses. There is no vaccine against it. There is no outright cure. But with good process it is possible to be immune from this disease.
The disease I’m referring to is called versionitis. Versionitis happens when you reference the wrong version of a document, an outdated version of regulation, or the wrong version of a drawing.
It’s the source of misunderstandings, it causes wasted materials, cost over-runs, and contractual disputes between contractors, architects, subcontractors and owners.
It happened to me very recently. The planner for the city sent me a document. She told me it was the latest and greatest. It was not yet published by the city on their website, but we should use the one she sent us as a guide for our development plans.
So I did as she suggested and saved the file, referred to it frequently, and built our plan based on her guidance. Imagine our surprise when the newly updated published document on the website didn’t match the version the planner sent us. All of this happened in the span of two weeks.
You might be a subject matter expert in a particular area. You know the regulations. But the regulations change without warning. I had a real estate agent give me an environmental report for a site that had contamination. She told me that the concentration levels of gasoline in the ground were below the required level of 150 ppm. But then the regulation changed to 50ppm and she had no idea. She was operating on stale data.
We had a subcontractor bid a job based on an old drawing. The GC made a mistake and didn’t include the latest drawings in the contract, even though the old drawings referenced in the contract were nearly 6 months old. The result was several mis-steps where the wrong components were ordered. The building inspector for the city pointed out the deficiencies and the new parts needed to be ordered for the HVAC system. The cost of this single error was more than $60,000.
Every time a copy of a file is made, there is a chance of versionitis.
So how do you prevent versionitis?
It requires a discipline. It means that every time you reference a government regulation, you go to the website and download a fresh copy of the document. Every time you share a file, you send a link to the file and not the file itself.
You see, the second you make a duplicate copy a file, one of those versions is potentially out of date. Even within our own team, we have to exercise great care and put version numbers and date codes in the name of a file.
The cost of implemented a bullet proof document management system is not that much. It’s a few thousand dollars a year. But saving a single costly mistake makes the investment look like a bargain.
We’re in the process of evaluating several software systems. In the coming months, once we have selected and implemented a system we’ll share more about what we chose to use and why.
On today’s show we’re taking a look at how job creation is going to drive migration and ultimately affect local real estate markets.
The US recorded the lowest number of jobless claims in the pandemic in the second last week of May. This is a further sign that economic recovery is taking hold. The number of people vaccinated rose quickly in the first quarter and is slowing. Still, the number of infections and hospitalizations in the US are falling steadily and many local economies are re-opening as a result.
We have some states that have been slow to open up from the pandemic and others that have been faster on the path to economic recovery. In a recent report published in the Wall Street Journal which relies on data from Zip Recruiter, there are some states where the number of job seekers exceeds the number of job openings. Those who have lost their jobs are having a hard time looking for work. I’m thinking of states like California and Arizona. This is not a red versus blue argument. These states were very hard hit by the pandemic and they have been slow to re-open their economies. California’s unemployment rate is at 8.3% and has held pretty steady since earlier this year.
But in other states like Utah, Idaho, and Kansas the number of job openings far exceed the number of unemployed by more than 3:1. Finding qualified labor in today’s market has proven difficult in those states. The current unemployment rate in Utah is on 2.8%. A number that low would be the envy of any economy. Idaho had an unemployment rate of 3.1% at the end of April.
Fully half the states in the US have decided to end the special pandemic unemployment benefits ahead of the previously published September deadline. Many states are ending the benefits in the next 2-3 weeks.
It remains to be seen whether the labor shortage is the result of people preferring to stay home and collect unemployment benefits, as many have asserted, or whether there is truly a labor shortage in many markets.
By the end of June we will start to know the answer. As these benefits end, we will want to keep a close eye on the job metrics and how these new jobs get filled. Will the labor come from the local population, or will it be the result of migration from other parts of the country.
It’s very difficult to generalize. But some states like Utah which have strong midwestern values, I have a hard time believing that people are sitting at home collecting a government check and watching Netflix all day long.
So the real question is whether the new job creation will also create new demand for housing that is not apparent in the current real estate market metrics.
We are seeing strong migration into those midwestern mountain states. Some people are clearly moving to those states. I’ve spoken with several people over the past year who are relocating. Some are moving for work, but in fact some are moving for the lifestyle and more relaxed pace of life associated with these states.
When I look at unemployment numbers, they can be a leading indicator of housing demand.
Our book this month is called “Atomic Habits: An easy and proven way to build good habits and break bad ones” by James Clear.
I was introduced to this book by Kelli Calabrese, one of the members of a mastermind that I’m part of. I have to say that the book has been impactful for me as I’ve been examining my own daily habits in the areas I’m seeking to redefine.
Habits are the compound interest of self-improvement. The same way that money multiplies through compound interest, the effects of your habits multiply as you repeat them. They seem to make little difference on any given day and yet the impact they deliver over the months and years can be enormous. It is only when looking back two, five, or perhaps ten years later that the value of good habits and the cost of bad ones becomes strikingly apparent.
One of the core concepts in the book is that small changes can compound. A 1% change can seem small. But if you start doing push-ups. On the first day you do one push-up. On the second day you do two. On the third day you do three. After 100 days you’re doing 100 push-ups.
We often dismiss small changes because they don’t seem to matter very much in the moment. If you save a little money now, you’re still not a millionaire. If you go to the gym three days in a row, you’re still out of shape. If you study Mandarin for an hour tonight, you still haven’t learned the language.
We make a few changes, but the results never seem to come quickly and so we slide back into our previous routines. Unfortunately, the slow pace of transformation also makes it easy to let a bad habit slide.
Your identity emerges out of your habits. You are not born with preset beliefs. Every belief, including those about yourself, is learned and conditioned through experience.* More precisely, your habits are how you embody your identity. When you make your bed each day, you embody the identity of an organized person. When you write each day, you embody the identity of a creative person. When you train each day, you embody the identity of an athletic person.
The labels “good habit” and “bad habit” are slightly inaccurate. There are no good habits or bad habits. There are only effective habits.
It turns out that habits are anchored in several loops of human behaviour. The first is the notion of conserving mental energy. Items that require conscious mental effort to bring to reality are not habits. Getting dressed in the morning, making a cup of coffee, emptying the dishwasher, all can be habits that don’t tax the conscious mind.
People who try to form habits operating exclusively from the conscious mind are destined to fail at habit formation. Habits, both good and bad don’t require a lot of mental energy. How much energy does it take to check your news feed in social media?
Forming new habits can often be accomplished with habit stacking. For example, if you do 20 pushups as part of making your morning coffee, then you will have a much easier time forming a new habit because it is associated with a pre-existing habit.
Brushing your teeth with your morning shower adds one more step to an existing habit, but doesn’t require a new separate habit to be formed.
It turns out that your environment contains powerful cues that are mentally associated with repeated behaviour patterns. If you can make a radical change to your environment, so too can change the patterns. Often a return to a previous environment will cause old patterns to re-establish because the cues are encoded in your memory as being associated with those patterns.
As I read the book, my awareness of my own autopilot behaviours became crystal clear.
I have listened to every one of your podcasts since Dec 2018 and because of your influence in my growth as a real estate professional I'm now working with an experienced developer and we currently have 83 acres under contract. I’ve attached the details to this email. I personally would like to develop a community designed for resilience. What are your thoughts?
John,
This is a great question and one that often perplexes new developers. The specifics of your proposed development project don’t work in the current market conditions. The land can be seen as a bargain. 83 acres for $900,000 comes to $10,800 per acre or about $0.25 per square foot. That’s not quite free, but it’s a very attractive price for raw land.
The problem with the specific proposal you sent is that comparable sales in the area range from about $135 per SF to about $180 per SF. Since new home construction in today’s market is costing about $150 per SF, and you also need to build the entire subdivision including roads, utilities, storm water management, landscaping and so on, the values in the area are not supporting new construction at this time. The infrastructure is going to cost you anywhere between $30,000 to $75,000 per buildable lot. Some items can really add to the cost. Don’t forget you need to bring fiber internet service at a cost of $7.00 per linear foot to each property. All of these costs are significant and it would cost you more to build these properties than the current local market is attracting in sales prices.
But by far the biggest cost is the site work and offsite improvements required to bring the infrastructure to the site. Many of the lots are larger lots. Even though the land is inexpensive to purchase, the cost of creating a shovel-ready lot can still be considerable.
The value of the particular property about 30 minutes outside Dallas will vary as a function of time. There has been some growth in the local area in recent years. Most major cities tend to grow outwards. Eventually those outlying areas become close enough to the city that people are willing to move there.
People move to the outlying areas for two major reasons.
- They’re in search of lower cost real estate because the city has become too expensive.
- They prefer to have more space and be outside the city. But they want to be close enough that they can drive into the city whenever they want to.
I find it useful to examine what major developers have done historically. They know that the land doesn’t support development today. So they will purchase land a few years ahead of their planned development and simply land bank it. Land banking is extremely effective, but it ties up cash. Land doesn’t generate cash flow. So the entire investment will likely be made with equity and zero debt.
The major developers plan a few decades ahead in their land acquisition. They will buy land inexpensively and sit on it until it becomes worth developing. At that moment, they look like geniuses. Land will sell for 100 times what they paid for it. But remember, they took the risk, tied up a bunch of cash and sat on it for a long time waiting for the growth of the city to create the value in the outlying area.
In retrospect when you run the math on the initial investment, the annualized rate of return looks incredibly healthy. But it’s a bit like melting ice. You might start out with a block of ice at -40 degrees. You start by adding heat. The temperature rises slowly, bit by bit. After a bunch of years, the ice is still 10 degrees below freezing. Then one day, you reach a tipping point and the ice melts. But you have to keep applying heat and have faith that the ice will melt a long distance into the future. So it goes with land banking.
Glen Sutherland is a Canadian investor who has gone into lower priced US submarkets in search of greater value. On today's show we're talking about how he has decided where to invest. Glen is also the host of "A Canadian Investing in the US" podcast.
Megan Lamke made the leap from home owner to investor to multi-family investor to syndicator. Today she runs a portfolio of properties across multiple markets. There are some innovative ideas in today's discussion that every multi-family investor should pay attention to. To reach out to Megan and to learn more, visit meganlamke.com. You can download a copy of her free book at https://meganlamke.com/grit
On today’s show we’re talking about J-walking. J-walking is when you take a small risk and cross the street where you don’t have a traffic light for pedestrians.
We’ve all done it. It’s breaking some rules, but as individuals we take some calculated risks.
The idea of J walking brings me to discussing building extra apartments into a property.
In the city of Chicago there are many 50 foot wide 3-story buildings with six apartments. These lovely old buildings were built in the 1920’s. There are thousands of them. Remember the roaring 20’s? That was the period after WW1 and after the Spanish Flu pandemic when the economy took off and expansion was happening everywhere. It was the precursor to the Great Depression that started later that decade.
These 1920’s buildings were made out of stone and brick with wood framing on the interior structure. The foundations were made out of stone and cement. Most foundations were 5 feet deep. But the basement typically had windows at the front and back which mirrored the look of the stately windows of the units above, even though the basements were largely unfinished. In some cases, owners would finish the basements in order to create storage space for residents in the basement. That space also created the opportunity for two more apartments. Many enterprising building owners did in fact create two more apartments in the basement. Some were done properly. But many were not.
For some reason, these basement apartments are called garden units. I don’t know why they call them that, because there’s nothing garden about them. They’re a basement apartment. If you visit Chicago and hear people talking about garden units, you need to translate that into meaning basement apartments.
If you look through the real estate listings for these types of buildings, you will also see mention of “legal garden units”. That means that a building permit was issued for those basement units.
The problem with these illegal units is that, unbeknown to the building owner, they are at risk of not having any insurance coverage. You see most insurance companies will not insure properties that were not legally built. I can see their point of view. They don’t have the opportunity to inspect properties before providing insurance coverage. If there were no bounds on the insurance, then property owners would be free to continue expanding their property illegally and the insurance companies would be on the hook with virtually unbounded liability. Let’s be clear, the insurance company will happily collect the insurance premium from you. They will take your money. But when there is a claim, the property owner and the insurance company become legal adversaries. There will be a review of the policy by the insurance company’s legal team and a determination on the limits of coverage will be made after an examination of the facts surrounding the claim. That includes an investigation. The insurance company may look to see if there are any building permits that were opened on the property and never closed out. They might do the same for any electrical permits. They may examine whether any additions were made to the property without a permit. Insurance companies will likely do anything they can to get out of paying out on a claim.
Now I’m not an insurance professional, and I’m not here to provide insurance advice. If you want to get a proper opinion, then I recommend that you connect with a lawyer who specializes in litigating insurance claims. They can usually set you straight on where your points of vulnerability might be.
When you J walk, you are taking a risk. Yes, everybody does it from time to time. But J walking is done selectively. Owning an illegal unit is a bit like J walking every minute of every day, 7 days a week, 365 days of the year.
On today’s show we’re taking a look at a front page article in the Wall Street Journal. I’m not one to rant very often about articles in the mainstream media. You could build a career out that endeavor. But this prominent article in such a widely read newspaper was particularly offensive. The article was entitled:
"Investors Buying Real Estate to Beat Inflation May Find Tactic Backfires"
I was a more offended by the slant of the article than by any of the detailed points in the article itself. The article seemed to imply that real estate is a bad investment in the current inflationary market environment.
I quote directly from the article.
There is no question that there are risks in any asset. But the article seems to criticize investors for piling into real estate and completely neglects the pricing of certain tech stocks and the stock market indices.
Of course any investor needs to properly analyze any investment opportunity and recognize where there are risks. Rent controlled properties can face situations where expenses rise faster than rents in an inflationary environment. This can be death to an investor. Real Estate isn’t the problem. Buying property in a rent controlled environment can be a bad idea.
For example, I’ve been a landlord in NY state in the past. I learned my lesson and I won’t do it again.
There is no question that some assets in some locations may experience a rise in vacancy. Yes, it’s more difficult to raise prices to match inflation in an oversupplied market condition.
The author of the article seemed to dance around one central issue without coming out and stating it.
Real Estate values follow the laws of supply and demand. News flash, you have to pay attention to the law of supply and demand. Since when did ignoring the law of supply and demand result in a good investment, of any description. Show me any investment asset that operates completely independently of the law of supply and demand.
All the author needed to say is that any investor needs to pay attention to the law of supply and demand when making investment decisions. Instead, he tried to paint the possibility of oversupply as a problem which in some markets makes real estate a bad investment. He also tried to paint longer term leases as a reason not to invest in real estate in an inflationary environment.
There are so many things wrong with this article that I almost don’t know where to begin.
The fact is, we have experienced rapid devaluation of the currency steadily for the past 50 years, dating back to the early 1970’s. Yes, we are in a period of heightened inflation. Who knows for how long. But a broad retrospective look at real estate over the past 50 years shows that almost all asset classes have experienced dramatic resilience against inflation.
Three things get wiped out in inflation.
- purchasing power for those on fixed income
- Savings gets wiped out
- Debt gets wiped out
Since real estate investors tend to use a high proportion of debt in their investments, they almost always end up being the beneficiary of inflation because those long term loans get devalued disproportionately compared with all the other elements associated with real estate. Rents go up in price. Operating expenses go up in price. New Construction goes up in price. It’s the last item that causes existing real estate to rise in price. Since the loan on a property doesn’t go up due to inflation, the increase in price is always to the benefit of the equity holder. Therein lies the inflation hedge.
On today’s show we’re talking about the seller who knows very little about their own property.
It makes sense, the seller of a property had no reason to know about the development potential of their property. They’re an owner. All they do is live in a house on a property.
This week I was involved in a dialog with a seller who was offering their property at a good price. The purchase made sense. That is, it made sense until I was able to check the government regulations that would come into play.
In this particular location, the minimum lot size was larger than the current property. That meant that any changes to the existing structure on the property would require a zoning variance. The existing structure is in derelict condition and is not worth salvaging, hence the good purchase price.
But further examination found that the property is located across the street from an environmentally protected zone. That was the trigger to go and investigate whether the conservation authority over the environmentally protected zone also had jurisdiction over what could be built on this property which is outside the environmentally protected zone.
Two minutes of search with the address showed very clearly that the property was on the edge of a flood zone where 1/4 of the property was fully within the flood zone. The remaining 80% of the property was within the regulation limit of the conservation authority. The regulation limit of the conservation authority extends another 90 feet beyond the edge of the flood zone and the environmentally protected zone.
So what does this mean?
It means that permission would need to be granted simultaneously by two different bureaucracies for anything to be built on the property. That means simultaneously satisfying two different sets of rules, one of them clearly written, and the second one not written.
Naturally, I declined to purchase the property. The best I could offer was that if the redevelopment permit could be obtained while the property was still in the hands of the seller, then I would buy the property with the entitlement as a condition of purchase.
It’s possible that someone who doesn’t perform due diligence might buy the property. In an environment of people offering over the asking price, someone with more money than sense might come along. But the seller is now facing a choice. Nobody who knows what they’re doing will buy this property in its current state.
It’s the seller who has the problem, not the buyer.
In another case, the seller looked on his tax bill and assumed that just because his tax bill said that his property was residential, he assumed that it was zoned residential. Imagine his surprise when I let him know that the property was not in fact zoned residential. That meant that redevelopment of the property would require a zoning change since the existing zoning would not permit any form of development on the property.
You see these are not isolated cases. Sellers rarely know what they own. Sometimes the zoning is changed without their knowledge. Sometimes they knew that the zoning was going to be changed and were unaware of the consequences. Property owners often assume that since the property exists, it’s allowed to exist.
I’ve seen additions to properties that do not conform. The owners of the property never even bothered to check whether a building permit had been issued when they bought the property. Imagine their surprise when I told the seller that the back half of their property was not legally permitted and if there was ever a fire, the insurance company would not pay out on the claim.
That’s right, insurance companies will only insure property that was legally built. If it was built without a permit, their attitude is that it’s not a legal property and therefore they’re under no obligation to insure an illegal property.
On today’s show we’re looking at a potential backlash to the work form anywhere wave that we’ve experienced as a result of the pandemic.
There are several factors that have been largely ignored in the narrative over the past year. There are numerous businesses predicting a massive reduction in business travel, and traditional office co-location.
I’ve been reflecting on the majority of my career, in the world of real estate investing, and in my prior career in the high tech industry. In the tech industry we had video conferencing readily available from the early 1990’s. We used it frequently. There are lots of people for whom 2020 was the year of zoom meetings. Before zoom we had Webex, and GotoMeeting and a host of other platforms. You could screen share a powerpoint presentation. The audio quality was good and the video quality was also good. But even then, I would travel on average about twice a month for business. I had status on several airlines, and my number one business expense was travel. The question is, why did I travel so much? How did I justify all that travel when seemingly, so much was accomplished in 2020 and in the first half of 2021 with virtually no business travel?
What was it about physical proximity that made business so much more effective? Will we experience a zoom backlash and a return to physical meetings? I believe that the answer is yes. We will rediscover all the reasons why physical meetings are valuable.
- Employee training
- Mind share
- The acceleration that results from physical proximity
- Regulatory and tax consequences
Let’s look at all four of these elements.
1) Employee training. When people are physically separated, the time period between touch points can increase. Junior people who have not established the relationships and confidence to interrupt a senior leader have trouble knowing when to ask for help. The result is a tremendous loss of time before a problem is noticed and a course correction is initiated. Active management of people requires frequent check-ins of short duration. It takes a mature organization to learn how to do this well.
2) I find that when I travel and meet someone face to face, I get more attention from the person I’m visiting than if I were attempting to speak by scheduling a phone call. Many people don’t like to spend that long on the phone. They don’t have the mental stamina to spend two hours on the phone. But you can easily imagine having a white board discussion to plan out a project in a face to face setting. Even a two hour zoom meeting can be exhausting for many. You simply get a lot more done by meeting face to face. By meeting in person you get mind share, free of interruptions.
3) Despite the time involved with physical travel, I find that mistakes get uncovered faster, and misunderstandings get resolved when people meet face to face. While it is possible to have zoom meetings and those meetings can be productive, there is much more accomplished in a face to face meeting.
4) Many companies are taking the step to accommodate workers’ desires for more flexibility, but if employers aren’t careful, companies could open themselves up to costly tax headaches. Companies also have to shoulder the compliance burden involved with navigating a complex patchwork of local, state and, potentially, international tax laws.
Someone who resides in one state, but has their place of employment in another state faces multiple tax jurisdictions. But if they’re now working from home, where is their place of employment? If you’re the sole employee in that state, or in that city, did the company just open a new branch office?
On today’s show we’re talking about something we take for granted. Water is ubiquitous. There is so much abundant water that it only becomes conspicuous by its absence.
Right now, drought is afflicting 88% of the American West, up from 40% a year ago, according to the U.S. Drought Monitor. In California, the mountain snowpack is at 58% of normal, largely as the result of one of the lowest statewide precipitation totals on record and an unusual spring warm-up. Most of the big reservoirs in California have sunk below half of their capacities.
This is profoundly affecting agriculture, and now real estate. We will feel the impact later this year as yields for many major crops including tomatoes, rice, lettuce, wine, almonds, and garlic all rely on water from this region.
Reservoir levels across the Southwest have been falling. The biggest of those reservoirs, Lake Mead, is 41% full after years of declining flow from the Colorado River. Federal officials are warning it is on track to slip below a threshold of 1,075 feet over the next two years, which would trigger government-mandated water cuts to millions of users. The Colorado River also supplies water to Mexico. Sadly, the river has been so taxed for agriculture and human consumption along its path, that the river no longer even reaches the Pacific Ocean.
Complicating matters is the Southwest’s explosive population growth. There seems to be a willingness to build cities where one of the essentials for living is missing. Why would you build a city like Las Vegas with a population of 2.7M in the middle of a desert. Why would you build a city of 4.6 million people in the middle of a desert. Of course I’m speaking of Phoenix Arizona.
Even coastal cities like Los Angeles are experiencing water shortages. But at least if you’re next to an ocean, you can get fresh water through desalinization. It’s expensive and consumes energy to produce fresh water from the sea, but at least it’s possible.
The Colorado river supplies much of the irrigation to California, the water supply to Phoenix Arizona and the surrounding area through the Central Arizona project which is a diversion of the river through central Phoenix.
There is another aspect to the drought in an area that has traditionally produced food in the US than any other region. 80% of the world’s production of almonds comes from the central valley in California. This crop is a huge consumer of water accounting for three times the water consumption of the city of Los Angeles. About 2/3 of those nuts are exported outside the state.
When we talk about real estate, we rarely worry about access to water. It’s almost taken for granted.
Tony Javier is a specialist in using TV to market his real estate investment business. On today's show we're talking about the nuances of using this non-traditional marketing channel to generate interest with clients. You can connect with Tony at TonyJavier.com or at RealEstateMastersTV.com.
On today's show we're talking with a true expert in managing a portfolio of short term rentals. There are a lot of systems and some nuance to managing a portfolio of short term rentals. This is not a game for amateurs. You can reach out to Boris and learn more at buildyourbnb.com.
On today’s show we’re taking a step back and taking a fresh look at what it means to be an investor.
But before we do, we need to clarify what we mean by investor. The English language fortunately has a rich vocabulary which makes it easier to make distinctions. These different words have different meanings. But sometimes in casual conversation it has become increasingly common to stretch the meaning of these words and use them inappropriately.
I think we would agree that a gambler and an investor are not the same thing. A gambler is engaged in a game of chance, knowing that the odds could result in a win or a loss. When you roll a pair of dice you have a 1/36 chance of rolling double sixes. That’s a 2.77% chance. Depending on the construct of the game, you could win, or you could lose.
When you go to the roulette table at the casino, you have a 1 in 37 chance of choosing the winning number. The casino will payout 35 times the bet, so on average, the casino will win all your money if you play long enough. But if you stop after a winning round, you could come away with some pocket money at the end of the evening. Nobody would ever confuse a gambler with an investor.
Gambling might be a way to raise money, but it’s not something you would ever do to raise money. You would never say, I’m going to the casino to raise an A round of financing for my startup company. There is a very clear distinction.
Investing first and foremost is about value creation and riding the coat-tails of value creation. When you sit back and ask a simple question like, “Why is that single family home worth $400,000?” The answer might be elusive to some. Some might say, well it’s because comparable properties in the area have sold close to that price.
If you ask the same question about a crypto-currency. Why is Bitcoin worth $40,000 or $60,000, or $2,000? The best you can come up with is “just because”. Well Just because doesn’t cut it. We get more sophisticated versions of just because. Some will say that there are a finite number of bitcoin in existence. It’s the artificial scarcity of a maximum 21 million that makes bitcoin valuable.
At last count, there were close to 10,000 other crypto-currencies in existence that are all variants of the theme on crypto. When you add the potential for those other currencies to provide substitution, the supposed scarcity of bitcoin is questionable. We have seen crypto enthusiasts talk about Etherium, RIPL, Doge, and numerous others.
But the notion that its value can fluctuate by 40% in a single month as we have witnessed in the past 30 days, means that crypto is not a useful store of value.
When you exchange dollars or Euros or Pesos for a crypto currency, you’re not investing. You’re not investing because there is no intrinsic creation of value. Which brings me to a new word we have not discussed yet today. That’s the word speculation. The word speculation is not that different from the word gambling when you closely examine the underlying meaning.
In the world of investing, I can buy shares in a project or a property or a company that is creating value in the marketplace. The residual cash created by that venture creates additional value that can be distributed to the investors as a return on their investment.
There is almost nothing in common between the world of gambling and the world of investing, even though there are those who seek to oversimplify the two and consider them equivalent. In the world of investing, you are taking calculated risks on the future performance of a venture. There is agency between the risk and the outcome which ultimately affects the outcome. In the world of gambling throwing the dice harder or with greater wrist action or a larger swing doesn’t affect the outcome. There is no agency.
On today’s show we’re talking about what can happen when politicians monkey around with taxation structures. Tax structures are designed to raise revenue to provide services for the citizens. Unlike the Federal government which has the latitude to print money, states and cities eventually have to balance their books.
Cities and towns are not officially recognized entities in the constitution of the country. They are given their powers by state or provincial legislation, depending on which country you live in. So state or provincial legislation always trumps the local legislation. At the state level, they can enact new regulations that can turn things upside down for a city.
On today’s show we’re going to look at a well intentioned piece of state legislation that is having some unintended side effects at the local level. It’s a cautionary tale of what can happen even when things look stable and predictable. It’s the reason why you need to have an unreasonable amount of cash reserve available to handle the possible delays that can result.
The State of Idaho has implemented new legislation designed to protect home owners from surprises in property taxes. These rules put limits on cities and towns in terms of how they can increase property taxes on their citizens. Now the new rules are complex.
A really fast growing city might experience annual growth of 2% a year. So if the state imposes a cap of 8% growth in their budget for property taxes to grow from one year to the next, that seems reasonable. It seems reasonable until you look at specific boundary conditions. Let’s say that you have a number of small satellite communities outside the boundary of a major metro area. The overall metro area might be experiencing 1% annual growth. But if the growth of the city happens outwardly as it often does, then you can have a situation where a satellite community may experience hyper growth for a period of a few years. It’s not uncommon for a few major developers to come in and build 1,000 houses in a town of 5,000. That town of 5,000 might be on the edge of a town of 500,000. In that case, 1,000 houses as measured on 500,000 seems insignificant, but on 5,000 is 20% growth. That small town cannot support the growth because they would be required to expand services faster than they’re permitted to expand their tax rolls.
Now I won’t go into all the nuances of this particular legislation. It took a few hours to explain in the city council meeting I reviewed. For those of you who take the time to fully understand the new legislation will quickly realize that there are many provisions of these new rules which I’ve not included in this short discussion.
The city in question is Caldwell Idaho. Caldwell is a suburb of Boise which has experienced a tremendous amount of growth in recent years. Boise is one of the fastest growing areas in the country right now. We have several land development projects underway in the area.
So the city of Caldwell immediately implemented a 120 day moratorium on approval of any new development in order to give them time to figure out how they were going to respond to the new rules.
There is already very low inventory of properties for sale, and the continued migration of population into the area doesn’t know anything about why development applications are being slowed down. The result of that is that prices for existing homes will likely increase further and faster than they already have over the past year as the pent up demand is not satisfied. As the market values increase due to the higher demand, the assessed value for those properties will also increase. That means that those same communities will experience an increase in property taxes because of the rising values which was caused by the shortage of supply which was caused by the legislation aimed at reducing property taxes.
On today’s show we are taking a look at a failure that has attempted to ignore what the underlying market data has been showing for years. The world of business follows the laws of supply and demand. But sometimes you see large companies making large investments hoping that large investments will somehow overwhelm the market and change the course of history.
Imagine for a moment if you went out and bought a poor quality shopping mall with high vacancy. You got a discount to the value from a few years ago and figured you would turn things around by offering some deals to entice new tenants. When that doesn’t work, you then go out and buying the gas station across the street to give you more control over the area. Yeah, that will help fix things.
The world of media has been constantly evolving over the past 20 years, and even longer. But since the 1990’s more and more people have spent more time interacting with the internet and less time with television. That is a clear trend with no doubt. Falling viewership has changed the economics of TV. The number of TV households in the US, Canada and Europe have consistently fallen year over year for the past decade. Our family cut the cord to cable TV back in 2007.
Therefore it’s no surprise that AT&T’s foray into the world of media has failed. Three years ago ATT was in court trying to defend their $80B purchase of Time Warner. We saw a foreshadowing of this outcome earlier in the year with the divestment of its stake in satellite distributor DirecTV.
The spin-off includes HBO, CNN, TNT, TBS and the Warner Bros. studio, into a new venture with Discovery Inc. Discovery’s CEO will be the CEO of the new venture and AT&T shareholders will own 71% of the new venture with Discovery shareholders owning the remaining 29%.
They’re wiping out tens of billions in shareholder equity in the process.
The folks at AT&T made a simple fundamental mistake. They forgot to understand what would add value in the eyes of customers.
This is the second time that the sale of Time Warner failed. The first time, was the $106 billion merger in 2001 with AOL Inc. which was one of the biggest flops in business history. Time Warner eventually spun off AOL.
What is striking about the entire Time Warner acquisition by AT&T is that much of the focus of the merger was internal. There were numerous reorganizations over the past four years. Each time, another wave of experienced people left the company. In the last round, they let go about 2,000 people including some of the industry’s best and brightest creative people.
This left rookie people running the show. They forgot that Time Warner was an entertainment company.
At this point you’re probably wondering what this has to do with real estate.
AT&T, or any business needs to remain relevant to its customers and fulfill its mission. When the business focus shifts to financial engineering of a profit, you can improve the numbers for a quarter. Some investments take longer to realize. So you can make a company profitable for the short term while taking the eye off the future profitability of the company. This kind of corporate shortchanging of shareholder value is rampant in corporate America.
In real estate, you can buy an obsolete asset for a discount and squeeze out a profit. You can buy a property in a shrinking market with falling values. If you buy it cheap enough, you can make a short term profit.
Buying DirecTV was like buying the Titanic after it had hit the iceberg. You could spend a lot of energy re-arranging the deck chairs and selling more drinks at the bar. But the ship is still going down. Buying Time Warner was a way of doubling down on the DirecTV purchase. If AT&T owned both content and distribution, then somehow it would wield more power in the marketplace and multiply its profits. At least that was the theory.
On today’s show we are talking about the trade-off of unbundling.
When you undertake a project, it’s tempting to have a one stop shop take the full responsibility for managing a project from start to finish. After all, the detailed steps along the way are not that complicated. How much more will you end up paying by bundling a few tasks together.
You would expect the small steps along the way to be fairly priced.
But detailed analysis almost always uncovers inefficiency.
Let me give you a few examples.
The first one is for a demolition project. The demolition contractor is someone I’ve used before. They’re being contracted to demolish the structure on a newly acquired site and to scrape the site clean.
I got a decent quote from the demolition contractor. But then I asked him a simple question. How much was he paying for disposal of the demolition and he said that he was paying $1,800 for a 40 yard bin. These are the really huge bins that you often see on construction sites that roll off the back of a truck with a hydraulic winch. That price included the bin and the disposal fee at the city landfill. It turns out that I have a relationship with a disposal company where I pay $225 for the bin and $95 per ton. So on an apples to apples comparison, I’m paying about $700 per bin as compared with $1,800 per bin.
A waste disposal bin is strictly a commodity. There is nothing about one bin that is going to result in a better finished product than another. When you multiply the number of waste bins needed, the savings are about $10,000. We’re talking about $10,000 in exchange for making one phone call and then sending 8 text messages when it’s time to deliver a new bin. The return for unbundling that segment of the project is very clear.
At the other end of the spectrum, we have an assisted living project that is scheduled to open in the next month. The budget for furniture is about $500,000. There are tables and chairs and sofas and coffee tables and artwork and outdoor furniture and umbrellas and on and on.
They need to tie together aesthetically and be functionally appropriate for an assisted living care home. This means that the furniture has to be durable and strong. This is not the kind of furniture that you might find at Costco or Ikea.
Initially we contacted a supplier who specialized in that kind of furniture. Very quickly it became clear that we would not meet the budget requirements if we sourced the entire project from a single supplier. So instead we decided to hire an interior designer. At first you might think that adding a designer would be an additional expense to the project. If we were budget challenged before, then adding an additional expense for a designer might seem strange.
There are a lot of moving parts and a multitude of details to be managed in sourcing the furniture, choice of fabrics, coordination of lead times and delivery to match the construction schedule.
By hiring the right designer, we were able to choose from a wider array of suppliers. Outdoor patio furniture which sees lower utilization than the indoor furniture could be from a less expensive product line. In the end, by using a designer we were able to stay within budget, despite the additional cost of hiring a designer.
Ultimately it comes down to managing the tradeoff of time versus money. Hiring someone to take charge of shopping around for the best deal only makes sense if you have leverage. Leverage means a small number of items where the savings can be substantial for minimal effort, or a large number of high value items where it makes sense to dedicate a staff member to getting the best deal.
Mike from NJ asks:
With the rapid increase in prices, I’m finding the environment so much more competitive and it is getting harder to find deals. Do you have any advice for someone who is looking to find deals in today’s environment?
Mike, this is a great question.
First of all, while the market has become more competitive, I’m finding that deals are still out there. But before we can find a deal we need to define what is a deal. It’s a little bit like asking if the image on a magazine cover is beautiful. Whether the image is beautiful is in the eye of the beholder.
Recognizing a deal means really knowing your numbers. You need to be on top of market values in your local area. When I say market values, I’m talking about the hyper local values that apply in almost every market. It turns out that in situations of very tight supply such as we have right now, the radius you can consider is usually expanded.
But above all, if you are looking to establish new values in an area, the key is to gain control over enough of the area that you can convince the market of the prices you are setting in the market. There has to be sufficient scale to create a meaningful and convincing data set.
I’ll give you a simple example. Last year, I bought a property that is on the border of a fast flowing River about 30 minutes outside the city. The purchase was a bank sale, and yes we got a good deal.
The second property was an off market deal for the property next door. The negotiations started when the neighbor died. The family clearly wanted to sell the property and the proceeds from the sale would be divided among 7 next of kin.
At about the same time, I started a dialog with the owner of a property across the street. This house is in physical distress. The owner does not want to do any further maintenance on the property. He is in his 70’s and actually has a farm house that he wants to restore. He wants to use the proceeds from the sale to restore the farm house.
So how does this small example help you?
I could give you another half dozen examples that are similar. In each case there is a special story surrounding the property.
In each case the finished product will not resemble the current property in its current condition. The vast majority of buyers in the market are still looking for properties that are move in ready. It’s a small percentage of buyers who are willing to redevelop a property.
Let’s go back to the definition of a deal. I have a clear idea of what the finished product will be and what it would sell for in today’s market. Our team is hands on involved in quoting construction projects on a daily basis. We can back up from the final sale price to determine the residual land value that we can afford to pay and still have a project that meets our margin criteria.
I’m describing three different properties that next to each other in the same neighborhood. If I was just doing a single property, I would be less confident in the prospect for the area. But I know that the value is often set by the neighbouring properties. By controlling the neighborhood, I’m controlling the value.
Once you go through the effort to understand the local approval process, the incremental effort to do three is small compared with doing one.
If you have been listening to this show for a while, you have no doubt heard me talk about the buy on the line, move the line strategy. The core of the strategy is to transform enough of the neighborhood that you raise the value not just for a single property, but for the entire area. We pioneered this strategy in Philadelphia during the depths of the Great Recession. Here too, we found many deals off-market. Some were auctions. But the process was exactly the same.
Alicia Jarrett is a repeat guest, all the way from Melbourne Australia. On today's show we're talking about two very different approaches to marketing. You can learn more about some direct marketing strategies from Alicia at superchargedoffers.com.
Ryan Severino heads the economics research team at commercial brokerage house JLL. Based in NYC, Ryan is tasked with providing guidance that informs the business planning for the company. Ryan publishes a weekly economics piece on LinkedIn. You can connect with Ryan through LinkedIn or through his research team at JLL.com
Today is another AMA Episode (Ask Me Anything) Carlos from Los Angeles asks,
We have a single investor who capitalizes most of our deals. He has recently been very focus on investment multiples in our investments and not as much on cash-on-cash returns, IRR, etc. He comes from the private equity world.
We have recently tried to highlight our overall returns once you factor in the tax benefits from depreciation. Since we are all in different tax brackets, this is a little tricky to do (in my opinion). Is this something you try to quantify for your investors?
Below is an excerpt from our investment memo highlighting the "tax-adjusted" cash yield and IRR. We worked with our CPA to quantify this.
This is a deal that our investor is not too excited about. We are using 1031x funds and are trading for a lower-risk property.
Carlos, this is a great question.
As a general rule we don’t stray into the realm of offering tax advice for the simple reason that everyone’s personal tax circumstance is different. I’ll give you a simple example. Let’s imagine for a moment that an investor is using funds from their retirement account. Any income received within the retirement account would be tax sheltered. In that scenario any tax benefit that would accrue to the investor from depreciation would be zero since they’re already in a zero tax situation for that specific investment.
On the flip side of the argument, we do point investors to educational material that may help them in the arena of making a decision on how best to structure their investment. They might decide to use cash funds instead of retirement account funds for that specific investment in order to take advantage of
Investment multiples are a very simple way of evaluating the quality of an investment. But of course they neglect time. If a project is delayed, it has the effect of lowering the annualized rate of return.
Of greater importance to the more sophisticated investors I speak with is the return of capital, rather than the return on investment. This involves a deeper assessment of risk.
I have to agree with your investor that the returns being offered by the proposed project are rather thin. Thin deals by their very nature represent higher risk. It often takes only a small change in circumstances for a thin deal to go sideways. If you have two things go wrong, now you’re underwater. I like the inherent safety of high profit margin deals. High margin deals provide ample financial cushion for problems to occur.
Risk assessment is extremely difficult to objectively quantify. After years of stable market conditions you might but a buffer for increased lumber costs. You might argue that a 20% or a 30% increase in lumber or a 3-5% increase in the overall cost of construction would be reasonable. No rational risk manager have predicted a 300% increase in the price of lumber. If your project had not pre-purchased and warehoused the materials, or if you didn’t have the financial cushion to withstand the material price increase, your project would be in trouble.
The impact of the tax sheltering creates the illusion of a better investment that is not necessarily real. I personally would rather find another vanilla investment that offers a stronger IRR without relying on the tax structure to make it viable.
We take the attitude that an investment should stand on its own. If the tax structure offers an even better return, then that’s icing on the cake. I find that most investors I speak with prefer to separate the tax consequence from the investment decision. Even for a single investor, their tax circumstance can change from one year to the next. What might be advantageous one year, might be of marginal value the next.
Thank you Carlos for a great question.
On today’s show I’m going out on a limb to predict a fall in steel prices over the coming months. This will benefit the cost of many types of construction including industrial, and concrete structures such as apartment buildings and condo towers.
While the industry insiders are not yet making this claim, I’m going to construct a thesis for this prediction and connect the dots for you. At the end of this, I believe you’re going to be convinced that my prediction has some validity.
I can’t tell you exactly how much steel prices will fall, or even for how long. All I can tell you at this juncture is that steel prices will fall.
The headwaters of this story start at a microchip manufacturing plant in Japan. You’re probably thinking, what does a chip manufacturing plant in Japan have to do with the price of concrete construction.
About 6 weeks ago there was a fire at a Renesas semiconductor plant in Naka Japan, just NE of Tokyo. This 300mm facility manufactures chips largely for the automotive industry. In fact, Renesas commands about 1/3 of the share of the market for microcontroller chips used in automotive applications.
The fire impacted about 6,500 SF of clean room, and destroyed 23 machines that are used in the manufacture of chips.
Two weeks ago, Renesas executives announced that they had completed the cleanup and were preparing to restart partial manufacturing capacity by the end of April and hoped to restore full capacity by July.
But even before the fire in the Renesas facility, there were signs of chip shortages in other semiconductor manufacturing facilities.
The impact of the chip shortage on the automotive industry has been estimated at as much as $60B this year. Some auto manufacturers have issued warnings about production cuts as a result of the chip shortage. Volkswagen is estimating production cuts of 1.3M units in the first quarter of 2021, and the cuts are expected to be even wider in the second quarter. The new merger of Fiat, Chrysler and Peugeot called Stellantis is estimating an 11% drop in production. Supply of chips is not expected to stabilize until Q4. Honda and Nissan have reported significant shutdowns in their factories due to the chip shortage.
The chip shortage means that consumption of steel from the automotive industry is also reduced by a large margin. One of the commodity metrics used to measure pricing in this sector is the Domestic Hot Rolled Coil Steel Futures price. This price is measured in USD per metric tonne. Generally speaking, the price for Steel from China is approximately 50% less expensive than the price for steel in the US of Europe. Transportation costs reduce the price gap somewhat at the point of consumption.
While Steel prices are currently at an all-time high with a solid upward trajectory since the middle of 2020, I see the drop in demand from the auto industry creating a softening of prices in the coming months and a stabilization of prices.
The rapid increase in the price of softwood lumber for construction has caused some builders to substitute steel for wood in some applications. That substitution has increased the demand for steel framing in applications that traditionally would not have been considered candidates for steel consumption. There are signs that lumber mill production is starting to catch up to the demand and we should see prices for lumber fall by the fourth quarter for lumber. As soon as that happens, the demand for steel framing in applications that would have used wood should evaporate. The construction industry will quickly switch back to the less expensive wood framing instead of steel as soon wood prices start to moderate.
Thanks for all your valuable insight into real estate investing through the Real Estate Espresso podcast. I was curious your thoughts about investing in an apartment building right now. Do you think it’s a strategic time to buy since there seems to be low demand for living in an apartment with the recent pandemic subsequently lowering an apartment building’s value therefore getting a better deal? It is so difficult finding a single-family property that you can justify buying as an investor because they are so expensive right now. Since single-family properties have a high comparative market analysis driving up value, do large multi family properties have a low income value right now? I am assuming that people will slowly begin to return to apartments and with credit being so cheap and possibly having little demand for apartments it might be a formula for a good investment. What are your thoughts? Thanks!
Allan,
This is a great question. I’m going to reframe the question somewhat to make a couple of distinctions. As worded, your question is a little too general. In some ways it seems like you’re asking if there are bargains to be found in the apartment market.
Part of your question is focused on choosing between investing in apartments versus single family homes for rentals. I don’t view the tradeoff as a yield related tradeoff. They’re fundamentally different products.
Real Estate always is hyperlocal. It is true that there is a high vacancy rate in high rise apartments in New York, San Francisco, Seattle, and Toronto.
These situations are temporary in some cases, and point to a problem in others.
Determining whether the investment conditions are favourable depends on three main factors.
- The local submarket conditions
- The local boots on the ground team you have performing your project management and property management
- The specifics of the deal.
Your question is an over-simplification of the issues which need to be looked at in a more holistic manner.
If you pick a market like NW Austin or Downtown Nashville which are undergoing significant growth, then one set of market dynamics are at play. Demand has exceeded supply by a wide margin and home affordability is an issue. This is creating increased demand for rental product. Eventually, supply may catch up to meet the demand, and could possibly surpass the demand. A deep analysis of the local submarkets is essential to determine the current supply / demand situation and to forecast what is possible in the 5-10 year horizon in terms of supply and demand.
There is no question that there is a lot of institutional money chasing too few opportunities which is creating demand for well managed stabilized product. Investors in search of yield have bid up the prices for these stabilized apartment complexes. Over time, the high quality assets have been snapped up and prices have increased for lower quality assets as money went in search of yield.
I personally would not invest in markets with shrinking population. That was true pre-pandemic and it’s still true today. If you do choose to invest in a market like, say NYC or Chicago, be aware that you’re making a bet about market trends reversing direction from the past several years. Chicago has lost population consistently over the past five years for reasons that could be considered underlying and systemic. There are issues with crime, high taxes, anemic employment growth, all of which have contributed to people leaving the city in search of greater opportunity.
Our criteria has hardly changed at all over the past 5 years. What has changed are the underlying market conditions. Some areas have become more favourable for investment, and others have become less favourable for investment.
Michael from Ottawa asks,
I heard that lumber distributors are stocking pile of wood to keep prices high. Isn't that illegal? That would be artificial scarcity. Then what is the difference between artificial scarcity vs price fixing?
Michael this is a great question.
The notion of illegal price fixing has been uncovered in various industries from time to time. If it were happening, it would be hard to detect and would require a deep investigation of the type that probably only the FBI or the Justice department could undertake. I spoke with a number of industry insiders and I think I have figured out what is most likely happening.
I’m hearing consistent feedback from multiple sources which leads me to believe that the major source of demand is not only for current new construction projects, but also to secure future supply.
This is best explained by segmenting the supply chain into various elements.
- End buyers who buy product only on the day that they need it.
- End Buyers who pre-purchase materials and warehouse the materials themselves
- End buyers who write long term contracts to effectively pre-purchase materials and secure future supply when they need it.
There is no question in my mind that many of the major builders are doing everything they can to secure future supply of materials.
I’m going to quote from a letter that was published by the CEO of a Texas based Matheus Lumber to all of its customers at the end of last week.
"As of today, mills cannot keep up with North American demand for forest products. With housing hitting 1.739 million starts in March, there is simply not enough supply to meet the demand. Additional capacity plans for the mills will probably not happen fast enough and prices will continue upward pressure. Mills are currently 45-90 days out and other items even longer. In addition, we are continuing to see 30 days or more in shipping delays for materials ordered. The mills are struggling to find transportation for the material that is already sold. Furthermore, the massive demand is causing the mills to raise prices by the day and/or hour. Prices have now exceeded anything thought possible, with no immediate relief in sight.
The Engineered Wood Products are the scarcest among all wood products. Due to allocations by the producers, there is essentially no open market Engineered Wood Products for immediate sale. Some of the major Engineered Wood producers are now only quoting projects that ship after January of 2022.
What the CEO of Matheus Lumber is saying echos what I’ve been hearing from other people that I’ve spoken with. I’m hearing many new construction home deliveries that are delayed by several months due to material shortages.
If you’re a builder, material shortages impact far more than just deliveries. It means that you have employees sitting idle.
In my view the acute shortage we are seeing is real to a degree and it has been made artificially worse by a few companies with deep pockets buying up whatever supply exists in order to secure their supply. That has left the retail market and the small players to fight over the few scraps that are left over.
I’m also hearing noises that the US is going to reduce tariffs on Canadian lumber from the current 20% to 9% in order to reduce the cost of lumber and to stimulate more sales coming from Canada to the US. Traditionally, Canadian lumber makes up about 30% of the US supply of softwood lumber for new home construction.
I’m personally not seeing any signs of inventory manipulation to result in price fixing. I’m seeing an industry scrambling to meet demand. I’m seeing transportation issues, and I’m seeing large inventory purchasing in order to secure supply.
As vaccination rates rise and Covid-19 cases fall in the U.S., more employers are calling workers back to the office. There’s just one problem: many don’t want to return. There are clearly other areas like Canada, Italy and France that are still firmly within the grip of the pandemic. But eventually, the same reductions in infection rates that are being seen in the UK and the US will spread to other parts of the world.
A survey by management consulting firm McKinsey & Co. found only 37% of workers prefer a full-time return to on-site work at the office. That represents a steep drop from the pre-Covid-19 era, when 62% of workers preferred an on-site model.
With 30% of employees surveyed saying they are likely to change jobs if required to return to the office on a permanent basis, return-to-work strategy has high stakes for businesses – particularly in the tight market for talent.
Some employees have legal protections to refuse to return, such as medical conditions, while others just don’t want to.
The pandemic has clearly had an impact on employees mental health. In the US, 56% of employees surveyed reported feeling at least somewhat burned out and at least 27% of employees reported a high degree of burnout.
Burnout is especially pronounced for people feeling anxious due to a lack of organizational communication.
For some organizations, the onsite environment is truly the best where in-person collaboration results in a more productive environment.
During the pandemic, some organizations spent less time in meetings, and certainly less time commuting when forced to work in a virtual environment. In many cases, individual productivity went up.
If your organization is considering a wholesale return to the office environment, you may face some unexpected challenges.
The McKinsey survey had some fascinating insights.
In describing the hybrid model of the future, more than half of government and corporate workers report that they would like to work from home at least three days a week once the pandemic is over. Across geographies, US employees are the most interested in having access to remote work, with nearly a third saying they would like to work remotely full time.
With many employers seeing resistance, many are choosing a hybrid approach that can accommodate the challenges employees may have with returning, such as a lack of child care options.
It’s also important for talent attraction and retention. Many employees will expect more flexibility moving forward, and it’s likely to be part of hiring negotiations.
So what does all of this mean for the office market? There is no doubt that demand of office space is going to continue to fall. I’ve been in direct discussions with the owners of buildings that have seen significant drops in leased space. The number of listings for subleased space has hit an all-time high. Subleases are being offered at fire-sale prices which will ultimately put downward pressure on the leasing rates for new office space that hits the market.
Tom Laune is a rare financial advisor. He advises people to invest in real estate, and also to use Life Insurance policies as a means of leverage for investing. To learn more, vist stressfreeplanning.com. There are a bunch of resources that explain the various strategies and there is a way to contact Tom on his website.
Alicia Jarrett is based in Melbourne Australia and invests in the USA. On today's show we're talking about how to manage people at a distance. To connect with Alicia or to learn more, visit landscouts.com. She can be reached directly at alicia@landscouts.com
You’ve no doubt heard the stories of people struggling to make ends meet in an inflationary environment. You’ve heard of hyperinflation in places like Argentina. This is a place where inflation is currently averaging 42.6% per year. Inflation in Argentina has been running between 25% and 52% over the past 5 years. Venezuela’s inflation is currently running at 3000%. Prices are rising so fast, that quotes for services are only valid for less than an hour. Prices are increasing at a rate of about 1% per hour in order to maintain pace with the devaluation of the Bolivar.
When you are in an inflationary environment, prices change fast. People become conditioned to the idea that prices are constantly changing. They know that they can never get ahead really. All they can hope to do is tread water.
But this raises the question of what are things worth?
We’ve grown accustomed to knowing what things cost, when our reference point is dollars. But separating the notion of price and value is sometimes a little difficult when the price changes frequently.
Has the value of a clay brick changed from one week to the next? Not really.
Has the value of a 2x4 piece of lumber changed from one day to the next? Not really.
Has the value of a chicken for dinner gone up? Not really. It contains the same amount of calories as it did last week.
But we’re increasingly seeing prices change quickly. So quickly in fact that suppliers are often willing to quote a price for only a short period of time.
Lumber quotes are only valid for half a day.
Chicken prices have surged nearly 100% in the past year. Lumber is up by a factor of 5.5 times. Fuel prices are up since the beginning of the year. This is largely due to a fall in domestic production. Higher energy prices definitely have a ripple effect through the economy. But a gallon of gas is not worth any more today than it was six months ago. It may cost more dollars to purchase, but it’s no more valuable than it was six months ago.
In my home city of Ottawa Canada, the price of a single detached residential home has gone up an average of 42.3% since this time last year. Let’s have that number sink in for a moment. 42.3% price increase for a single family home since this time last year.
Will this price stick for the long term? Is this the new normal? That means that prices have increased by $221,000 in the past year. That comes to a price increase of $605 per day, or a price increase of $25 per hour. When you consider that a work day is 8 hours a day, 5 days a week, the price increase comes to $105 for every hour of the work week. Most working people don’t earn $105 an hour. Even if you did earn that much, you would have to put 100% of your income towards paying only for the price increase.
As a real estate property owner, you look at these asset price increases and feel good. But as someone who is servicing increasing debt levels if you're buying in the current market conditions, the prospect can seem daunting. It’s all good until interest rates rise just enough to make the affordability of that massive mortgage loan problematic.
In the world of commercial real estate investing, these rapid increases in prices tend to favour landlords. Higher housing prices make it more difficult for tenants to transition from renting to home ownership.
But when everything is going up in price the key question is whether rents will increase fast enough to keep ahead of increasing expenses.
Prepare to live in a world of very fluid pricing, and try to figure out what that means for the prices you’re going to set in your business.
On today’s show we are talking about another form of situational awareness.
When you buy a property in a neighborhood it’s pretty common to drive up and down the streets and look around.
Are people leaving trash on the front lawn? Are there broken down cars in the lane way?
Are people taking care of their property?
That’s one form of situational awareness. We live in a physical world.
But that form of situational awareness is a bit like looking in the rear view mirror.
What if you could look at a property and see into the future?
Well it turns out that you can. When I look at a neighborhood, I want to see who owns each property and what zoning applications have been filed.
Let’s imagine that you drive down the street and you see homes, one after another. There is nothing particularly remarkable to see. Some driveways have kids bikes. Some driveways have a basketball net. You might conclude that young families live here.
But a search of title might tell you something that is not readily visible to the naked eye.
You might discover that one group of houses are owned by the local housing authority. The people living there are receiving some form of social assistance. There is nothing wrong with that of course. But if you were making assumptions about how property values in the area would appreciate, your assumptions might be incorrect.
If you found a group of properties that were all owned by the same company, that might point to future development of those properties.
If you found a property where the ownership had 5 names on title, you might research the ownership further. When did the property change hands? Was there a death in the family? Ownership by multiple next of kin is rarely a stable situation. Chances are high that the property could appear on the market for sale in the near future.
You’ve probably heard investigative reporters use words like “Follow the money and you will understand the motives”. This can be true when you’re looking at property as well.
When you look at the chain of title on properties in the area you get to ask questions. Questions like,
Why did that commercial property change hands five times in the past three years? Why did that property change hands for $10? Clearly it didn’t change hands for $10. What’s the real story behind what happened?
Why is there e mortgage recorded on a property that is clearly above the market value of the property? I wonder what’s happening here?
Why did this property have three mortgages recorded on title in less than a year? Who are the lenders? Are the lenders traditional banks or private citizens? That tells you something about what might be happening on a property.
You see none of this is visible by driving down the street.
A recent search of neighbouring properties uncovered that one of our neighbours could be considered a really good neighbor. The owner of this property has not initiated a zoning application, nor have they done anything to the property. But this particular owner has a reputation for development. Could new development next door add value to our property?
Using historic data to predict the future seems to be getting more and more difficult. It used to be the case that you could rely on recent history as a predictor of near term demand. But that’s become increasingly difficult.
On today’s show we’re talking about a new phenomenon that has become so common there is actually a phrase that is used to describe it.
We’re talking about revenge spending.
Revenge spending is not a new term. It’s often associated with a spending spree that happens when a member of a couple is mad at their partner. This podcast is not about marital troubles. We’re not talking about that kind of revenge spending.
The kind of revenge spending that is trending in 2021 is pandemic revenge spending. This is the feeling that somehow we have missed out on treating ourselves for the past year. That somehow the universe owes us something.
We’ve put up with no celebrations, no dining out, no concerts, no vacations by the beach, no new clothing and so on.
People have the urge to go out and splurge on themselves, almost as a reward for being locked down over the past year.
Revenge spending is going to take many different forms. People are spending money on luxuries, but not just in North America. All over the world.
For many this is going to mean vacation travel in the second half of the year. So instead of just revenge spending, it’s going to be revenge travel.
I’m talking with many people who have their finger on the mouse button, just waiting to purchase their airfare. I also know several who had travel booked for the Spring and have cancelled their plans. It’s still a little too soon in a number of locations to travel.
Some countries have stated that they’re willing to accept tourists who are fully vaccinated. But even the global cruise industry is still on life support. In 2019, that industry brought in $57B in revenue and served 29.7M passengers. That’s a lot of vacations that are seeking alternate forms of vacation this year, and possibly into next. It’s going to be some time before the global cruise industry recovers to pre-pandemic levels.
The pandemic has caused a number of people to rethink their priorities. Some have quit their jobs. Others have separated from their spouse after being locked up for a year with them. Some have decided to start a new business.
One thing that we can easily predict is that the velocity of change in 2021 will be unlike any other year in recent memory.
Supply chain shortages are testing the whole notion of supply elasticity of demand. Prices are being bid up across the board.
This is true in real estate as well. We are continuing to see white hot market conditions in multiple markets. I have not moved to control as much land in a single time period as I have since the emergence from the pandemic began.
The recovery is exposing those who are out of position. The examples are everywhere. The car rental companies had to reduce the size of their fleets in order to survive. Now they have a shortage of cars on holiday weekends. Business travel has not returned, and the demand is coming from the leisure sector. But here too, the demand is changing week by week.
The emergence from the pandemic slowdown will be chaotic and exhilarating. It will also be frustrating for those who are out of position. It will be downright dangerous for those who forecast the spike in short term demand to continue.
Revenge spending is an isolated event and not a long term trend.
On today’s show we’re talking about putting information where people are looking.
Gary Vaynerchuk is the CEO of Vaynermedia, a NYC digital marketing firm. Gary is one of these guys that has the notion of attention deeply ingrained in his being. He tells the story of how when he was a young boy he would run a bunch of lemonade stands.
The lemonade stands were operated by older kids. Gary would post signs for the lemonade stands on trees and sign posts. Then he would sit by the side of the road and watch the eyes of motorists to see if they posted signs were catching the attention passing motorists.
This is understanding the basics of attention at its most basic level.
The fact is, we are overloaded with marketers trying to vie for our attention. So we tune the vast majority of it out.
If you as an investor, a sponsor, or a developer want to connect with potential investors, you want to be paying attention to where people are looking.
On February 22 of this year Magnify Money which is a wholly owned subsidiary of Lending Tree published a paper based on some market research they had conducted with their clients. There are a number of fascinating findings in this report.
Nearly 6 in 10 investors 40 or younger are members of investment communities or forums, such as Reddit or a group of like-minded investor friends.
YouTube is the top source for investing information among young investors, with 41% turning to the site in the past month.
22% of Gen Z investors say they were younger than 18 when they started investing, versus 8% of millennial investors. In fact, 40% of Gen Z investors say they were encouraged by their parents to begin investing, which backs the earlier start.
Only 36% of young investors plan to use that money for retirement. Instead, 35% will primarily use those returns to make additional investments, while 19% will use the money to pay for a major purchase like a home or a car.
As an investor, you might be thinking that having a YouTube channel is not the best way to reach your potential investors. You might be thinking that TikTok is an app for sharing short dance videos.
But the fact is, a significant portion of the investing public are turning to these sources for information. Now you might decide that your ideal client is not a Tiktok user. But you should remember that Tiktok as 689 million active users on a monthly basis. That may seem like a small number when compared with Facebook’s 2.7B users or Youtube’s 2B users.
That doesn’t mean you should ignore those other platforms. But 689 million users is a significant potential audience.
You might be thinking that your investors are likely not millennials, and perhaps not even Get Z. There are not that many accredited investors in that age group. We’re really talking about targeting less than 1% of the population. But if you’re speaking to 1% of 689 million people, that’s still nearly an audience of 7 million people. Perhaps you want to be more selective and speak to the top 0.1%, that’s still an audience of 700,000 people.
The key is to find the way to connect with people who are out there looking for you. This particular study provides new insights that were not part of the conventional wisdom when it comes to investment education.
On today’s show we’re talking about three of the spreadsheet, the most common mistakes I see investors make. The first is the dreaded rule of thumb mistake.
Somewhere along the way, a real estate trainer provided some rules of thumb about what things should cost. In particular, we’re talking about expense ratios.
The logic goes something like this. In a multi-family apartment building, you should allocate about 45% of your revenue to expenses.
Well folks, I’m here to tell you that this approach to analyzing your apartment complex is just plain inaccurate. In fact it’s so inaccurate that it’s not even useful as a tool for quick math.
I’ve seen the exact same product with the same management company experience two dramatically different expense ratios. In one city, the expense ratio was 31% and in the other it was 42%. The rents were basically the same. The difference was in property taxes and insurance. One city had much higher property taxes which accounted for a massive difference in the total operating expenses for essentially the same product. So rules of thumb don’t work.
The only exception to that would be if you had another similar building in the same area with a good bit of operating history. In that case, you can borrow actual expense numbers as an estimate from a similar property in the same area. But you’re not blindly multiplying by a percentage. In that case you’re using real data as a point of reference.
Expenses tend not to care how much you’re getting in rent. If you have a lot of common area, you’re going to need to spend money on energy to provide lighting and climate control for those common areas. How old is the building? How much will you need to spend on maintenance?
How high is your tenant turnover? The higher your turnover, the more you’re going to spend on unit turns.
When a water heater decides that it has reached end of life, it doesn’t care whether you’re getting $700 a month in rent or $3,000 a month in rent. It’s going to cost the same to replace the water heater. But clearly as a percentage of rent, the cost of maintenance is going to be much higher.
I’ve then seen investors take this flawed assumption and build a financial house of cards on top of it.
There are three deadly sins when it comes to underwriting a deal. Excel will give you beautiful reports and charts and graphs. That creates an aura of legitimacy that far outstrips the integrity of the underlying data.
- Push the rents above the market. Nothing too aggressive, maybe just $50 a month above market. I’ve seen so many investors delude themselves using this approach.
- Use the aforementioned expense estimates.
- The cap rate assumption.
The market cap rate is often used to determine the value of a property. But since cap rates these days are so low, even a small change in cap rate can result in a large change in value.
I would have valued a new property in that C class location at about a 6% or 6.5% cap rate. But this investor chose to underwrite the value based on a 4.5% cap rate. That 2% difference in cap rate may not sound like that big a difference. But in reality, we’re talking about a 32% difference in value. Simply by choosing a lower cap rate, this investor had inflated the value of his proposed property by 32%.
This particular investor had accepted another investor’s pro-forma as a good model without digging deeply into the numbers. It turns out that his expense ratio was below 20% which is unrealistic.
When you layer the other sins on top, you find that the cumulative error is a whopping 76% overestimation of the value of the property. But Excel is perfectly willing to dutifully perform the math and show glowing numbers.
In short, proper underwriting requires a deep analysis of all the variables that make up the income and expenses for a project. There is no shortcut.
On today's show George shares his view on the market cycle. He's seen no less than 7 market cycles in his career. George's perspective is only possible with experience of having lived through so many cycles.
Essentialism by Greg McKeown
Greg McKeown is a speaker, bestselling author, and host of a popular podcast. He has been featured in The New York Times, Fast Company, Fortune, HuffPost, Politico, and Inc.; is among the most popular bloggers for LinkedIn; and has been interviewed on NPR, NBC, and Fox and on Steve Harvey and more. He is a Young Global Leader for the World Economic Forum. Originally from London, he now lives in California with his wife, And four children.
Essentialism is not about how to get more things done; it’s about how to get the right things done. It doesn’t mean just doing less for the sake of less either. It is about making the wisest possible investment of your time and energy in order to operate at our highest point of contribution by doing only what is essential.
The way of the Essentialist means living by design, not by default. Instead of making choices reactively, the Essentialist deliberately distinguishes the vital few from the trivial many, eliminates the nonessentials, and then removes obstacles so the essential things have clear, smooth passage. In other words, Essentialism is a disciplined, systematic approach for determining where our highest point of contribution lies, then making execution of those things almost effortless.
Today, technology has lowered the barrier for others to share their opinion about what we should be focusing on. It is not just information overload; it is opinion overload.
But when we try to do it all and have it all, we find ourselves making trade-offs at the margins that we would never take on as our intentional strategy. When we don’t purposefully and deliberately choose where to focus our energies and time, other people—our bosses, our colleagues, our clients, and even our families—will choose for us, and before long we’ll have lost sight of everything that is meaningful and important.
What if the whole world shifted from the undisciplined pursuit of more to the disciplined pursuit of less…only better?
What if we stopped celebrating being busy as a measurement of importance? What if instead we celebrated how much time we had spent listening, pondering, meditating, and enjoying time with the most important people in our lives?
Essentialism is not a way to do one more thing; it is a different way of doing everything. It is a way of thinking.
When we forget our ability to choose, we learn to be helpless. Drip by drip we allow our power to be taken away until we end up becoming a function of other people’s choices—or even a function of our own past choices.
Do setbacks often only strengthen our resolve to work longer and harder? Do we sometimes respond to every challenge with “Yes, I can take this on as well”? After all, we have been taught from a young age that hard work is key to producing results, and many of us have been amply rewarded for our productivity and our ability to muscle through every task or challenge the world throws at us. Yet, for capable people who are already working hard, are there limits to the value of hard work? Is there a point at which doing more does not produce more?
Essentialists see trade-offs as an inherent part of life, not as an inherently negative part of life. Instead of asking, “What do I have to give up?” they ask, “What do I want to go big on?” The cumulative impact of this small change in thinking can be profound.
The book Essentialism goes beyond preaching about the benefits of thinking deeply about what is important. The author creates a discipline and a series of daily habits that act as an antidote to the gravitational pull of trying to do too much.
On today’s show we’re talking about the tipping point of home valuations. This is really a discussion about situational awareness. It’s important to be aware of your surroundings. Most people would not walk alone in a dark alley in a rough part of town. It might be too difficult to have complete situational awareness to know whether it’s a safe move or not. The same situational awareness that would help keep you safe in a dark alley is what you need to stay safe as a real estate investor.
I’m starting to see an increasing number of people who are baffled by the rapid rise in home prices. The biggest factor affecting home supply is the lack of willingness to move.
I hear the same refrain over and over again. I love my neighborhood. If I sell, I can get a great price for my house, but where will I go? I can’t buy back into the area at a reasonable price. If I sell, I would have to move to a less expensive area.
This week, I had a conversation with a home owner in Dallas who said his house has gone up in value by $400,000 in the last two years. He’s willing to buy a larger house on some acreage in a less expensive area and cash out, and put the spare change in his pocket. A large family move is a daunting prospect. I’m hearing people who are contemplating making these moves, or have outright made the decision to move. One or two of these are interesting. But trends are the result of thousands of small independent decisions.
Real Estate markets are inefficient. They’re slow moving. They’re slow moving because people don’t move quickly. People move slowly.
Real estate has always been about location, location, location. The question is what does that really mean?
The definition is secular. It means different things to different people. For one person location means walking distance to their favourite coffee shop and grocery store. For someone else it means being close to their family members. For another, they want a view of the water and as much distance as possible to their closest neighbour.
It used to be the case that distance to work was a primary factor in deciding where to live. That is still going to be a major factor for the majority of the population. The number of jobs that are truly location independent still make up a minority of the working population. It’s a growing minority, but still a minority.
As the economy opens up, I believe we will start to see some mobility within the population that has been far below the annual averages over the past year of the pandemic. As people start to move, you will start to see more inventory of homes for sale coming into the market. The lack of inventory of existing homes for sale has been one of the largest factors driving the rapid increase in prices. Demand for houses due to household formation, and low interest rates, have both created a fear of missing out for new home buyers. New home buyers have been priced out of home ownership as prices have risen.
When you look at the rapid increase in values in some areas, coupled with the virtual freeze on movement that has been the story of the pandemic, I have to stand up and take notice.
When I know half a dozen people personally who are actively looking at rural acreage, I have to stand up and take notice. This is not a scientific survey by any means.
I can’t ignore a few data points like this. There is definitely something happening here.
I’m seeing migration at play. I’m talking to realtors who are looking for new supply. They’re looking further afield for that new supply. I’m talking to other developers who are seeing new demand in areas where demand was light in the past.
The year was 2011. It was a hot summer day in August and it was around 108 degrees Fahrenheit or 42 degrees centigrade in the shade in Phoenix. There were about 50 people assembled on the patio next to court house steps on Jefferson street. They were all there for the same reason. Most people had a clipboard with the the list of the days properties to be auctioned.
In a few minutes time, the auctioneers would arrive with their ruggedized laptops. Today there were three auctioneers and each one set up on a separate picnic table, separated by about 15 feet. If you stood between two of the tables you would probably be able to hear two sets of auction properties at once.
You could tell who were the professional bidders. They had an ear piece connected to their phone in one ear so they could communicate with the head office and they were listening to the auctioneers with the other ear.
This day’s list had 260 properties to be auctioned. The list was made public at 9AM the day before the auction. So you had at most 27 hours to review the list and perform a drive by inspection of the properties on the list.
But before you did that, you would need to carefully review the list and determine which properties would be of interest. You would need to search title to determine whether any other liens were recorded on title. Knowing the full picture of the liens on title was key to knowing what the likely minimum sale price would be at the auction. If the price didn’t meet the reserve price and didn’t sell, then the lender would become the owner as a result of the auction.
If you looked around you could tell who were the professional bidders and who were the amateurs. The pros all knew each other. The rookies were looking around, taking it all in. They were unsure where to stand, unsure of how it all worked.
There was a police officer from Toronto. There was a mother and daughter who arrived with one specific property in mind.
Each time a property sold, the winning bidder confirmed their information with the auctioneer and handed over a cashiers check for $10,000. They would have 24 hours to bring the balance of the purchase in the form of a cashiers check. The auctioneer would read out the lot number from the list of auctioned properties and then read out the address and the starting bid. Within a minute the property would have a new owner or it would revert to the foreclosing lender if there were no bids.
Many of the properties sold for $25,000 to $35,000.
The professional bidders wanting to protect their value in the process would bid against rookie buyers to force the price up before backing down. They forced the purchase price up to $50,000 when the mother and daughter
Many of those in attendance were shocked that the mother and daughter were forced to pay too much. On that day about 1/3 of the properties went back to the bank with no bid. Another quarter that were originally on the published list did not get auctioned. It was an average day on the courthouse steps in the noon sun. That year, 36,000 homes went into foreclosure.
Mother and daughter overpaid by about $20,000 that day. But today, their home would probably sell for between $400,000-$450,000. With the benefit of hindsight, we can see that there were no bad deals that day.
Back then we were looking upon the auctions as the new normal.
Here we are in 2021, in the tail end of the largest pandemic induced economic disruption in recent economic history. Homes are selling above asking price in multiple offers. The current market conditions have no end in sight. This is the new normal. Back in 2019 the market appeared hot. Here we are nearly two years later and the market seems hotter than ever.
As I reflect upon the auctions of 2007, those were not normal market conditions. The frenzied market conditions of 2021 are not normal either.
On today’s show we’re talking about risk taking when a good deal presents itself.
This past week, another investor who is developing a residential subdivision had their source of funding evaporate. The timing, a week before closing is awkward for the buyer. They have alternatives but are definitely going to be scrambling to maintain some level of control.
The challenge is that completing the due diligence in such a short time period is going to be difficult and there will be some corners cut in the due diligence process out of necessity. The true question is whether the risk being assumed in cutting those corners is enough to step back from the deal or not?
The value of the land is tied entirely to the development potential. If the land remains farm land, then the purchase price is too high. If the land can be fully developed as has been represented by the seller, then it’s a bargain.
If the land can even be partially developed, then it’s a fair price. So how does a buyer segment the due diligence in order to find that ideal balance between risk and reward?
We have an extensive due diligence checklist that we apply to our own projects. In this particular instance, the other developer has not completed what we would consider a complete due diligence.
When performing due diligence, the work falls into three basic categories.
- The specific submarket.
- The people
- The deal
In our case, we’re 100% comfortable with the specific submarket. We know that there is demand far in excess of supply.
The specific market we are focused on is Boise Idaho. This is the third fastest growing market in the country over the past few years.
We have all of the major national home builders now active in the market. Some home builders who had been absent are now competing with us for land.
We believe the purchase price being offered is a fair price. Somehow we need to get comfortable with the risk, knowing that the planning department has not made a recommendation to city council, and that city council has not voted on the entitlement.
At a price of under $20,000 per lot, the property is a fair price, provided they can be entitled. We believe that fully entitled lots will capture a higher price in the open market once shovel ready. The profit potential is there. But then we also need to look at the big picture and the downside risk.
At this moment we have land to develop about 500 homes in a single market. At what point do we become overly concentrated in a single market? When does the risk become too large? What percentage of the overall market do we alone represent in terms of growth?
At this stage, we don’t know if this new project makes sense yet. We’re going to be conducting our own due diligence and making an assessment of the downside risk. The upside is clear. The downside is not as clear. Unless we can get enough information to satisfy our own due diligence process, we will have no choice but to decline the opportunity. Tempting as it might be, we simply cannot sacrifice the discipline in our business for what might be a good deal, or equally could be dud.
You’ve no doubt heard the old joke about the guy who calls a pizza place to order a pizza over the phone. He orders a medium sized pizza with mushrooms and sliced tomatoes. The person taking the order asks whether they would like the pizza cut into 8 slices or 10, to which our trusty guy ordering the pizza says. Oh yes, cut it in 10, I’m hungry today. Yes, it’s an old joke, and not all that funny really. But, I’m guessing the guy who ordered the pizza must work for the Federal reserve.
In a world of finite resources, of finite primary wealth, and of finite pizza, issuing more currency, or making smaller slices doesn’t create more pizza. It simply dilutes the value of each slice of pizza.
OK. So we know governments are printing money like never before. According to modern monetary theory, we’re being told printing money will not be inflationary as long as it’s being done the right way.
What will cause the next downturn in real estate?
The world is filled with counter party risk. Quite simply, counter party risk is the result of an asset on one balance sheet appearing as a liability on someone else’s balance sheet. When the chain of financial dependence becomes too deep and too unstable, then you have a chain of dominos. Once one domino falls, then all of the dominos in the chain fall over.
So the question is, where is the instability in the system? Where is the house of cards?
Some have argued that the government is simply printing too much money and that’s the cause of the instability.
If you’ve been listening to this podcast for a while, you’ll remember me saying that printing money works, until it doesn’t. When it doesn’t work, there’s no turning back. It’s a slippery slope, a runaway train.
The only way back from that kind of slippery slope is a complete reset of the financial system. Some countries have tried cosmetic resets to the financial system. Venezuela’s recent attempt was to lop off five zero’s from their bank notes. In the end, that didn’t work, because they didn’t fix the underlying issue. It takes a commitment to stop printing money.
We also see inflation when we look at asset prices.
Stocks are trading at peak valuations; the average Price/Earnings ratio in the S&P 500, for example, is now 42, roughly 3x the historic average. It has only been higher two other times– just before the 2000 crash, and just before the 2008 crash.
Bonds are so expensive that more than $13 trillion worth trade at negative yields.
So let’s imagine that one day, stock traders wake up and realize that the prices being offered in the stock market for these companies don’t make sense. This has happened from time to time throughout history. We saw it on October 19, 1987. We saw it in 2001 after the dot com bubble burst. We saw it again in 2008 when it became clear that the US banking system was over-leveraged.
A precipitous drop in stock market prices could cause a cascade effect on assets across the board.
One of the warning signs is the amount of debt in the stock market. You might be wondering what I’m talking about. The stock market is an equity market. I’m talking about the margin accounts at all the major brokerage houses. When traders have high margin accounts and market prices fall, then traders need to sell assets in a hurry to cover their margin shortfall. That puts more downward pressure on the market.
Let’s imagine that you are sitting on a lot of cash. Let’s imagine that you’re worried about inflation. That means your cash is going to be worth less a year from now, or two years from now, of five years from now than it’s worth today.
Would you be willing to lend money for a long time at a low fixed interest rate? Or would you prefer to put your money into an asset that provides a more effective hedge against inflation?
There are those who have a scarcity mindset, and those who have an abundance mindset. The scarcity mindset says that the pie is only so big and if you’re going to get more, that means that somehow I’m going to get less. The abundance mindset says that it’s possible to make the pie bigger for everyone. As you will see, both these philosophies can be simultaneously true. But it depends on the context.
If you compose a new hit song, and it sells a million copies, you didn’t take a song resource away from anyone else. Someone else can also come along and compose a hit song. There’s no hard limit on the number of songs that can be hits, or that can be written. You can create wealth by creating value in multiple different forms.
On today’s show we’re talking about the different forms of wealth. We’re being asked to believe that there is a new way of accounting. Modern monetary theory says that you can print money and it won’t be inflationary.
But before we can take a deep look at this question, we need to return to basic principles. Tactics sit on top of principles. Just like actions sit on top of the laws of physics. When someone tells me that they can defy the laws of physics with a new technology, I quickly return to the laws of physics. So far, we have not managed to act our way out of physics.
There are three types of wealth. Primary, secondary and tertiary forms of wealth.
Primary wealth is sourced from the land. It is rich soils, thick stands of timber and abundant reserves of ores and fossil fuels in the ground. Primary wealth relies upon rich supplies of fresh water. When we grow wheat in the prairies in Canada and export the wheat to China, we’re really exporting water to China. Fresh water is primary wealth. Arable land is primary wealth. Reserves of oil and copper and lithium and iron and gold are forms of primary wealth.
Secondary wealth is the means of production that has been extracted and/or converted from primary wealth and brought to market. It's lumber, steel, food in the grocery store, and factories. China has extraordinary secondary wealth, which has relied upon other countries to supply the primary wealth.
Tertiary wealth, better known as 'paper wealth' (stocks, bonds, etc), is merely a claim on either primary and secondary wealth. Without either of those two forms of wealth, tertiary wealth has no value.
It was only recently that people somehow forgot this simple logical progression. Two hundred years ago, the answer to the question “Who are the wealthiest people around here?” was as simple as pointing to those who owned the most land (primary) or factories and stores (secondary).
So when people are trading in paper assets, or electronic assets like a crypto-currency, those assets are worthless unless they sit on top of a foundation of either primary and secondary assets.
Let’s look at one of the savviest guys in the world. I’m speaking of Bill Gates. His Family Office is estimated to own 269,984 acres of farm land in the United States. He is estimated to be the single largest farm land owner in the world.
Agricultural land with water on it is primary wealth. With population increasing globally, we will need to produce 70% more food over the next 30 years. The world population has grown 28% since the year 2000. We could be at 9 billion by the year 2037 and 10 billion by 2057. More importantly, global fresh water demand is expected to grow by 20-30% by 2050. We already have vast areas of arable land that have become depleted through a combination of erosion and depletion of the water table. These losses will eventually have an impact on the ability of the world to sustain human life.
That farm land is going to become more and more valuable as demand for food increases.
Storm Cunningham became obsessed with revitalization after seeing our choral reefs dyings. A diver and former Green Beret, he now lectures all over the world on the topic. He's the author of several books on the topic and is the editor of "Revitalization Magazine". His latest book, "Reconomics" can be purchased on Amazon.
To learn more and to connect, visit https://stormcunningham.com
Alicia Jarrett is 16 hours time zone away in Melbourne Australia. She invests in Florida real estate. Today's episode focuses on how she has built her business to effectively implement systems and processes to invest from afar.
To connect with Alicia, visit superchargedoffers.com.
On today’s show we’re taking a closer look at supply chains in today’s environment. I’m now hearing daily reports of empty shelves at building supply stores.
I’m seeing posts on social media of contractors who have placed orders for construction lumber with some of the big box lumber stores two weeks ago and still do not have their orders fulfilled. I experienced the same thing last year when purchasing cedar for a small project. The supplier took my order for material that was in stock. By the time the staff went to pick the inventory and fulfill the order, someone else had purchased the material. I found another source and I asked for a refund. A month later, I received a phone call that my order was ready and I could come and pick it up. Needless to say they were surprised to hear that I had cancelled the order and already received a refund.
The higher cost of lumber is adding between $25,000-$30,000 to the cost of a new home, if you can find the material.
Earlier this year, one of my general contractors submitted a change order asking if he could replace some roof decking with a superior plywood product, since the builder grade chipboard was out of stock. The price difference was nearly zero because the more commonly used product was in such short supply that it was actually more expensive than plywood. Naturally I said yes.
The recent quotes I received for materials made me redevelop all of my budgeting spreadsheets. Some construction projects have been cancelled due to the high cost of construction. In my home market, a new $100M police station tender was withdrawn. The police station is needed and the budget is in place. But the high cost of construction seems to be extending beyond the cost of lumber.
So the question is why have lumber prices gone up so much, especially at the retail level?
Madison’s Lumber reporter has been publishing weekly since 1952. They’re one of the foremost authorities on the lumber industry. Canadian lumber is a significant contributor to the US construction industry. The pandemic lockdowns of 2020 closed saw mill plants for 6 weeks in Canada, and then when they re-opened they were cautious on ramping up production. Meanwhile, demand did not fall throughout the year. The retailers experienced a spike in price coming from the sawmills. The retailers had no time to react. They had no time to hedge with futures contracts. They were selling framing studs at $3.50 and then turning around and buying the replacement inventory from the sawmills at a higher price. They had never experienced that before. A sheet of plywood that used to sell for $35 is now $100.
For the sawmills, the year 2020 was ideal. They want to close the year with the log yard full of new timber to cut and the yard with finished inventory empty. That’s exactly what happened. But the demand is so far in excess of supply, that sawmills are resorting to transporting finished product by truck instead of by rail. The transportation cost by truck is triple compared with rail. So the rail transport is going unused, and there are a shortage of truckers, which further pushes up the price for transportation of finished goods.
The major builders are definitely taking steps to ensure security of supply. There is no question in my mind that builders are hoarding materials in order to secure supply. I’ve spoken with several major builders who have purchased the lumber for about 2,000 residential units at a time. That inventory will be consumed this year, but not next week. This shadow inventory follows classical economic cycles. At some point, production will expand to meet demand and the stockpiling behaviour will end. At that time, companies will stop placing excessive orders to protect their security of supply. They will consume their in-house inventory and demand for materials will drop despite continued construction activity.
On today’s show we’re talking about one of the hottest new trends in rental product. The single family home is part of the American dream. People want a place they can call home. But home ownership isn’t necessarily a perfect fit for everyone.
Home prices for single family homes have risen to the point where owning is 40% more expensive on a monthly basis compared with renting. In the late 1990’s, the premium for ownership was only 20% compared with renting.
Regardless of affordability, single family homes in a neighborhood are more desirable for young families compared with a multi-family apartment complex. An apartment complex can be a better fit for some people who prefer the lifestyle and amenities that only a rental complex can provide. If your apartment complex has a half million dollar swimming pool, recreation center and fitness room, you’re going to have a hard time replicating that experience in a single family home.
Multi-family apartments are ideal from an investment standpoint. Property management is easily accomplished. Single family homes are designed to be unique, to express the individuality of the owner. Since no two homes are alike in an ideal world, the cost of maintaining single family homes will inherently be higher than apartments that can be standardized. None of the interior finishes are likely to be the same. The flooring will be different, paint colors, room sizes, appliances. So much will be different.
But if you designed a community of single family homes or townhouses for rent, you might be able to marry the best of both worlds. You might deliver the end user experience of a single family home, combined with the management efficiency of the apartment complex.
Not surprisingly, as investors have discovered the benefits of this product. Rental homes are more expensive to rent than apartments. As a result, you tend to attract a higher quality of tenant that can afford a more expensive product. A single family home will rent for several hundred dollars more per month than an apartment. When it comes to quality of rental product, you are also selecting the quality of your tenant. The poorest quality of tenant tends not to rent a more expensive product.
The purpose built rental community has become a much more desirable investment for both investors and lenders.
There are a number of new loan products that are aimed specifically at the single family home rental community. The tenants for these homes are typically young families with stable employment.
Institutional investors are snapping up stabilized portfolios of single family home communities at relatively high prices.
It’s no surprise then that we have started to design more of these communities as part of our own portfolio of assets.
On today’s show we’re going to do a deep dive on a technology tactic that has been very effective for us.
If you are new to a market, you have a hard time developing the relationships and getting a deep local knowledge of what is happening in a market. You have a hard time getting to know the city councillors, the key people in the planning department, and the mayor.
You might be developing your zoning application, but with next to zero knowledge of where various members of city council stand on specific issues.
These meetings are usually recorded video conferences. They’re slow moving formal meetings with lots of procedures. There will be a roll call at the start of each meeting. The first several minutes of each meeting will be a review of the agenda, an introduction of the attendees, and a series of guidelines for how the meeting is to be conducted. These meetings can last anywhere from one hour to eight hours. There is a wealth of information contained in these meetings. Imagine if you had been in attendance at all of the city council meetings over the past year, or if you had been in attendance at all of the planning and zoning meetings over the past year. You would be much better equipped to submit your zoning application if you were armed with the experience of attending all of those meetings. You would know which city councillors are likely to object. You would learn what the effective arguments and counter arguments would be. You would also learn which arguments are likely to fail or be outright ignored.
But unless you take the time and listen to those days of meetings, you would be at a distinct disadvantage to know the issues and opinions of the various committee members.
Let’s say that you’re looking for relief on the height of your building. The zoning might limit your project to 40 feet and you need 45 feet to build your project. How do you know when and where the city has dealt with issues relating to height over the past two years? Do you really want to take the time to listen to two years of city council meetings in order to become an expert on heights?
You could hire a consultant who speaks regularly with people in the planning office and who is a paid lobbyist to influence city council members on behalf of developers on various projects.
These high priced consultants have assembled knowledge based on extensive involvement in the planning process over a multitude of projects.
What if you, or someone in your own team could accelerate their level of knowledge in a fraction of the time? What if you could zero in on any time the topic of height restriction was uttered in a city council meeting. Even the most highly paid consultant could not effectively amass this level of knowledge.
In our business we have married one of the technologies out of the world of podcasting to accelerate our access to the details of all of the city council meetings. We developed an internal system to effectively accelerate the capture of salient information from these hours and hours of meetings.
If you apply transcription technology to a city council meeting instead of a podcast, you can produce a transcript that is fully searchable.
So now you have a word document complete with time stamps. Let’s say that you’re interested in the height restrictions. You can search an entire 3 hour city council meeting for the word height. Changes are good, that if the word height is being used in a city council meeting, it is with reference to the height of a building. You can go back and see any time the word height was uttered in a city council meeting or a planning meeting in the past several years. In a matter of minutes you’re able to zero in and extract the relevant information by searching every single word that was uttered during that time.
If you're interest in learning more about this technology, send me an email at info@victorjm.com
In the mid 1800’s the Steam locomotive opened up the Western part of the United States and Canada for that matter. This new technology made migration possible on a large scale. It became possible to move people and materials. Not surprisingly, communities opened up within a very short distance of these railway lines. It was a technology breakthrough that enabled migration.
The year was 1902, American inventor Willis Carrier built what is considered the first modern electrical air conditioning unit. He installed it in a printing plant in Brooklyn to help maintain the printing equipment in better alignment with more consistent temperature and humidity.
The migration of people from the cooler Northern latitudes to the Sunbelt of the US was largely made possible by the invention of the air conditioner. Think about it. Phoenix Arizona would not exist without two technical innovations.
- The air conditioner
- The redirection of the Colorado River into central Phoenix with the Central Arizona Project.
Las Vegas Nevada would not exist without the air conditioner.
Back in 1900, Miami Made County had a population of under 5,000 people. In fact Miami didn’t become a major city until after the second world war. By the 1960’s, Miami was adding 120 people a day. Without the air conditioner, Miami would not exist in the way that it does today.
When you look at the urbanization trend over the past 30 years, we have seen more and more people move into the highest density cities. These moves have been largely driven by employment.
New York City is one of the best examples.
The question is, what is the next technology innovation that will change the way migration patterns happen? Will it be global internet coverage? Will it be the combination of internet and video conferencing technology like zoom?
For the past several decades, proximity to the office has been the driving factor in choosing where to live. Location of employment has driven housing demand more than any other single factor.
But what if the narrative has changed? What if you can live where you want to live and work where you want to work?
You truly can have it all. Your manager can be sitting in an office in Manhattan and you can live on some acreage overlooking the mountains. That’s possible today, but somewhat unthinkable a few decades ago.
The bigger question is what will happen to migration patterns. How will companies train staff for positions that can be virtual? Will it be important for new hires to start in the physical office environment in order to become indoctrinated in the company’s culture, before being allowed to work remote?
Will the human contact of the traditional office become a competitive advantage? Or will the more agile virtual organizations be more competitive?
Will the higher perceived quality of life that comes from working at home be perceived as an employment benefit? Will the time recovered from commuting to the office be seen as a life improvement? Will people work longer hours when they work from home because there are fewer boundaries between work life and home life?
All of these remain open questions. But these are questions worth examining as you make investment decisions where the outcome is heavily influenced by the answer to these questions.
On today’s show we’re talking about how to negotiate with a seller who has no idea what is permitted on their property.
There are numerous examples of properties that exist for historical reasons, but don’t comply with new zoning regulations.
For example, new zoning regulations may have a minimum lot size, or perhaps new setback requirements. As long as you keep the existing structure within the existing envelope, you’re entitled to maintain the existing improvements.
But as soon as you demolish the existing structure and attempt to build something new, then the new rules apply. In that case, you could be destroying significant value and ultimately render a parcel of land useless.
I was speaking with the owner of a property this week and he didn’t know the zoning of his property. His property was below the minimum lot size and the existing house did not meet the minimum setbacks to the back property line, or the side property line. The property has no municipal services and would be too small to have both a water well and a septic system. A septic system requires about a 49 foot spacing between a water well and a septic system. It also requires the septic system be located 10 feet from the property line. Put all of this together and you have constraints that can no longer be met on the existing property.
If his septic system needs to be replaced, the new permit will require compliance with the existing code. But if you don’t have enough land to comply, you have a problem. There is a paradox that cannot be satisfied on the existing property. You will need to somehow expand the property, or find a way to connect to municipal services. The property just became unusable and its value dropped like a stone.
All too often, the existing home owner doesn’t understand these risks. They often don’t even know the zoning attached to their property. After all, why would they? The property has been in their family for generations. Their grandparents lived there. Their parents lived there. They spent summers there as a child.
Nobody ever discussed zoning rules. There would be no reason to. Over the years, the zoning code was updated and the owners would have not even have been notified. Unless there was an act of condemnation, the seller of the property would have no idea what the current zoning restrictions would mean for their own property.
In the old days, homes were built very close to the road. This was for practical reasons. Cars didn’t exist. Snow would have been a problem in the winter months, so a large setback from the road would have been reserved for only the wealthiest of property owners with an estate.
As roads were built to accommodate cars, they were widened to deal with increased traffic levels and the setback to the front door of the house would have shrunk as more and more cars dominated daily life.
These older homes built on stone foundations would never have contemplated what the future would bring.
I’m currently in discussion with the seller of another property. They believe that a significant subdivision can be built on that land. If the zoning can be changed, then that’s true. But the final number of units will be limited by the the access to the major arterial road immediately in from t of the property. The seller can’t be an expert on what will be permitted. It’s not their field of expertise, and they have not attempted to get the kind of zoning density that a developer would want in a parcel of that size.
Nevertheless, the seller and their agent speak with tremendous confidence about what can be built on the property.
The agent aims to convince the buyer that they have the knowledge and that’s all the buyer should need. No need to worry. Zoning changes are done all the time and they’re completely routine, right?
Spencer Gray hails from Indianapolis, Indiana where he heads up Gray Capital. Through partnerships over the past six years, he now owns a share in over 9,000 apartments. On today's show we are talking about how to scale the organization. To learn more or to connect with Spencer, visit graycapitalllc.com
Mike Zlotnik (Big Mike) lives in NYC where he has been specializing in hotel to residential conversion projects nationwide. This is an interesting segment that predates the pandemic and has risen in importance since the amount of distress in the hospitality industry. To connect with Mike and to learn more, visit bigmikefund.com.
On today’s show we’re talking about the many items that could prevent a development project from being realized. Some of these will be obvious, and then others simply defy rational explanation. Think of today’s show as a 5 minute Master-class on land development.
Whenever you are contemplating a development project, there are dozens of constraints that are being placed on the development of a property. Often, the city will say no to a project for reasons that are surprising. I’ve seen projects denied for lots of reasons. On today’s show we’re going to look at the top 10 reasons why projects are denied.
- Zoning
Zoning is all about land use. We’re talking primary use and secondary uses. The city decides in its official plan where they want to locate certain types of development. Generally speaking you want to co-locate similar types of land use. You want your industrial lands clustered together, your commercial retail grouped together. If your proposed project doesn’t fit with the plan, it is probably going to be denied.
- Density
The infrastructure of the city is designed to accommodate a certain density in a given area. Density relates to numbers of people in a given area, as well as land coverage.
- Traffic Impact
Many times you will be asked to perform a traffic impact study for your new proposed project. The impact of your new development on the existing traffic patterns in the area is something that the municipality will take into account.
- Lack of utility capacity
Cities develop their plan for utilities based on density. Your concept for that new apartment complex may meet the zoning requirements. But if the city doesn’t have the sewer capacity for another 200 toilets and showers and washing machines, it doesn’t matter. It could take years before the city digs up the streets and installs a larger diameter pipe to carry the additional load of higher density.
- Neighborhood opposition
If your project could impact the neighbours, you may be asked to hold a neighborhood consultation. If enough of the neighbours object to your project, that might be enough to kill it. Politicians often ask a couple of questions. How much increase in tax revenue will result from the approval of the proposed project? Secondly, how many votes could we lose if we say yes to a proposed project.
- Drainage
If you take a parcel of raw land and start covering it with buildings and paved surfaces, you eliminate the ability for that land to absorb water. The water needs to go somewhere. If constructing your project will result in flooding your neighbours, then your project is dead.
- Lack of School capacity
If you’re going to build that new subdivision with 200 houses, a percentage of those homes will have school aged children. If the existing schools in the area are at capacity, adding homes will only make the problem worse. Schools take longer to plan and build than individual houses. So you may experience the refusal for your proposed project, simply because the schools don’t have the capacity.
- Neighborhood Impact
Separate from your neighbours opposing your project, your project might create problems for neighbours that they’re simply unaware of. I’ll give you a couple of examples. If your proposal is to build a tall building, your building might cast a shadow on residential properties nearby. Imagine if that sunny southern exposure window in a neighbour’s house never saw the sun again because there’s now a building in the way.
- Architectural Guidelines
Sometimes the community has designated an areas to maintain a certain architectural character.
- Parking
This is probably the biggest constraint on development projects. Parking takes up a lot of land. In fact, it takes often as much area as the living space.
On today’s show we are talking about the top three mistakes that I see people make in an initial meeting when they are meeting with a potential business prospect.
- Confusing introduction
It’s a bit of a cliche, but you don’t get a second chance to make a first impression. That has to do with the way you look, the energy level you bring to the interaction, and the way you introduce yourself.
Some people who are real estate investors also have other things going on in their lives. If you are here to talk real estate, then talk about real estate. Don’t lead with the fact that you sell life insurance. People have a tendency to put you in a box. Understand that this process is at play.
They will make a decision in the first few minutes. They will either want to get to know you better, or they will be wondering how long before they can politely talk to someone else.
You don’t want to lie or mislead. If you are a doctor, then start with the fact that you invest in real estate. You can then casually mention that you also see patients in the afternoons.
If you are are socially insecure, then this is something to work on. Becoming confident in social situations can be an acquired skill, developed with training and mastered with practice.
If you confuse the other party, the chances of them doing business with you drop dramatically. A confused mind doesn’t buy.
2) Talking too much
If you spend more than 30% of the time talking, you are probably talking too much. If you are answering a question, offer an answer that is a conversation starter. Let’s say that you are tempted to talk about one of your projects. You might be building a small group of houses. Rather than talking just about the houses you are building, you can frame your answer in a context. That leaves an opening to talk further about the building project, or the context. So you might say something like, We’ve observed the huge reduction in inventory for sale, combined with the fall in affordability for single family homes. So we made the decision to reduce the size of the homes to reduce material cost, at the same time that prices are rising. That means that we have the potential to increase the profit margin, but more importantly reduce the risk to the downside if market conditions change quickly in the next 12 months as they always could.
So then the other side would almost be compelled to ask where you made decisions to reduce cost. Maybe they take the conversation in the direction of the economy. Maybe they talk about decisions they have made in response to the current market conditions. You have the possibility of establishing a real connection with the person you just met. But if you just talk about yourself, they will lose interest quickly. If you launch into a speech about how you designed the homes, you will probably lose their interest very quickly.
There is a natural cadence to conversation that is a little like a game of tennis. You want to pass the ball back and forth over the net and keep the rally going. If you run off with the ball and keep it on your side of the net, then it ceases to be a rally. It ceases to be a conversation. Some people talk too much when they get nervous. It’s time to truly listen.
3) Don’t ask questions
If you are not being curious, how can you possibly have a chance to demonstrate that you are interested in the other party. But most important, you don’t get to dig down a few layers and develop a relationship. There is an art to asking questions. Some people ask questions in the way a prosecutor would cross examine a witness. You may know people who do that. We are not talking about that kind of questioning. We’re talking about establishing rapport. Finding out what you have in common, what you can both relate to. Questions that are too specific can sound like an inquisition too early in a relationship.
On today’s show we are talking about how market cycles form and the effect it can have on the economy and a business. How do you know when you are in a bubble and how do you protect against catastrophe when you are surrounded by insane market conditions?
Market cycles are often driven by an irrational fear. We saw it last year during the early weeks of the pandemic. Grocery store shelves were emptied of paper products, of hand sanitizer, of cleaning supplies.
Last night I went to the grocery store and the shelves were full of toilet paper. Not only that, toilet paper had taken over the seasonal shelf that last week had been full of Easter candy.
Like many, we had a three month supply of toilet paper. Are we using more toilet paper than last year? Clearly the answer is no.
So it stands to reason that if toilet paper sales in 2020 were $2B above 2019, then at some point toilet paper sales will fall to $2B below the average. That represents a fall of $4B from the peak sales in 2020.
You’re probably thinking ok that’s toilet paper. What does that have to do with my business? What does that have to do with real estate?
The market conditions a decade ago are a distant memory. Back then you could go to auctions on the court house steps and pick up half a dozen distressed properties over your lunch hour. You could buy properties for 60% less than construction cost. The population had not changed. People still needed a place to live. How did the demand evaporate and create these strange market conditions?
The question is, with new supply coming into the market at the rate of about 1.2-1.5 million homes a year in the United States, and roughly 1/4 million housing starts in Canada, will there be enough demand to absorb the new supply in the locations where that supply is being added?
This is the classic question of assessing the headwinds and tailwinds in a market segment.
Unlike toilet paper, which can easily be shipped to meet the demand, houses are firmly planted in the ground. You could have a housing boom in Fort Lauderdale at the same time that you experience a housing recession in Detroit. That has more to do with migration trends than it does population growth.
The lack of supply could be real, or perhaps artificial. Was there really a lack of toilet paper last year? Not really. People were hoarding toilet paper. They were buying toilet paper to hold. They were not selling it, and they were not using it any faster than normal.
The question is, are people buying more real estate than they need and just holding it. How many people from the NE USA are buying second homes in Florida or the Carolinas? Those condos near the beach sit empty for most of the year. Perhaps they compete with hotels in the short term rental market. That does not constitute new household formation, but it does absorb inventory.
How many young adults under age 30 are still living at home with their parents? This is a shocking statistic. In February of 2020, 47% of young adults between 18-29 were living with at least one parent. By July of 2020, that number had grown to 52% of young adults between 18-29 were living with their parents.
Those are numbers that have not been seen since the Great Depression in the 1930’s .
So what household formation trends can we expect? We know that the median age of first marriage has grown by two years in the past decade. The median age for men is 30 and 28 for women.
So when we go from a shortage of toilet paper to a surplus, could you have predicted those market conditions? When real estate markets will go from low inventory to a surplus, what forces will drive that shift? Could you have seen those forces in hindsight?
While the world was distracted by a crippling pandemic, major economic shifts were underway and the headlines totally missed it.
Changes that affect the course of history happen slowly at first, then all of a sudden. I believe we’re in one of those phases again, right now as we speak. The last time this happened was 1971.
We’re still bearing the fallout of the damage that Richard Nixon did to the United States back in 1971 when he took the US dollar off the gold standard. I remember those days even though I was just a child. I was eight years old. We used to listen to a half hour news radio show every evening during dinner time at my house. I remember the news vividly. I watched the news conference when Nixon made the announcement.
I remember the OPEC oil embargo of the US. Naturally, the narrative on the news made the oil rich nations of the middle east to be the enemy. It was those nasty greedy oil Barrons in Saudi Arabia that were responsible for the long lines at the gas station, the unprecedented prices for a gallon of gasoline.
When in fact, the oil Barrons were quite right to be upset at the notion that they were being paid less for their oil with the illusion that the price remained the same.
What followed was a period of inflation, unlike what had been seen in the US in recent memory.
Inflation was out of control.
It started with oil, then spread to other commodities. Eventually the price increases trickled through the economy and spread to include rent, transportation, food, and eventually wages. It was a time of labour strife, of unions going on strike to protest declining purchasing power and the demand for higher wages.
There were strikes at car manufacturers, the post office, at airlines, the railways, the longshoremen unloading cargo ships. The culprits were the big bad corporations who were exploiting their workers. Or were they?
Perhaps the erosion of the purchasing power of their wage was really to blame. But since the government wasn’t paying the majority of pay checks in those days, you could only look to your employer for a raise, not the government.
So here we are in 2021, with commodity prices shooting up and yet inflation is still below the 2% target.
But wheat prices are up 33% of last year. Oil prices are triple what they were at this time last year. Copper prices are up 72.4% over this time last year. Lumber is up 260%. Corn prices are up 80% over last year. Real Estate prices for residential homes are up 16% nationwide. Yet somehow inflation is worryingly low, below 2%. Somehow there is either a disconnect, or the effect has yet to trickle through the system.
China is America’s largest trading partner. The tone of the talks this past week in Anchorage Alaska between the US and China have made it clear that China is taking the dominant role in the discussions.
OK. So what does this have to do with real estate? If you’re a real estate investor and you’re trying to underwrite deals based on flat market assumptions about inflation, it’s getting more and more difficult to create a financial model that reflects the reality we are now experiencing.
If prices are up, will rents follow suit?
Transportation costs are up dramatically. The balance of trade can be clearly seen in the cost of transportation. Shipping a container from California to Shanghai cost $445. But that same shipping contained coming from China to Long Beach California costs over $3,000, and if you want to ship to the US East Coast, add another $700.
The question is how long until China no longer accepts the devaluing US dollar as a means of payment?
When that happens, you will see a rapid drop in value of the US dollar. When that happens, you want to be holding real estate and as few dollars as humanly possible.
Collins asks.
I’m purchasing eight acres of Wetlands. Many people do not know the difference between Flood Zones and Wetlands... which limits the amount of people with whom one can discuss options.
The entire site is designated as wetlands. I have an approved permit from the Army Corps of Engineers for a fill pad and building, but NOT a city approved building permit. I would have to apply for and receive a Wetland Development permit from the City. The city requires a 2:1 mitigation ratio (i.e. 2 square feet of mitigation credit for each 1 square foot of wetland filled…). The city also requires undisturbed wetland areas to remain in a natural wetland state, so the yard surrounding the proposed building will have to be natural. This means no topsoil and sod is allowed for a manicured lawn, and the only plants or landscaping allowed have to be wetland species plants and trees, no invasive species or non-native wetland landscaping that are typical in a normal, suburban yard landscape.
What are some creative ways to use or leverage wetlands? Perhaps borrow against the land as collateral? Or dig in for the long haul and seek mitigations in order to develop?
Collins,
This is a great question. The question of land value is one that varies widely based on the designation of the land. In my experience, land increases in monetary value only when it has development potential.
Land that is zoned rural or agricultural, or environmentally protected is worth very little. You could have the exact same land zoned for residential that sells for $800,000 an acre. That exact same land zoned agricultural or environmentally protected might be valued at $4,000 an acre. We’re talking a 20x increase in value.
Wetland mitigation is a designation worth getting for a property. You are correct that in some cases, a property with a wetland designation doesn’t necessarily mean it’s not suitable for development.
For example, it could mean that the water table is buried only to a shallow depth beneath the surface. If it’s wet, it could affect the geotechnical stability of the soil It might mean driving piles down 40 feet or until you hit bedrock before in order to create a stable substrate to build a structure on top. A conventional cement foundation may not work in a wetland situation. So your cost of construction could be higher.
The range of Wetland mitigations vary widely. At one end of the spectrum, you simply write a check to the relevant authority and they give you a certificate of mitigation.
That form of mitigation is called compensatory mitigation. If you’re going to be negatively affecting a wetland, then the state may want some money in exchange to protect other wetland.
Generally, mitigation obligations are not assessed on an acre for acre basis. Unavoidable net losses to wetland ecological value resulting from a project are quantified as habitat units using the appropriate Wetland Value Assessment (WVA) model. You can trade these habitat units resulting from a monetary mitigation action to equal the habitat units lost.
At the other end of the spectrum, you could spend a ton of money and resources and get absolutely nowhere.
Creating a mitigation bank is a complicated high-risk, high-return venture that requires a high-level of specialized expertise. At the very least, you will need to enlist the help of several highly qualified, experienced consultants to navigate the multi-step process.
Another option to create value would be to develop a portion of the property and then donate a portion permanently to conservation using a conservation easement. The tax benefit of the conservation easement could be substantial since the value of the land for tax purposes might be assessed at its highest and best use, rather than its value as a wetland.
Kyle Wilson is best known as the President of Jim Rohn International. He has worked with so many of the world's top personal development thought leaders including Zig Ziglar, Brian Tracy, Mark Victor Hansen, Les Brown, Dennis Waitley, to name just a few. On today's show we're talking about how to build a long standing relationship with your customers without "selling them". Kyle is best known for saying that he never uses a marketing tactic that violates a principle.
To learn more, visit kylewilson.com. If you send Kyle an email to info@kylewilson.com, he will send you a copy of one of his most recent books, "The Success Habits of Super Achievers". Let him know that you heard him on the Real Estate Espresso Podcast.
Jas Takhar is one of Canada's top 1% brokers. He manages a large team in Toronto. On today's show we're talking about the market cycle and how investors should be looking at the dynamics in one of North America's fastest growing cities.
On today’s show we’re talking about a losing bid.
Any time you lose a bid on a property, there is a natural reaction to second guess your offer. Did we offer too little or was the winner out of their mind?
It happened to us this week. There were a total of 8 offers on this property in a good location. We calculated our offer price based on a reasonable set of zoning assumptions and a reasonable balancing of risk.
A day after losing the bid, we spoke with the winning bidder to understand why they had bid nearly $900,000 more than our offer price.
It came down to assumptions on the entitled density. If we could only get a low density approved, we would earn zero profit at the price the winner offered. But if he was right, even his offer price was still a bargain purchase price. It all comes down to what you believe the planning commission and ultimately city council will approve in that location.
After careful deliberation, and the opportunity to do due diligence, we made an even higher offer to buy the contract from the winning bidder. So not only did we offer to pay $900,000 more than our original offer, we put a premium to compensate the winning bidder for their efforts.
We may have got it wrong, or maybe we were right. But now we will have the time to perform the proper due diligence and determine the true potential for the property, and therefore its value.
So why would we offer an even higher bid on the same property after having lost the bid? As long as the project ultimately meets our financial metrics, it really doesn’t matter that we’re paying a bit more. Would I prefer to pay less? Of course.
The unfortunate thing about auction environments is that the winner almost always ends up paying more than if they were the only bidder.
The question is whether auction fever takes over and the winner ends up paying too much. We are pretty disciplined investors and make sure that we don’t take needless risks.
So now that we have the property under contract, the key is to determine the viability of the project during the due diligence period.
The fact is, we don’t know if the project is truly viable yet. We will need to take the time over the next several weeks and truly determine the envelope of this project. We will run multiple different scenarios. What happens if we get a density of 4 units per acre, or 6 units per acre or how about 12 units per acre. Each one of these scenarios is a completely different product with a different market positioning.
But now that we have it under contract, we have the control to make good decisions. Do we feel bad that we’re paying even more? Not at all. We’re constantly learning.
What makes this project safe is the notion that land in the core of the city is fully developed. The city is one of the fastest growing cities in North America. It’s certainly within the top 10 fastest growing cities. The inventory is low, and the product we’re aiming to develop will continue to be in high demand, even if market conditions soften.
Typically when there is a downturn in real estate, it affects the most expensive end of the market first. This particular property has multiple exit strategies. So we feel safe in developing a few hundred units of new residential housing. We’re still buying the land in a hot area at under $3.50 per square foot.
The process of development can a little messy and unpredictable at times. You are literally dealing with a blank canvas. It takes multiple iterations of a design concept to arrive at something that truly fits in every respect. It has to fit the area in terms of features, price point, amenities. It’s truly a creative process that is an art form.
On today’s show we’re going to look at one of the largest barriers to housing affordability. But before we do, we’re going back to basic principles. We’re going to start with the law of supply and demand. If demand goes up and supply goes down, then it follows that prices will rise until a new equilibrium is reached.
That’s exactly what we’ve seen over the past year. But in areas of highest prices, we have seen that the acute shortage is not of construction materials, nor has it been the ability to construct, but it’s been the cost of land.
But it’s not just land that is expensive, but low density is expensive.
Some communities have tried over the years to maintain their sense of community by restricting zoning. Property values have risen accordingly.
Let’s look at the Township of Southold on Long Island. This is an area near the North-east fork at the far east end of Long Island.
The community is extremely wealthy. Properties are expensive, and the community is decidedly anti development.
According to the Township’s own zoning guide, land use within the Township has not changed much in the past decade.
But here is the one statistic that fully describes the story. There are only a little more than 13,800 homes in the entire community. That’s a density of 1.27 units per acre in the residential zones. That’s extremely low density. The community has averaged only 30 new construction building permits per year over the past decade. It means that prices have risen to the point where people who live in the area could not actually afford to buy into the area. If they sell their home, they would have to leave. They can’t afford to stay.
This situation describes so many communities across North America.
But it’s not that Southold lacks land. On the contrary. They have plenty of it. Their zoning specifically is designed to be exclusionary. By artificially creating scarcity, these communities create an aura of exclusivity and therefore they keep the values of property high.
Lack of affordable housing is a problem, yes. It’s mentioned in their 58 page zoning guide. But it could be argued that the lack of affordable housing is not really a problem, it’s a feature.
Under the recently announced 3.1T Biden infrastructure bill, hidden deep within the pages is a provision to make housing more affordable.
The proposed program of at least $5 billion would offer grants to cities and towns that relax restrictions on new construction.
This initiative was reported this week in the Wall Street Journal. It’s interesting because it’s attacking the issue of affordability at one of the root causes of the problem.
Many of the constraints on development are entirely artificial. It’s not that there is not sufficient land available. It’s that local governments are not allowing you to build projects that would result in affordable housing. They do this by limiting density.
The Biden administration said in a fact sheet that the program would award “flexible and attractive funding to jurisdictions that take concrete steps to eliminate such needless barriers to producing affordable housing.” The White House won’t penalize cities if they don’t want to participate, according to some administration officials.
Earlier this year I reported that some towns like Minneapolis have taken steps to relax their zoning code and allow for higher density in order to bring more affordable housing into nice areas.
The link between value and entitlement has never been more clear.
Today’s question comes from Jeremy. He asks,
I’m looking to develop a residential subdivision that is close to a naval air force base. There are plenty of houses all around the subject property. Could the airport affect what gets built on the property?
Jeremy this is a great question.
The regions around airports are all subject to elevated noise levels. The good news is that modern civilian aircraft have got a lot quieter as more fuel efficient aircraft have replaced the early jet engines of decades past. Newer aircraft use a turbo-fan high bypass engine that relies on the turbine to rotate a fan, rather than simply using the thrust of the tent engine combustion to propel the aircraft.
But airports that are close to residential areas regularly get complaints from the general public. The airport authority don’t like getting complaints, so instead they restrict what can be built near the airport so that they don’t get complaints.
The aviation authority in most countries have a set of standards that they use to both measure and enforce noise coming from an airport.
The FAA has a measure of noise called Community Noise Equivalent Level (CNEL) and a second measure called the Day Night Average Sound Level (DNL) On a map these noise contours show the measurements as you get further from the airport. Some airports that are close to residential areas like John Wayne airport in Orange County have even gone so far as to restrict flight departure and arrival times so as not to disturb the neighborhood. No flight will depart John Wayne before 7AM, and they also need to use noise abatement procedures. That means taking off at a steep angle of attack until the aircraft reaches the boundary of the airport property, then throttling back and using a slower rate of climb. There is a close interplay between the operation at the airport and the surrounding community.
Now a naval air force station will have a lot of jets which are very noisy. They often depart in tandem, and they will go supersonic causing sonic boom which is loud enough to drown out conversations inside a home of office building.
Strange as it may sound, the airport authority may have jurisdiction over what gets built in the area surrounding the airport. They may prohibit development within certain noise contours. They may also impose additional requirements on the construction.
For example, if you are allowed to build, you might be required to provide additional sound insulation. That could include triple glazed windows instead of double glazed windows.
I spent several weeks evaluating a waterfront property a few years ago that was close to an airport. The way the map was drawn showed the airport exclusion zone roughly coinciding with the edge of the river.
Nobody could tell us whether the inside of the line, the outside edge of the line, or the center of the line represented the edge of the exclusion zone. It would take months for the airport authority to rule on any development. They would not even offer an opinion unless a full application was submitted to the airport authority. That meant spending a lot of money on design and engineering only to be told no you can’t build in that location.
So in our case we didn’t buy the property, even though it looked extremely desirable. The last time we looked, that land was still for sale 4 years later. I’m guessing we made the right decision.
There are noise and vibration engineers, which is a branch of mechanical engineering. There are a subset of that specialty who specialize in airports. These are the folks you need to consult in making a determination whether your property is buildable or not. The city will generally grant your zoning permit which could give you a false sense of security that you have all the entitlements you need to build a home in that location.
On today’s show I’m going to share a rather unscientific observation. It’s not based on a statistical sample size of any significance. But the data is first hand and for that reason, I’m paying attention to it.
A lot has been written about the pain of retail in the past year. There’s lots of office vacancy that has opened up as well. Many are wondering if the workplace of the future has been altered forever by the pandemic.
I’ve seen many retail vacancies almost everywhere I look. We’re talking the typical main street locations. Businesses that have held the same location for 40 years have closed.
However, I’ve had numerous conversations with commercial property owners in recent weeks.
My own commercial space is now fully leased, even if the monthly rate isn’t the highest. We have one tenant who is still struggling financially. But overall, the situation is manageable. The surprising part is that we are starting to get unsolicited interest from prospective tenants for commercial storefronts. This is after having extremely little interest for nearly a year.
Another commercial owner that I spoke with had four retail vacancies for much of the past year. Three out of the four spaces now have new leases signed.
That’s a remarkable change compared with only a few months ago.
Despite the economic pain, economies are looking past the pandemic. Let’s look at two completely different markets to see if there are some clues.
We’re going to compare Austin Texas and Las Vegas Nevada.
The biggest economic driver in Austin Texas is the tech industry. There is extensive growth in the tech sector from major tech employers including Amazon, Apple, Facebook, Tesla, Oracle and Qualcomm to name just a few. Come corporate relocations from California have accelerated the growth of the Austin market. These are high value jobs that have been resilient in during the pandemic.
In 2020, about 1.2M SF were added to the supply in the market. Vacancy increased from 4.2% to 4.9%. Much of the new growth was in outlying areas as the city continues to expand its boundaries in all directions. Asking rents continued to push upwards at $22.06 per SF, and increase of 0.5% compared with the previous year. Single tenant properties performed the best. Rents in the central business district fell as much as 20%. This area experienced the largest loss in business as workers stayed home during the pandemic.
Las Vegas on the other hand is heavily dependent on tourism and gaming. Both industries were decimated by the pandemic. Las Vegas has one of the highest rates of unemployment in the nation.
Retail vacancy increased from 7.2% to 7.6% over the past year. Most of that increase was the result of new product entering the market. Nearly 700,000 SF were added to the market in 2020 and an expected 702,000 SF or new retail is expected to hit the market in 2021, or about 0.7% growth of the total. Less than half of the new supply is expected to be absorbed this year.
So perhaps it’s no surprise that location matters more than anything else. In the case of retail, properties that are close to where people live performed the best. Those properties in new and expanding areas performed better than those linked to office workers. But you didn’t need a pandemic to know that downtown retail has performed poorly compared with the suburbs. That trend has been playing itself out for more than a decade.
There is no question that trends in retail are changing. Some retail space is functionally obsolete.
Anyone buying older retail sites has to consider one of two possible plays.
- Purchasing at such a low price that you can make money by renting at rates well below the rest of the market.
- Redeveloping the property to a higher and best use.
On today’s show we’re talking about the difficult topic of how to account for what has happened in the past year during the pandemic. Now I want to be clear, I’m not an accountant, and I don’t play one on a podcast. The questions raised on today’s show are for you to discuss with your accountant and make a determination for your specific circumstance on how to treat the situation.
So here we go.
If you’re a commercial landlord, you probably had tenants that could not pay their full lease amount. Their business might have been forced to close in order to stop the spread of the pandemic. With no revenue coming in the door, the tenant would have been looking for a reduction in rent.
As a landlord, you had a few choices. To start with, your lease probably did not have any pandemic provisions in it. A reduction in lease payments, or a forgiveness in lease payments was probably not contemplated in the lease.
These concessions are taking various forms and include reduced rent (cash payment forgiveness) or possibly deferral of rent payments.
But if a lease modification was not properly undertaken, what is the proper accounting treatment?
Do you report the full rental income on your income statement and then carry the outstanding amount as an accounts receivable? What if you never get paid? When is the income written off from the balance sheet?
What if circumstances arise that are beyond the control of the parties of the contract, such as a force majeure clause, or the laws in the jurisdiction governing the lease may create an enforceable right when a concession is legally required?
If a lease agreement provides these rights and obligations, then the concession may not be considered a lease modification. If the lease makes no mentions of a concession, then the concession is likely a lease modification.
If you’re a residential landlord and your tenant has not paid, but still owes you rent, how are you supposed to account for the rent?
You have a moratorium on evictions and have limited remedies to get your tenants to pay up. The tenants still owe you the back rent. It has not been forgiven.
How are you supposed to account for it? Do you treat the unpaid rent as an accounts payable with no reduction in income? Do you reduce the income and treat the rent as if it was variable? Could you end up paying income tax on income you never actually received?
What if there was a foreclosure involved on the property?
A foreclosure is treated the same as a sale of property. Capital gain or loss may be triggered upon such sale and, in certain instances, taxpayers may also realize income from forgiveness on certain mortgage debt. Exclusions of income created in a foreclosure may be available to taxpayers but the specific facts should be first reviewed and all tax implications considered.
What if the lease was cancelled? How will that be treated by the tax authority? It’s not necessarily obvious. You need to check.
If your tenant left behind improvements, there could be tax consequences. Whenever a lease is terminated, whether early or at the end of a lease, a landlord generally becomes the owner of improvements which were made to such leased space during the lease. Did the landlord receive a benefit or income from acquiring new property that it didn’t have before the tenant terminated the lease? You might be deemed to have received a taxable benefit, and not actually have the income to pay the tax on this benefit.
But what if the landlord paid for the improvements and was recovering the improvements over the life of the lease? How will the improvements be treated in that circumstance? Are the unamortized improvements written off? There are so many questions.
The rules are complex and vary by jurisdiction. You can’t simply guess at what should make sense.
David Kafka is the Remax broker in Belize, specializing in helping foreigners who want to own property in Belize. On today's show we're talking about what it's like to own property there and how the economy has survived the pandemic. You can learn more or connect with David at 1stChoiceBelize.com
Cory Boatright hails from Oklahoma City where he has created a volume wholesaling business. In addition, Cory has also amassed a sizeable multi-family apartment portfolio. What sets Cory apart is that he is an expert at the art and science of marketing. On today's show we're talking about how to use split testing to refine any marketing campaign.
You can connect with Cory at REIProfits on Instagram or investingcapitalgroup.com to learn more about his apartment syndication business.
One of the widely accepted principles in the tax code is that you should be taxed on money you actually received. But there are a few examples of taxation on phantom income. The problem has the potential to get much bigger. On today’s show we’re talking about the concept of a deemed disposition. It’s pretty clear in the tax law of most western countries that if you sell an asset and you make a profit, that sale might be subject to capital gains tax.
But recently Janet Yellen, the new Treasury Secretary and former Fed Chair has been advocating that the government consider taxing unrealized capital gains.
The latest incarnation of this concept is called the “Sensible Taxation and Equity Promotion” Act of 2021, or STEP for short. Wonderful! Another catchy acronym for yet another destructive law.
Based on current US federal estate tax law, if someone dies today, his/her assets are exempt from federal estate tax up to $11.2 million, or $22.4 million for a couple.
That’s a hefty exemption that covers more than 99.9% of the population.
If it passes, the value of a newly deceased person’s estate will be valued at Fair Market Value.
Then, any unrealized capital gains would be taxed based on that person’s original cost basis.
Essentially they’re treating you as if, on the day that you died, sold all all of your assets and had to pay capital gains tax.
But they’ve dropped the exemption all the way down to $1 million.
Just about every asset is included, ranging from real estate to a small family business. They even specifically included collectibles like art, gold, and rare coins.
Some other countries like Canada don’t have inheritance taxes. But in Canada, there is a deemed disposition upon death and if any capital gains taxes are due, they need to be paid at that time when the terminal tax return is filed for the deceased person. The result has been that often the children will inherit a property that has been in the family for decades. The cost of the property was close to zero compared with today’s valuation. The new owners face a hefty tax obligation, or risk losing the property.
In many cases, the next of kin will need to get a bank loan to pay the taxes in order to hang onto the property. The only other choice is to sell the property and pay the tax on an actual disposition. In many cases, it’s preferable to transfer the property at a predetermined price while the parent is still alive in order to reduce the tax burden.
2021 could be the year of strategic tax planning.
Today is the first of the month and on the first day of each month we review the book of the month.
The book this month is by two of my favourite authors. Chip and Dan Heath are two brothers who are both university professors. One is at Stanford and the other is at Duke University. Together they have written multiple best selling books including Made to Stick and Decisive.
Our book this month is called Switch.
The book is dedicated to answering the question of how to change things when change is hard. The mind is governed by two different systems, the rational mind and the emotional mind. The rational mind wants that great beach body and the emotional mind wants that OREO cookie.
But this book is different than what you might be expecting. It examines change at the individual level, the organizational level and at a societal level.
The book is well researched and shows the path through stories and examples.
It doesn’t preach at you, but rather guides you to solutions that you discover yourself.
One of the central concepts of the book is the notion of bright lights. Bright lights are those shining examples of success that you can copy. The concept of a mentor who has walked the path before you is one possible bright light. But there are many others. One of the best and most powerful bright lights can in fact be your own experience. You could have a shining example of something that worked well in your past. That shining example can be a beacon of light for you to replicate that success, perhaps with a minor adaptation suited to the current circumstance.
In the book Switch, the authors share the story of how Robyn Waters a merchant buyer with little to no authority transformed Target from a lagging department store that low cost copied Walmart and Kmart, to a fashion leader. Robyn understood that she had no authority. If she was to transform the way purchasing decisions were made, she had to tap into the buyer’s emotional drive. The company culture was completely data driven. Sales of last years fashion products were used to determine purchasing decisions this year. By definition, the company would always be a fashion laggard. Their process was overwhelmingly Analyze - Think - Change. She transformed the culture into a See-Feel-Change decision making that was supported by the analytical approach. Early wins would be measured to make faster decisions on how to procure new products.
When the organization is so large and so heavy with momentum, change often seems impossible.
We often rush to judgement about people. Someone who inherently is a good driver, can become a bad driver if you put them in a traffic jam, 20 minutes behind schedule to catch a flight for a family vacation. They aren’t a bad driver per se. But the environment created the bad driver. It’s too easy to focus on the driver and make the driver the problem. But often the root cause is the environment. If you want to change the outcome, you could try changing the driver. But it might be more effective to change the environment.
One of the core concepts in the book is that the emotional side of the mind is a six ton elephant. The logical side of the mind is the rider. The rider attempts to steer the elephant by issuing commands and pulling on the reigns. But if there is a disagreement between the rider and the elephant, there’s little question as to which one will win.
If you simply convince people logically, they will agree with you. You will have direction, but without motivation.
That is the key insight. Your head and your heart must be in alignment.
On today’s show we’re talking about the real estate shortage.
The obvious question is that if the population has not been growing significantly, and immigration has been curtailed significantly as a result of the pandemic, then why do we have a housing shortage in such a big way.
The fact is, we have seen migration that has produced the shortage. There are surpluses in a few areas like NYC, San Francisco, Seattle. But migration, combined with a small number of people listing their properties has created real estate gridlock. Unless people list their homes for resale, there are not that many homes available for purchase on the market.
While there are not than many distressed properties in the owner occupied market as of this point. Many of the properties that had their loans in forbearance have managed to exit their forbearance agreements and get back into good standing.
But the real story is the nearly 8M rental properties where the tenants are seriously delinquent and the landlords have not been able to collect rent, nor have they been able to evict. Some of those properties are a ticking time bomb and they need to be factored into the housing equation. They’re being artificially held off the market as a result of the moratorium on evictions.
The gridlock in the single family home market is such that demand exceeds supply in many markets. On a national basis, real estate sales for single family homes and condos have jumped 9.1% in February compared with 2020. Home prices are up 16.2% YOY.
Inventories are at historic lows across most of the US and Canada. Normally when that happens, construction activity ramps up. But we have actually seen a drop in construction activity since the start of the year. New home construction has been hovering around 1M units a year for much of the past decade. The entire construction industry shrunk in the wake of the 2008 financial crisis. If you go back to 2006, the construction industry in the US was producing over 2M home a year. The current construction industry simply doesn’t have the capacity to produce that many homes any longer.
Supply chain disruptions during the pandemic have pushed construction prices up. Hard construction costs are up 11.4% compared with this time last year. Oddly, there is a surplus of trees for softwood lumber, but a shortage of finished construction lumber. Tree growers are getting near historic lows for their trees, and the lumber mills are getting near historic highs for cut kiln dried lumber, nearly triple the price compared with this time last year.
The biggest driver of demand is the number of new millennial buyers. There are now over 45 million people in the 30-39 year age range. This is part of the so-called echo boom generation. The age of first time home buyers keeps increasing and now sits at 33 years of age. That’s two years older than the previous generation.
Over the next five years, the number of people entering that age group is expected to grow to nearly 47 million people.
There is an expectation of 2.5 million new household formations in each of the next two years. This will place a lot of pressure on housing stock.
The folks at Goldman Sachs have predicted an 8.1% increase in GDP for 2021 in the US. This would be the largest economic spike since 1951. Goldman is predicting that unemployment will fall to 4% and inflation will remain in check at 2.1%.
The Federal Reserve had a slightly more cautious forecast for 2021. They’re predicting a 6.5% growth in GDP, unemployment at 4.5% and inflation at 2.4%.
All of this suggests that the boom in the housing market will continue for at least another two years.
Today’s show is another AMA episode. Except, on today’s show I’ve had virtually the same question from several listeners in different geographies. I’ve synthesized a composite question which basically aims to cover the landscape of the question.
The question is how to determine the density of apartments that you can build on a site having rather large dimensions. In one case, the property is in a dense urban location and measures about 200 feet by 500 feet. How many apartments can I get if the building is limited to 5 stories in height?
This is a great question. Of course each municipality has rules that determine the setbacks of the building from the property line, front, back and sides. But the setbacks are not the constraint in this case.
When you’re evaluating the utility of a building site for residential apartments, you need to think about the basic apartment as a building block. A one bedroom apartment is going to need about 22-25 feet of perimeter space on the building exterior in order to have windows in the living room and the bedroom. A two bedroom apartment is going to need about 35 feet of exterior wall space for two bedrooms and a living room. Apartments are not that deep. On the interior, you’re going to locate the kitchen, the bathrooms, closets, hallways, laundry facilities. None of those items require windows. Your most expensive real estate in an apartment building is the exterior walls because that’s where you have windows. At most, your apartment is going to be 30 to 40 feet deep. If you allow 6 feet for a hallway between apartments, then at most your building will be 85-90 feet deep from one side of the building to the other. If the property is too large, you have space in the core that is not really usable. Making a larger laundry room in an apartment is only going to add cost and is not going to bring you additional rent.
So there are certain land dimensions that naturally lend themselves to building an apartment building, and then other dimensions that are just plain awkward.
So if you have a property that is deeper than you need it to be for an apartment building, you’re not naturally going to be able to make use of that extra land. A site that is 200 feet deep is too deep for a single building to span the entire depth of the site and not deep enough to have two towers.
You can use some of the extra depth in a dense urban setting to create a sense of open streetscape by setting the building further back from the street. You can also make a larger footprint on the ground floor for the amenities like the lobby, the party room, parking entrance, a gym, and so on. But carrying that extra depth up the to the top of the tower is wasteful.
I’ve seen many rookie developers multiply the width of the property by the height restriction in and then divide by the size of an average apartments order to determine how many units are possible. But this simple calculation neglects the real constraints in designing an apartment building.
A property that is 400 feet deep may be a candidate for two towers on top of a podium ground floor with a space between them. Perhaps a horseshoe shaped or U shaped building on top of a podium. The goal is to maximize the perimeter area of the building so you can get as many bedrooms and living rooms on the exterior of the building as possible. That one constraint is usually the limiting factor on the number of apartments that are possible.
The second limiting factor for any apartment building is going to be the parking ratio. The city will determine the minimum parking allowed in the zoning code. But you also need to take market demand into account as well. If your building height and perimeter calculations can allow, say, 200 apartments, but you only have space for 100 cars, you might be limited by parking.
On today’s show we’re talking about how some businesses were largely left out in the cold over the past year, despite being mandated to close, or drastically scale back their business to prevent spread of the pandemic.
A number of new initiatives have been brought forward since December and again most recently in the past month.
Last week the SBA revealed the much anticipated timeline for $28.6B grant program for restaurants hit hard by the pandemic. This is one sector that has seen thousands of businesses close permanently. Those that remain are hanging on by a thread.
I’ve spoken with several restaurant owners in recent weeks about how they have fared during the pandemic. It didn’t matter whether they were located in the US, Canada or the UK. The story has been pretty much the same.
Naturally, they’ve laid off staff in order to survive. The biggest issue has been whether their landlords have been willing to work with the business or not.
In cases where the landlord insisted on getting paid full rent throughout the pandemic, many restaurants have been forced to close.
Many of the owners I’ve spoken with have adapted their menu and have created new menus specifically optimized for the take-out experience.
But in most cases, these businesses have needed more than just a pivot to take-out business. Survival has required a combination of rent relief from landlords or government assistance.
Those restaurants that are still left standing after the pandemic is over will in my opinion do a booming business.
The Small Business Administration in the USA is planning to roll out the Restaurant Revitalization Fund grant program within 30 days.
Those who are in the performing arts have also been stripped of their income in the past year. This includes musicians, actors, comedians, magicians, and all of the supporting businesses that form part of the performing arts. We’re talking about lighting and sound technicians, directors, ticket agents, ushers, and the food and drink concessions that form part of most performing arts venues.
Earlier this year The SBA only recently announced the rollout of its Shuttered Venue Operators Grant program, first passed into law by Congress in December.
The SBA said potential applicants must be registered in the federal government’s system for award management (SAM) in order to receive a grant. I can tell you from first hand experience, that getting a SAM number is a bureaucratic process that has a few stumbling spots in the process.
Eligible businesses include live venue operators, promoters, theatrical producers, live performing arts organizations, museums, zoos, aquariums and theaters themselves.
But even with the April 8 start date, eligible businesses will have to wait in line. The SBA has said the first 14 days of this program will only be open to venues that suffered a 90% or greater revenue loss between this past April and December, due to Covid-19. The subsequent 14 days will be reserved for venues that suffered a 70% revenue loss or more in that time. Only after the first 28 days can venues that suffered smaller losses be considered for the grants.
Grants are sized by the average monthly gross revenue for each full month a company was operational, then multiplied by six and capped at $10 million. Funds can be used for a wide variety of expenses, including payroll, rent, utility payments, scheduled mortgage and debt payments, personal protective equipment, independent contractor payments, admin costs, state and local taxes, and even insurance and capital.
We’re starting to see the return to normal for many businesses as the number of vaccinations increase. Some restaurants are now more than 50% full during dinner hours. The patterns have changed. It used to be the case that Friday lunch hour was the busiest. Now Monday and Tuesday lunch hours are the busiest.
Today's show is an excerpt of a talk I gave at a podcasting workshop earlier this week. We're talking about how to provide an effective pitch to a show host or show producer and what makes a good guest.
On today's show George Ross and I are discussing how to handle inflation of construction material prices.
On today’s show we’re taking a retrospective look at what’s happened in the world of senior housing in the past year.
Unlike other multifamily asset classes, senior housing follows completely different demographic and adoption patterns. That is certainly born out in the data over the past year. Rental properties have seen very little change in vacancy during the pandemic. Sales and refinance activity of rental properties have been brisk.
According to data from NIC, seniors housing occupancy fell to another record low in fourth quarter 2020, though the rate of decline eased from earlier in the year: Occupancy declined 7.0% in 2020 to 80.7%. Underlying segment trends were similar: Majority Assisted Living (AL) declined 7.7% to 77.7% and Majority Independent Living (IL) declined 6.3% to 83.5%.
Nursing care occupancy averaged 75.3 percent in the fourth quarter. Inventory growth also slowed to just 1,626 units added in NIC’s top 31 metropolitan markets, the slowest pace since the third quarter of 2013. Personally, I’m glad to see that new supply is slowing down. In my opinion, the majority of primary markets are oversupplied. The opportunity exists in secondary and tertiary markets. That means paying close attention to the hyperlocal market conditions. We’re talking about the demand side of the equation, and the income demographics to support the senior housing economic model.
Of course averages don’t tell the full story. Results varied widely among metropolitan regions, according to NIC MAP, which found that the West Coast cities of San Jose, Calif., San Francisco and Seattle reported the highest occupancy rates at 88.5 percent, 86.8 percent and 84.8 percent, respectively. Houston, Cleveland and Miami saw the lowest occupancies at 73.5 percent, 76.6 percent and 76.7 percent.
We have an 80 bed assisted living facility scheduled to open in the next couple of months and we should be in a position to start taking reservations for residents in the coming weeks. My partner in that project also operates a number of facilities in the Dallas market. In that portfolio, there is a 1.6% vacancy rate as compared with a nation wide market average of nearly 22% vacancy.
The obvious question is what is being done differently in these facilities that is resulting in such a dramatically different vacancy rate. I believe it comes down to a few key differences.
- These homes are built on the residential care model. These homes are smaller facilities with 12 to 16 residents per home. That contrasts with the big box model of hundreds of beds in a single building
- We have not had any Covid-19 outbreaks in any of the facilities. We had a single staff member test positive for Covid-19 and they were immediately isolated from the rest of the staff and residents and fortunately we had no propagation of the disease into the homes.
This emphasizes the importance of having a highly differentiated product in the market. When we perform the intake interview for most new residents, they’re not coming from their own home. They are typically coming from an existing big box care facility and they hated it.
It is clear that there will be opportunities to acquire distressed assets in the coming months. Some have already appeared on the market. But success in the market starts with understanding the operating model for success, not just the averages.
On today’s show we’re talking about how Elon Musk could change the dynamics of real estate for ever.
Now you’re probably thinking that is a bold statement. You might be thinking that I’m talking about electric cars. But I’m not.
You see the value of real estate is determined by location, location, location. Location matters for several reasons.
People want to be close to certain amenities. They don’t want to have to travel too far to get their groceries, eat a nice dinner in a restaurant, or commute to work.
Many people view their house is a sanctuary, a place to get away from the density and hustle of the big city.
But rural properties suffer from a number of problems. Unless the city has brought the infrastructure to your property, the cost of building and maintaining your own infrastructure is less appealing than using city services.
We’re accustomed to having seven utilities at our property. We expect electricity, water, sewer, natural gas, TV, phone and internet. If even one of those are missing, the property is less desirable. The cost to bring those services to your property can be prohibitive.
Well a little over a year ago, SpaceX launched its first satellites for its Starlink service of low earth orbit satellites.
This mesh of satellites will enable global rural communications. Eventually, SpaceX hopes to launch 42,000 satellites to service rural internet in virtually every corner of the globe including the high arctic.
Today’s satellite internet service uses geostationary satellites. But in order to match the earth’s rotation, the satellites must be 22,236 miles from the earth’s surface. Even at the speed of light, it takes about 1/9 of a second to reach the satellite from earth. Sending a round trip message to a satellite, another destination on earth and back takes about half a second. That’s a long delay in the world of computing. That’s just the travel time. Computers need time on each end of the link to process information. So satellite internet traditionally has been very slow.
The Starlink service has already over 1,000 satellites in service. Each launch of the falcon 9 rocket carries another 60 satellites. Friends of mine are already participating in the limited beta trial of the Starlink service. The downlink speeds of 70-80 Mbps are pretty respectable. Uplink speeds of 20 mbps are also quite acceptable. The service today is prone to short term dropouts. Uptime statistics are reportedly between 98.5% and 99%. These brief outages are the result of gaps in coverage. As more satellites are launched, these brief periods of downtime should disappear.
If the launch schedule is maintained, there should be 12,000 satellites circling the earth at a distance of 340 miles by 2024.
The price for a receiver is $450 USD and the service costs $99 a month. I just purchased a rural property for my wife and I and the Starlink website indicates that I should be eligible to get a Starlink receiver later this year.
If I can get respectable internet service for under $500 in up front investment and $99 a month, pretty much anywhere, then the choice of property location opens up dramatically.
London has been paying the price for Brexit for nearly five years as the uncertainty of the outcome had businesses leaving the UK for a headquarters on the continent. Many companies chose the UK because it is English speaking and has a stable legal and monetary system, while giving those companies full access to the European market under the single pan European economic zone.
But then those same businesses faced the prospect of losing access to the vibrant European market by virtue of having located in the UK, many businesses relocated to Amsterdam, Copenhagen, Belgium, and Germany. Real Estate prices in London predictably fell hard over the past five years.
Here we are in 2021. Real Estate prices are showing a surprising rebound. Is this the same artifact that we have seen during the pandemic where supply of homes for sale diminished significantly?
Throughout 2018, 2019 and 2020 we’ve seen one business after another relocate from the UK to other parts of Europe. Some of them relocated to Ireland which remained as part of the European Union. The UK is now divided with one foot inside the European Union and one foot outside.
Needless to say, there has been a flight of capital from England to other parts of the UK and to continental Europe.
For future for real estate in London looked bleak. Vacancies are up, and commercial vacancies have hit troublesome levels.
But then came China to the rescue.
You’re thinking wait, what? What does China have to do with England? How can China help UK real estate?
Since the new security law was enacted in Hong Kong in 2020, the central Chinese government has taken steps to eliminate dissent. Freedoms in Hong Kong that were taken for granted under British rule are disappearing. The new security law, under which at least 100 people have already been arrested, makes it easier to punish demonstrators and reduces Hong Kong’s autonomy. This month, 47 activists were charged with subversion under the legislation, after a mass arrest in early January.
Earlier this year, the Hong Kong government told UK citizens that they will need to choose between the having British status or Chinese status.
On March 11, the Chinese central government put another nail in the coffin of freedoms in Hong Kong.
But one thing is clear, people from Hong Kong have started arriving in London. They speak the Queen’s English and they are bringing investment dollars with them.
There has been a surge in interest in London real estate from Hong Kong over the past year.
According to Astons, Hong Kong residents represented the second-largest foreign buyer group in prime central London in the first three quarters of 2020. They accounted for 9.2% of foreign property purchases and spent an estimated £305.5 million across 243 transactions—or roughly £1.19 million (US$1.67 million) per property.
So far in the second half of 2020, property prices in London edged up about 17,000 pounds. That’s not a huge increase, but its a reversal of the previous trend over the past four years.
Pay close attention to geopolitical migration.
On today’s show we’re trying to make sense out of our financial markets.
You would think that the Federal Reserve, the central bank for the world’s reserve currency is influential in the world’s monetary system. So therefore the chair of the Federal Reserve would hold the single most influential banking position in the world. You would also expect the person occupying that chair to demonstrate a modest amount of fiscal responsibility.
It used to be the case that printing of money was something that was spoken of in hushed tones. It was a bit like cheating at the black jack table. Professional card players didn’t speak about it, but everyone knew it was happening to some degree.
But now in 2021, there is no attempt to hide it. The US Federal Government brings in 1.7T in personal income taxes per year. That’s about half of the total revenues it brings in each year.
But in 2020, the Federal Reserve printed about the same amount of money that the US government collected in taxes. Nearly 1/5 of the dollars in existence since the beginning of the US as a nation were printed in 2020.
Now the latest comments from the Federal Reserve Chairman seem to focus less on any measure of inflation, but on the “anchoring of inflation expectations”.
Anchoring is a concept that applies to psychology. If you believe it’s warm out, then it’s warm out. If the weatherman says the temperature is 10 degrees today, then it’s 10 degrees. The temperature has been measured and reported, irrespective of the weatherman’s opinion on the temperature. But if the weatherman says, it’s a beautiful warm day today, and the temperatures will be a nice balmy 10 degrees by mid afternoon, he is said to be anchoring an expectation.
The Fed chairman in his remarks Monday, prepared for a presentation to the House Finance Committee today, said that a short term jump in prices would not be enough to trigger a panic about inflation.
He said that as the economy emerges from the pandemic, there will be all kinds of increases in demand, and supply chain constraints, that will trigger price fluctuations. These price increases don’t concern him. He’s focused on the long term anchoring of inflation expectations at the 2% average. They intend to keep interest rates low until the economy reaches full employment and interest rates exceed the average 2% anchored expectation.
The countries with excess US dollars are starting to get worried that the US is printing too much money and therefore the value of the dollars they’re holding is declining. The international market is clearly attaching a risk premium to the US dollar. But the US continues to behave as though it can do what it wants, when it wants as if it sets the rules alone. If the Fed says interest rates are low, then rates are low, irrespective of what international investors are saying.
Other countries have tried this approach and failed. I’m thinking of modern day Argentina where interest rates are 38%. Back in 2012, their interest rate was a fairly respectable 9%. They boldly started printing their way out of their economic malaise. The memory of hyperinflation in the early 1990’s was a distant memory.
But then why would other countries be selling their US Treasury bills and using the proceeds to buy gold? Russia sold almost all its US Treasuries and bought gold instead. China has been on a gold buying binge over the past 20 years.
When I hear the word “anchoring” in the same sentence as inflation, I hear that the measurement is being replaced with a narrative, in order to direct attention away from the facts.
On today’s show we’re talking about construction budgets and how to make sure you’re insulated from construction price increases during the early phases of a project.
When you’re investing in new construction, you need to lock in expectations. You are setting expectations with your lender who is going to take a few months to underwrite the project and approve the loan. You’re dealing with investors and you’re setting expectations on the total equity investment and the rates of return.
Then along comes a year like 2020, or 2021 and construction prices are volatile. How do you set realistic expectations with your lender on the total investment? How do you set expectations with your investors when the ground is shifting beneath your feet?
This raises the question about whether we’re in an inflationary environment or not. Are the price fluctuations an artifact of short term supply constraints? It’s been clear that lumber prices have swung wildly over the past 12 months. In March of 2020, lumber was priced at $264 per 1,000 board feet. By September, the price was $985 per 1,000 board feet and by November had fallen to about half that price. Today we’re back up around $1,000 per 1,000 board feet.
Are these prices here to stay? Over the past 20 years, prices have fluctuated up and down. Energy prices are up compared with this time last year. Oil is now up to about $67 per barrel. That’s more than double the price at this time last year. We even had a short term supply glut when prices ran negative as some futures contracts expired with a shortage of midstream storage capacity.
Inflation as measured by the consumer price index is an average over a basket of goods.
If prices for materials go up, will rents go up correspondingly? Will salaries go up correspondingly or not? Which of the metrics be negatively impacted?
Modeling the future of a project that is a year away from construction becomes an exercise in Crystal ball gazing. How do you buffer your project for construction price increases? Do you assume that rents will go up or not?
So the question becomes, how do you plan your projects to be resilient in the face of inflation, and the beneficiary in the event of longer term inflation?
We’ve spent a lot of hours modelling these scenarios in our business as we put together various pro-forma estimates for our projects.
There are two questions that you need to answer.
- What would be the impact on the IRR on a 5% increase in cost of the project? Is it still a viable project? Are your profit margins still in an acceptable range? Will your debt coverage still meet the metrics with a 5% increase in cost?
- What happens to the cash position within the project if you’re faced with a 10% increase in hard construction, or a 5% increase in overall project cost? Do you get backed into a corner and risk running out of cash during construction?
It’s the second scenario, running out of cash that is the most dangerous to a project. You have to make sure you don’t run out of cash. That means using your leverage responsibly. It means increasing your loan reserves to protect the project. It means bringing 5% more equity to the table. If you bring 5% more equity to the table, you could theoretically borrow 5% more money if you needed to. That doesn’t mean you have to increase the cost of the project by 5% in your pro-forma. You still have your original plan based on a prudent forecast of construction costs. But if you had to ask the bank for additional funds, you have the necessary equity already raised as part of your capital raise to handle the larger loan request.
In an inflationary environment, the road can be bumpy. It will likely work out in the end and leverage will multiply your returns. But you need to design in a buffer to protect yourself from the downside risk.
Dr. Trevor Blattner is an endodontist (specialist in root canals) and real estate investor. On today's show we're talking about his new book "Redefining the Top 1%".
Everyone's journey into real estate investing and development is unique. To learn more reach out to Trevor at
DrTrevorBlattner.com
You can pre-order his book and take advantage of a bunch of pre-release goodies including the workbook and the audio book.
John Lee Dumas is the host of the wildly popular Entrepreneurs on Fire podcast. After more than 3,000 interviews with the world's leading entrepreneurs, he has distilled down a decade of learning into a new book that represents the 17 key steps to have a successful business and a successful life.
The book is called "The Common Path To Uncommon Success" by John Lee Dumas. The book launches on March 23, 2021. Go to uncommonsuccessbook.com to pre-order your copy. John includes a number of free additional resources for those who pre-order the book.
I'm an avid listener as well to his daily show Entrepreneurs on Fire which can be found on all the major podcast platforms. It was Entrepreneurs on Fire which was my inspiration and proof point that a daily show was both possible and realistic. Now nearly three years later, The Real Estate Espresso Podcast is still going strong as a daily show.
On today's show, this is a personal reflection on a day that seemed filled with setbacks.
It’s easy to get discouraged when setbacks occur. But as I took inventory of my own emotional state at the end of the day. Surprisingly, I was not upset. I came to the conclusion that what happened had nothing to do with me. Those setbacks in a project don’t reflect on me personally. I clearly wasn’t happy about the situations. But I wasn’t upset.
I found that my energy and focus remained consistent throughout the day. Each setback was met with immediate acceptance of the reality. The decisions that resulted from each of those setbacks were obvious. There was not angst, no worry about the future. Just simple logical decision making.
I have to tell you, this was not always the case. There was a time when I was younger that I would have grieved during a setback. I would have experienced a sense of loss. But today, I don’t
As I spoke with members of my team, there was a real recognition that the journey we are on is truly the best part of the experience. Setbacks are part of the process. We’re truly having an amazing time, even when the ball takes a bounce that is not the way we wanted.
We also have dozens of things that have happened the way we would want them to. It’s easy to focus on the negative. Those items are glaring. I’m closing out the day with an immense sense of gratitude for the commitment of our team, and for the support that we have received along the way.
On today’s show we’re talking about government playing a central role in monitoring every single financial transaction in a nation. Crypto-currency has been hailed as a way to break free from the chains of government based fiat currency. So far, many nations have not weighed in on crypto-currency. The two best known forms of crypto-currency are Bitcoin and Etherium. But in truth there are several thousand such currencies in existence. They vary in their features and functionality.
Governments are clearly afraid of losing monetary control over their economies. They are not about to surrender control of the money supply to a merry band of independent software programmers. I expect we’re going to see governments start to implement their own version of a crypto currency in order to sell the benefits of crypto to the general public. The first country to start the rollout of a digital currency is China with the digital Yuan. So far, the country has the currency undergoing limited trials.
Benefits that some users report include the convenience of paying with their smart phone. This is similar to the convenience of paying with something like Apple Pay on your phone. But in this case, there is no middle-man, and there are no transaction fees that are typically associated with digital wallets.
Digital wallets like Ali-pay or Tencent’s WeChat Pay have received wide adoption in China with over 700 million users of these systems today. Both companies are required to share transaction information with the central government if requested.
Right now, the central bank has the a trial with about 700,000 users participating in a trial. The central bank has said that they intend to protect privacy. This means that privacy may exist horizontally. If you buy groceries at the store, the grocer won’t have any information about your identity. But vertically the government has full visibility of all of your transactions and funds.
Now I’m not a huge conspiracy theorist. But the fact is, giving government full oversight over every single transaction in the economy represents a massive invasion of privacy.
In case you think this is only happening in China, think again.
The president of the Federal Reserve Bank of Cleveland made comments last September at the Chicago Payments Symposium conference. In her speech, she outlined a number of initiatives underway at the Federal Reserve.
Legislation has been proposed that each American has an account at the Fed in which digital dollars could be deposited, as liabilities of the Federal Reserve Banks, which could be used for emergency payments.
Other proposals would create a new payments instrument, digital cash, which would be just like the physical currency issued by central banks today, but in a digital form and, potentially, without the anonymity of physical currency.
The Indian crypto community is closely watching whether the Indian Federal government will ban cryptocurrencies, including bitcoin.
The latest information regarding the Indian crypto ban comes from Reuters which reported Sunday night that “India will propose a law banning cryptocurrencies, fining anyone trading in the country or even holding such digital assets.”
If you’re keeping you cash in your own Digital wallet that is located on your phone, what happens to all the bank deposits? If there are no bank deposits, how is the bank going to have sufficient funds to lend money out? Of course they don’t have enough money now. They only keep 10% of the loans on their books in deposit reserves now, and in some countries in Europe, only 3%.
On today’s show we’re looking at the fragile recovery in the travel and hospitality sector. This week was March break in much of North America.
The signs of recovery are starting to show. This is clear from anecdotal reports, as well as from the hotel analytics firm STR Global. STR issues a weekly report on the health of the hotel industry which can be viewed on the data insights portion of their website. The leisure-and-hospitality industry added 35,700 jobs in February.
Hotel occupancy for the first week of March was 49%, a 20 week high.
The increased willingness to travel seems to come down to a number of factors.
- Falling case counts across the nation.
- Increasing number of people being vaccinated.
- Fatigue with the whole pandemic.
- Some states have opened up their economies
Overall, occupancy has recovered to 70% of pre-pandemic levels and REVPAR has recovered to about 55% of pre-pandemic levels.
One hotel that we monitor closely is the Golden Nugget Hotel and Casino in Lake Charles Louisiana. One of our team members attempted to book a room this week at this 1,100 room property and found that there was no vacancy mid-week.
Even in our own portfolio of short term rentals, we’re seeing climbing occupancy. Throughout ski season, we experienced occupancy of close to 90%. We’re seeing longer term reservations and rising nightly rates. All of this seems positive for the upcoming summer season. But we don’t believe that occupancy levels will return to pre-pandemic levels until international travel returns in a big way.
Many countries have still closed their borders and many are grappling with the whole question of vaccine passports. While none have truly implemented this, we have yet to see how international travel will be held back by rates of vaccination.
There are obviously ethical questions about whether restricting travel based on vaccine status is an infringement of human rights. No doubt there will be legal challenges on this question.
We are starting to see capital transactions happening in the hotel business.
Blackstone Group Inc. and Starwood Capital Group said Monday they had teamed up to buy Extended Stay America for $6B.
Extended Stay is a midprice hotel chain that focuses on lodging for guests interested in staying for weeks or longer, offering kitchen facilities and more space than a typical hotel room. During the pandemic, its rooms and suites attracted essential workers, healthcare professionals and others who needed to travel.
That business helped Extended Stay achieve a 74% occupancy rate last year when occupancies industry wide were running below 45%. This says that the inclusion of full kitchen has made the properties a more desirable product in the market. It mirrors the experience we have had in our own portfolio of short term rentals that happen to be located in hotel properties with rich amenities.
Blackstone are experts in the hotel business. They’re a savvy buyer. They used to own Hilton hotels from 2007 to 2018. They bought Hilton at the peak of the market and within months were deep underwater on their investment. Through hands-on management, rolling up their sleeves, they learned the hotel business. By the time they turned it around, Blackstone turned a catastrophic loss into a $14B gain.
This is a savvy purchase. The market place should pay attention. I predict that this is not the last move that Blackstone is going to make in the hotel industry. They might make further acquisitions. They might reposition the brand. They might use the Extended Stay America brand as a launch point to purchase distressed assets that can complement the existing portfolio.
Today's question come from David in Belize.
Love the show and thanks again for all the work you put into it. We always hear if you see a problem, find a solution.
I see a big problem in Ambergris Caye Belize in parking. I think we could help the downtown area since there is always no parking and streets very congested.
We would have challenges as to locating a lot. The lot if we found would be around 50’ x 70’ . The garage would be for golf carts and we can do 4 or 5 floors.
We could do concrete, steel or a combination of them. I would want an elevator or 2 and maybe 2 entrances and exits. But 1 may work. So, 2 people working 2 shifts so like 5 people. Plus, maybe a maintenance person.
I feel we would get a lot of long-term workers paying and then the tourist.
The other challenge is the hourly or daily fee. I see some parking lots lot’s charge like $25 USD a day. The airport charges $2 just to go in and $25 USD a day as well. I need to do some more research but there are no garages here other then just empty lots they rent spaces out in Belize City and places like that.
I was wondering your thoughts on a syndication on a parking garage. The payback would be a bit long
The spaces would be like 100 for the 5 floors. After the setbacks, road drive paths. Maybe $800k to $1M to build. At $12.50 per day average Seems like the umbers work at 50% occupancy.
David, thank you for the kind words and this is a great question. I’ve been to San Pedro in Belize and I know exactly of the parking problem you’re speaking about. It’s a dense area and there is very little parking. There are narrow streets packed with small shops and lots of pedestrian traffic competing with golf carts for a clear lane. The town has lots of character, even if it seems a little chaotic a times.
Parking is one of those real estate plays that are not very sexy, but can be a great investment.
In fact, one of the largest companies in France called Vinci made its’ wealth globally by investing in parking lots all over the globe.
The problem with parking lots is that when many of the transactions are done in cash, for whatever reason cash has a tendency to go missing and not be fully accounted for. If you have a parking lot attendant who is handling a lot of cash and they’re earning only a few dollars an hour, the temptation is simply too great for them to pocket some of the extra change.
Even if you make the parking lot attendant a partner in the business, they could still steal from you. In tropical locations like Belize you could experiment with electronic payments exclusively, but I don’t know if that would be a barrier to adoption. It would probably work with tourists who regularly carry credit cards. But the locals may choose not to use it.
I would test market your idea on a limited basis with an existing ground level parking lot. Structured parking is expensive and you need to gain some operational experience in the local market to determine whether the idea will work. That will make for a much more compelling value proposition when it comes time to raise the capital for the construction.
Finding the right location for a parking lot can be a challenge. Sometimes, you may find an old building that is condemned or functionally obsolete. Parking can be a very viable temporary investment. You buy the derelict building, demolish it and build a temporary parking lot for a year or two while the developer who will ultimately develop that location gets their plans and financing together.
You may be able to propose a deal with a local developer to operate the parking on their behalf in order to gain first hand experience with managing a parking operation on the island.
On today’s show we are talking about how to win in a super competitive environment. There is no question that today’s environment resembles more of an auction than a true market place.
We see it consistently in the single family home market and even in the market for multi family apartments. Last week a colleague of mine was shaking his head at the sale of a rural single family home with no municipal services that sold for $500,000 above its fair market value. The buyer was so frustrated with attempting to buy in the core of the city that they overpaid simply to buy some acreage.
I’ve observed sales of apartment complexes that frankly make no sense. Some sellers are demanding that buyers deliver a firm offer with no conditions, or a conditional offer with $200,000 non refundable deposit in order to be eligible to bid on the purchase. Offers without these conditions will not be considered in the words of the listing agent. The apartment complex in question is an older property with obvious deferred maintenance in a lower income area of Dallas.
I personally would never make a purchase under those conditions. Yet it appears that some buyers are willing to go there. So if you are a sane rational buyer, how do you win in this environment?
Do you lower your standards and succumb to the insanity?
The best deals are done off market so that you stay out of the auction environment. But what if you can’t seem to find these off market deals?
The auction buyers are obsessed with speed. They want to see a new listing. They will offer on a listing that is hours old. If a listing has been on the market for 30 days or longer, the auction buyer automatically assumes that there is something wrong with the property, that the property has been rejected by the the competitive buyers. It can’t possibly be a deal if it’s still on the market after all this time.
What if the assumption is incorrect?
You have the entire auction marketplace looking with anticipation at new listings. They want listings that show 1 day on market. They are not focused on the listings that show 25 days or 35 days on market, or 60 days on market . Those listings are stale. In truth, some of those 25 day old listings were on the market for one day, they were conditionally sold for several weeks and then reverted back to being an active listing. In truth they’ve been on the market for two days, but the listing shows 25 days because they were conditionally sold for 23 of those 25 days.
The number of buyers for the stale listing is reduced dramatically. You might be the only bidder for a property that just came back to active listing.
So how do you ensure that you get a good shot at these properties? You track the properties that show as being under contract. You let the broker know that you are a patient buyer and that you are interested if the property goes back on the market. You are in a different category than the other offers that were ultimately rejected 25 or 30 days ago. Those buyers have moved on to other properties. You are at the front of the line to buy a cancelled contract.
In an environment where properties are selling above asking price, some relative bargains are possible.
If you want to get out of the auction environment, then your first choice will certainly be the off market property. A close second could be the cancelled contract that is unfairly labeled as a stale listing.
Today's show is the third in a series with Sheraton hotel heiress Mitzi Perdue. On today's show we're talking about growing up in a hotel family overcoming personal adversity, multi-generational wealth, and legacy. If you haven't heard the first two segments, you may want to go back over the last two weeks and listen to those first.
To connect with Mitzi and to support her efforts combatting human trafficking, visit her website at winthisfight.org.
Justin Sliva specializes in buying land that people have largely neglected. This is a fascinating story of how parcels of multi-generational land get forgotten and can be purchased for a bargain price.
You can connect with Justin at CasualFridaysREI.com where he also hosts a weekly podcast.
This question comes from Tomas.
I believe that on a previous podcast you mentioned that there is an expanding opportunity in the market for short stay accomodations. There are folks that are looking for 1-3 month stays in their local markets to fill the gap between moving from one property to another.
Do you think that it is possible to have a small boutique hotel with regular guests and a floor of longer term (1-3 month) guests all under one roof? Or are there simply too many negative issues. If so, would such an arrangement even be desirable from an asset management perspective?
I would love to get your perspective on this.
Best,
Tomas
Tomas, this is a great question and I love the way you’re thinking. What you’re describing is following one of the basic rules of business. That is, you’re solving a business problem.
The question is whether the hotel product in question is a suitable solution for the problem you’re outlining.
The problem exists in a number of specific areas. In business the more precisely you can speak to your target customer, the better the connection. You have a few distinct problems that can be solved here.
- A seller is reluctant to sell because they know it’s going to take a while for them to find a replacement property. What if the realtor could present a solution to the problem of the seller has no place to go. So they don’t put their property on the market.
- Maybe their replacement property is a new construction home and it’s going to take months for the new house to be built. But they don’t want to carry two loans. It would be better to rent during the period of construction so that the capital from the sale can be used to build the new house. Carrying double the debt might feel high risk for some home owners.A tailor made rental for the temporarily displaced homeowner could be perfect.
- Maybe the seller has a new house under construction and the builder is delayed. This happens with alarming regularity. There is clearly a market for solving this problem of delayed new home closings.
So the question is what is the right product to meet that needs of that target client.
When you say a hotel, I would assert that this would need to be a suite hotel with full kitchen, a large enough work space, and enough breathing room to be a viable location for a few months. There are very few hotels that meet that description. If it’s an extended stay hotel with high quality beds and high quality amenities, it could work.
If the hotel guests and the medium term residents are segregated on separate floors, that may be enough to entice medium term guests.
I think that the first reaction from a potential guest at the thought of staying in a hotel room for 6 months would be negative. So it would need to properly positioned.
But if you can market it as an extended stay residence that happens to be co-located on the same property as a hotel, it could work. It’s increasingly the trend in hotels to double brand a single hotel property with two different brands within a hotel family.
You will see a Residence Inn co-located with a Marriott Courtyard on the same property.
Another key to marketing this to clients would be a word of mouth recommendation from the real estate agent who is brokering the deal, or the builder who is responsible for the delay.
One of the objections is the perception that a hotel room priced on a nightly basis is going to be too expensive compared with a monthly rental. While the hotel might be willing to discount the nightly rate when renting by the month, the perception is still that the nightly rate is going to be too high.
In order to satisfy the client that you have the right product, I believe the product will need to be branded and positioned as a monthly, all inclusive, medium term executive rental.
On today’s show we are taking a look an how office buildings are falling over like dominos. Of course I’m speaking in metaphors.
About three years ago I was presented with the opportunity to purchase a medical office building that was 50% vacant. The price was great. The building was owned by 8 partners that included doctors within the building, a dentist and a pharmacist.
This 27,000 square foot building had a lot of potential. The increasing number of small businesses that provide independent consulting services to government and the tech industry would be perfect for such a building. Technology startups would be perfect tenants. The vision painted by the seller was amazing.
Well, I didn’t quite see the vision. I saw a dying building. The dentist who was a part owner in the building rented space across the street in a brand new construction ground level commercial space with more parking and large modern windows. Dentists are great tenants. They put a ton of money into tenant improvements. They put lead lining in the walls to provide Xray shielding. They install plumbing, high pressure compressors for their air drills, air handling. A dentists office is not a transient tenant. Once they’re in, they’re not moving. But here we had a dentist who was a part owner in the building who had a financial incentive to not only have a thriving dental practice, but also a successful business. When the dentist moved across the street, it said to me that the dentist saw the building as a liability to his business, not an asset.
That was all I needed to know and I didn’t buy the building.
Fast forward to 2021 and in hindsight that decision not to buy is looking better than ever. Office buildings all over North America are experiencing falling occupancy. Our market was already oversupplied with office space. Office vacancy was averaging 12% for the five years prior to the pandemic. By 2019 vacancy was 8% just prior to the pandemic, and then we saw vacancy steadily increase throughout 2020. But understand that commercial office leases are usually multi-year leases. Decisions to vacate space made in 2020 may not appear in the market until this year, next year, or the year after.
A year ago, Interrent REIT purchased a 50 year old 11 story office building for $21.8M on the edge of the downtown with a plan to convert the building into 153 apartments. A 50 year old office building would have a difficult time competing with new product in the downtown core. It would take a substantial refit to turn it into Class A space. Even then, it would never capture top rental rates. When you layer the high rate of vacancy on top, maintaining the building as an office building would not make financial sense.
In the latest news, the developer of a planned new office tower in San Francisco announced that Salesforce has apparently withdrawn from plans to lease a major block of space at a planned San Francisco office tower, according to comments made by one of the developers during a public hearing Monday.
At that meeting it was disclosed that the “initial lease commitment” that the developer had for the unbuilt 61-story Transbay Tower “is no longer in hand.”
Another project, Oceanwide Center — a 2M SF project near the Salesforce tower was proposed to be the city’s second tallest tower. Construction is now stopped. The GC is a company called Swinerton. There is currently a dispute on the roughly $60M that is allegedly owed to Swinerton on that project.
It doesn’t matter whether we’re talking about a 27,000 SF medical office building, or a 1.5M square foot project, all of these offices are struggling. These buildings are an endangered species with the pre-pandemic economic model. It’s going to take some price discovery to find the new equilibrium of fair market value.
Today’s show is a retrospective look at one of my favourite hotels in North America. It’s a hotel that I’ve stayed at many times over the years.
The Fairmont San Jose — Silicon Valley's largest hotel — has filed for bankruptcy and is closing its doors, at least temporarily. On Friday of last week, the hotel informed guests rather abruptly that they needed to leave. That included an NHL hockey team that was in town to play against the San Jose Sharks.
If it does reopen, though, it likely will be under the flag of another brand.
FMT SJ LLC, which operates the hotel, filed for Chapter 11 bankruptcy protection Friday. The company expects the iconic 33-year-old hotel, located downtown on the east side of Plaza de Cesar Chavez, to remain closed for two to three months. The company hopes to use its bankruptcy to get an extension on its mortgage debt, end its agreement with Fairmont Hotels, and find a new hotel brand to partner with that will provide the hotel with new financing.
The company purchased the hotel from Maritz, Wolff & Co., a real estate investment firm headed and co-founded by Lew Wolff, one of downtown San Jose's most influential developers.
Wolff's firm purchased the hotel from the San Jose Redevelopment Agency for a reported price of $36.7 million in 1996. At the time, the hotel was at risk of falling into foreclosure; Maritz, Wolff & Co. helped to stabilize its business. It also constructed a 14-story annex to the hotel that was completed in 2002.
This is a marquis hotel. It’s in a great location. It’s a terrific property. The dispute at this stage is about money. It’s not a question of whether this hotel will re-emerge as a going concern. Of that there is little doubt. What’s not 100% clear is the ownership structure of the hotel. Will it be the same owner operator? Will the lender take a haircut? Or will the lender attempt to foreclose and take possession of the hotel? Will the hotel owners require an injection of capital to stay alive and retain their ownership position?
At a time when about 20% of the hotels in North American are in default on their mortgage debt, we can expect to see more surprises like this.
On today’s show we’re talking about the three areas that I am seeing the most technology investment with venture capital and angel investors.
The pandemic has served as an accelerator and has exposed weaknesses in a number of sectors. All of these areas of innovation were on a growth trajectory through the natural evolutionary course of the marketplace.
Innovations get funded when they solve specific problems. This requires a clear statement of the acute problem.
The first area that was dramatically impacted by the pandemic was healthcare. Many family medicine doctors and specialists had to adapt to new protocols. In particular, we saw many doctors resorting to telemedicine, attempting to diagnose over the telephone and limiting in person patient care to the absolute minimum.
Tele medicine is one area that is begging for innovation. The US military has been using telemedicine within its own proprietary communication systems for years. But there are very few well developed solutions for public health or for family medicine.
Would it be possible to integrate certain diagnostic or measurement apparatus into a smart phone app that the doctor can rely upon? While large advances have been made in electronic medical records, significant delays still exist between pathology testing labs, x-ray labs, and the attending physician’s desk.
The second area that is crying for innovation is educational technology. The classroom on zoom is better than a webinar, and it’s better than watching a movie. But it’s a long way from optimum. Zoom was not designed to be an electronic classroom, nor was Microsoft Teams. This is an area with lots of opportunity for innovation. An integrated platform for teaching and testing doesn’t exist.
There are a handful of trends underway in edtech. The biggest area where technology stands to improve education is by personalizing education. We’ve gone from a world that focused on everything for the masses to a world that is focused on the individual. Academic records are being sent electronically these days. But these records are prone to tampering. Blockchain technology can solve this problem.
The third area is retail sales. The internet has enabled an increasing proportion of sales to go Direct to Consumer (DTC). The question is which search engine should be used to find the product you’re looking for? Amazon is a search engine, an e-commerce engine, and a distribution channel.
The direct to consumer model doesn’t require a platform like Walmart or Amazon. You want an organic eucalyptus based insect repellant made by monks in Tibet? What’s that? Walmart doesn’t carry it? No problem. In the world of direct to consumer, you don’t need Walmart or Amazon or Alibaba. You simply need to be able to find it using a search engine. There are emerging specialty search engines out there. It’s not just the world of Google. Pinterest is a search engine. Etsy is a search engine. Direct to consumer is an area that is still a wide open field waiting for improvement. Shopify is one company that has made significant inroads in the new world of direct to consumer.
So why am I telling you this? What does this have to do with real estate? As I’ve said on previous shows, the next shift in real estate will come from the world of online innovation.
Let’s imaging that 1/3 or 1/2 of visits to the doctor’s office can be replaced with telemedicine. Would that affect the design of doctor’s offices, of medical clinics, and possibly of hospitals? I think the answer is yes. A medical office building that ignores these shifts is destined to become a dinosaur faster than necessary. Will the design of a classroom change with innovations in edtech? Will the design of a university campus change if 50% of the classes are held online? Will the world of retail be further affected by direct to consumer model? The answer to all three of these questions is clearly yes.
Today’s show is a little bit of rant. I get morally offended and outraged when I see people within the general public taken advantage of. I recently came across a homeowner who was looking to renovate her home. We’re talking about the addition of a 12x14 bedroom, the redesign of a room to create an ensuite bathroom, new siding, new windows, new insulation, the addition of a garage and some landscaping. Contractors were quoting her an all-in cost of close to $400,000. My initial reaction was to say that she could be an entirely new house for that price. A detailed review of the quotes showed the problem. A simple amount of education could save this homeowner hundreds of thousands of dollars. I consider these types of quotes to be outright theft. There is nothing criminal about charging a high price. If the grocery store starts charging $10 for a kit-kat chocolate bar, there is nothing compelling you to spend $10 for a chocolate bar. But when that happens, then everything else in the grocery store is called into question. So if you don’t know construction pricing, and more than one general contractor gives you a high price, then you might be tempted to think it’s normal. Let’s look at a few specific examples from the quotes this poor homeowner received. Let’s start with the bathroom. It’s a relatively small bathroom at 5 x 12 feet. The quote for the tile work was for $10,000. If we tiled the entire bathroom, across the entire floor, the shower floor, and all the walls from floor to ceiling including behind the cabinets, there are 332 feet of tile area. Let’s say that we hire an expensive tile installer at $8 per square foot, and let’s say that we spend $6 per square foot on the tile which is more than triple what a builder would pay. If you add all of that up, the most you could spend on tiling that bathroom would be $4,650 on the worst day ever. How the contractor justified their quote of $10,000 is a mystery to me. So the question is, how does the average homeowner avoid paying these types of inflated retail prices for modest construction work? Simple home remodelling projects like this are small projects. The really small contractors are the ones who are often gouging customers. I call these contractors 2 guys and a pickup truck. Everything about them is inconsistent. They don’t show up on time. They don’t keep their word on pricing. They charge too much. They take advantage of homeowners who don’t know any better. The true professionals in construction on the other hand are a pleasure to work with. They work quickly, methodically, fairly. There is pride in workmanship. They spend the first half day on a job site measuring and marking with a laser level. They are slow and careful at the beginning, and then accelerate when it comes time to do the construction. They’re faster than you could imagine. But unless you’re prepared to offer them full-time employment, how do you get access to them? Well, it turns out that many of these professionals are willing to work evenings and weekends for a little extra pocket money. These weekend warriors will work for the same wage as their full-time employment. They will do quality work. They will be fast. But don’t waste their time picking up supplies. Make sure the materials they need are on the job site before they arrive. The most difficult job to get done with quality people is the one that is too small for the major construction firms and too big for the weekend warriors to get done on evening and weekends. But if your goal is to get a job done at a reasonable price, with high quality, figure out how to carve it up into chunks that are small enough for the weekend warriors to bid, commit, and complete. If you do, you’ll save more than 50% compared with the shark infested waters of retail home renovation contractors.
Randy Blankstein hails from Chicago where he specializes in single tenant lease commercial properties on a nation-wide basis. On today's show we're gazing into the crystal ball to see the future of retail commercial space. To learn more or connect with Randy, visit the bouldergroup.com.
Robert Helms is my guest today. He's the host of The Real Estate Guys Radio Show, now in its 25th year on the air. Robert is a dear friend, a fellow developer and investor with projects both in the US and internationally. On today's show we're talking about navigating the past year and an upcoming event (yes live) in Dallas. To learn more send an email to syndication@realestateguysradio.com.
Enjoy...
Carl in Ohio asks:
I’d love to get your input on 3D printed homes, and wonder if you have considered putting together any projects for that and raising funds for it.
If you have any free time, I’d love to get your input on it. You’re one of the few people I’ve invested with that has a very diverse technical background and can look at a topic to see if it has a potential for exponential growth, or is gonna be a dud.
Have a great day, and thank you for your time.
Carl,
This is a great question.
First let’s frame what we’re talking about. This is not the same as the nozzle that puts out a narrow strand of nylon to manufacture small components in a lab environment. We’re talking about erecting a large truss system that is wider and higher than your house and has a nozzle on a three dimensional track. The nozzle squeezes out a uniform stream of cement according to the computer generated 3 dimensional drawing that is loaded into the system. The nozzle moves at a pretty good speed of about 6 inches per second. Current generations of 3D printers are capable of finishing a 600 square foot structure in about a day if it’s running continuously. Cement is an excellent building material. It’s strong and relatively inexpensive. Estimates from one manufacturer are about $8-12 per square foot in cost. One manufacturer claims that the same surface can be used on both interior and exterior. All that is needed is a coat of paint. Raw concrete while workable, is not always an acceptable interior finishing surface. So if you don’t want drywall, you might save a little more cost.
But to determine whether 3D printing makes sense, let’s look at the budget for constructing a conventional stick built home or apartment complex.
The actual framing of a building or house accounts at most for 15-20% of the hard construction cost. The average is around 17%. So even if you cut the cost of the material and labor in half, at most you’re saving 8% of the total construction cost. The developer doesn’t really care what material is being used for the framing. If wood prices go up, they’ll switch to steel studs. If steel goes up, they’ll switch to masonry. You get the idea.
The expensive part of the construction is the plumbing, electrical and HVAC. None of these are candidates for 3D printing. A typical 2,000 square foot home will attract about $12,000 in plumbing costs, $14,000 in HVAC, and another $12,000 in electrical. The interior finishes are most expensive in the kitchen and bathrooms. You’re looking at about $4,000-5,000 in appliances. Flooring is about $6.00 per square foot installed. Yes, you can go cheaper, but I’m talking basic builder grade materials for new construction.
When you add it all up, you’re looking at between $120-$134 per square foot for the hard cost of construction.
The largest variable cost in a project is site related. Maybe the soil isn’t suitable for supporting a building and needs to be replaced with compacted fill that is structurally stable. Maybe there’s bedrock that must be broken or blasted. Maybe the city forces you to build underground stormwater detention in cement pipes at $100 per linear foot. These types of site related issues can add millions to the cost of a project with zero added value.
When when you add the land cost, the impact fees, architecture, engineering, insurance, sales tax, the cost of borrowed money you can have a total cost of nearly $200 per SF. In dense urban situations, the cost could be much higher where the cost of the land is equal to or greater than the cost of construction. In that instance, saving $2-5 per square foot for a 3D printed structure is not a game changer. It’s single digit percentages savings.
On today’s show we’re taking a look at the impact of the emergence from the pandemic. We are facing a renewed sense of optimism in the economy with signs of dropping case counts for new infections. We have states like Texas and Mississippi fully opening their economies and dropping mask mandates completely.
But the path from A to B is rarely a straight line.
Some of the dropping case counts represent a false sense of security. A small but growing proportion of these cases are the so-called mutant variants that have higher rates of transmission. The UK variant is nearly 50% more transmissible than the original SARS Cov2 virus and represents a fast growing percentage of the new cases. It only took a few months in the UK for the new variant to become the dominant strain of the virus. So while the current case counts are dropping, the new variants represent a threat to the pandemic recovery.
There is no question that the emergence from the pandemic will vary widely from one geographic region to the next.
Cities that have a high exposure to travel and hospitality like Las Vegas will experience a protracted recovery, even if governments throw the gates wide open tomorrow. It is going to take time before the public at large regains the confidence to travel en masse for vacations. 2021 will continue to be a second year of social distanced, driving distance vacations.
Friends of mine who have taken recent trips report less than 25 passengers on aircraft capable of carrying 150 passengers.
The rate of vaccination is another variable. As of the first week of March, some states in the US report less than 15% vaccine penetration. Other states are currently at 25-30% vaccine penetration. These differences will also
Israel has led the world in terms of vaccine rollout. So far 85% of those over age 60 have been vaccinated, and 40% of those aged between 16 and 60 have been vaccinated. Recent reports from earlier this week show that Covid-19 infection rates for those who have been vaccinated in Israel are one in 1,500. If these results are mirrored elsewhere in the world, the outlook for an end to the pandemic is promising.
But it will take a long time before the rest of the world catches up to Israel. President Biden made a bold claim that enough doses will be available in the US to fully inoculate the population by May. So far as of March 3, the US has administer 23 doses of vaccine per 100 people. But in Canada, that number sits at 5 doses per 100 people.
There are a few warning signs for investors in hospitality. Of course the hotel industry has been hammered in 2020 due to the pandemic. There was a lot of new supply under construction in 2020 which could not have foreseen the pandemic or its impact. Four markets stand out with more than 9% of the existing inventory of rooms under construction. Those four cities are Nashville, Austin, San Jose and New York.
Ten markets have between 6-9% of their existing inventory under construction. Such a large increase in supply coming online in a short period of time leaves an uncertain future for hotels in those markets. Those 10 markets are Portland, Salt Lake, Denver, Savannah, Oklahoma City, Jacksonville, Columbus, Charlotte, South East Florida, and Detroit.
Hotel occupancy was 45% for the year and currently about 20% of hotels are in default on their loans. But lenders appear to be working with hotel operators and the number of forced transactions remains small at the moment.
Not surprisingly, hotels in sun belt destinations have fared better than most other areas. The lone exception is Hawaii where hotel occupancy is one of the lowest across the US.
The five worst performing markets for travel and leisure were New York, Boston, Chicago, Seattle, and San Francisco. All of these markets show declines in rev per available room in excess of 65% compared with 2019.
On today’s show we’re talking about a tectonic shift that is happening in virtually every community in North America.
There is a lot of development land available in the core of major cities. Now as you’re hearing this you’re probably thinking, no there isn’t, not in my city.
But I want you to think about large land parcels that have the potential to be redeveloped. It is rare to find anything more than 5 acres in the core of a city. But these do exist.
What I’m seeing are the handful of shopping malls that have become functionally obsolete in each community. These shopping malls are every 4-5 miles apart. Many of them are dying.
At one time they had one or two anchor stores, maybe a Kmart or a Sears department store. These medium sized shopping malls were designed and built in the 1960’s and 1970’s. The large national brands have left these malls. The tenants are small independent businesses. You might find a real estate brokerage, or an insurance company, a dental clinic occupying space in the shopping mall. There might be a pharmacy or a walk-in medical clinic. But this type of use is no longer the shopping mall experience for which the space was designed.
Once an anchor to a mall is gone, it’s unlikely that a new anchor will be induced to occupy that space.
I’ve seen major development firms acquire shopping malls with a view to redeveloping those sites. They are land banking those sites in the short to medium term. It takes a while to put together a plan, get the community on board with the redevelopment of the site and complete the development.
I don’t typically give our listeners homework. But today I’m going to give you homework. This homework is for anyone who is truly interested in forecasting what is going to happen in their local community. So if that describes you, you want to pay close attention. The assignment is very simple. You mission, should you choose to accept it, is to document all of the dead or dying shopping malls. You want to figure out how large those parcels are and estimate what type of multi-family product could be developed on those properties.
Some might end up as a garden style apartment complex. Others might be a high rise project. In both cases, the limiting factor is almost always the parking density. You need to figure out will the project be limited by surface parking or structured parking. Parking nearly always consumes almost the same amount of land as the apartments.
So once you’ve gone through that analysis, you will be able to predict the projects that will come to fruition over the next 5 to 10 years. You’ll be seeing around corners and predicting what will happen in terms of new supply entering the market, before the zoning applications hit the zoning office.
The next thing to pay attention to is all of the dead or dying office buildings and make a determination which ones have the potential to be converted to residential, the hotels that have the potential to be converted to senior housing, and the ones that are functionally obsolete and can’t be repurposed.
We are at an inflection point in real estate. The pandemic has poured jet fuel on some trends that might have taken 20 years to play out. Now they’re going to happen in half the time or less.
When you start to look at a city through the lens of a developer, you can start to see around corners. Why? Because you’re the one who’s creating the bend in the road. If it’s not you, then it’s someone you know.
Dr. Lee in Michigan asks,
My question concerns the highest and best use of soon-to-be vacant commercial space.
It seems as if there are many assisted living facilities in my area and it's not really a business model I know very much about. However, I do have quite a bit of experience in value engineering and developing real estate. If I have 6,000 square feet of vacant commercial space (roughly 60 x 100) with all utilities available, would this be large enough to repurpose into an assisted living space in which I could build out and rent to an operator? The current, soon-to-be-former use is a combination warehouse and office space.
What else do I need to be thinking about with respect to the property's potential for this use versus any other use (besides zoning)?
Lee this is a great question.
You are correct that the property has the potential to be repurposed. Whether the building would be a good starting point for an assisted living project depends on several factors. The regulations that govern assisted living are unique to each state and province. In the realm of residential assisted living, some states limit the number of beds. In the case of Michigan where you are located, these homes are called adult foster care homes.
there are several different classifications. There are rules for homes having up to 6 residents, homes up to 12, up to 20 and above 20. The state publishes a handy 24 page document that provides some basic information. But in order to fully understand the requirements you will need to consult an architect who has experience in building these types of facilities in the state of Michigan.
But before you even go down that path, there are a few things I can tell you from being involved in the construction of these types of facilities.
The first thing you should determine is the supply and demand situation in your community. This involves visiting the existing homes in the area and making an assessment of their occupancy. You may find that the market is saturated with offerings compared with the current demand. However, the market segments into many different types of facilities. It might be over-supplied in one area and undersupplied in another.
The assisted living business is first and foremost a service business built on top of a real estate business. The financial performance it is dominated by the service side of the business.
You will find that the cost of your construction is not the determining factor in the success of your project. The 6,000 SF footprint you outlined should be enough to build a viable product. The homes we design are a little larger at 8,500 SF. But you should be able to come up with an efficient design that would fit in a smaller envelope.
The service offering can vary widely in price to the end customer. Some facilities focus on insurance paid and subsidized services. Some focus on customer paid. The pricing model might be a fixed price all you can eat type of offering, or it might be a la carte pricing. Talk to people who are in the industry and can give you a sense for how the economic model is constructed in your community.
If your facility is going to specialize in memory care, that might command a premium in the market compared with basic services. If you see a need for a particular segment that is under served, you could discover an opportunity. For example, maybe there is no senior housing that caters to those on a vegetarian diet or a vegan diet. Maybe there is no kosher house and the demand exists for say kosher or halal cooking.
The key to building a successful venture in this regard involves finding the operator that you are going to trust to run the business successfully, to qualify for and maintain the state license.
Today’s show is another book of the month book review. Our book this month is a brand new book called “Think Again: The Power of Knowing What You Don’t Know” by Adam Grant. Adam is a deep thinker. His book is a deep exploration of the question. “What do we know?”
Adam Grant is an organizational psychologist at Wharton. He’s one of TED’s most popular speakers and his books have sold millions of copies. His talks have been view more than 25 million times and his podcast called Work-Life is great. I listen to it regularly.
He’s been recognized as one of the world’s 10 most influential management thinkers. He’s a graduate of Harvard and completed his PhD from the University of Michigan.
Adam’s book Think Again examines numerous questions like:
What does it mean to be mentally fit? Normally we think that intelligence is a prerequisite. Intelligence is traditionally viewed as the ability to think and learn.
Yet in our current world, there may be another set of cognitive skills that might matter more: the ability to rethink and unlearn.
He examines how opinions and beliefs are formed. He looks at the history of research on the topic and how faced with the exact same circumstances, some people get attached to their thoughts. Their very identity is wrapped up in their opinion.
For others, they exhibit the ability to let go of opinions, to change their mind, and to remain attached to principles and values rather than beliefs and opinions.
Being wrong is often burdened with social stigma, with weakness. This is particularly true for men. So rather than believing what we see, we see what we believe.
In psychology there are at least two biases that drive this pattern. One is confirmation bias: seeing what we expect to see. The other is desirability bias: seeing what we want to see. These biases don’t just prevent us from applying our intelligence. They can actually contort our intelligence into a weapon against the truth.
Thinking like a scientist involves more than just reacting with an open mind. It means being actively open-minded. It requires searching for reasons why we might be wrong—not for reasons why we must be right—and revising our views based on what we learn.
“Arrogance is ignorance plus conviction,”
“While humility is a permeable filter that absorbs life experience and converts it into knowledge and wisdom, arrogance is a rubber shield that life experience simply bounces off of.”
What I love about Adam’s book “Think Again” is that he challenges both loosely held and even tightly held beliefs about the way we conduct ourselves. He doesn’t care that he might offend someone. He has the research to back up all of his assertions. His findings are at times counter intuitive. The conclusions often break the author’s previous beliefs. He had to unlearn some of his old ideas. It’s only then that we can grow past our own limiting beliefs.
Bob is the author of the book of the month this past month "The Go Giver". On today's show we are taking a look behind the curtain to understand the process of writing a book and being positioned as a thought leader. There are several powerful lessons in this at times intimate conversation with Bob.
To learn more or connect with Bob, his website is at burg.com
Bill Ham is a specialist in redevelopment of properties. On today's show we're talking about mass obsolescence of assets in the market that has not been factored into the housing metrics by demographers, city planners, or even investors.
Bill is based in Atlanta Georgia where he runs Broadwell Property Group. You can connect with him directly at broadwellpropertygroup.com
On today’s show we’re looking at the trajectory of interest rates for the coming months. This is widely covered in the mainstream news. If we only repeated what you could read in the Wall Street Journal, or on CNBC then this show would not be adding any value. So we’re going to dig a bit deeper into the analysis of the Fed Chairman’s remarks to the Senate Finance Committee earlier this week to make sense of what it means for real estate investors.
There were two major items of business at the Senate Finance Committee meeting this time around. #1 was to get the economic update and statement from the federal reserve chairman Jerome Powell. Second was to confirm Janet Yellen as Treasury Secretary. Janet Yellen was chair of the Fed before the appointment of Jerome Powell. So she is interacting with her counterpart in the Fed from the perspective of someone who used to occupy that chair.
When Janet Yellen was chair of the fed, she was beating the drum about the need to print money to keep the economy healthy. Now as Treasury Secretary, she’s beating that drum even louder even before being formally confirmed in the position.
Even before the Senate Finance Committee meeting, we have been seeing a lot of market activity.
The low interest rate environment is driving demand for refinancing of debt into lower cost debt. I can tell you from conversations I’m having with lenders that their origination desks are over-flowing with demand for refinances. This is true a traditional banks, commercial lenders, and even the loan insurers like Fannie Mae, Freddie Mac and HUD.
The department of housing and urban development divides the nation into regions and services loan requests out of their regional offices.
I’m hearing that the HUD office in Fort Worth Texas has such a backlog that they will not even assign an analyst to look at a file for three weeks after receipt of an application. The delay in the San Francisco office is now more than 6 weeks before they will even look at a new file.
Achieving inflation that averages 2 percent over time helps ensure that longer-term inflation expectations remain well anchored at the FOMC's longer-run 2 percent objective. Hence, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.
So this means that they’re going to hold interest rates low even once inflation is shown to be above the 2% target for a period of time. They reiterated the intention to continue the current stimulus until late into 2021 and likely into 2022.
Fed Chairman Jerome Powell said strong demand is driving Treasury bill yields close to zero.
“It’s a lot of demand for short-term,” said Powell. “There’s a lot of liquidity, and people want to store it” in Treasury bills.
Powell said Treasury instruments are the concern of the Treasury Department, and the Fed is more concerned about keeping its target fed funds rate in its targeted range of zero to 0.25%. So he recognized where the extra cash is ending up, and basically said that it’s Janet Yellen’s problem to issue the treasury notes.
Paradoxically, the yield on the longer term treasury notes has been rising in recent weeks. It’s an indication that the sentiment of inflation remaining low is not being widely accepted by the market. The dollar is losing value against major currencies and the yield for US Treasuries is going up.
The reason we focus on the 10 year treasury is that most permanent financing interest rates are based on a rate lock that is tied to the yield on the 10 year treasury.
The benchmark Treasury note jumped above 1.50% on Thursday afternoon after investors showed weak demand for $62 billion of 7-year notes. The 10-year note yield climbed 15 basis points to 1.54%.
On today’s show we’re talking about how to buy a business.
We are in the middle of negotiating the purchase of a business. The seller’s accountant proposed that rather than purchase the assets of the business we should consider buying the shares of the company instead. So on today’s show we’re going to do a deeper dive on the merits of a share purchase versus an asset purchase.
When you buy a business in its entirety, you’re buying everything within the business, all of its assets and all of its liabilities.
This has some risk to the buyer because liabilities come in two different forms. There are actual known liabilities, and then there are contingent liabilities that can be hiding beneath the surface.
I’ll give you a simple example to explain the difference between the two.
Let’s say that you borrow $100 from the bank. Then you owe the bank $100 and that gets listed on the company’s balance sheet as a liability.
But let’s say that you signed a contract and that contract has a clause which says you’ll defend the other party in the contract if they get sued for whatever reason. In legal terms, this is called an indemnity, in which you agree to indemnify or hold harmless the other party against a risk. For example it’s common to have an indemnity for the employees of a business in case they get sued in the course of doing their job. The employer would agree to defend the employee against a law suit that was brought against an employee if that suit was connected with the work they were doing for the company.
Now let’s say that a so far, there are no lawsuits against the company, or its employees. Let’s say that a year later, one of the employees gets slapped with a lawsuit connected with their work for the company. That potential for a lawsuit would be considered a contingent liability. But in truth, not only is it a contingent liability, it’s also an unknown liability.
Another form of contingent liability is a future tax liability. The tax owing is a function of a number of complex factors. Let’s say that the company has been claiming depreciation and that has the effect of lowering the cost basis of some of the inventory or equipment in the business. Let’s say that you then decide to sell that equipment and because it might have been depreciated for tax purposes faster than it actually depreciated in the open market, you now are facing a capital gain on the sale of a piece of used equipment. It could be a piece of equipment or a building. It doesn’t matter. The principle is the same.
So when you buy a company bu purchasing the shares of the company, you’re buying all of the assets of the company and all of the liabilities. In practice, it’s almost impossible to know the liabilities of the company.
When you purchase the assets of a business alone, you still have enough to continue the operation of the business. It’s a bit like saying I want to buy a deck of cards, but I only want hearts and spades because they’re an asset. You can keep the diamonds and clubs because they’re a liability. Oh and you can keep the joker as well because I don’t know what that is. I can operate the business just fine with just the hearts and spades.
A share sale looks so simple on paper.
An asset purchase may seem more complex at first. You need to dissect the business and list the parts of the business you want to buy. You will need an asset purchase agreement.
If the business you’re buying is going to have some intellectual property, then you may want to govern that with an intellectual property agreement.
If the seller is going to provide services to the buyer for a period of time, then you’ll need a transitional services agreement. The added cost and complexity of dissecting the business now is worth the benefit of knowing that the business cannot contain any landmines in the future.
On today’s show, we’re going to dissect a word where you probably think you understand the meaning.
That word is used often. It makes headlines. In fact it’s a highly abused word, especially in the news.
That word is “Economy”. You’ve probably attended a talk on the state of the economy. I’m going to emphasize, “the economy” as if there is only one economy. Some economic indicators you’ve heard are things like gross domestic product, unemployment, workforce participation, consumer price index. All of these metrics are used to describe the state of the economy.
Let’s run a little retrospective on the past 12 months. The past year has been among the most tumultuous in economic terms in recent memory.
In the United States the economy experienced a loss of 22.36M jobs over an 8 week period from February to April. That amounts to 14.7% of the workforce lost their jobs. But these job losses were not uniform at all. The worst states were Michigan, Vermont, Nevada and Hawaii all having job losses exceeding 20% in a matter of weeks. Michigan was the worst at 23.8% of all jobs lost.
At the other end of the spectrum Oklahoma, Wyoming, Nebraska and the District of Columbia all had job losses less than 10%. Oklahoma lost the feast jobs at 8.5% of jobs lost from February to the trough in April.
Let’s look at the recovery from April to December. How many of the lost jobs were recovered? Well the results vary widely.
Some states like New Mexico only recovered 31% of the lost jobs during the pandemic. Texas recovered 64.4% of the lost jobs and Idaho and Utah recovered 102 and 103.6% of the lost jobs respectively. In Utah and Idaho, the economic downturn has been erase like it never happened.
So for the year ending December 31, 2020 Hawaii is down 13.8% for the year, and Utah and Idaho are up 0.6% for the year. There is no one single economy.
For those who have lost their jobs, and exhausted their unemployment benefits, they’ve burned through their savings, maxed out their credit cards and probably dipped into their retirement savings in order to make ends meet. For them, the current conditions are among the hardest they’ve experienced in their life.
For the vast majority, those who have jobs, who kept their jobs, they kept their incom
e. They didn’t have much to spend it on. The personal savings rate across the US went from an average of 7% before the pandemic to a peak of 35% during the middle of the pandemic before settling out to an average savings rate of 18% for the year. Not surprisingly, with all that extra cash in the system, few places to spend it, credit card debt reduced by about 12% across the nation.
You see there is not one single economy. There are a number of macro economic forces that are at play. They will disrupt the current situation. Imagine taking a chess board, throwing all the pieces up in the air and seeing where they land. Some of the chess pieces will land in a vulnerable spot. Others will land in a winning spot. That’s called luck. If we look to the random nature of that jump ball situation, we will be either winners or losers. But all of that neglects that we have agency, we have the power to change our own personal direction to adapt to the market conditions as they are on the ground. That agency means we can make conscious decisions to play defence and wait it out, or play offence and capitalize on the market conditions. So what does that mean?
Business is nothing more than a sport of solving problems that people are willing to spend money to solve. If you can be seen in the market as a credible solution to a given problem, you can do good business.
It’s not the market’s job to come to you. It’s your job to solve a business problem that people are willing to pay money to have solved. When you look at the world through that lens, the economy is irrelevant. In fact, there is no economy.
On today’s show we’re talking about the link between online and offline and the world of real estate in particular. When I look to see where real estate is going, I look to online innovators. That seems counter-intuitive. After all, we live in an offline world.
When we think of the online world, your first thoughts might go to Facebook, or Instagram, or TikTok or ClubHouse. How could those technologies possibly disrupt the world of real estate? It makes no sense.
In my view, the disruption to the physical world is going to come from the online world. The catalyst for disruption in real estate won’t come from a new building technology per se. Although there are a number of innovations in technology that are changing the way buildings are designed and constructed.
I look to those companies that are upending business using technology. We’re talking about how Travis Kalanick, the founder of Uber, and most recently of Ghost Kitchen startup called Cloud Kitchens.
This was merely an idea a year ago. Today, some top chefs in NYC have abandoned their expensive real estate and are serving the take-out market out of commercial kitchens located in less expensive industrial space, rather than the prime location kitchen with the fancy ground floor restaurant dining room attached.
I attend a daily meeting with Glenn Sanford, CEO of EXP Realty. You might be wondering what I’m doing hanging out with the CEO of a real estate brokerage. I’m not a real estate agent and don’t want to be. Apart from the word of real estate, there’s no real connection.
What sets Glenn apart from others in the space is that he speaks like a software designer. He uses language, terms and metaphors that came out of the world of software development. It’s not an act. He simply exudes it. As we’ve talked about recently, When I look at the systems he has used to build his business, there’s no doubt in my mind that he is thinking scalability, the kind of scalability that can only be matched in an online world. His company has experienced the kind of growth that only a software company can achieve. It would have been near impossible in a bricks and mortar business.
It used to be the case that an impressive office with a sprawling lobby and layers of assistants made an impressive first impression for a prospective client, or an aspiring employment candidate. Today, that’s a distant memory.
I’ve been using zoom for meetings for several years now. But my use of zoom has expanded dramatically. Even in the past week, I have spent no less than 6 hours a day in zoom meetings on some days.
In December of 2019, zoom had about 10 million daily active participants. By March this had grown to 200 million and by April, over 300 million. How did zoom scale their enterprise by a factor of 30 in the span of months? The ease of use of zoom and the excellent performance made this possible. It turns out that Zoom uses Amazon’s web services data center. They’re one of the largest suppliers of third party data services. Amazon’s server farm was easily able to scale the service offering to meet the needs of zoom’s growth.
None of these shifts individually represent a major change. But cumulatively, the compound effect of all these changes on the design of real estate is significant. I don’t need to dedicate as much wall space for book cases anymore.
How many people used to have a video studio in their homes 20 years ago? Hardly any. Today, I know of dozens. If I was designing a home for this coming decade, I would be designing it differently compared with only a few years ago. Back in the day, homes and apartments used to have a built -in cabinet for the delivery of fresh milk. Today, nobody would even think of that. But a secure e-commerce locker makes a lot of sense.
We know that technology is changing rapidly. We have no idea what building technologies will look like in 30 years from now.
On today’s show we’re talking about what happens when your local bureaucrats make a mistake.
I’ve encountered the odd time when a plans examiner makes a mistake. These are relatively rare, but in retrospect they happen far more often than I care to think.
We’ve experienced these problems from time to time. But I also keep hearing about problems like this. In fact, I’d go so far as to say this happens with alarming regularity.
In the case of one of my consulting clients, the fire Marshall stamped a set of drawings and returned them as having been approved when in fact, the plans had never been examined at all. The property owner was under the impression that they had fire Marshall approval. About a month later, the building department admitted that the fire Marshall had indeed made a mistake and stamped the wrong drawings. These plans had never been looked at. Not only that, the fire marshall demanded a number of changes would be required to the plans in order to comply with the building code. Upon review of the requested changes, in the opinion of the architect, the fire Marshall had erred in their interpretation of the building code and that the installation of a complete fire suppression system was not required.
This second story involves a problem with one of our projects currently under construction. The plumbing connection to the city was approved. However, the plans examiner who was supposed to review the plumbing design retired in the middle of the permit approval. The plumbing drawing was given a rubber stamp but never actually reviewed. The chosen water meter was inappropriate for the size of project and would not have given an accurate reading. Naturally the plans department was very apologetic. It was a mistake that never should have happened. Nevertheless, the problem needed to be fixed. As a result, the metering had to be redesigned with an added onsite cost of $18,000. The problem was only discovered in the field by the building inspector during the plumbing inspection.
In another case, we had a plans examiner on a project who had trouble interpreting the rules for a property situated on the corner. The property was fronting on one street and had its side yard on the second street. This is normal on most corner lots. But the plans examiner was having a hard time figuring out where the front of the property was located. So they applied the rules for the front of the building at both the front and the side. They argued that the property essentially had two fronts, and therefore had to comply with the front yard setbacks for both. The plans examiner argued that the design did not comply with the zoning, even though the zoning department had approved the design.
In another case, we had a building nearing completion and the on site building inspector argued that the plans examiner who approved the design did not allow sufficient sprinkler capacity on the top floor of the building. The inspector demanded that we run a 5” sprinkler pipe up the exterior of the building to supply additional water pressure to the top floor. Now, for those of you who have been following the news lately, you’ll know that water pipes should not be allowed to freeze. Running a sprinkler pipe up the exterior of a building means that no water will reach the top floor for about 4-5 months of the year.
As you’re undertaking your projects, expect some surprises from your local building officials.
On today's show, we're back with Mitzi Perdue. Mitzi is known for being part of the founding family of Sheraton Hotels. Her husband was Frank Perdue of Perdue Farms. Today, Mitzi has dedicated her energy to combatting human trafficking. On today's show you will hear about how some leading technology could be effective in bringing an end to modern day human slavery. To learn more, connect with Mitzi at winthisfight.org.
Henry Daas is a serial entrepreneur and business coach from the NY area. On today's show we're talking about managing risk. To learn more, feel free to connect with Henry at henrydaas.com.
During the period from 1914-1918, the first world war gripped Europe. It was the war to end all wars. Wars are inflationary. The first world war was no exception. The US entered the War in 1917. The consumer price index was first developed in 1919, to track to the big inflation of the previous several years, an artifact of wartime, under which the prices of ordinary things available in 1913 had more than doubled. In the 1920s, prices settled a little, to about 170% of the pre-Great War 1913 level.
The permanent erosion of the dollar, the reality of which first became clear in the 1920s, forced savers to find some instrument that would pay them back in the old way, in money that held its value. The choice was made to capture, via stocks, the forthcoming profits of businesses.
During the 1920s, the booming stock market roped in millions of new investors, many of whom bought stock on margin. If a new offering came into the market, investors would pile into the stock causing it to shoot up in value. At the height of the 1920’s, there were so many initial public offerings that some of the companies didn’t even have an operating business underneath them. Nevertheless, investors piled in and their newfound paper wealth was cause for celebration. Those company founders who initiated the offering got to cash in on the wave of capital being thrown at the company.
Of course we all know from the history books how this turned out. On October 29, 1929 it all came crashing down. At the time, only about 1/3 of the banks were part of the Federal Reserve system. Thousands of banks that were not part of the Fed became insolvent. Investors who had margin accounts had to cough up the cash to cover their margin calls. Most didn’t have the liquidity to do so. Banks and brokerage houses called in loans on a massive scale.
We know that investing in companies that don’t have any income, nor any underlying operations is craziness. We know that high rates of leverage to purchase items that have high price volatility makes no sense.
So here we are in the year 2021. There have been a number of high pinitial public offerings this past year, despite the pandemic.
Some of these IPO’s have been different than the traditional IPO.
A special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an IPO for the purpose of acquiring an existing company. In 2020, as of the beginning of August, more than 50 SPACs have been formed in the U.S. which have raised some $21.5 billion.
So investors are being told to put up their cash to invest in a business that will complete acquisitions of come unknown companies in the future. You won’t know if the underlying company is a good buy at the time you make the investment. Just trust that the folks making these acquisitions know what they’re doing.
The securities and exchange commission created the securities act of 1933 for the purpose of protecting the investing public. There are stricter rules around how offerings can be made than existed in 1929. At the start of the 1920’s there was a global pandemic that killed more people than the preceding war.
Am I the only one who is seeing a parallel between the environment today versus the 1920’s? I realize that a blank check company isn’t exactly the same thing as a shell company with no business, but it sure looks the same from a distance.
History may not repeat itself exactly, but perhaps it rhymes.
Today's show is a reading of an article written by Simon Black on his Sovereign Man newsletter. It was so well written that I just had to share it with you. To learn more about Simon, visit sovereignman.com.
This question comes from Meg in New Canaan NY.
Hi Victor
Hope all is well with you and your family. I have a question with regard to sustainable building practices in real estate investment projects.
We have been designing our homes using more sustainable building practices for the past several years. Here in NY, the requirements for clean energy are set to get even stricter and, on top of that, we have a moratorium on new natural gas lines in our area that I don’t envision the state lifting in full. For residential, natural gas is not supplied to a development unless there is already gas on site and upgrades to the existing meter are not allowed. For commercial projects it is similar although I don’t know all the specifics.
I was wondering how you are handling the call for clean energy, energy reduction, and sustainability in your projects. As well, are you seeing any appreciation from the buyers/renters/investors for your efforts to provide cleaner energy and more sustainable, energy efficient buildings? Are people willing to pay more rent in these types of projects or willing to purchase for more of a premium? Do you have more or less investors interested in these types of projects?
Thank you for your time. I always appreciate your perspective.
Meg,
This is a great question. There are two ways to answer this question.
- Don’t develop in NY State. There are so many easier places to develop with less overhead, less bureaucracy, lower taxes, stronger demand, better profit margins, and on and on.
But that’s not a very good answer to your question.
2) If natural gas is no longer permitted for new installations, you could comply by putting in an electric system and simply pushing the environmental problem onto the electric utility. The old resistive systems are very inefficient and among the most costly to operate. Still, NY has access to relatively cheap power.
New York State gets 44% of its electricity from burning natural gas. 30% comes from nuclear, and tt buys 18% of its electricity from the James Bay hydroelectric project in Northern Quebec and Labrador. This environmentally friendly alternative to burning fossil fuels flooded 4,500 square miles of forest causing incalculable ecological damage to this ancient boreal forest. But since there were only about 5,000 native indigenous people living in the area, the impact was deemed acceptable and the project got pushed through and built with no environmental assessment. NY state still has four coal fired electric power plants in operation. Natural gas is among the cleanest burning fuels in existence. It’s a bit hypocritical that they’re converting coal fired plants to natural gas at the same time as they’re telling homeowners they can’t use it.
We have not found a meaningful metric that would make the benefit of a low emissions system attractive to tenants.
We have found that achieving energy efficiency requires a number of changes to the design. In fact, it has more to do with choice of materials than anything else. This includes more expensive, more highly insulated windows. Naturally, each of these choices increases the cost. Closed cell foam insulation is more effective than other forms of insulation. But again, it costs more.
By far the most effective and cost effect method of providing heat to a property is by using a geothermal system. This is like a heat pump, except that the heat source is the thermal mass of the ground rather than trying to extract heat from the winter air that is potentially very cold. These systems require a fair bit of land or a deep well in order to gain access to a meaningful heat source.
On today’s show we are taking a closer look at the macro economy. A trifecta of forces are amplifying the trade deficit which will ultimately cause price inflation in the West.
A critical shortage of containers is driving up shipping costs and delays for goods purchased from China.
The pandemic and uneven global economic recovery has led to this problem cropping up in Asia, although other parts of the world have also been hit. Many desperate companies wait weeks for containers and pay premium rates to get them, causing shipping costs to skyrocket.
This affects everyone who needs to ship goods from China, but particularly e-commerce companies and consumers, who may bear the brunt of higher costs.
Containers from Asia would normally be returned full with exports from the US or Canada or Europe.
But there is such a shortage of containers that the owners of these containers are not willing to keep them in the west for even a few days. These containers are being turned around empty. We already are facing a massive trade deficit with China that is now being amplified by the container shortage.
But it begs the question, if the world had enough containers in the past, why is there a shortage now? Where did all the containers go? Many of the containers are stranded in the west. Oddly enough, I’ve seen prices for used shipping containers in Canada drop to about $1,400. They still exist, but they are in the wrong place and somehow they don’t know how to get them back to Asia. Manufacturing of new containers slowed during the pandemic, which has further amplified the problem.
So shipping costs have tripled in a very short time.
We have oil prices now up at nearly $60 per barrel. US oil production is down by 1/3 compared with this time last year, making the US far more dependent on imports of expensive foreign oil. This will widen the already large trade deficit even further.
I predict that oil prices are heading even higher this year. $80 is easily within sight and $90-$100 a barrel is not out of the question.
The rising price of oil will widen the trade deficit once again.
There can only be one outcome from such a large trade deficit, and that is a fall in the value of the US dollar against the other currencies including the Canadian dollar, the Euro and the Japanese Yen.
When that happens, the direct impact to consumers is an increase in price for all these imported goods. I’m not talking about one or two percentage points. I’m expecting a 10-15% drop in the value of the dollar compared with the major trading currencies of the US.
Eventually the supply chain returns to normal and the extra inventory is going to be reduced. When it’s time to reduce inventory, the orders drop to zero for a period of time. This is the natural cyclical nature of many supply chains.
In the meantime, the government is busy claiming victory on the economic recovery that has been artificially created through the printing of Monopoly money.
As soon as the stimulus stops, so too does the illusion. The economy is like a hardcore drug addict, completely dependent on the next hit.
Expect higher prices for just about everything this year.
What a mess.
On today’s show we’re talking about how easy it is to purchase and configure a remote security camera system that can be monitored from anywhere in the world for the cost of not much more than an internet connection and a couple of hundred dollars per camera.
Security is one of those expenses that will rarely make you money. It can only cost you money, and on the rare occasion, save you from experiencing financial loss.
The most expensive form of security involves having a live person on site, either on a continual, or rotating basis. The problem with live patrols is that you can’t be everywhere all the time. You never know when an incident will occur.
Traditionally, security systems have been proprietary and costly. But the technology has improved significantly and it’s now possible to design systems that deliver campus wide coverage for a reasonable cost.
The traditional criticism of security cameras is that they don’t capture enough detail to clearly identify the people involved in an incident, especially in low light conditions.
The technology has advanced in several ways that have made security cameras a compelling choice for security.
One of the other criticisms is that crooks will intentionally disable cameras if they’re about to commit a crime. But here too, there are advances in technology that can make these tactics easier to catch.
Cameras are offering much higher resolution these days. This is critical when it comes to zeroing in on details in an image.
Today, the images are incredibly clear. More importantly, the software that controls the cameras is becoming smarter. Some software systems will use motion detection to zoom into the area of an image that is changing from one frame to the next. The static portions of an image rarely contain the relevant information about a crime in progress.
The software can trigger alarms based on a variety of events. The newest systems can detect the loss of signal at a camera and signal an alarm based on this. If you design your system so that a given area is covered by more than one camera, then it becomes difficult for a crook to disable a camera without being detected.
The latest software systems incorporate license plate recognition that is as good as the systems used by law enforcement.
When a crime is committed, unless you happened to be observing the cameras at that instant in time, you don’t know what video footage to review. The longer time has passed from the time of the crime to the notification, the harder and more time consuming it is to review the camera footage to deduce what happened.
Motion detection allows all those times when nothing is happening, which is the vast majority of the time to virtually disappear from your review process. The amount of time saved by eliminating the dead time is huge.
Many real estate investors live at a distance from their properties. These systems can remotely monitored over the internet. They have apps for both iPhone and Android that make remote surveillance easy.
We sometimes encounter situations involving employees that require investigation. It might be an employee claiming overtime when in fact they were not on site. It might be a harassment claim by an employee, or perhaps a resident.
These camera systems also record audio. If an assertion is made about an employee or a resident, the audio recording can often resolve the dispute.
Finally, some residents make false claims about a property manager. If there is a recording of everything that happens in the leasing office, the audio and video evidence can often be useful in arguing a claim in front of the landlord tenant board.
I’d like to introduce Mitzi Perdue (Perdue Chicken fame). Her husband was Frank Perdue. We start with the story of her romance with Frank, fitting for the Valentine's Day edition.
Mitzi’s maiden name was Henderson and her father was the founder of Sheraton Hotels. I’ve spent considerable time getting to know Mitzi in recent months. So many powerful lessons in the creation and growth of the Sheraton brand.
Mitzi is a member of the NSA. She’s a Methodist. She’s a philanthropist. She’s a teacher of life skills. The Henderson family is a fifth-generation family business. She’s a steward of priceless artifacts with the singular purpose of stopping human trafficking.
Today's episode is filled with powerful lessons.
Enjoy...
Denver Colorado based NineDotArts.com is a curator of art for installations of all kinds. Our guest Martha Weidmann is the CEO of the company. They access a network of over 10,000 artists to design the art experience for all kinds of projects ranging from hotels, multi-family residential properties, and offices to large-scale, mixed use developments and interactive public art installations.
On today's show we're talking about how thoughtful art selection can create a unique user experience that bare walls cannot by themselves.
To learn more, reach out to Martha at NineDotArts.com
On today’s show we’re talking about migration. Migration happens within the country for a variety of reasons. People have been slowly leaving the rust belt in favor of the sun belt. The trend has been alive and well for a couple of decades now. Today we’re going to take a deep look at Florida and what migration can tell us about real estate demand.
There are a lot of NY accents in the state of Florida and former New Yorkers make up 7.5% of Florida residents, more than any other state.
Florida has a very low proportion of native born residents, making up only 35% of the population. About 22.3% of Florida’s residents were born outside the US. This makes sense. Florida has long been a favored destination for people coming from Latin America. Spanish is widely spoken and I’ve had more than one Uber driver who only spoke Spanish and no English.
Over the past decade, Florida has averaged a net influx of population totaling 297,000 people a year.
2016 was a banner year for migration with nearly 2% population growth in a single year. That year 408,000 people moved into the state.
It’s projected that migration is going to average 305,000 a year over the next five years, a little above the average for the past decade. That amounts to 835 people a day moving into the state. That translates into significant demand for new housing. We’re talking about adding a city the equivalent size of Orlando each year.
That’s a big number.
In contrast, NY State lost 123,000 people in the past year. Illinois experienced a loss of 79,000 residents in the past year. The fastest losing state is California which lost nearly 200,000 to migration last year. Michigan lost 18,000 in the same time period.
So where are people moving in Florida? Where are they going?
The top growth market in Florida over the past decade has been the southwest cities of Fort Myers and Cape Coral. Jacksonville, Miami, and Port St. Lucie round out the top 5 cities in terms of growth.
The two largest home builders in Florida are Lennar and DR Horton. They consistently lead with the largest number of new building permits across all 5 of the major regions in the state.
In the realm of multi-family, South Florida lead the way with 12,000 units of new supply added to the market. The largest growth markets were Fort Lauderdale with 2,634 units of new capacity added to the market, and Downtown Miami and South Beach with 2,000 units and South Miami / Coral Gables with 1,700 units.
The greater Miami area picked up the lion’s share of the new growth.
But as always, real estate is hyper local. Northeast Miami has earned a reputation of being a bit of a rough area. NE Miami experienced a net absorption loss of 683 units at the same time that south Miami absorbed 762 units.
Some investors, particularly out of state investors tend to get into trouble by simply looking at the macro migration numbers.
I’ve noticed that the number one factor influencing local population growth is the quality of air service. The further you get from a major airport in Florida, the lower the property values, and the lower the percentage of population growth.
You have two major airports along the Gulf Coast. You have Tampa, and Fort Myers. Property values are at their lowest in Englewood which is about the midway point between the two airports. There are still waterfront properties In Englewood and Venice that can be purchased a surprisingly affordable prices. But with 800 people a day moving into the state, low cost of borrowing, low cost of living compared with the major NE cities, there’s continual upward pressure on prices.
The discussion of housing affordability is at the forefront of many community meetings. Three things stand in the way of affordable housing.
1) High cost of land
2) High cost of construction
3) Cost of servicing the land with the infrastructure
Unless you can dramatically reduce the cost of these three items, the cost of housing will continue to be high for those who are on fixed incomes and those who are lower on the income ladder.
It doesn’t matter who builds the house. It’s not the fault of the builder. If materials and labor dictate that new construction costs $130 per SF in many areas of the US, and if land contributes another $50 per SF of finished floor area, someone buying a 1500 SF house is going to need an income of $36,000 minimum in order to afford such a really small house. If a household is close to that income level, housing affordability is going to be a challenge. Two people in a household earning minimum wage will roughly afford to live in a mobile home and not much else. At $10 an hour, you’re looking at $18,000 a year in income per person. Very hard to make ends meet at such a low income level. We’re not talking about a teenager living at home, working at McDonalds part-time for a bit of pocket change. When you have independent adults in minimum wage jobs, they will quickly become the working poor.
On today’s show we’re taking a look a mobile home parks. Today about 10% of US households live in mobile home parks. They represent about 20 million home sites.
Most of these parks started out as mom and pop owned projects. Today, they’re a corporate affair with big business and family offices investing in them.
Mobile homes provide the largest inventory of unsubsidized, affordable housing in the nation, but many began as RV parks in the 1960s and 1970s and are now old, with rundown water and electric systems and trailers that have been long past “mobile” for decades.
As a park owner, the profit is in the lot rent, not the structures. Their prevalence varies widely by state.
Some states like Colorado have a lot of them. More than 100,000 people live in more than 900 parks across Colorado.
Many started as RV parks and then were converted to mobile home parks. But the infrastructure requirements for RV’s and mobile homes are different. Rv’s require 30A and 50A electrical service. But the building code treats a mobile home the same as a detached home and requires 200A service. The reality is that a mobile home will draw almost the same amount of electricity as an RV. The biggest demand for electricity comes from heating or air conditioning. Lights and kitchen appliances are insignificant consumers of energy by comparison. Nevertheless you will need to completely redesign the electrical system for a park in order to handle mobile homes if the park was not designed for it.
The next major areas that can be costly to upgrade for the long term are the water and sewer infrastructure. Most of these parks are outside the dense urban environment and rely on well water and septic systems rather than municipal services.
So why are these types of assets attractive to institutional investors?
The largest cost of operating a park like this is the staff. If the park is small at say 50 units, there is not enough income from the park to pay for the staff required to operate it. These only work as owner operated parks.
The cap rates for a well run, large sized park can be easily 14-15%, provided they are purchased at a good price. The specialists in operating these parks have developed strong systems for owning and operating them.
On today’s show we’re going to be talking about a proverb that you’ve probably heard you parents, or maybe your grandparents say. There are several different versions of it. But it goes something like this.
They will only help you if you don’t need it.
Strangely, banks have more cash on hand than ever. Consumers have been using stimulus checks to pay down credit card balances. The new loans from the SBA disappear from bank balance sheets once they’re forgiven. The residential mortgages that have been written in the past year, a record year for originations and refinance activity are usually securitized and sold into the secondary bond market.
Businesses are not borrowing to expand. They’re accessing lines of credit to hang on, but they’re not really investing.
As many as 8% of homeowners in the United States have accessed some form of forbearance agreement with their lender on their residential property. A forbearance agreement is when the lender says,
OK. I can see you’re having temporary financial trouble. Let’s postpone a portion of your loan payments. Maybe let’s have you pay only the interest payment, you can defer the principal portion of the loan payment for six months and we’ll extend the loan by six months. That would be an example of a forbearance agreement.
Today, less than 5% of the homes in the country are still in a forbearance agreement. Many have managed to exit the forbearance. The banks were encouraged to extend these types of terms to borrowers and at the same time, the Federal government issued a moratorium on foreclosures, in addition to the moratorium on evictions that protect tenants from eviction during the pandemic.
Those forbearance agreements have a term of 12 months. Over the coming 90 days, many of those forbearance agreements are going to be coming to a an end. So the question is, what happens at the end of the 12 month term? There is still a moratorium on foreclosures. The foreclosure process is not fast at all. But still it’s not clear what will happen to these millions of homes?
Will the lender extend the forbearance agreement? Will the lender modify the loan and extend the term of the loan, or lower the interest rate? Or will the lender move to put these loans in default?
It turns out that in order for the lender to approve the modification, they will need to re-underwrite the loan. If you don’t have a steady income stream you won’t qualify.
If you are receiving an unemployment check and you’re going to have trouble making payments on your home loan, you won’t qualify for a loan modification. You have to not need the help in order to qualify for the help.
Now the contradiction in terms should not be lost on you.
About a quarter of the forbearance agreements in existence will expire in the next 6 weeks.
I can tell you know from first hand experience that the permanent economic damage is starting to appear in a big way.
I’m seeing first hand businesses closing down, and I’m seeing these business assets being sold. I’m now seeing asset sales from businesses that are closing cross my desk about once a week. My team is conducting due diligence on multiple businesses right now as we speak.
I speak regularly with a specialist in asset disposal. These are the folks that will come into a business or a restaurant that is closing and remove all the equipment and cart it away to a warehouse to be sold at auction. They’re running out of warehouse space. They’re busier than they’ve ever been.
So the impending housing crisis of foreclosures on the scale of 2008 seems to be a distance away. Governments are trying hard to prevent the carnage in the housing market that was experienced following the 2008 financial crisis. All we can say right now is that government will continue to shovel cash into the system. Where this cash will ultimately end up nobody knows.
We have a great listener question today.
What are your Key Performance Indicators for underwriting a rental building (100m+) on Park Avenue NY in the current market conditions (decrease in occupancy and increase in concessions). There is also few sales comps in the last decade.
Thanks in advance
This is a great question.
This is an area of NYC that I know well. My father had his dental practice on the corner of Park Avenue and 73rd Street. My mother was an architect on the Pan Am building, now called the Met Life building on Park Avenue and 43rd Street.
Park Avenue luxury rentals are complex buildings to own. Most of the land underneath those buildings, North of Grande Central Station is owned by the Pennsylvania Railway and leased to the buildings.
Those ground leases are expensive which is part of what contributes to the high rent needed to merely break even on those assets. Eventually those buildings could be turned into condo buildings, or rebuilt to even higher density.
You are correct that these buildings don’t change hands very often. Most of the luxury apartment buildings that are rentals along Park Avenue have not experienced a large increase in vacancy. Many of these older buildings date back to the early 1900’s.
These buildings along Park Avenue are not a commodity. Those who are renting in those buildings are paying $5,000-$7,000 per month. They’re paying that because they want to be in that location. At the purchase price of several million dollars, even a rent of $7,000 a month is a relative bargain. So these tenants are not moving out in search of something cheaper. The turnover in these buildings is extremely low.
Some have been updated and converted into condominiums in the process. Those that have been converted to condo are pricing around $6,000 per square foot.
However, given the excess of supply that has opened up in Manhattan in the past two years, it’s going to take several years for this market to recover. I don’t believe we’re anywhere near the bottom of the market in NYC.
Even before the pandemic hit, there was a lot of new supply having entered the market. There was an estimated inventory of about 9,000 vacant brand new construction condos in the market. That represents about 7 years of inventory at 2019 absorption rates.
So who would be buying buildings like this at such inflated prices?
Buildings like this are considered to be trophy assets. The buyer of such a building is someone with a lot of cash to put to work. They’re looking for an asset where it’s more important to tie up a large amount of cash to protect it for the long term, rather than simply maximizing the rate of return.
Some international wealthy families have their money in places like Brazil or Argentina where they face considerable ongoing currency risk. More important than earning a high rate of return, is protection from 10-15% annual foreign exchange loss. These families sometimes like to park cash in a stable asset that is safe by virtue of being in a high demand location in a global gateway city like NY.
Some of these buildings are being valued at cap rates in the mid 3’s. That means the cash on cash return would be approximately 3.5%, with zero leverage. At that price the property won’t generate enough free cash flow to service any debt.
It all comes down to being clear on your investment criteria. We would not buy a building at a 3.5% cap rate. That’s not for us. We prefer to build new construction at a 6.5-7% cap rate and then refinance the property at a lower cap rate that is consistent with the market valuations around 5%. Remember, the difference in price between 3.5% cap rate and 7% cap rate is double the price. One of the key metrics is price and the ability to use debt to finance these buildings. But we’re comfortable building new construction. That’s not for everyone.
What is old is new again. On today’s show, we’re taking a deeper look at digital marketing. Why? Because every successful business needs to be known by its customers and real estate businesses are no different.
Some of you may be wondering why there is not a lot of advertising on the real estate espresso podcast. We have had advertisements in the past on the show. At most they were 30 seconds long. These days, the show is free of advertising.
Back in the good old days, marketers would spend money on advertising. They would run an ad on Television. We just finished watching the latest crop of advertisements during the Super Bowl broadcast. The ads that make their debut at the Super Bowl are aimed at a broad audience.
The advertisement for Doritos corn chips can’t directly be measured. We don’t know who will go out and buy corn chips as a result of the commercial.
Google had a very simple business model when it got into the paid search business. It charged $0.05 for the opportunity to be placed above the organic search results. Then some businesses realized that their competitors were buying that ad space. Every time someone searched for Home Depot, an ad for Lowes would appear. So Home Depot would offer to pay a higher price for that same ad. Eventually it became an auction environment. The advertising auction price would rise to the point where the equilibrium would be reached.
Google rose to becoming one of the most valuable companies on the planet with zero sales force. Think about it. They had zero sales force to achieve that market position. Yet, they managed to siphon almost all of the marketing value out of the system with zero sales force.
Business is changing. It used to be that commerce was sold through platforms. If you wanted your product to get to the consumer, you needed a platform. In some cases, you needed a company like Walmart to choose you. Or maybe a national supermarket chain needed to choose you. The business model was rarely direct to consumer. Google enabled companies to cut out the middle man and made it possible for smaller companies to go direct to consumer.
But there was still a large percentage of commerce that was not using search in order to reach the end customer. Nobody uses google to search for Coca Cola, or Pepsi.
With pay per click, the ROI is easily measured. The advertising is direct to consumer. There is no middle layer obscuring your view of the transaction. But some businesses are starting to experience a loss of return on these platforms. Competitors are hiring services to covertly click on your ads to waste your ad budget.
Some behind the scenes I’m hearing that Google plans to change the emphasis on new forms of advertising that are tailor made for the kinds of businesses that today are advertising on television, or on billboards.
The world of television has not changed its format in 50 years. They still subject the viewer to 5 minutes of advertising every hour. Google on the other hand has figured out that viewer attention span is much shorter than 5 minutes. Most viewers will not tolerate 5 minutes of advertising without changing channel. Google ads on the other hand are no longer than 15 seconds. Many are under 10 seconds.
What does this mean for you, as a business owner? It means that the already saturated online world is about to get even noisier. In my view, the world of interruption marketing is becoming less and less effective.
Those who master the art of building a relationship with their customers and with their audience are those who ultimately win.
Wes Hill hails from Chico, California (about 100 miles North of Sacramento). Wes and his partners own about 1,400 apartment units across several states. On today's show we're trying to gain insight on rent collection statistics across multiple geographic areas. Today's discussion highlights the plight of landlords across the country.
You can connect with Wes at MultiFamilyAssetAdvisors.com.
Today's show is not a real estate show. Our guest is Joseph Fung, founder of a technology startup company. We're talking about an innovative technology company that is training people how to become expert sales people involved in the sale of complex products. All companies require sales. As legendary investor and RichDad advisor Ken McElroy says, "Sales solves all problems".
To learn more, reach out to Joseph at uvaro.com.
Today’s question comes from Chris in Long Island. He asks,
You’ve talked about many different asset classes on the show, but I haven’t heard you talk about crypto currency? Why haven’t you talked about it, and what are your thoughts on crypto-currency.
Chris this is a great question.
In order to answer the question, we need to go back to the very definition of what is money. I don’t know if this is strictly a dictionary definition, but in my mind in order for something to be money it has to have three characteristics.
- It has to be a means of exchange
- It has to be a store of value
- It has to be easily divisible into different sizes so that you can use it to exchange for a wide spectrum of goods, services and commerce.
Let’s look at a crypto currency like Bitcoin, or Etherium, or any of a host of others and measure them against those three criteria.
- As a means of exchange, it’s not great. There are more methods coming into play. But you can’t just go out and buy groceries with a crypto-currency
- As a store of value, it definitely fails. The value of crypto currencies have been extremely volatile, both up and down. The value seems to be linked to the number of coins in existence and demand for coins. The notion of value is based on the promise that supply of coins won’t be inflated and debased the way the dollars are being printed.
- Most of the coin exchanges like coinbase allow for fractional purchase of coins. So maybe the third is satisfied.
But against the measures of the definition of what money needs to look like, I can’t see how anyone thinks that crypto-currency is money.
A bank has a centralized database where they keep track of how much is owed to you. That centralized database is not 100% perfect, but is pretty trustworthy. I assert that it’s trustworthy because I can virtually guarantee that all the listeners of this show have a certain amount of their liquid cash on deposit at the bank where it is being tracked in a central database.
The argument for crypto currency is that there is no bank that is keeping track of your funds. The database technology that sits underneath the crypto-currency is based on a technology called block-chain. The blockchain is a database that is distributed across thousands if not millions of computers and so there are literally thousands or millions of copies of your transaction being recorded across all those computers. The argument is that if someone attempted to tamper with the records in the database, it would be virtually impossible for them to tamper with all of those copies of your records. The inconsistency would show up instantly and the fraud would be exposed.
A single computer updating a single entry in a database can complete that operation in a few microseconds. But if you have to make the same change and recalculate the signature 1,000 times across 1,000 computers, or 10,000 computers, it’s clearly going to take a lot longer.
So blockchain technology is essentially a slow distributed database.
So crypto has some security features that are interesting and compelling. On the flip side, the inherent security doesn’t come for free. There is a technical problem associated with a distributed database and that is scalability.
Have people experienced huge capital gains in crypto-currency? Clearly the answer is yes. Have people lost money? Absolutely. In my world investing has the notion of value at the foundation. Speculation on the future price is not investing in my world. That’s gambling. I believe there is risk in everything we do. But when it comes to investing I want to take calculated risks, not play in a game of chance.
In a mastermind, you will often meet new people who each take a few minutes to introduce themselves. On today's show you're hearing a recording of my introduction to a mastermind group. If you're not part of a mastermind, I strongly urge you to make that investment in time and relationship building.
On today’s show we’re talking about the shift in housing supply during the pandemic and what it means for new builders. Housing starts were up 12% for the year according to data just published by the research team at Fannie Mae. Multi-family starts are down 13.6% compared with a year ago. Total housing starts of all types were up 5.8%. Now through the year we had supply chain disruptions which meant that some items were difficult to source. Those hard to find items naturally went up in price.
Lumber is priced as a commodity and lumber futures trade on the commodities markets like many other commodities including copper, pork bellies, wheat, and energy. Softwood lumber is priced per 1,000 board feet. The math is pretty easy to work out. If lumber prices are at $1,000 per 1,000 board feet, you’re basically paying $1 per foot. The simple test is how much would an 8 foot long stud cost you to purchase? You might expect it to cost about $8-10, and that’s exactly what we see.
We’ve seen lumber prices fluctuate wildly throughout the year. Prices dropped to $264 at the end of March, and were up to $367 by the end of May. Once summer hit and we had a succession of hurricanes make landfall all over the country. Lumber prices hit $970 in mid September before dropping into the $500’s for most of the fall. Through Q4, prices rose into the $800’s and have remained around $850-$880 for most of January.
The impact of these high lumber prices, along with all the other supply chain shortages is that overall construction cost has increased about 10-12% in less than a year.
The price increase by itself would have made it difficult to start any new construction. The saving grace has been that the falling inventory has pushed prices up to the point where higher sale prices have made new housing starts viable. If prices hadn’t jumped an average of 11% across the nation for existing home sales, the market conditions would not support new construction. Fortunately for builders, prices do support the higher cost of construction.
But there is also an opportunity. It turns out that steel framing is less expensive than wood. Steel framing has commonly been used in commercial construction. It has the advantage that it doesn’t warp or shrink, or swell with humidity. It’s also very strong in compression when properly installed with drywall.
Some might be tempted to switch materials from wood framing to steel in certain applications. Sadly it’s not that simple. The carpenters who frame out of wood are not necessarily experts on how to frame out of steel. In addition, your architect would need to design the building to have the proper lineup of materials and cross sections.
What you might save in materials, you could easily lose in labor, complexity and rework if things are not done properly.
But if you’re looking to build cost effective housing, this could be an area to explore with your architectural team.
Unless you’ve been able to secure your materials or your subcontractors are willing to reconfirm and guarantee pricing, you might face a situation where a subcontractor walks off the job and refuses to honour their contract. You could sue them, but at the end of the day, you have a project to complete and a law suit won’t get the building finished on time and on budget.
2021 is turning out to be a year of value engineering, where the owner, the architect, and the general contractor will need to get creative about adapting to material shortages, price jumps, and optimizing your negotiations with subcontractors.
On today’s show we’re going to pick up on a story that we covered several months ago. The headlines these days are about Covid-19, it’s impact, and the slow vaccine rollout. The papers are headlining updated economic stimulus plans, the surging price of silver, surging AMC stock prices and the military coup in Myanmar.
Frankly, these are all important, but there’s something far more important to pay attention to, and it’s not making headlines.
I’m talking about the handling of the situation in Hong Kong. Depending on how the world responds to the Hong Kong situation, will likely determine how China acts when it comes to Taiwan. Hong Kong is the dress rehearsal for Taiwan in my opinion.
You might be wondering what all of this has to do with real estate investing. Stay with me and I’ll make the link in just a minute.
One of the things that can dramatically affect local real estate is migration. When people pick up and leave due to political situations, we can see large scale migration.
Two weeks ago the Hong Kong government told UK citizens that they will need to choose between the having British status or Chinese status.
The new policy was in reaction to the British Government’s decision to allow people with BNO status, which is British Nationality Overseas status to apply for a visa and have a path to citizenship where they would eventually get a British passport.
China stated that as of Jan 2021, the BNO status will no longer be recognized.
The British government estimates 5.4 million Hong Kong residents are eligible for the scheme, that's about 72% of its 7.5 million population in Hong Kong.
These include:
- 2.9 million BNOs
- 2.3 million dependents of BNOs
- 187,000 18-23-year-olds with at least one BNO parent
It is difficult to say how many eligible people will actually come to the UK. The latest estimate from the UK government puts the number expected to take up the offer at 300,000.
There are about 80,000 people in Hong Kong who hold US passports, and 300,000 in Hong Kong who hold Canadian passports. The unofficial number suggests that as many as 500,000 Canadians may reside in Hong Kong.
So the question is, how many people may choose to leave Hong Kong in favour of their second passport. It’s hard to believe that things will get better for foreigners living in Hong Kong. It’s not like the climate will get more business friendly, or that individual citizens’ rights and freedoms will improve in the coming years. So the question is, how many will leave and how soon?
So what does this mean for real estate investors?
We could see a significant influx of residents from Hong Kong in the coming months.
It’s most likely that they will move to a coastal city that already has a large Cantonese community. Remember, people in Hong Kong don’t speak Mandarin. They speak Cantonese. This is a different language. The culture is different. We can expect people to favor cities like Vancouver, Toronto, San Francisco, Seattle, and a few others.
If 300,000 Canadians were to land in Toronto, or Vancouver, where would they go? Yes, there is some vacancy, but not enough to absorb 300,000 people.
If 80,000 Americans were to land in San Francisco, Los Angeles or Seattle, where would they go?
I believe there is a window of opportunity for investors that are paying attention, who can clearly identify the needs of Hong Kong residents looking to relocate in North America, to deliver a product ideally suited to the needs of someone coming to the US or Canada in a hurry. Maybe they’ll send the kids across first and then follow later in 6 months when personal and financial affairs are in order.
On today’s show we’re talking about a book that has changed numerous lives of friends of mine, and quite frankly I’m embarrassed to say that I waited a long time to read it. I waited even longer to recommend it. But we’re here to correct that this month.
This weekend I had the privilege to spend an hour with the author of this month’s book on a zoom call. The author’s name is Bob Burg and he was coming to us from his home in Jupiter Floria. Bob is the author of 8 books and has sold over 2M copies. Some of his books have been translated into 29 languages. Bob has been named one of the 200 most influential authors in the World by Richtopia.
The book is “The Go Giver; A Little Story About a Powerful Business Idea”
I’ve long been a believer in abundance mentality. If you’re a listener to this show, chances are good that you’ve been certainly exposed to it, if you’re not a full convert to the mindset of abundance.
The opposite of abundance mentality is scarcity mentality. That’s the mindset that says “The pie is only so big. If I’m going to get my fair share, I have to take it from someone else.”
The abundance mindset says that, rather than taking from someone else, focus instead on making the pie bigger.
But the book the Go Giver is much deeper. You are probably thinking that you understand the abundance mindset. But there are many other factors that go into the true giver mentality, rather than focusing on abundance. Bob Burg breaks it down into 5 principles, as if they’re almost laws of nature.
The book is written as a narrative, as a fable with Joe, the super aggressive salesman trying to meet his sales quota for the quarter.
He keeps losing deal after deal. He’s focused on the prize. He’s focused on meeting his sales quota. There’s a week remaining in the quarter and he’s getting desperate.
In the course of the week, our salesman Joe meets a mentor who takes him through a series of five lessons, each with daily homework.
The power of this book is in its simplicity. Bob Burg doesn’t just give you the information. He wraps it in a story. We learn through stories.
We are taken through a narrative that transforms the main character in the story, bit by bit. Each lesson results in a shift. But still pieces of the puzzle are missing and the picture isn’t clear.
You see some businesses are focused on just giving enough value to make the trade a fair trade. If you get a decent cup of coffee for $2, that’s a fair trade. But you’re not going to become a global leader with that. You have to deliver a coffee experience so great, that the customer feels like they’re getting a massive bargain at $2.
But even if you deliver incredible value, it will still be a small business unless you truly aim to serve a lot of people, and serve them really well. That’s why a rock star gets paid so much more than a great musician who plays on Friday night’s in a bar band. The rock star has focused on impacting many more people.
I’m not going to give the entire book away. What I discovered is that those people who are takers show up as plain as can be.
Spending time with the author Bob Burg was very special. It was clear that even though the book has a few simple ideas, it doesn’t mean they’re all easy to implement. Social conditioning can run deep for many. The ideas in this book can challenge core beliefs for some.
The discussion took us much deeper than the book itself. Bob started quoting Benjamin Franklin and other great thinkers that came before. The ideas in the book are really designed to be timeless. Even though this book was first published in 2007, and then later updated in 2015, this book is destined to become a timeless classic.
Martin Saenz is a specialist in buying distressed notes in the secondary market. These loans can be the source of huge profits when they are modified and restored to performing status. This is another incredible conversation about investing strategy. To learn more, you can connect with Martin at bqfunds.com
Sam Bates is undertaking a value-add multi-family apartment investment project. The usual tactics of adding value through improvements form part of the forced appreciation. But the addition of a captive high speed internet service is bringing an additional high margin revenue stream which adds nearly $1M to the value of the property while being minimally invasive to the operation of the property. This story contains a powerful lesson on how to improve the property with minimal impact.
Some people think that putting money in the stock market is investing.
But in the past week we’ve seen the power of social networks to mobilize large numbers of people to undertake an otherwise un-natural transaction en mass, all at once.
The nearly dead company GameStop has been making headlines in recent days. A number of people are probably wondering why Gamestop’s stock has been surging. It doesn’t quite make sense. So before I explain what happened to Gamestop, you need to understand short sales in the stock market.
So imagine you think that a company’s stock is going to fall. Pick a company, any company. You might choose Boeing. Boeing is trading around $197 per share. Let’s say that you want to short Boeing, you borrow a share from a broker and sell it immediately at its current price. You then hope that the stock’s price is going to fall so that you can buy it back at a lower price and return the shares you borrowed to your broker. You make money on the difference.
So if Boeing shares fall to $190, then you could buy the stock for less than you sold it and and profit on the difference. You decide to cover your short position by purchasing the stock and $190 and now you’re in a safe position with a profit of $7.
But if instead of the $197, the stock shoots up to $205, you still need to return your borrowed share to the broker, except now it’s going to cost you $8 to buy back the stock at the new higher price. You would be facing a loss of $8. Since the stock could continue to rise indefinitely, the losses for a short seller can continue to increase indefinitely. You have to replace the borrowed share and the more the price rises, the bigger the loss.
For Gamestop, a few weeks ago someone on reddit on the wallstreetbets page noticed that a hedge fund had taken a massive amount of short trades against Gamestop. The one reader convinced everyone on the thread to join forces to buy as much of the Gamestop stock as possible. This pushed the price up in the short term. The short seller was immediately exposed to billions in potential losses. Eventually the losses grew beyond the $13.1 billion that the hedge fund was worth. Eventually the hedge fund was forced to declare bankruptcy. Now we have the reddit thread combing through other hedge fund positions with massive short exposures so they can short squeeze them into bankruptcy as well.
We’re now seeing similar assaults on share of AMC Entertainment which nearly tripled in value on Wednesday.
Now folks, this isn’t investing. This is called gaming the market. But it’s pitting massive distributed liquidity against concentrated liquidity in the brokerage houses.
Today, 90% of the trading volume in the market is based on large computer based trades that are aiming to squeeze out small profits. The initiative for these trades are software programs written by quantitative analysts. These guys and gals are mathematicians who analyze the performance of the markets and they try to develop algorithms that give a brokerage house, a hedge fund, or an investment bank a quantitative edge in the market. So as a simple example, a computer program that looks at the price of Boeing on the London stock exchange might notice that the stock is trading a few pennies higher in London than on New York. The software would then exploit the price difference by purchasing the stock in New York and immediately selling in London and making a few cents profit on the trade with very little risk. You don’t make a lot of money on each trade unless you through huge volumes at it. Throw too much money at the trade and now you risk eating your own lunch and negating the very price difference you were aiming to exploit. There are dozens and dozens of algorithms that have been created to try and outsmart the market. The folks who do this are affectionately called quants.
To the untrained eye, this is strange. Now you know why.
On today’s show we’re talking about the work from home trend that the pandemic seems to have amplified. Long before the pandemic, the warning signs were there in many industries. On today’s show we’re going to take a closer look at one company that was formed purely with the assumption of zero bricks and mortar locations for the entire company.
This company was newly formed EXP Realty, now a public company that has nearly 40,000 agents in the company. The company was formed in 2009 and has been slowly quietly building to create a breakout transformation of the industry.
If you consider that each employee in a traditional company would allocate anywhere between 200-300 square feet per employee, the annual cost of office space at $30 per square foot gross is about $6,000 per employee. For the company with 40,000 employees that amounts to a cost saving of 240 million dollars a year.
That’s a real saving of hard cash that can better be put toward creating a more competitive company.
The fact is, almost every real estate broker or agent has a home office, or at times a mobile office. What they need are strong systems. They need to be in the field with their clients.
The incredible part of their story is that they have been able to scale much more quickly than most other companies. The effort to onboard a single employee is much greater when they need to have a physical space, a physical desk.
The company is growing fast. Last year, the company grew from 500M in 2018, to 980M in 2019, and 1.46B in 2020.
Imagine if the company had a bricks and mortar footprint, would they have achieved the growth in 2020 in the middle of a pandemic?
The point of this episode is to highlight a business that is all about real estate, that has zero real estate. Think about it. That’s a pretty strong contradiction in terms for some. It might be ironic for others. But they own no real estate. This is not something that just happens. In order for a company to grow to 40,000 strong requires strong systems. It’s a little like the McDonalds philosophy. When Ray Kroc bought the original McDonalds locations from the McDonalds brothers, he didn’t focus on making a better hamburger. He focused on the systems and processes that would allow the business to scale. The systems would have to be strong enough to allow a Big Mac to taste the same in Tokyo or Tasmania, in Santiago or San Francisco.
That means an emphasis on training and onboarding of new staff, on having systems for routine transactions, and more importantly for having systems for managing exceptions.
After all, why do we need physical offices?
Some would say that physical proximity is needed for training. Well, that’s not strictly true. Some would say that you need to be able to walk down the hall and ask the boss a question when you have a problem. That’s not true either. You need a place to store all your physical files for security. Well, yes you do, but nothing says the file storage has to be centralized. If you have a system of electronic records storage, that data center is going to be internet connected anyway.
Real Estate as a business is hyper local. Being an agent or a broker in a particular area is hyper local. But operating a brokerage is geography independent. You need to localize certain forms to comply with local regulations, but the steps involved in a transaction are the same.
So the question remains, how many other industries can be virtualized? Does a law office need to have a physical office?
On today’s show we’re talking about relationship building in an era of social isolation. We’re social creatures and there’s nothing like speaking with people and having real conversations with people.
I see it with kids who are interacting on role playing games where they will be playing the game in teams, connected by headset and conversing with friends across town or sometimes on the other side of the world.
Well now the adult version of that is taking the business world by storm. It’s a new social media application called clubhouse. Some of you may have heard of it. Most of you are probably unaware of what it’s all about. So today’s show is dedicated to bringing you into the current decade kicking and screaming. I’m here to tell you that this new way of interacting is going to be as huge as Facebook or LinkedIn. No doubt, Twitter, Facebook and LinkedIn will respond with a competitive offering of their own. Who knows, maybe Google will jump into the fray. But at a time when several social media companies are under federal anti-trust investigations, it would be difficult for any of these entrenched companies to grab a dominant position in an emerging technology especially if they try to do it by acquisition. There is no way the regulators will approve the industry consolidation while there is an anti-trust suit against these companies.
OK. So what is clubhouse. Think of a social media app that is somewhat like Facebook, except the only way to communicate is by talking. The only way to talk is by being in a room. There are three types of rooms. Rooms can be created by any member at any time. You can invite people who follow you to join you in a room. You can also schedule the opening time for a room and notify the community that at 8PM, there is going to be a room dedicated to talking about fishing. So all those members who have indicated an interest in fishing will be made aware of the upcoming meeting on fishing. They won’t see notifications about rooms dedicated to travel to Paris unless they’ve listed travel to Paris as one of their interests.
Some members who have been consistent room hosts will have the right to apply to create a club. A club is a little like a Facebook group. There might be a club dedicated to, say, commercial real estate, or fundraising. If the room isn’t a club, you’ll only see it as an open room to join if you are connected with people who are in the room.
Once you’re in the room, there are two parts to the room. There is a stage and an audience. Only the people on stage can speak. When you’re in the audience, you can be invited on stage by the moderators of the room. Once you’re on stage, you can join the conversation.
In many of the clubs, the moderators are there to have a panel discussion and answer audience questions. In many of the rooms I’ve attended the moderators ask audience members to put up their hand and come onto the stage to ask a question or make a comment relevant to the chosen topic of the room.
In my experience, some of these rooms are open for hours. Some of the people I spoke with on the weekend said that they came onto Clubhouse intending to stay for an hour, and instead stayed four hours.
I’ve engaged in several conversations that have been incredibly powerful in just a few days. Several people I’ve spoken with have managed to already translate the connections they made in Clubhouse into real live offline relationships that have monetary value.
The software is in Beta release so far. They just announced a $100 million capital raise at a $1B valuation. Leading the fundraise is Andreessen Horowitz. Let’s put this in perspective. This is for a company that has zero revenue. They reportedly have about 2 million active users on a weekly basis.
Today’s another AMA episode, ask me anything. Nicolas from Washington asks:
“If I may ask, how do you move things forward and get things accomplished without causing pain or hardships to those around you (in my case my wife) when they are in a slower lane?”
Nicolas, this is a great question. I understand that you’re currently trying to balance a full time job, self-care, family, friends and investing.
What you’re describing is a common problem. I can’t say that I do this perfectly. Some days I’ll be recording a show after my wife has gone to sleep. It’s a matter of choosing what to put in your calendar and aligning it with your goals.
The first word that comes to mind from your question is the word stress. It feels like you’re experiencing stress. My definition of stress is the gap that exists between expectation and reality. Stress lives in that gap. If there’s no gap, there can be no stress. Since there are only two variables, you’re choices are to focus on aligning expectations, or alter the reality. There’s not much else.
In the case of your wife, this is an exercise in determining how to involve your wife in the decision-making process around investing. The points of stress can be many:
1) It might be around the time required to manage an investment
2) It could be whether investing in this particular asset class is a safe investment.
3) Some people simply have no entrepreneurial genes within them. They don’t understand it. They think that business owners are pushy people and they would just rather go to their 9-5 government job and trust that the system will take care of them.
4) Maybe your wife has a belief system that investing is risky and the only safe thing is to keep your money in the bank.
I don’t know in your specific case where the disconnect is. But I will say that you need to invest time in gaining alignment with your wife. That is a process.
Sometimes a spouse says. I don’t understand all this real estate stuff. You can go ahead and do what you want as long as it doesn’t take time away from the family. Again, I don’t know your specific circumstance.
If there’s something that’s important to you, then you may simply want to ask her to make an investment in time to understand it enough so that you can both be aligned. You’re not asking for her to become immersed in it, not to make it her hobby or her passion. Maybe there something she’s into that is not your passion. Maybe she’s interested in lilac trees or quilting. You may want to reciprocate by showing genuine interest in something that’s important to her. Again, it’s not going to become your passion. You commit to understand it enough that you get a deeper understanding of her.
There’s no absolute right or wrong way to do this business. Some people are happy owning three vacation rentals that earn as much net income as a 10 unit apartment building. Others want to be active part owners in a portfolio of 100 apartments, and still others want to be passive investors in a portfolio of 1,000 apartments.
On today’s show we’re going to take a short trip through the history books. We’re not going back to Roman times, or ancient Greece. Although there are numerous powerful lessons in history that we could easily apply to today’s environment.
No. On today’s show we’re going back to the fall of 2019, and then we’re going to go back to the fall of the year 1999.
2019 seems like a distant memory. The economy seemed to be humming along nicely. Unemployment was at a historic low. Stock market valuations were considered irrationally high in 2019. We were in the 4thquarter of one of the longest albeit slowest economic expansions on record. Extrapolating continued expansion seemed foolhardy at best.
But today’s wounded economy is totally different: only partly recovered, possibly facing a double-dip, probably facing a slowdown, and certainly facing a very high degree of uncertainty. Yet the market is much higher today than it was in 2019 when the economy looked fine and unemployment was at a historic low. Today the P/E ratio of the market is among the highest in history and the economy is fragile to say the least.
Let’s go back to 1999. My company Tundra Semiconductor went public on February 8, 1999 on the Toronto Stock Exchange. The Shares priced at $9.25 but were in such demand that they opened at $13.10 and closed their first day of trading at $13.24.
We were part of that .com euphoria. We didn’t know it. We were too wrapped up in counting our rising daily net worth. At one point, my stock options were worth millions. By March of 2000, the stock hit a high of $78. We were all on top of the world. We were extrapolating to when our stock might be worth $300 to $400 a share. We were absolutely delusional. It was a very powerful and humbling lesson in greed and the dangers of the echo chamber of groupthink. Everyone in the tech industry was rationalizing the valuations. The idea that people would skip the pet food aisle at the grocery store and order their pet food from a separate specialty retailer online was clearly nuts. But those companies still managed to attract stock valuations in the billions.
When the bubble burst, most of that paper wealth, that monopoly money wealth evaporated.
I know of some people who exercised their options, triggering a tax obligation, and then didn’t sell the stock. So they were left with stock that was worth far less that when they exercised. The remaining value wasn’t even enough to pay the tax obligation. Some people had to mortgage their house to pay the tax bill on money they never got to put in their bank account. That’s how confident people were in the valuation of these companies.
I think about an interview with Scott McNealy, former CEO of Sun Microsystems. He said “What were you thinking?”. He was asking this of investors paying a “ridiculous” ten times revenues for his stock at the height of the .com mania.
If you bought Sun Microsystems stock in 1994, you would have seen a 100x increase in value by the time it hit the peak price of $253.
So here we are. Tesla stock is trading at 1600 times trailing 12 month earnings. It has an enterprise value of 802 billion dollars. The stock is trading at 28 times revenue.
Sun Microsystems was a relative bargain at only 10 x revenue. When the world finally woke up and said this is nuts. The stock came back to earth. By 2008, the stock had lost 98% of its value compared with 2000.
$1.3T worth of paper value was wiped out in the .com bubble burst. The resulting economic recession was partly caused by the difficulty that many companies faced in raising capital needed to expand their businesses. It forced contraction in thousands of businesses which resulting in economic contraction.
So here we are. We are in a major bubble. That is as plain as day.
On today’s show we’re going to be replaying a conversation that I had with Adam Taggart on the Peak Prosperity Youtube Channel. Peak Prosperity is an organization run by my good friends Dr. Chris Martenson and Adam Taggart. The Peak Prosperity movement has over 1 million followers and they’re dedicated to helping people build resilience into their lives.
I love speaking with Adam. He’s been a guest a few times on the podcast as has his partner Chris. Dr. Chris Martenson holds a phd in pathology from Duke University and he was one of the first people to sound in the alarm about the Covid-19 outbreak back in January of last year. He’s been consistently weeks or months ahead in his reporting compared with the information coming out of government agencies. Adam, similarly has been active in seeking out analysts in the financial markets to understand what is happening beneath the surface that we see reported in the mainstream financial press.
Adam and Chris both continue to make fundamentally life changing contributions to the world of business resilience and human resilience. When we talk about capital, people often just focus on what is in your bank account. Adam and Chris believe that there are 8 forms of capital that make up your life and that if you only focus and cultivate one or two of those forms of capital, you’re not going to make it. Definitely you’re going to want to check them out at peakprosperity.com.
George Ross is well known as former executive vice president in the Trump Organization. He was a judge on the TV show The Apprentice. He taught at the law school at NYU for more than 20 years and is the author of two best selling books on real estate and negotiation. He has represented some of New York's most famous and wealthiest clients. It's almost impossible to drive a couple of blocks in NY without George having a first hand story about a building or landmark. On today's show we're talking about recent events and what it might mean for real estate investors and developers.
This is part 2, a continuation from yesterday's show. Braxton from New Orleans asks:
It feels like we are certainly departing from the status quo of the past 10-20 years. I have taken cash out of some of my small rental properties but struggle to re-deploy in more investment properties because prices continue to be pushed upward. There is a mountain of liquidity and increasing competition for investment at low yield. My personal view is we may see near term inflation, but I am concerned we could also be at the doorstep of another debt crisis like in 2008. It appears as though speculative mania has taken over in many markets. How do you view the inflation vs deflation risk and balance you near term investment decisions? If there is inflation it would make sense to buy assets as the housing rents should keep pace with prices, however if there is deflation retaining cash may make more sense. I would like to know how you are thinking through this scenario as each path will likely have very different outcomes.
I think we are going to experience a period of stagflation, a combination of economic stagnation combined with inflation. Stagflation is caused when something artificial causes economic contraction. Efforts to stimulate the economy are held back because the artificial cause is still present. The result is an economy that is flooded with cash, but nowhere to go. The result is inflationary despite the economic contraction. That means prices will fall in some sectors of the economy, but not all. The artificial event of course is the pandemic this time around. Governments the world over are ordering businesses to close and to not conduct business in order to protect human life and the healthcare system.
Keynsian economists believe that stimulus will be inflationary and that retrenchment is deflationary. But that’s not necessarily true as we saw in the late 1970’s after the OPEC oil embargo.
Any talk of deflation is of short term deflation. Nobody’s talking of a protracted depression like we saw in the 1930’s. I have no doubt that we are in a long term inflationary trend. This has been true since the early 1970’s. So the question is really whether a deflationary interlude would be devastating for you as an investor or not.
The key to positioning your portfolio to handle a deflationary period is to make sure you have sufficient covering equity, and that you have sufficient monthly cash flow, or ample cash reserves.
Your third question is whether we’re going to experience another debt crisis. A 2008 style residential real estate crash is possible, but not very likely in my view. The banks are much better capitalized and the Fed has basically told their member banks that they will buy up the toxic debt if it appears. It would take a big rise in interest rates in order for loan rates to become unaffordable, which would trigger a drop in real estate prices. For now, the Federal Reserve has issued guidance for the next couple of years that rates would remain low. When you do the math on the excess reserves that the banks have on deposit at the Fed, there’s more than enough cash there to handle a massive default on real estate.
As of earlier this week, the new Treasury Secretary Janet Yellen who was previously Chair of the Federal Reserve has been the cheerleader for even more aggressive printing of money. We may be facing a sovereign debt crisis at some point in the future, but not a real estate debt crisis.
I believe the US government is going to print money until the population or the rest of the world loses confidence in the dollar. At that point, we will experience rising interest rates in order for the US to sell its bonds.
If the US doesn’t succeed in restoring confidence in the dollar, then the US will lose its position as the global reserve currency and will get reset into some other monetary system.
Braxton here from the Greater New Orleans area. I am a long time listener to your show and I find great value in the breadth of content. I really enjoy the show format and this is the one podcast I can commit to on a daily basis. Thank you for all that you do for the Real Estate community. I know it must take an immense amount of effort to produce this on a consistent basis.
My question today is on the topic you hear often these days on the great debate between inflation and deflation.
It feels like we are certainly departing from the status quo of the past 10-20 years. I have taken cash out of some of my small rental properties but struggle to re-deploy in more investment properties because prices continue to be pushed upward. There is a mountain of liquidity and increasing competition for investment at low yield. My personal view is we may see near term inflation, but I am concerned we could also be at the doorstep of another debt crisis like in 2008. It appears as though speculative mania has taken over in many markets. How do you view the inflation vs deflation risk and balance you near term investment decisions? If there is inflation it would make sense to buy assets as the housing rents should keep pace with prices, however if there is deflation retaining cash may make more sense. I would like to know how you are thinking through this scenario as each path will likely have very different outcomes.
Braxton,
This is a great question. In my view, there are three major elements to be considered here separately.
The first question is a little like asking, are there any bargains to be found in today’s hyper competitive environment.
The second question is related to inflation versus deflation.
Your third question relates to whether we’re going to experience another debt crisis in the near future.
These are such good questions, that I’m going to answer them over a couple of episodes so that we can do each one justice.
Let’s start with #1. There’s no question that we are seeing an auction environment in many segments. The winning bidder in an auction almost always pays more that if there is only one buyer at the table.
The key is to focus on a specific stream of investment types. When you are well positioned in the marketplace, you will find lots of special situations that appear without showing up on the market. I’ll give you an example. We have millions of small businesses that are hurting in the current environment. The business owner may be looking to exit the business, but wants to keep any marketing of the business a secret. As soon as the owner markets the business, they damage the business, their employees go looking for another job out of fear for their job security. Often those businesses have real estate associated with them. We’re evaluating one right now as we speak where it might be possible to separate the real estate from the business and lower the cost of acquisition to a fraction of the asking price.
Off market deals happen as a result of special situations. It might be a death in the family, or a divorce. Sometimes it’s a medical emergency that precipitates a financial problem. Coming in to save a situation for a family in financial distress can be an opportunity to do well and do good at the same time. You might pick up a property at a fair discount to the market, while preserving a good chunk of the seller’s equity.
Finally, we look for opportunities to add value, to transform a property from something that’s not in very high demand into its highest and best use. This way we're not competing based on the existing market.
On today’s show we’re talking about the need for travel. It sounds strange to say “Need” when we’re talking about travel.
According to a report just issued last week by hotel analytics firm STR global for the first week of January. Across the nation occupancy was 37.0% (-28.3%) Average daily rate (ADR)was US$87.97 (-27.1%). Revenue per available room (RevPAR): US$32.59 (-47.7%). These are crushingly bad numbers. They represent an uplift from the low points in Q2 of last year. But these are far below profitable levels for the industry.
According to Airbnb CEO Brian Chesky the changes the Covid pandemic has brought to the travel and lodging industries are permanent shifts, not temporary adjustments.
According to AirBnB, travel is never going back to what it was before the pandemic, He feels that there are several trends that are worth noting.
- Bye-bye to business travel...as we know it:
Chesky said the shift to remote work and meetings that Covid-19 accelerated is resulting in "a significant permanent decline in business travel, as we know it."
Now I have a dissenting view on this particular point. People used to travel for all kinds of reasons in business. There’s no doubt that there are many meetings that can be held as effectively online as in person. I’m a huge believer in using technology for these types of meetings. When I’ve traveled on business, it’s been for a primary purpose, and that is to build relationships. I believe relationship building is better done in person. Those in the future who are clear as to why they are traveling will have a competitive advantage. Relationship Building Business Travel is going to be a new superpower for those few who embrace it.
- Not a "rural" exodus, but an "everywhere" one
Rather than traditional tourism, people sought out getaways with family or friends or temporary work-from-anywhere relocations, he said. And rather than a dichotomy of urban living to rural destinations, he feels that travel demand has been "redistributed" among smaller and mid-sized communities.
- From "mass travel" to "meaningful travel":
"Mass travel, mass tourism, which he defines as people going to crowded tourist districts, standing in line, getting their selfie in front of a landmark, in lines with other tourists, will be replaced with more meaningful travel.”
I actually don’t agree with AirBnB on this point. There are still places I want to visit by air. I can’t wait for air travel to be restored. I can’t wait to get back to Europe. I want to go sailing in Sydney Harbour, and visit the Great Barrier Reef. These destinations are not driving distance. That’s why I believe we will see a rapid resurgence of air travel in the second half of 2021.
There is no question that after a year of being isolated from family, people want to travel home and visit relatives. I see this in my own family. For the next year, travel is going to be more about connecting with friends and family than visiting the Louvre or the Eiffel Tower. I agree with him on that point.
Mr. Chesky believes this is a semi-permanent shift.
This is where we disagree. I believe that the first trip will be to visit friends and family. But what about the second trip and the third?
People in Northern climates are addicted to their winter getaway to that beach destination where they can layer on the sun screen and get sand in their toes.
Travel is not just about connecting with people. It’s about regeneration. That means getting out of your home environment for a change of scenery. It’s very hard to have an effective vacation at home when there are dozens of unfinished chores calling for your attention. When you board a flight, take a cruise, you can truly disconnect from your day to day life, if you choose to and get a real recharging of your batteries.
On today’s show we’re talking about what is money, and what is economic output? On today’s show I’m going to put forward a monetary theory that might be worth considering in today’s environment of rampant printing of money.
In order for something to be considered money, it has to satisfy three criteria.
- It must be a store of value
- It must be a means of exchange
- It must be easily divisible into small units
I think we would agree that the dollar and the Euro, and not even the British Pound are a very good store of value. They’re all depreciating assets.
It seems like we’re trying to make sense of our monetary system with increasing frequency these days. The global dialog on crypto-currency has certainly brought the discussion front and center.
But when we talk about money and go back to the early economists over the past couple of centuries, you will come across the labor theory of value.
Two pre-eminent economists at opposite ends of the spectrum both subscribed to the labour theory of value. Adam Smith was a free market capitalist and Karl Marx was decidedly at the socialist end of the spectrum.
Since most items in the 1800’s were manufactured using human labor in some way, the idea was that the value of a commodity was determined by and could be measured objectively by the average number of labor hours necessary to produce it. In the labor theory of value, the amount of labor that goes into producing an economic good is the source of that good's value.
But today we can easily separate the notion of cost and value. Tying value strictly to labor input clearly misses the notion of value to the end customer. Should a glass of water be free? Or is a bottle of water fairly priced at $1.00? The labor theory of value would suggest that its value should be linked to the amount of time it takes a person to fill the vessel that carries the water.
We no longer link the dollar to gold and silver. Starting in 1878, the US dollar was actually a silver certificate redeemable to the bearer on demand for an ounce of silver.
In 1963, the US congress passed a bill repealing the silver purchase act. The US was running low on silver bullion and the US dollar was no longer linked to silver reserves. Along the way, the amount of silver backed by a silver certificate also changed as the currency was debased.
Today of course the US dollar is no longer an asset. It’s a promissory note, it’s a debt instrument.
Almost 1/3 of the US dollars issued since the declaration of Independence, over 200 years were minted in the past year. 2021 appears to be on track to mirror last year in terms of printing of money. We’re not two weeks into the new year and another $1.9T in spending has been proposed.
With a new administration in Washington, there is a lot of talk about the need to reduce greenhouse gas emissions, something I entirely support.
But here’s another inescapable fact. For every unit of economic output, there is a corresponding consumption of energy.
But simply making it difficult or expensive to burn fossil fuels misses the economic value of energy. If you turn off energy output, you’re reducing the economy by that amount. He who controls energy controls the economy.
Energy is money. You can’t accomplish anything in today’s economy without energy.
So why are we not using units of energy as a means of exchange? Why are dollars not a claim on units of energy?
Now I’m not suggesting that we barter with lumps of coal or a cup of gasoline. That’s about as convenient as a bar of silver. We can still have units of currency that are paper money, or even digital money. But what if we tied the dollar to a unit of energy?
Energy is the great equalizer. Energy is required to produce food. It’s required to transport goods to market. Energy is required to listen to this podcast.
On today’s show we’re talking about foreign exchange. The question is what does foreign exchange tell us about our investments and our point of reference?
You might be sitting in your living room as you listen to this podcast. You think you’re standing still, but in truth the earth is spinning at 1,037 miles per hour at the equator, or roughly 70% of that at the 45th parallel. You’re really travelling quite fast. But wait, the earth is spinning around the sun at a speed of 67,000 miles per hour. You’re not standing still at all. You’re in supersonic flight and you don’t even know it. You get the idea.
When talk of money, we tend to use our own currency as the point of reference. Maybe you use the US dollar as the point of reference. Maybe your point of reference is ounces of gold, or perhaps bitcoin. So when the dollar drops in value against the Euro, or the Japanese Yen, you might not notice
This week Mark Haefele, Chief Investment Officer at UBS in Zurich said that they’re advising some of their clients to diversify their holdings into Russian Rubles and Indian Rupees. That’s because they’re expecting the US dollar to lose value over the next year against a basket of foreign currencies.
Currency markets have traditionally been driven by the most attractive currency. But lately, rather than being attracted to the best currency, traders increasingly a being attracted to the least worst currency. None of them are great. Interest rates in India are much higher than in Europe of the US. Money deposited in an Indian bank will get you somewhere between 4-7%. Mortgage rates are between 8.5%-9%. The Russian central bank has kept interest rates at 4.25% in their latest guidance. The Indian Central bank has set its rate at 4%. So investors in search of yield are placing a bet that neither Russia nor India will default on their debt within the term of the bonds maturity.
You know something’s wrong when India and Russia are being put forward as alternatives to the US dollar. So why would UBS be recommending this?
Let’s look at the practice of the US issuing government debt for most of my adult lifetime. The Fed would print some cash. The Treasury would issue Treasury bills and sell them on the open market and investors domestically and around the world would buy these up. The largest buyers for these T-Bills have traditionally been the Japanese central bank and the Chinese central bank. Together, Japan and China own about 10% of the US debt. Foreign governments own approximately 30% of the US debt. But since the start of the pandemic, there has been an unprecedented printing of money.
Just last week, Joe Biden put forward another 1.9T in proposed pandemic relief spending. For now, all of this newly minted debt is going to be held on the balance sheet of the Federal Reserve. The US issued nearly 5T of new money in the past year. It’s hard to wrap your mind around these numbers.
A lower dollar makes the cost of imports go up. The US imports a lot of products from overseas and continues to have a balance of trade deficit with its major trading partners including China.
The price of oil will go up. Since oil and many commodities are denominated in USD, we can expect energy costs to go up in response to the drop in the dollar.
So what does it mean for real estate investors when the dollar falls in value?
It means that the cost of imports go up. It means that we enter a period of higher inflation. It means that the cost of construction goes up, which ultimately affects the affordability of new housing. That in turn affects the cost that new buildings must charge for rent. That too can be inflationary.
As we’ve talked about recently on the show, when inflation is the new game, the rules have changed and you need to align your portfolio and your investment strategy accordingly.
Omar Khan came to the world of real estate investing from the world of stock options trading. Today he continues to move capital in and out of stock options, and in and out of real estate. On today's show, we're talking about the merits of various strategies and how it's important to adhere to your investment criteria, even when the market appears to have moved into over-priced territory.
You can learn more about Omar and his stock market training program at thetatradingco.com.
Today's show is a conversation with an extraordinary human being. Tom Dreesen has been in show business for 50 years. Along the way, Tom has made over 500 appearances on national television as a standup comedian, including more than 60 appearances on The Tonight Show. He was one of David Letterman's favorite guests and frequently hosted the show in Letterman's absence. He also appeared countless times in Las Vegas, Tahoe, Reno, and Atlantic City with artists like Smokey Robinson, Liza Minnelli, and Sammy Davis, Jr. And, for 13 years, he toured the nation as the opening act for Frank Sinatra. Tom recently released a new book entitled "Still Standing: My Journey from Streets and Saloons to the Stage, and Sinatra". Listen to this wide-ranging and impactful conversation with Tom Dreesen.
On today’s show we’re talking about water.
We’re all attracted to water features on a property. A lake, a pond, a canal, a river. All these water features make a property more interesting than a flat area of grass. In addition to the visual appeal, water brings a positive environmental benefit to a property. It provides a refuge for nature, for birds, fish, frogs, insects, and all kinds of vegetation that you may not otherwise find in an open field.
But if you have water on your property, chances are that you don’t own it. The question of ownership of water dates back to riparian water rights. This is an area of law that varies widely from one jurisdiction to another. Generally speaking, the law has been created and interpreted by the courts in response to conflicts between competing legal systems.
There are too many cases to cover on today’s show, but I’ll give you an example from the state of Texas. You’re going to need to perform your own research and due diligence in the location you own property.
The basic idea when it comes to water is the presumption that mother nature was perfect in how the natural environment was created. When we start putting buildings, paving surfaces we start interfering with how the water flows when it rains, and we start interfering with how water is absorbed into the soil.
When we’re talking about water we need to be clear on what kind of water we are talking about, is it ground water or surface water. Generally speaking, Texas groundwater belongs to the landowner. Groundwater is governed by the rule of capture, which grants landowners the right to capture the water beneath their property. The landowners do not own the water but have a right only to pump and capture whatever water is available, regardless of the effects of that pumping on neighbors underground water supply.
Surface water on the other hand is much more complex. It depends on how the surface water is situated. If it is flowing, then the water is owned by the state. If that flowing waterway is a named waterway, then the flow of that waterway might be managed by the Army Corps of Engineers. Altering the bank of the waterway or having water flow into or out of that waterway would require approval from the Army Corps of Engineers.
Surface water in Texas follows two sets of rules, Riparian rights, or Prior Appropriation. The riparian doctrine is based on English common law. The rules in most states and Canadian provinces follow the English Riparian rights. These court-developed rules are used in deciding cases that involve water use conflicts. The basic concept is that private water rights are tied to the ownership of land bordering a natural river or stream. Water rights are controlled by land ownership.
Riparian landowners have a right to use the water, provided that the use is reasonable in relation to the needs of all other riparian owners. Riparian owners retain the right to use water so long as they own the land adjacent to the water.
In the days of the wild west, when land was being explored, the much drier states had much less water. People used water whenever they could find it, regardless who owned the land. In the absence of any rules, people simply took water from streams and used it; that is, they appropriated it. When this practice became legalized, it became known as the Doctrine of Prior Appropriation.
In some communities, you are allowed to capture rain water. In others, you are not. Finally, many communities will require you to manage your stormwater runoff so as to not harm your neighbors. They may required you to build a stormwater detention pond to provide more controlled runoff during storm events that bring large amounts of rainfall. This is one area where you can’t simply apply what you believe is common sense.
AMA - Anu from San Diego asks:
In the current SF real estate boom (last 6 months), the most growth has happened in the luxury end of the market. A new report from Redfin confirms this trend over the past year.
Two questions:
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I would like to know your opinion on why this has happened.
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Do you think this is a temporary phenomenon or is it here to stay?
Anu this is a great question.
The pandemic has hurt the economy in numerous ways. But the pain has not been uniform. Those who have been most impacted by the business shutdowns have been those hourly paid workers.
Those at the top of the economic ladder have continued to do well in 2020, even if some of the gains might be argued to be an illusion. The fall in the stock market it Q2 was overtaken by a run up in the market in Q3 and Q4. That has given people more confidence. Some recognized that the profits could evaporate and chose to redeploy the cash into property
The low interest rate environment, combined with the forward interest rate guidance for the next three years has created incentive for homeowners to borrow even more money than ever before. It’s clear that the Fed intends to keep interest rates low for at least the next few years.
But remember, when we’re talking about the luxury segment of the market, we’re talking about the top 5% of the properties in a market by price.
The analysis that Redfin performed in the article you referenced broke down their analysis into 5 segments.. There are three equal-sized tiers based on Redfin Estimates of the market values as of Dec. 15, 2020, as well as tiers for the bottom 5% and top 5% of the market. The top 5% of the market by price is considered “luxury” for the purposes of this report, while the bottom 5% is titled “most affordable.
These luxury properties still make up a small percentage of the market, and they’re still taking longer to sell than properties in the middle and lower end of the market. When people make a decision to purchase their homestead property, they’re looking with a longer time horizon. They’re looking past the pandemic. It might have been a purchase that was planned in the future, but merely accelerated.
The increase in land costs and the increase in construction cost has caused some builders to focus on the upper end of the market. Those builders found a combination of robust market demand drive by low interest rates, and better profit margins. You see builders make most of their profit on upgrades and custom finishes. These buyers are willing to spend more.
Some buyers took the opportunity that the pandemic afforded to invest in personal projects. The lockdown in the spring created extra time while the world figured out how to work from home. Some people took on home renovation projects, perhaps a backyard space like a deck or a pool. Others chose to design a new house. We’re seeing that reflected in the numbers.
It’s tempting to look at short term trends in the market and extrapolate those trends into the future. In a stable boring market where nothing changes from one month to the next, you might be able to project into the future a little bit.
It’s a little like trying to make sense out of the spike in toilet paper sales in Q2 of 2020. Store shelves were emptied of toilet paper. Did the population start using the bathroom at an accelerated rate? Did the population grow all of a sudden therefore driving demand for more toilet paper? Of course the answer is no. Over the long term, toilet paper consumption will revert to the average consumption, despite short term decisions to buy sooner than needed.
I expect the same will be true in the luxury property segment. It appears like a large increase, but in reality, the numbers are small and it doesn’t take a large shift in absolute numbers to materially affect the percentages.
On today’s show we’re talking about one of the traps that the market might be luring investors with.
When you make an investment in real property, this is often majority funded by permanent financing, usually amortized over a long time like 20-30 years. But if the market window for your demand is short term, then you’re at risk of making a bad investment.
I’m hearing reports that cottages and other similar vacation properties are already fully booked for next summer. Some investors I’ve spoken with have indicated a desire to purchase a vacation property and rent it out when not in use. They point to the strong demand as the rationale for the investment.
The fact is we don’t know what the demand will look like in a year or two, or five.
We know that global travel is down 90% due to the pandemic. People who are desperate for a getaway are booking accommodations within driving distance of home that allow for them to remain socially isolated.
In a pandemic environment, this all makes perfect sense. Even our own short term rental portfolio has continued to experience strong demand well into the coming year.
But we expect that the pandemic will eventually come to an end. It won’t be in the next few months. It will take much of 2021 before enough of the population is immunized for these restrictions on social activities to eliminated.
Israel stands alone in the world as having the most aggressive roll-out of vaccination of any nation. They have already immunized 20% of the population and expect to complete the entire population over 16 years of age before the end of March.
The roll-out in the US, Canada, Europe, is looking like it will be well into the 4th quarter before the majority of the population is immunized. It could be even longer. I’m expecting 2021 to look an awful lot like 2020 in terms of travel and leisure.
Cruise ships probably won’t be sailing anytime in 2021. If they do, it will be later in the year. In 2019, the cruise industry had nearly 30 million passengers, the majority of them from North America. There are all these tourists who are looking for a different vacation this year.
But eventually, many will return to cruise ships, to beach resorts in the islands, to the bus tour through Asia, to the luxury cottages in the middle of a game reserve in Africa or Australia. All of these experiences are off-limits for many because of the higher risk of infection that comes with international travel.
So what happens to all those cottages that are fully booked this year when people return to traveling? What will bookings look like in 2022 and 2023 and beyond?
I think back to the lean years at resorts that built excess capacity. Many of those condo units sat empty for much of the year. In retrospect turned out to be very poor investments. Yes, they look great again in 2020 and perhaps in 2021. But if it took a black swan event like a global pandemic to make your investment viable, is that really a good strategy?
If you currently own a vacation property and you want to make a small incremental investment in maximize the revenue for that property, I say go for it. Maybe you want to upgrade the furniture and the interior finishes so you can command a higher price in the market. That’s a good move.
But if you’re an investor looking to make a major investment with a 25 or 30 year commitment, how do you know if the demand for your product is going to be there in a year from now, or five? After all, just as quickly as conditions changed this year, they could change again next year.
I would go back to the market conditions of 2017 and 2018 as a better indicator of what the market demand might look like in the post covid environment. You want to use market analysis tools like Alltherooms or AirDNA to determine both demand and pricing for your local market before you make an investment.
On today’s show we’re talking about the notion of valuation or what is sometimes called price discovery.
I was 13 years old when I got my first taste of price discovery. In Istanbul Turkey there is the largest covered bazaar that comprises over 61 streets and over 4,000 vendors. The vendor was trying to sell me a metal sword and a negotiation ensued. I was a rookie at this, but my father knew the game and by the end of a 5 minute negotiation we settled on a price that was about 1/3 of the original asking price. The seller was grumbling the whole time as he wrapped up my purchase. I left his shop confident that I had just got a great deal. As I reflect back on it now, how much was that souvenir really worth? It’s worth what I paid for it. Did I pay too much? Did I get a great deal? I have truly no idea.
There is the story of Honus Wagner played in major league baseball for 21 seasons, most of that for the Pittsburg Pirates. He was one the first five players to be inducted into the National Baseball Hall of Fame in 1936.
On October 31 of last year, one of 50 Wagner baseball cards sold for $1.4M dollars. It’s not the most expensive version of that card to ever sell. The most expensive one sold for $3.25M. The scarcity is part of what drives the notion of value. If there were 1,000 of these cards, they would be worth much less. It’s because there are only 50 remaining in existence that drives the notion of value. Maybe the baseball card worth 2.5 cents, the cost of the paper and ink to print it?
When you buy shares in a public company, you’re buying a fraction of a company, that presumably has the ability through its active ongoing business to generate a profit for its owners. As a shareholder, you’re an owner. You would think that the value of a business is somehow tied to its ability to generate a profit. A business that generates a lot of profit should be worth more than a business that generates very little profit.
Tesla Stock is currently trading at 1,667 times earnings. That means that if Tesla remained at the same level of profitability, it would take 1,667 years to earn your initial investment back, and that’s assuming of course that the company paid out 100% of its earnings in dividends to investors. At that point, I’m starting to wonder which is a better deal, Tesla stock or the baseball card?
The notion of value has become distorted.
A single family home in an expensive neighborhood is worth $1M because we all agree that it’s worth that much.
This is what is called price discovery. If a house on the street sells for $100,000 more, now all of a sudden everyone on the street thinks their house is worth $100,000 more.
But the world of real estate investing is different than the world of residential home ownership. It might seem to the uninitiated that they’re similar. But they’re quite different.
You see if an apartment rents for $1,500 a month, that rent check clears every month. If you have a 100 unit building, then you have 1,200 transactions that closed over the past 12 months. There is no speculation about what the apartments will rent for. There is hard data. So when it comes to valuation, if rental properties are valuing at a 6% cap rate, then you can easily determine what a property is worth. You have lots of data from hundreds and hundreds actual transactions that settled each and every month.
So what is a piece of real estate worth? Is it merely the result of negotiation, or perhaps the real estate business that is wrapped around the property is worth a multiple of its net income, its ability to generate a profit.
Today is another AMA episode (ask me anything). Karla asks:
Your book “Magnetic Capital” in my opinion is a quality , easy to follow book. Would you please share your own process to write, market and publish your book? Any highs and lows from lessons learned in the process that you can recommend?
Have a successful year.
Karla, This is a great question.
There are undoubtedly numerous ways to write a book, but I’ll share with you my process. When I say this, I’m confining the discussion to non-fiction books. The process for fiction books is somewhat different. It all starts with intention. Some people write a book as a vanity project. For some it’s a large expensive business card. For some it is a real contribution to the world to advance the art and science in a particular area. You really want to get clear on why you are writing a book. It starts with asking a few simple questions,
- “Who are you writing the book for?”
- “Why does the world need this book?”
- “Why are you the one to write this book?”
- Do you seek publisher or to self publish?
In the case of Magnetic Capital, I saw many people who wanted to grow as real estate investors who were lacking the skill in raising capital. Some were trying to raise money and having terrible results. So the book was written for the investor who was looking to grow beyond their own capital, but most importantly, those who were looking to grow beyond the initial stages of leveraging other people’s money. Some people start out by performing a joint venture or two and then get stuck.
Most of the books written on the topic tended to be academic in nature and lacked a practical approach to understanding the psychology of raising capital. It seemed like people were out there trying to violate laws of nature, violate laws of human respect, and certainly violate securities laws.
So I saw a gap in the marketplace.
So let’s talk about how to outline a book. In my case, I took a stack of blank 8.5x11 sheets of paper and brainstormed the chapter titles. I put one chapter title on each page. Some chapter titles didn’t make sense and I threw those away. I then spread out all of the pages on my dining room table so that I could see the big picture for the structure of the book. I could easily move the sheets around so that the sequence of the chapters made sense. I then took each sheet and wrote down 3-5 major points that would need to be covered in each chapter.
I then decided which chapters would need real life examples to support the points being made in the chapters.
Some books require a lot of research. I’m thinking of authors like Malcolm Gladwell or Jim Collins. In those cases, you might be facing a couple of years of work prior to writing the book. In my case, the book was already inside me and just needed to come out on paper.
The mechanics of writing the book was extremely straightforward. I would write every day. Some days I would sit at the computer and write a few pages each day. In the case of Magnetic Capital, the first draft of the entire book was written in under a month, followed by a few weeks of editing.
The publishing process has two choices, working with a publisher or self publishing. If you’re going to work with a publisher, the industry has changed. In fact, the work is pretty much all going to fall to you unless you already have a huge brand name with a massive following. Before you can even engage with a literary agent you’re going to need to prepare a book proposal. What they call a book proposal is really a detailed marketing plan when you look at all the headings. There are several templates out there on the internet from various literary agents. I chose to self-publish my book using Amazon as the platform. It was easy to do and there are lots of good resources out there that can guide you on the particulars.
Bryan Miller is a musician, composer, a musician to the film industry in Hollywood, and a real estate investor. You can learn more about Bryan and his strategies at capitalstackinvestments.com.
Aaron Norris is based in Riverside California, but invests in purpose built rental communities in SW Florida. His company Property Radar provides a level of data analytics that goes above and beyond the usual freely available data on the internet. To learn more check out propertyradar.com.
Today’s question is a beginner question coming from Gord in Hamilton Ontario. He writes:
We’re guiding our kids into adulthood in the context of real estate and investment. My kids are 20 and 22, one living at home working an HVAC apprenticeship and the other in university for teaching, living in another city and working part time. They are both very responsible with their money and are saving for their futures. I want to guide them as to how they should save or invest now so that one day they can own a home (it is looking less and less affordable). My son (HVAC) wants to buy a two unit and live in one eventually to start out, but I am having difficulty knowing how to guide him correctly.
Gord, this is a great question.
I’ve often said that if you can’t afford to buy a house you should buy two.
The structure of that deal will depend a little on the base income of your kids. But as a first time buyer, they should qualify for a high ratio insured loan. The structure we’re talking about in Canada is a CMHC insured loan. You will pay an insurance premium on the loan which means a higher rate, but you will also get a high ratio loan. Typically these loans max out at 95% loan to cost. The specifics of the program allow for the first $500,000 to have a 5% downpayment and then a 10% downpayment for anything above $500,000 up to a maximum purchase price of $1M.
For those listeners in the US, you can do the same thing with an FHA 203B loan. The FHA loan will max out at 97% loan to cost. The max loan amount of the FHA program varies depending on the community.
Generally speaking the name of the game here is to get the rental income from the second unit in a duplex to subsidize the cost of ownership of your principal residence. At two units, the lender is going to look at the property in the same way as they would look at a residential property. The high ratio loan program qualifies for a single owner occupied home or a duplex where one half is owner occupied. It would not apply to a triplex or a 4-plex.
You would likely want a duplex like this to be self managed by the owner. As a first taste of being a landlord, this is a great way to start. The owner is always onsite and can monitor what is happening at the property. But you don’t want to do all the work yourself without the guidance of someone more experienced looking over their shoulder in an advisory capacity.
The biggest mistake that rookie landlords make is in knowing how to qualify the prospective tenants and then knowing the rules under the landlord tenant regulations.
The key for properties like this is to choose a property that is going to attract the right quality of tenant. If you choose a property that is at the lower end of the income spectrum, you run the risk of attracting tenants that can’t afford your property.
Get yourself a property that is going to attract the kind of tenant that you ultimately want living there for a long time.
A Duplex can be a great house hack. The market in Hamilton has become an extension of the Greater Toronto area. The overall Toronto area sports a population of 6.1M people and historically has added about 125,000 residents a year.
Your son may not have the income to qualify for a single family home at $720,000, but may qualify for a duplex at $750,000. The addition of the rental income when added to your son’s employment income may be enough to make the project viable. Later down the road, that first investment could act as a stepping stone to bigger and better properties.
It is from these modest beginnings buying their first property in their 20’s can grow to having a vibrant portfolio which can provide financial independence later in life. The message here is one of encouragement.
Thank you Gord for a great question. For the listeners at home, if you can’t afford to buy a house, perhaps you should buy two.
On today’s show we talking about a cultural shift that is underway in one of the technology companies that defines the current era in which we live.
On today’s show I’m going to connect the dots as a thought experiment.
I’m going to draw a parallel between the post office and Google.
The post office is a utility that provides some of the basic plumbing for our society. There are private companies that have tried to compete with the post office in providing this basic transportation of goods. It’s a commodity. You know that it’s a commodity because you simply expect it to be there. The postal service is ubiquitous. It’s not conspicuous. Nobody drives down the street and says “oh cool, there’s a mailbox.”
The post office would be more conspicuous by its absence. The post office is also unionized. The collective bargaining for employees by unions has tied the hands of the leaders at the postal service
In this discussion, the outcome has been pretty consistent across nations. We could be talking about the US, France, England, Canada. Attempts to innovate within the postal service have largely failed. This is the world of slow decision making and bureaucracy that has come to exemplify quasi government organizations.
The technology world on the other hand is the world of innovation, of experimentation. Technology companies create new prototype products and services in a race to create value ahead of the competition.
In some cases, the technology companies will develop the new capabilities internally. If they move too slowly, then acquiring and integrating a startup can be an effective shortcut.
Google acquired YouTube. Facebook acquired Instagram. You get the idea. These moves were made with the speed and agility of a startup.
In an earlier part of my career As Vice President of Engineering, I was leading the microprocessor development team that my company acquired from IBM. This was back in 2004. There were two parts of the team located in France. We had a team outside Paris, and a team just outside of Nice. I used to spend a week a month in France with the team face to face and naturally on the phone with them on a daily basis. I can tell you from first hand experience that the goals of the business leadership is to maximize the growth of the business in order to create the opportunity for all the stakeholders of the business to benefit. That means healthy compensation for the employees, it means employee stock plans and stock options for employees. The goals of the union are not shared with the goals of the business. The net result was that the union representing the roughly 10,000 IBM employees in France filed a lawsuit challenging the validity of the acquisition in the courts. The net result was that all 110 employees in France ended up back at IBM and I built a new microprocessor design team in Austin Texas and in Silicon Valley. Only a handful of the people in France chose to relocate to the new design centres in the US. So when I heard this week that more than 225 Google engineers and other workers have formed a union, I was surprised to say the least.
The Alphabet Workers Union, which represents employees in Silicon Valley and cities like Cambridge, Massachusetts, and Seattle, gives protection and resources to workers who join. Those who opt to become members will contribute 1% of their total compensation to the union to fund its efforts.
For now, this is a minority union. It will not have the power to negotiate compensation on behalf of employees.
I find this particular effort to be important because we see a company that has maintained its startup culture now being bogged down by increasing public scrutiny, a justice department anti-trust lawsuit, and now a union movement. Companies that have their hands tied through government bureaucracies are destined to be about as agile and as innovative as the post office.
This question is from Anu in San Diego.
I am a big fan of your show and i listen to all your episodes.
I would like to know your opinion on the relative effect of upward vs downward forces on SF home prices. There is upward pressure on SF homes currently because of low interest rates and pent up demand. In the coming months, there may be downward pressure due to job losses and overall bad state of the economy. But there may be additional demand for bigger houses because of many more people working from home and thus needing more space. In my local market, I am seeing a ton of folks upgrading their houses because a 3-4 bedroom house is not enough anymore as both spouses require a separate home office now. This trend may be here to stay as more companies announce permanent work from home options. I would love to know your opinion on how this may play out in future. Will some category of homes see increased demand vs lots of delinquencies in another segment? Or do you think the delinquencies will have an effect on the entire housing market?
Anu this is a great question. In fact there are several questions. You are correct in pointing out that very few existing houses were designed with work spaces in mind. Some homes had an office designed into them. My house was a rare exception to that trend. Most of the time, people are repurposing a bedroom as an office. If you live in an apartment, then the dining room table is one of the few options. San Francisco itself is a small market, but the SF Bay area consists of many markets and spans nearly 2 hours driving distance from one end to the other. The Bay area seems to be mirroring many of the same migration characteristics that we’ve seen in other hub cities like NYC, Toronto and Seattle.
Those who have been renting luxury apartments in the city left the high density environment when it was clear that they had no reason to be a short distance from an office that was closed anyway. They can afford to buy a much larger property in a lower density environment, but don’t necessarily want to leave the metro area altogether. After all, they’re not quitting their job.
People are shunning downtown apartments. Conversations with people I know who live in San Francisco are showing the trend clearly. The same has happened in NYC and Toronto. Toronto currently has 30,000 vacant apartments for rent in the core of the city. That’s a huge number. People are leaving their rental apartments in droves. Vacancies in some buildings are approaching 50%. Rents have fallen 35% across the city. I’m hearing that it’s like a ghost town in the core of the city. People simply don’t want to be confined to a box in the sky with no amenities during a lockdown situation where they have to work, eat, sleep and exercise. All of this seems like a prison.
For half the price of a rental 1BR apartment in San Francisco, you can buy a 3BR 1,400 SF townhouse in San Rafael with a patio, plenty of amenities including a swimming pool and gym, a two car garage.
The suburbs don’t have the problem of homeless people. You don’t see protest marches in a residential neighborhood. But you do in the core of the city. People feel safer in the suburbs. The reasons for exiting the core of the city just keep piling up.
We are seeing millennials who had been living in the city finally getting married, starting families and now looking for a bit more space to spread out. The condo market, in particular the luxury end of the condo market is over-supplied in the short term. The luxury apartment rental market is also oversupplied for the next while and this is where we are seeing a massive correction.
I believe the correction we are seeing is confined to select segments of the market. This change is going to be with us for another 3-5 years before we find a new market balance point.
David in central valley California asks
Hi Victor.
I'm looking to develop a build to rent community of apartment sized single family homes. This will go from un- entitled vacant land all the way through to the sale of the built homes. My question is at what point are the impact fees paid. Is it while performing the horizontal land improvements and utility hookups? Or is it during vertical construction?
Thank you!
David, This is a great question.
For the listeners at home, let’s take a minute to describe impact fees or what in some places are called development charges.
These are fees that are charged to developers for the benefit of having the opportunity to make a profit from the expansion of a community. These fees are only assessed on new units that are added to a community. For example, if you demolish a house and replace the house with a new single family home, you would not pay any impact fee because you are not adding any density to the community. If instead you replace the single family home with a duplex, then you would pay an impact fee on the one additional unit and no fee for the existing unit you are replacing.
Impact fees pay for the municipal infrastructure that makes it possible for you to build your property. We’re talking about the roads, water infrastructure, sewers, schools, parks, public transit, community centres, expansion of policing and so on.
These fees vary widely from one community to the next, and they can vary widely within a community.
Some cities have zero impact fees. Impact fees are extremely common throughout California where you live.
I read a recent paper on the state of impact fees in the Central Valley in California where you live. I put a link to the study in the show notes. This 84 page report was authored in 2019 and gives a pretty good overview of the issues surrounding development impact fees in the Central Valley. It specifically studied 10 municipalities in the Central Valley.
https://www.hcd.ca.gov/policy-research/plans-reports/docs/impact-fee-study.pdf
Only a little over a quarter of the communities actually published the studies that were used to assess the impact fees. This lack of transparency makes it difficult to determine whether the assessment of impact fees is fair.
The schedule of fees was also not readily available in many of the communities. When you finally do get hold of the schedule, determining which payment applies to you can be incredibly confusing. Often the preliminary feedback and estimate from the planning department doesn’t match the final assessment of fees.
The net result is that many developers have a hard time predicting the correct fee structure for their financial pro forma.
In the absence of an accurate number, the only prudent thing to do is to estimate high and hope that the real impact fee comes in below your estimate. But there is also a chance that the project becomes unattractive with a high estimate for the impact fees. You might end up talking yourself out of a project simply because the municipal government is doing a poor job of being transparent about their development charges.
This is an excellent question and unfortunately it’s an area that is full of complexity and potential land mines. There is no quick or easy answer to your question. Hopefully this discussion helps you navigate through the maze and ask relevant questions from the decision makers who can answer the specific questions pertaining to a particular property and proposed development.
Today's show is one of the most important shows on investment strategy you'll hear this year.
On today's show we're talking with my good friend Steff Boldrini from San Francisco about how to structure a construction loan for a new construction project.
On today’s show we we are taking a deep look at the book called “This is Marketing” by Seth Godin
For the longest time there has been confusion between the various words that surround the topic. What is selling? What is advertising? What is marketing?
So many of the manipulations that we have accepted as normal we now almost universally reject as ineffective.
My friend Kyle Wilson says it well when he says
“Don’t use a tactic that violates a principle.”
It doesn’t make any sense to make a key and then run around looking for a lock to open. The only productive solution is to find a lock and then fashion a key. It’s easier to make products and services for the customers you seek to serve than it is to find customers for your products and services.
Marketing is the generous act of helping someone solve a problem. Their problem. It’s a chance to change the culture for the better. Marketing involves very little in the way of shouting, hustling, or coercion. It’s a chance to serve, instead.
So many people think that marketing is about getting the word out. That’s one of the last steps in the process.
It starts with creating change that solves a problem. When that change defines the culture, then you have the ingredients for marketing.
If you want to make change, begin by making culture. Begin by organizing a tightly knit group. Begin by getting people in sync. Culture beats strategy—so much that culture is strategy.
This is marketing by Seth Godin creates a new definition of marketing by turning the industry on its head. You see Seth has tried almost every method known to man. A few have worked, and most have failed. In some cases, the product succeeded despite the money wasted on advertising that nobody saw.
He won’t give you a step-by-step step formula. Instead the book is a compass that keeps you grounded in timeless principles that honour the relationship of trust between you and the people who you seek to serve.
It’s hard to believe that 2020 is almost in the history books, the year that seemed to bring one surprise after another. The news media are filled with retrospectives on this most unusual of years, 2020.
They’re bringing you stories that got the most air time over the past year. What was it that defined 2020? For some it was the pandemic. For others it was the protests against social injustice that gripped many communities around the world. Some will state with great fervour that the Presidential election combined with the pandemic that was the defining event of 2020.
Yes, all of those things happened. There was economic carnage. There were massive job losses on a scale we have not witnessed in history. If your family lost a loved one, or if you lost someone you know to Covid-19, this year 2020 will be forever etched in your memory.
As you conduct your retrospective on the year, don’t look to the news media to interpret the year for you. It was your year, nobody else. The only year that counts was your year. The purpose of conducting a retrospective is for you to learn and grow from it. If you spent the year watching youtube videos waiting for the pandemic to be over, then chances are you’re not listening to this podcast. That’s not the culture here, and I suspect not for any of our listeners.
I’ve discovered something extremely important in life and I’d like to share it with you. It’s a perspective on living that has almost nothing to do with what actually happens.
For some people, 2020 was a year of financial hardship. For others the exact same circumstance was a test of resourcefulness.
As I conduct my retrospective on 2020, I’m seeing accomplishments that I’m proud of, and others that didn’t go my way.
For many people, 2020 was a year of adjustment. They didn’t have a routine for working from home. They were not accustomed to holding meetings using video conferencing.
For us, 2020 was a year of adjustment. It was stressful, simply because there was a wide gap between the expectations we had going into the year, and the reality on the ground. We had to accept the current reality was not going to meet our expectations.
We experienced delays on virtually every project. We experienced higher than expected expenses.
We experienced drops in revenue in some areas of the business. We experienced two hurricanes only 5 weeks apart. We also experienced new opportunities that were not present at the beginning of the year.
We had zoom meetings for family gatherings. We got to experience moments over zoom that would never have happened any other way.
Our regular monthly real estate meetups went online as well. While the quality of the relationship building suffered, going online enabled us to bring guests from all over the world would not have travelled all the way to Ottawa Canada for a 45 minute speech.
Our regular masterminds went from being a conference call to a zoom meeting and we had much more engagement.
Conducting a retrospective is a little like mining for gold. You have to sift through a few tons of rock in order to extract a few ounces of gold. The gold we’re looking for are the lessons that are buried deep within the thousands of memories in 2020. The art is in extracting the gold and letting go of the tons of rock and tailings from the mining process that will only weigh you down. The tailings are those feelings of regret, of shame. You did what you did. You didn’t do what you didn’t do. You can’t change it. You can only learn from it and aim to do better in the future.
As I look to 2021, my resolve is to strengthen three habits. This year, my sleep has been thrown off, my morning routine is not where I want it to be, and my exercise has suffered. This is my focus in 2021.
What does it mean when restaurants close? What does it mean when restaurants close for real estate investors?
On today’s show we’re going to take a deeper look at the restaurant industry. This year, 76 restaurants closed in Dallas, never to return. It’s common for some restaurants to fail even in a strong economy. But this year was different.
Several estimates from earlier this year suggest that 10% of restaurants closed permanently in Q2 of this year.
OpenTable is the company that makes it easy for you to book a restaurant table online. So not only are they convenient, they’re a great source of real industry data. They maintain data for each city in which they operate, each state, each country and even globally.
So far this year, the number of seated diners in 2020 is down 58.4% on a global basis. Seated diners are down 60.39% so far this year in the USA, and 60.98% in Canada. Diners ate 49.38% fewer seated meals in the UK this year. Some of the business was offset by take-out business for which we don’t have an accurate global statistic. Needless to say, there are few businesses that can survive a 60% decline in business. If people aren’t reserving tables, then servers are not needed. Dishwashers are not needed. Bartenders are not needed. In California, table reservations are down 65.6%. In Illinois, table reservations are down 70%, and in New York state they’re down a whopping 75%. The data for NYC is down an astonishing 83% for the year.
It goes without saying that the PPP assistance that came at the end of March, consisting of 10 weeks of payroll is not sufficient to cover a drop in revenue of 83%. Most of these businesses will have fixed costs that are simply too high for the small amount of government assistance to cover.
The restaurant needs to negotiate with the landlord. The landlord in turn needs to negotiate with their creditors.
For many businesses, deferring the rent isn’t enough to save the business. If all the money is ultimately owed to the landlord, it might take a restaurant 10 years to make up that back rent out of excess cash flow from the business when dining returns to normal. The owner might simply choose to throw in the towel and determine that they don’t want to spend the next decade working for their landlord and essentially making no money. It might be easier to shut down and start again with something new when the time is right.
So when all these properties are vacant, a new restaurant opening has a lot of negotiating leverage to demand rent concessions. The landlord faces the difficult choice of lowering their price to the point of tolerable pain or experiencing prolonged vacancy which incurs even greater financial pain. When a new restaurant faces so much choice in good locations, complete with a modern kitchen already in place, they can negotiate exceptional lease terms.
Restaurant statistics over the past week which includes Christmas Day showed a global average of 61% decline in tables reservations for the last week of December compared with the same period in 2019. The US Average was 62.25% down and Canada is 74.5% down compared with the same period last year.
In my opinion, we’re not going to see a recovery in the restaurant industry until the Spring. Until that time, I don’t see many people making significant investments in the traditional seated dining food service industry. The big question is how many businesses will be left standing in 3 months time.
Wall Street and Main Street have had different philosophies for a long time when it comes to investing. Wall Street’s focus is securitizing the underlying businesses. They’ve created so many derivative products that create financial leverage. This is a packaging and re-packaging of investment vehicles into increasingly large opaque homogenized pools of assets.
What’s insane to me are the valuations being attached to these companies. I’ve long held that wall street valuations are far too high for the underlying assets. If a property is trading at, say, a 6% cap rate. If all the properties being held by that company are trading at a 6% cap rate, and the company is only in the business of holding assets like this, then how could the company be trading at 50x earnings, or the equivalent of a 2% cap rate? Yes, I understand that leverage can increase the yield. But leverage also increases the risk. That risk is already built into the cap rate for the property. How can a company be worth more than its underlying assets?
We saw crazy valuations in the early 2000’s with the collateralized debt obligations. These were nothing more than packaging of pools of mortgage loans into a new financial instrument that could be sold. It had the effect of moving the debt off the bank’s balance sheet and allowing banks to loan even more money. The opaque nature of those debt obligations nearly collapsed the global financial system. It all worked fine as long as the default rate on those debt obligations remained low. When things blew up in 2008, the fragile nature of these paper assets became apparent.
Wall Street seems to be at it again. The latest is a major push by Goldman Sachs to get into real estate, and the commercial sale leaseback game in particular. A unit of Goldman Sachs just purchased Oak Street Real Estate Capital for an estimated $2B.
Sale leasebacks are a way for some companies to strengthen their balance sheets. The buyer purchases the commercial real estate from an active business who in turn take the cash and pay down debt. Instead, the business pays rent rather than servicing the debt. In some cases, it’s a way for companies that have paid down the debt to raise cash without borrowing funds. It’s a game that makes it all seem like a massive shell game where very little of value is being added to the equation.
For the buyer of a sale leaseback asset, the key is in understanding the business health of the selling company.
If we look at the makeup of the Oak Street portfolio, they’re about 35% retail, 50% industrial and 15% office. That’s not a bad asset mix as long as their exposure on the retail side is not at the higher risk end of the spectrum.
Wall Street firms have to be seeing the crazy multiples in the market and are going in search of yield. While so much of Wall Street is focused on arbitrage of paper assets, the underlying fundamentals eventually rule the day.
Another player in the sale leaseback space is Realty Income Inc. This REIT has 16.4B of assets in their portfolio. Their largest shareholders include various Vanguard funds and Blackrock. Together, these two own about 22% of the REIT. This REIT is trading at 51 x trailing 12 months earnings. Another REIT in the space is VEREIT. They’re trading at 31.55 x earnings.
No doubt you’re going to hear about the risk in real estate investing when you see the prices of these stocks fall. Understand that the value of the underlying real estate is disconnected from the valuation of the companies that own them. This is no different than owning Tesla stock or Netflix stock where the market price is disconnected from the financial performance of the underlying business. I’m glad that I’m firmly grounded on main street and not playing the Wall Street game.
Ravi in Philadelphia asks
I am a loyal listener to your podcast and greatly appreciate all the content that you provide.
I was given an opportunity to invest in college student housing in Valdosta, Georgia adjacent to the state affiliated University.
Numbers looked reasonably good, but as always I look at these things with a skeptical eye.
My question to you is what are your feelings regarding student housing as an asset class? I do
invest in multifamily apartment buildings but student housing is an area that I have not had much experience with. This particular asset has about 230 units and is mainly for students of that university. My concern is that this asset class may be a bit risky during this time since there has been significant upheaval with regards to the pandemic. Although the parents cosign the leases, this does not insulate from any risks related to schools being closed and these students not paying.
I would love to hear your opinion on this. As always, I value your input as I feel you are very well balanced and provide a very analytical point of view. Thank you as always for your contributions to the community.
Ravi, thank you for the kind words.
This is a great question. I’ve owned student housing since 2011 and generally speaking I love the asset class. However, in the past three years, my perspective on the long term outlook for student housing has changed. The pandemic and the upheaval of 2020 has merely accelerated a trend that was already underway. The problem with student housing is that it is facing multiple headwinds at the same time.
The first is demographic. The number of university age teens is expected to decline over the next decade. This is based on the number of births in the US. Births peaked in the late 1980’s and have declined ever since. This is the so-called echo-boom generation. Not surprisingly, university enrolment peaked in 2011. This was a combination of the economic downturn that happened in the wake of the 2008 financial crisis and the peak number of births that occurred around 1990. This would lead to peak university enrolment about 20 years later.
Let’s talk about the shift to online education. Even before the pandemic, a number of universities had increased the percentage of classes being offered online. If you look at many of the major universities, they have all increased the online programs. The University of Texas at Arlington, a campus of 52,000 students held 52% of its classes online in 2019. They were well prepared for the dislocation of 2020 when they were forced to increase that percentage to a much higher number.
Generally speaking, we are seeing demand for student housing dropping each year. When supply exceeds demand, you will see prices fall for monthly rent.
Let’s look at your specific case in Valdosta. This is a small campus. It grew from about 5,000 students to over 9,000 students at the peak. From 2011 to 2015, student enrolment fell by 17% and the President of the University reduced the number of lecture staff on contract by 35. According to articles I read, many in the community started to question to long term viability of that specific campus. Remember, Valdosta is one of 26 institutions that make up the University System of the State of Georgia. If there were to be shrinkage of enrolment, it stands to reason that the smaller campuses would be eliminated. There would be an effort to consolidate and focus investment on the larger campuses.
I’ve not done a complete due diligence on the specifics of your deal. But when I look at the overall market for student housing on a national basis, and then more specifically in the Valdosta location, I’m not seeing the market conditions that would screaming for me to invest. I’m seeing considerable risk on the downside and not much potential on the upside.
Chay Lapin is a specialist in the Delaware Statutory Trust. On today's show we learned that this structure has gained popularity when working with investors looking to shelter capital gains under section 1031. You can connect with Chay at kpi1031.com where you can learn more about the DST, its limitations, and how it can benefit investors.
Savannah Arroyo is based in Los Angeles, California where she still works full time as a registered nurse. Over the past several years she has developed a multi-family portfolio focused on deep value-add projects. She has been syndicating deals with her husband and has gained a considerable following as the "Net Worth Nurse". You can connect with Savannah at https://thenetworthnurse.com
Welcome to the Christmas Day edition of the podcast. Lawmakers in Washington were hard at work earlier this week passing a whole bucketload of gifts this holiday season. Governments around the world are grappling with the economic impact of the pandemic. The last financial aid spending was passed on March 27, just a couple of weeks into the pandemic. Legislative gridlock resulted in nearly 9 months to the day of time between the two bills. Back in March, the expectation was that the economic impact, while deep would last only a few weeks. Many of those provisions had a horizon of only a few weeks. The PPP program was only designed to provide 8 weeks of financial assistance. Now, nearly 9 months later, the businesses that are still left standing are hoping they’ll survive this next wave.
In the latest bill, money is being handed out. But, it’s not a level playing field. Money is being printed and handed out like candy to the myriad of special interest groups. Every time there is an appropriation of funds, the various special interest groups advance their pet project into the legislation. The results are evident in the latest $900 billion spending bill.
If you read the 5593 page document, you’ll find that there are all kinds of holiday gifts buried in those pages.
Let’s be clear, this bill was sold as a stimulus bill to help a population hemorrhaging from the economic damage of the pandemic.
As you might hope, there is $284B allocated to a second phase of the PPP. This second phase will allow you to get 2.5 months of payroll in the form of a forgivable loan as long as 60% of the money is spent on salaries. You need to have a reduction of 25% in revenue compared with the comparable quarter in 2019 in order to qualify. If you are in the food or accommodation business which have been particularly hard hit, then you might be eligible for 3.5 months of payroll in the form of a forgivable loan. This is directly in the line with what we would expect this legislation to be all about.
Needless to say, I was surprised to see $85,505,000 earmarked for Cambodia to strengthen regional security and stability, particularly regarding territorial disputes in the South China Sea and the enforcement of international sanctions against North Korea. It’s also to assert its sovereignty against interference by the PRC. It’s also to cease violence and harassment against civil society and political opposition in Cambodia.
Under the banner of International Narcotics Control and Law Enforcement, there is a provision for 134,950,000 to four states in Burma. These funds are not actually for International Narcotics Control and law enforcement. They’re available for programs to promote ethnic and religious tolerance and to combat gender based violence in 4 states in Burma. Why they have singled out ethnic and religious tolerance in 4 states, and not all 14 states in Burma, under the banner of Narcotics control in a Covid-19 assistance bill is a little confusing to me.
Another $45 million of taxpayer money (page 1,491) will be awarded to key government officials in Central America-- places like El Salvador, Honduras, and Guatemala-- in order to “combat corruption”. You can’t make this stuff up-- they are giving money to corrupt officials to fund anti-corruption programs. It’s brilliant!
We have $10 million on page 1,486 going to the government of Pakistan SPECIFICALLY for gender studies programs.
The authors of the bill are pretty crafty. By bundling all kinds of unrelated spending under an emergency spending bill, it’s virtually impossible for lawmakers to vote against these provisions that have nothing to do with the main core of the intent for the spending.
On today’s show we’re talking about a technology company that looks to upend the back office work associated with real estate transactions.
Real Estate closings haven’t changed very much in the past 20 years. In fact, I can say that a large percentage of real estate transactions don’t close on time. Sometimes it’s the fault of the lender who request additional information at the last minute. But often it’s the result of missing items or mistakes in the preparation of closing documents.
I can also tell you that I know of several instances when a corrective deed needed to be recorded because of mistakes in the closing process. In addition to improving productivity, these back office automations also improve quality and compliance with county recorder processes and rules.
Real estate transactions are still completed at title companies using a paper process that hasn’t changed much in decades. There are a number of companies looking to disrupt the real estate closing table. In truth, there’s no reason that real estate closings can’t be modernized. The leader in this space is a company called Qualia.
As of earlier this week, the company is the latest unicorn. The term unicorn is used to describe a company that has grown from startup to a valuation of $1B. The digital real estate startup, Qualia, raised $65 million in a Series D financing round, increasing its total funding to $160 million and valuing the five-year-old company at over $1 billion.
Qualia's aim is to digitize the home buying and selling process so that it is easier for everyone. The company's platform acts as a virtual deal room, allowing consumers to review and sign paperwork remotely from the safety of their own homes or on their phones.
The pandemic has been a "tailwind" for Qualia, as all real estate parties involved needed a way to conduct the transactions remotely. The pandemic has been a bit of a forcing function to break past the legislative barriers that have prevented electronic closings up until now.
Documents that are recorded are generally required to be notarized. The slow movement has been legislative and at the state level. The United States truly is a union of 50 states each with their own rules as to how real estate closings are to be performed.
I would ask your title company if they’ve implemented electronic closing for their closings, and if not, what is preventing them from implementing a fully electronic closing table solution.
On today’s show we’re talking about one of the drivers for new housing.
I was speaking with an appraiser this week. That conversation led to an insight that you will rarely stumble across in the news. It seems that 2020 has been a difficult year in more ways than one.
We know that it has been difficult for the healthcare sector. We also know that 2020 has been difficult economically. We’ve heard that 2020 has been difficult from a mental health perspective. My wife runs a clinical family therapy practice with a number of practitioners in her office. I can tell you that most of the therapists have a pretty full case load. 2020 has also been difficult on relationships.
Contrary to popular urban legends, we’ve seen consumption of alcohol actually decrease by 8% compared with 2019.
Many couples are spending extended periods of time together in tight quarters, with no breaks from each other. The appraisers have seen a massive increase in volume for appraisals for homes that are not actually being sold. These are cases where a couple is splitting up and the separation process requires a valuation for the matrimonial home. Some of these houses will end up on the market for sale, and some will not. But division of households for divorce is increasing demand for rental housing. There may not be a large supply of rental housing in some areas.
Bedroom communities are often designed around residential subdivisions of single family homes. You don’t typically find rental housing in these same neighborhoods. In some cases, a member of a couple is forced to find housing many miles from the original family home. This is often in a different school district making it complicated for families looking to minimize disruption to children who might be at school. When a family separates, there is often a need for a larger rental property so that each child has a bedroom even though they might occupy that bedroom only part time. If no children are involved, then the person moving out is probably looking for a 1 bedroom apartment.
I’ve recently seen new construction rental buildings being built in areas that traditionally I would have considered would not be candidates for rental housing. They’re far from public transit. They’re deep in a residential area. I would have predicted that those buildings would have performed poorly in those locations. Fast forward a year later and those buildings are full and renting at strong rental rates.
What’s the reason?
You guessed it. Families that have split need a second rental residence nearby. There is a natural seasonal cycle for housing. We know from past history that the busiest moving days of the year are July 1 and August 1. You would not expect people to be moving in February. But some do. It’s often because a couple is splitting apart.
If you want to get a unique insight into what’s happening in your local market, have a conversation with an appraiser and ask them about the valuation work they’re doing for properties that are not selling. These properties are not going to be listed for sale anytime soon.
We’re going into a second wave of the pandemic right now. There will be healthcare stress, economic stress, and yes marital stress. If you have a product that meets the needs of this segment of the market, you can market to that specific client. The needs of that client might be different than just your average tenant. You could specify in your rental listing, for example, which school bus routes are near your property.
On today’s show we’re talking about the impact of the next wave of the pandemic. I have to say, this is proving to be an emotional roller coaster. While our business has survived the pandemic surprisingly well, the signs of permanent economic damage are starting to show in the broad economy.
As I drive down the street, the number of permanently closed stores is growing by the week. The news of businesses being forced to close again for an extended period of time is heartbreaking. Unless these businesses are given sufficient financial aid, the economic damage will be permanent.
When the lockdown occurred in the Spring, it was done as a preemptive measure, long before the numbers of infections, hospitalizations and deaths increased. It took a solid 12 weeks for the curve to begin to flatten and for the numbers to decrease. It’s hard to tell whether the reduction in numbers was a result of the lockdown or if it was a seasonal effect the would have happened regardless. This time it’s different. We are just going into winter. The numbers have already surpassed the highs we experienced in the spring.
We have a vaccine rollout that is in process. Despite the early data looking promising, it is still very early data.
It will take many months before a sufficient percentage of the population has been inoculated to stop the spread of the disease. Even when someone has received the vaccine, they need to continue to take care and not get infected for a period of up to 30 days before the vaccine provides maximum protection. But we don’t know how much the vaccine will stop the spread of the disease. Until that is know, the physical measures to stop the spread of the disease will still be required. That means that the impact to the economy will continue for a period of time.
Governments the world over are telling the population that we can expect a lockdown of 28 days. I don’t personally believe that it’s even possible for governments to have enough data with which to make a decision to ease lockdowns on such a short time span. I reviewed several studies that looked at the average length of stay in hospital. The average length of hospital stay since the start of the pandemic has been very close to 20 days. The average incubation period is 5.8 days. So it would take a minimum of 6 days, plus another 20 days for a decision made today to even begin to affect the outcome 28 days from now. In fact, I would argue that the effect would be so small that it would be virtually impossible to measure. There is no way that anyone could make that decision. There simply isn’t enough data with which to make a decision. The numbers won’t have changed in that time period.
So where does 28 days come from? I believe that governments are choosing a time period that is long enough to make a dent, but not so long as to create a revolt in the population. If government came forward and said we need a 4 month lockdown, I have no doubt that we would see protests in the streets. They chose 4 weeks simply to appease the population into compliance.
I’m going back to my original prediction in March of 2020 in which I forecast that this disease would take 18 months to work its way through the medical system and the economy. I’m going to stand by that original prediction. We are going into a second wave. The second wave is more serious than the first. That’s all pretty clear.
The vaccine won’t be deployed in sufficient numbers to have a lasting impact until late summer or early fall. So as you plan your cash flow, your hiring, your travel, and your revenue, remember that we are in the middle of an extremely fluid situation that is likely to change from one week to the next.
I’m often asked by both friends and listeners to the show how we decide to take on a specific project versus passing on an opportunity.
The fact is, there is no exact science. But we are looking for certain characteristics.
It starts with the people. Are the right people involved? If not, there is no sense starting on the project. Then we need to look at the market and then finally the specific deal.
- I want to be in an area of strong demand. We want to see population growth. We want to see a shortage of supply and we want to see resistance to development. That sounds paradoxical. Why would a developer want to work in an area that is pushing back on development? It’s a balance. We don’t want so much resistance that it becomes impossible.
- Simply buying a property that has no distinguishing features is not interesting to me. I believe that we are on a mission. That mission is to create communities that people feel at home in. They need to feel connected. The community has to exist for a reason, not just cheap housing.
Let me give you a an example.
Our latest project is the design of a new residential subdivision in the outskirts of Boise Idaho. Boise is a city that seems to be attracting people from higher density communities on the west coast. They’re moving for access to the outdoors, for the lower cost of living. The city is #4 in the country in terms of growth. There is a massive mismatch between demand and supply.
A recent survey of the home listings found only 154 homes for sale of any description. The average days on market was 5.5 days. Prices were up on average 13.5% in 2020.
When we found 45 acres across the street from a brand new high school, with new infrastructure including roads, a water treatment plant across the street and ample electric supply we saw a lot of potential. We are not fans of auction situations because we always end up paying more in those situations. In some cases we will engage in the auction if the numbers make sense. This was one of those rare cases.
The property is located on the edge of the suburb of Middleton. Middleton has grown by nearly 50% in the past few years. Future growth will require the annexation of more land from the county into the city. Even with the tremendous growth, there is nothing for sale. Any development land has sold out very quickly.
We saw this project as an opportunity to participate in community building. We had direct talks with the planning department and with the Mayor. We understood what the sentiment was within city council. We felt that we could develop a winning concept for the area, that would truly add value to the community.
I know what you’re thinking. How is it that some guy up in Ottawa Canada is having conversations over zoom with the Mayor in Idaho about developing a new neighborhood thousands of miles away?
Middleton has another problem. 85% of the people who live in the community, don’t work there. How could we be part of the solution? We are not talking about necessarily building lots of commercial property. The work from home phenomenon is not just a temporary pandemic solution. Even once the pandemic is over, there will be a residual and substantial portion of the population who will want to work from home.
When you consider the design of most homes, even recently designed homes, the question of work space has been largely ignored. This particular project represents a unique opportunity to create a live work play community.
We held our first community meeting last week with local residents where we shared many of the design concepts. It was an opportunity to hear first hand from local residents how they felt about development in the area.
Finally, is this going to be an isolated project or does it form part of an ongoing stream of investment projects?
On today's show we're talking with George Ross about some of the structural changes underway in the world of retail. If you own retail space, or you are looking to acquire a retail property at a bargain, you'll want to listen to George's perspective. I'm not saying he has it 100% right in all cases. It's a perspective worth considering.
Chris Funk is based in Jacksonville Floria and develops new construction build to rent in multiple markets across the Southern US. You can learn more or connect with Chris at SouthernImpressionHomes.com.
On today’s show we’re talking about the help that comes with many well intentioned government initiatives. Today’s show just makes you go Hmmm. I wonder what they were thinking.
Today we’re taking a closer look at a number of pandemic help programs that seem to have veered off their originally advertised objectives. There are so many of these stories, I’m just going to give you a sampling. There’s simply too many to cover in 5 minutes.
Back in the Spring, the Federal reserve announced with much fanfare that it would take $75 billion dollars appropriated by Congress and through the magic of its printing press turn it into $600 billion dollars in assistance for mid-sized businesses through its main street lending program.
Now 8 months into the program, and the banks have written less than $6B in loans. This is 1% of the funds that were promised under the program.
The Fed doesn’t have the ability to give away money, but they can lend it. The banks would still have to absorb 5% of the loan losses and the fed would absorb 95% of the loan losses. Banks don’t like to lose any money, so they underwrote the loans very conservatively. If a borrower qualified as a good credit risk, then the banks loaned money through their commercial loan desks without help from the Fed. If they didn’t qualify, then the banks generally declined to fund the loans, despite the Fed assurance of backing 95% of the loan losses. The sliver that actually qualified was less than 1% and it wasn’t because the businesses don’t need the help this year.
The pandemic has put enormous burden on healthcare systems around the World. Canada welcomes about 49,000 refugees or asylum seekers into the country each year. While they’re waiting for their refugee claim to be assessed, they have the right to get a job. Many end up working in numerous low paying jobs like call centres, or as personal support workers in long term care facilities and nursing homes. During the peak of the pandemic in the Spring, Canada’s Federal Government announced with much fanfare that it would allow personal support workers to shortcut being accepted as permanent residents in Canada if they commit to continuing to work as personal support workers for a minimum six month period. It took 7 months following the announcement for the government to publish their 60 page guide on how to apply and the 25 page application form. Within a week of the forms and the guide being available, a new guide was published with new qualification regulations.
The Small Business Administration department of the US government was tasked with administering two different programs to assist small businesses. The first was the pay check protection program which would provide up to 12 weeks of salary in the form of a loan provided you kept your employees on payroll for a minimum of 8 weeks. But the problem is that 12 weeks of payroll assistance is not enough to support businesses that are now in month 9 of a pandemic. Very few businesses are sitting on enough cash to survive 9 months of economic collapse.
The second SBA program was the Economic Injury Disaster Loan. The EIDL is not a grant, although the first $10,000 could be a grant under certain circumstances. It’s a loan at 3.75% for up to 30 years.
Governments all over are scrambling to try and figure out how to help save the economy. I don’t envy the job of government. They have a nearly impossible job. Even the assistance that some businesses are receiving will not be enough to save them. So if your business has been impacted by the pandemic, don’t just sit back and wait for government to save you. You have the agency to act and be responsible for your own business success.
Demographics can be used to predict the future of real estate markets. Nowhere is this more true than in the hundreds of small towns and villages all over the world. Younger people have been moving out of the small towns in search of fame and fortune in the big city.
Some countries have been experiencing very low birth rates resulting in rapidly aging populations. In the US, birth rates were at 1.77 in 2017 and have fallen another 2% in since 2017. That’s not high enough to sustain the population at a constant level. Demographers will tell you that you need a birth rate of 2.2 in order to hold population constant.
Some countries have increased immigration in order to offset the drop in fertility. In Spain, the number of deaths have exceeded the number of births for years and shows no sign of changing.
Bulgaria’s population is shrinking faster than any nation on earth. Despite having a growing expat population, Bulgarians are leaving the country in droves looking for more lucrative employment elsewhere in Europe. Combined with a birth rate of 1.46, the country is expected to lose 23% of its population over the next 30 years if current trends continue.
A similar trend has been reported in Latvia.
In Italy, the birth rate sits a 1.34, one of the lowest in the Europe. Cost of living, low wages, and difficulty in finding steady employment is the #1 factor that most Italians cite in their decision not to have more than one child.
Dying towns exist all over the country. Italy has been running an experiment to bring new investment into small towns. The most visible was the small town name Sambuca which started offering abandoned houses for auctions starting at 1E. The houses come with strings attached. They have to be redeveloped and a minimum amount of investment in renovation needs to be made.
These auctions have been highly publicized and have attracted thousands of bidders from all over the world.
Some of these centuries old houses in historic medieval villages have sold for 1E. But most have been bid up in price. Some sell for $5,000, 10,000, 20,000 euros. Still, that’s a reasonable deal. After renovation, some owners report total investments of around 140,000 USD for a newly rebuilt home in a slice of paradise in the Italian countryside.
These are small towns where everyone in town knows your name. The owner needs to commit to spend a certain minimum amount of time there each year. Ultimately, the towns want these residents to start businesses and to bring economic activity back to these smaller centers.
Some have been purchased and owner occupied for part of the year, and then put up as short term rentals for a portion of the year.
About 16 towns have initially participated in similar projects 1E home projects. These programs give you a house and Italian residency. Now you will need to pay a 5,000E deposit to make sure you don’t walk away from your obligation to complete the purchase and the renovations. If you don’t complete the renovations within the contract term, then you will lose your deposit that might be more than your purchase price for the property.
Many of them are in the poorest provinces like Sicily, Puglia, Calabria and Sardinia.
But in today’s environment when you can be connected to the rest of the world through the internet, the actual physical location of your home matters less than it might have mattered in the past. There are so many people operating location independent businesses. Their clients are in one location, and they choose where to live based on a lifestyle choice.
Aaron asks,
I’ve been listening to your podcast for several months now and really like it. Thank you for all your insight into real estate investing. I was curious do you have an episode where you discuss further about whether or not someone should get their real estate license if they are getting serious about personal real estate investing. If you haven’t answered that question what are your thoughts?
Aaron, this is a great question. Real estate agents and brokers have access to a lot of tools that regular folks don’t easily access. If you go back 30 years, before so much of the real estate world became accessible online, it seemed like realtors had a monopoly on access to the information.
However, as technology has progressed, we find increasingly that the tools realtors used can also be accessed by the general public, sometimes for a modest fee.
Some jurisdictions have stricter privacy policies than others.
The other benefit of having a realtor on your team is that you can collect a commission on your transactions if you represent yourself. That can amount to a 2-3% saving on the gross purchase and a 2-3% saving on the sale. That’s significant and can improve your profit margins quite a bit.
Not only that, you can often market yourself as an investor friendly broker and many investment colleagues may throw business your way. That steady flow of transactions can smooth out your income stream. The life of a real estate investor can often be pretty inconsistent from a cash flow perspective. That income roller coaster can be great one month and swing to negative the next month.
In many real estate boards, new listings go out to the realtor community a few days before being published to the public Multiple Listing Service website. That two day head start in front of the buying public can be a real competitive advantage.
On the other side of the coin, there are responsibilities that come with being a realtor that you carry with you everywhere you go. If you are at a cocktail party and you hand someone your business card, your real estate licensing board will probably require that you disclose that you are a licensed realtor at the same time. You will have to hand out two business cards, one for your investment firm, and one for your real estate firm.
The biggest issue you have with being a realtor is that you have a duty to fully disclose. You might be selling a property that has a historic problem. It might have been a past water damage that was repaired, or perhaps asbestos that was remediated. It might even be an existing risk item that you would expect the buyer to examine in their own due diligence. As a seller, you can allow the buyer to conduct their own due diligence and you have no duty to disclose. But as a realtor, you have a duty to disclose no matter what. If the buyer finds a problem after closing, your risk of litigation is much much higher.
Everyone knows that realtors carry errors and omissions insurance. So even if the realtor has no money, the plaintiff in a lawsuit knows that there is a good chance of collecting from the insurance policy if they sue the realtor.
For that reason, realtors attract more than their share of litigation.
Failure to disclose is enough to trigger a lawsuit and a sanction by the regulator for your real estate license. The thinking is that when you are in a conflict of interest position, you have a fiduciary duty to protect the public and your clients ahead of your own self interest. When you’re a realtor and a principal in a transaction, you are in a conflict of interest position.
I can’t advise you on which way to go on this question. There are pros and cons that you will need to weigh. I know investors that carry a real estate license. I also know many investors that have tight relationships with brokers who are not direct owners in their projects.
On today’s show I’m going to share the final segment in this forecast based on highlights from Dr. Duncan’s presentation that I believe are relevant for all real estate investors. On today’s show we’re focusing on new construction. Here we go.
People who are currently homeowners are more fearful of the Corona virus and are not listing their homes for sale. Sellers don’t want strangers come into their house and possibly infect the family. On the other hand, those who are tenants in multi-family apartments are more fearful of the virus in the high density environment than they are of moving. They are taking advantage of the low interest rate environment as an opportunity to buy and lock in an interest rate for a long time. This surge in demand, with a drop in supply is putting a lot of upward pressure on prices. Both Fannie Mae and Freddie Mac are reporting record years for loan originations.
Across the nation there are 2.7 months of inventory on the market. That’s the lowest level since data has been collected.
New home builders have seen a surge in contracts for new homes. The builders will eventually need to catch up and build those homes. It’s hard to say how they will respond to demand for new sales if they get too far ahead of construction. Availability of skilled labor is the constraint in the construction industry right now.
We can anticipate that once the pandemic is under control, whether that is through a an effective therapeutic, or widespread adoption of a vaccine, supply of houses on the market will increase. Depending on the locations for that supply, interest rates for new loans, and the demand at that point in time, we could expect to see a softening in prices.
For now, new home builder backlog is at record levels.
If we go back to 2005 through 2006, the industry had a capacity to deliver 1.4 million new homes a year and sales peaked in 2006 at that level. In the aftermath of the 2008 downturn the industry delivered about 300,000 new homes a year at the bottom of the market. And has been averaging between 500,000 and 600,000 new homes a year for the past 5 years. It’s fair to say that the industry is sized to deliver that volume of new homes. In October, sales peaked at an annualized rate of 1M homes a year which is well above the capacity of the market at current staffing levels. The question is whether the industry can and will grow to to meet the challenge of the higher sales volumes without becoming overheated and perpetuating a boom and bust cycle yet again.
Based on the Fannie Mae data, the outlook for new home construction shows demand for 830k new single family home sales in 2020, a 21% increase over 2019. This is expected to grow a further 6.2% to 881k units in 2021 and remain flat at 881k units in 2022.
2020 has been a banner year for refinance activities, representing a 127% growth over 2019. Next year, refinance activity is expected to contract by 56.5%. Normally a 56.5% contraction would be a huge deal. But it will basically match 2019 refinance volumes and 2019 was a banner year for refinance activity.
Based on everything I’m hearing, I going to go out on a limb and predict that single family new construction for rental is going to be a product that is in high demand. In particular, I believe that new construction townhouses which live like a single family home are going to be in high demand because they are more affordable than a detached home. The drive for affordability is going to influence demand for the coming next several years.
Last week I attended a small private presentation hosted by my good friend Tom Wilson at the BACOMM monthly meeting held in Silicon Valley. The guest speaker was Dr. Doug Duncan, Chief Economist for Fannie Mae. Doug has been a guest on the show before. Doug leads a large team of nearly 200 economic analysts and have consistently won awards for having the most accurate economic predictions anywhere in the US.
We covered part 1 of Doug’s predictions on Friday’s show.
On today’s show I’m going to share a few more highlights from Dr. Duncan’s presentation that I believe are relevant for all real estate investors.
This year the Federal Reserve changed their stance on inflation. The Fed doesn’t see moving the overnight funds rate above 0.25% until the end of 2022. This is the part that is significant. They have also changed their stance on inflation. Rather than setting a 2% ceiling on the rate of inflation, the Fed is now saying that they’re going to be fine with an average 2% for inflation. That’s a dramatically different stance. That means that the Fed might not raise interest rates when core CPI creeps up above 2%. They will wait until the average is above 2%. For 2020, they’re estimating inflation below 1.8%. This means that inflation would need to exceed 2.2% next year before they take action to cool inflationary pressures.
So as real estate investors we can count on low interest rate policy for some time to come.
Dr. Duncan shared data on the office market for a number of cities across the US. He noted that many office markets can expect it to take more than 6 years for local office vacancies to return to pre-Covid levels.
Part of the reason has to do with the amount of new office construction in the pipeline. Most cities are experiencing growth in supply that is far in excess of demand over the next three years. That new supply was already committed prior to the pandemic.
San Francisco is expecting a 7% growth in office supply over the next 3 years, with a 0% increase in demand. Many of the major markets are experiencing flat demand over the next several years and increasing supply. Doug believes that many businesses will want to return to the higher productivity environment of an office. Nevertheless, office space is one of those areas that is under extreme pressure over the next 5-7 years.
The only city that is expected to show a fast rebound in office is Washington DC. That’s largely driven by government.
Cap rates in multifamily don’t appear to have changed at all during 2020.
Fannie Mae is looking hard at migration. They’re looking at where applications for new loans are being from, and the location of the loans for the subject properties. From this data, they can clearly see that migration is underway from more dense zip codes to less dense zip codes. They have the actual data from real transactions. This isn’t a survey or a statistical poll. It’s based on boots on the ground activity. Whether that is sustainable remains to be seen.
Job prospects for millennials over the past 5 years have been in the urban core. Not surprisingly, they have moved close to their jobs. Do they want single family homes? Yes, but those don’t exist in the downtown core. Now that they aren’t tied to being in the core, millennial are migrating to the suburbs.
When it comes to rental properties, Fannie Mae is seeing much more tenant rotation in the A class properties than in the B and C properties. Those who are upwardly mobile and can afford a house are buying a house and moving out of a high density property to low density.
On today's show I'm talking with Mike Wolf about strategies for the coming quarter. Mike has been in the business for 31 years and is wintering in Puerto Vallarta Mexico. To connect with Mike, visit MikeWolfMastery.com
Joel Block hails from Los Angeles California where he has been a fund manager for many years, specializing in hedge funds, real estate syndications, and all kinds of businesses. On today's show we're talking about the latest impacts of the pandemic on real estate assets.
You can reach Joel at bullseyecap.com.
Last week I attended a small private presentation hosted by my good friend Tom Wilson at the BACOMM monthly meeting held in Silicon Valley. The guest speaker was Dr. Doug Duncan, Chief Economist for Fannie Mae. Doug has been a guest on the show before. Doug leads a large team of nearly 200 economic analysts and have consistently won awards for having the most accurate economic predictions anywhere in the US. When I speak with Doug, he’s not just reciting data. He has layers upon layers of evidence to support the conclusions drawn. This one hour talk was packed with market insights that I have not seen anywhere else and I want to share these with you. If Dr. Duncan’s observations are correct, they will serve as a guide for what’s to come in 2021 and beyond.
On today’s show I’m going to share a few highlights from Dr. Duncan’s presentation that I believe are relevant for all real estate investors.
What we’re dealing with in 2020 is a pandemic and not an economic variable. We simply don’t have economic models that have a pandemic built in as an economic variable.
The Fannie Mae forecast is based on data over the past 4 quarters and is making reasonable assumptions about the trajectory of the disease in the first half of 2021.
There are a number of conclusions that can be drawn from the data that Dr. Doug Duncan presented.
What they found is that the highest percentage of renters are in the food and beverage, retail and hospitality sectors of the economy. These are the very sectors that have been most impacted by the pandemic. Therefore, they conclude that the impact to home owners has been proportionately much less.
The folks at Fannie Mae looked at the loans that are in forbearance. Again, the lenders are in direct communication with their customers. Fully 25% of those who took the option of a forbearance agreement did so out of an abundance of caution. They did not experience job loss, nor a reduction in income. They took the forbearance just in case.
Another 25% of those who took the forbearance option did experience a partial loss of income, but still had sufficient cash flow to make their mortgage payments. Strictly speaking, they didn’t need to take the forbearance agreement. When those forbearance agreements expired, those home owners were in fact able to resume mortgage payments and have not gone into default. Based on this, we can conclude that the state of financial distress for home owners is about half of what the total numbers would suggest. That’s a good sign.
So let’s see what’s going to happen to the remaining 50% of the homes that are in distress. Dr. Duncan believes that loan modification agreements will be signed with the borrowers that the banks believe are good credit risks. If a borrower is 6 months behind on their payments, they may extend the loan by a year, add the outstanding payments to the loan, spread over the remainder of the loan and bring the loan into good standing. Those properties will not go into foreclosure. That leaves a much smaller number that will actually go into foreclosure.
Dr. Duncan also shared that several large institutional players who are sitting on large sums of cash are prepared to step in and purchase portfolios of distressed properties in bulk. Therefore the impact to the lenders can be reduced with a few large transactions, rather than the waves of auctions on the court house steps that were daily occurrences in 2009 and beyond.
On this basis, I’m going back on what I’ve reported previously. Will there be distress in the coming months? Yes there will. But I believe that distress is going to be confined to specific sectors of commercial real estate. Specifically, I’m referring to retail, office and hospitality. I’m concluding that we will not see a repeat of 2008 with millions of homes appearing on the market at deep discounts.
There is a growing movement aiming to address the perception of racial bias when it comes to housing.
The US has a history of racial division dating back to the days of segregation. Those practices were outlawed in 1917 when the US Supreme Court deemed those practices as contravening the law. The law was further strengthened in 1964 with the Civil Rights bill was signed into law by Lyndon Johnson. The practice of designating certain neighborhoods as white only, or black only clearly violates every moral and ethical and legal principle in a free and modern society. To be clear, our society has made huge strides since those days. At the same time, it’s also clear that racial inequality still exists on multiple levels.
The question remains whether certain newer regulations have the unintended consequence of discriminating against racial groups.
The City of Minneapolis has tackled this question with respect to the zoning code. The argument is that a high proportion of dark skinned people are tenants in Minneapolis, and a high proportion of light skinned people are home owners. Therefore, it could be argued that the zoning code that limits certain zones to single family homes that are predominantly owner occupied has the same effect as racial segregation, even if that was not the intent of the regulation.
In response, the city has decided to eliminate the single family home designation in the zoning code. In fact, a number of states and the department of housing and urban development (HUD) have started to tackle the question as to whether zoning is exclusionary. They added provisions for higher density in transit oriented areas.
This approach seems both balanced and positive. As a developer, the creation of more opportunity for higher density development within the core of the city is a positive step. This could be one of those rare moments when there is consensus on what might be a politically charged, or perhaps racially charged topic. Developers welcome a more relaxed regulatory environment. Home owners and tenants grappling with affordability would welcome the move as well.
Curiously, some cities like Philadelphia have gone in the opposite direction. The city has moved to reduce the areas in the city which are zoned for multi-family development. I’ve personally owned property in the city that has had the zoning arbitrarily changed from residential multifamily to residential single family. Those properties that are zoned multi-family are arguably more valuable because you can build higher density.
If you look at cities like Houston, which has no zoning code whatsoever, the city functions without a problem. Market forces and practical considerations like traffic and utilities provide the only broad constraints. Unless a property has a deed restriction specific to the property, you can build a warehouse next to a single family home, next to a school, next to an office building. The city has assumed that common sense will prevail and the free market will determine whether a project will succeed in a specific location or not.
When you look at the work of almost any municipal government, if you take the time to read the minutes of the city council meeting, or watch the video replay of the meetings, you’ll find that more than 90% of the work of local government is tied up in land use. The amount of resource that is frankly wasted in bureaucratic red tape is astounding. Some residents will argue that maintaining the historic nature of some areas can only be done with the protection of strict regulation.
No doubt, cities all over will be looking at what Minneapolis has done to help guide their own future land use policy.
A change in zoning regulations has the potential to change the supply demand balance dynamics within a city. This one factor can do more to determine the long term viability of a new multi-family project than most people recognize.
Charlie Munger, is Warren Buffet’s partner in Berkshire Hathaway. He’s famous for saying, “Show me the incentive and I’ll show you the outcome.”
Society and government alike have been conditioned to think of regulation as the path to controlling market behaviour, to eliminate so-called “bad behaviour”.
The internet is the great equalizer that has broken many business assumptions. We live in a physical world. People live in houses. They eat real food (mostly). The doctor cures the physical ailments. Governments pave the streets so you can travel with ease from your house to your destination.
Local, state and provincial governments tax their residents in order to pay for these items. The local governments try to control what happens in the local communities through regulation.
The recent runup in share price for Tesla has increased Elon Musk’s paper net worth to the point where he is now the second wealthiest person on the planet. This week he announced that he moved from Silicon Valley in California to Austin Texas. In May of this year he announced that he was selling all of his properties in California. He clearly cut all ties to California to make it abundantly clear that he is no longer a California resident. Apart from needing to raise a bunch of cash to exercise his stock options this year, his nearly $1B in stock option compensation, which become exercisable this year would bring a whopping tax bill.
Texas of course has no state income tax, compared with California’s new proposed 16.8% top marginal tax rate. So if Elon Musk cashes in on $1B in stock option profits, he could conceivably save $168M in tax just by moving to Austin. Would I accept $168M in cash in order to move to Austin? I suspect that virtually anyone would.
On the first of December, Hewlett Packard Enterprise announced it was moving its corporate headquarters from San Jose to the Houston suburb of Spring. Spring is located in the NW of Houston, very close to where HP had it’s enterprise server and storage division.
HP has said that it is listening to its employees who want greater choice on where to locate. They want a place where there is a lower tax rate, a lower cost of living, and more ability to spread out without the congestion of traffic in Silicon Valley. Hewlett Packard split into two companies in 2015, with the more profitable server and IT services business forming HPE, and the consumer computer and printer business remained as HP Inc and is still based in Cupertino near the original HP headquarters.
Here again, we have a company that is a fixture in Silicon Valley, one of the Silicon Valley originals, making the move to a lower cost, lower tax, lower regulation environment.
I hired engineers in both Silicon Valley and in Texas in my hi-tech career. I can tell you from first hand experience, that equally talented people cost 25% more in Silicon Valley, simply because the cost of living in that area is so much higher.
I used to hire organizations from India and relocate portions of the team to North America to facilitate the communication. The bulk of the team remained in Bangalore. Today, that model is gone. I regularly hire top talent in India even today. Not only do I save money, the main reason I do it is for speed and quality. North Americans culturally tend to work in isolation. My team in India will throw 4-6 people at solving a design problem and deliver a high-quality result in a quarter of the time and at a fraction of the cost of a comparable North American team. In my case, the incentives are cost, quality and time. Those are strong incentives.
If there are local regulations that make work here locally more expensive, or more cumbersome, we’re not obligated to conduct business or invest in a particular geography.
We will invest where the numbers make sense. As Charlie Munger says, Show me the incentive and I’ll show you the outcome.
On today’s show we’re talking about the dangers of stock market manipulation and why every investor who has exposure to the stock market needs to pay attention .
The performance of the stock market is a phrase that makes no sense. What we’re describing is the aggregate performance of the underlying companies that make up the stock index.
There are a few things that determine company value. First there are the fundamentals. Is the company generating a profit? Is it growing both revenue and profit? Is it gaining market share?
Then there are technical factors that are influenced by market sentiment? These are the headwinds and tailwinds that have more to do with the buyers and sellers of shares than the underlying companies. We’ll come back to that in a minute.
Finally, there is the financial engineering that manipulates the price per share of a company without changing the fundamental value of the business. In fact, sometimes the management can goose the price of a stock artificially for short term gain while harming the long term health of the business. This is the part that is the most troublesome and we’ve seen happen on a large scale in recent years.
A buyback occurs when a company uses some of its cash to repurchase its own shares. Other choices include investing for growth, acquisitions, paying down debt or paying dividends.
Legalized in 1982 by the Reagan administration, buybacks took off after a 1992 tax bill created incentive for more stock compensation. Now stocks and options making up about two-thirds of executive pay.
In the current low-interest-rate environment, many companies have taken on more debt, whose interest cost can be tax-deductible, to buy back shares whose dividends may be more costly.
Imagine if you have a preferred share that has an interest coupon at 7%, and you can borrow funds at say 5%. You can buy back equity which reduces the number of outstanding shares, and reduce your interest expense. That would be an obvious move for any company to undertake.
Where it gets dangerous is when a company retires common shares that do not pay a dividend and increase the company’s interest expense in order to reduce the number of shares outstanding.
Reducing a company’s float of outstanding shares through a buy-back program increases the earnings per share, creating the illusion that the company is performing better than it really is. The increase in earnings per share can drive bonuses for company executives. Imagine for a moment that executive compensation is tied to earnings per share. In some cases the compensation might be a cash payment, or as increasingly the case, stock options. On the surface that seems like a fair and reasonable method.
Let’s create a fictional example. We’re going to use the company from the Road Runner and Wiley Coyote cartoon. Our company is Acme. The company has an enterprise value of $1B with virtually no debt and the stock is trading at $10. The company is earning $1 per share in earnings. The company executives are given a stock option grant at $10. The company had a hiccup in the past year and isn’t growing. It’s revenue is flat, and earnings are flat.
So the executives decide to go borrow $100 million dollars to buy back 10% of the shares of the company. The interest cost has gone up a bit, so they decide to lay off a few employees to reduce expenses. The impact of the layoffs is on projects that would deliver revenue in 3-4 years, so the immediate impact to revenue is zero. It’s merely a cost saving.
With fewer shares in circulation, the earnings per share has increased by 10%. All other things being equal, the shares are now worth $11. The company executives are now sitting on $1 worth of profit on their stock options.
Natalia says, “I have a property that is my personal residence that I’m looking to rent out as an entire property on a short-term basis. I also have several condos that I own that would do better as a short-term rental than as a long-term rental. How do I decide on pricing a nightly rate?”
Natalia this is a great question. It’s also a huge question and I’m going to try and condense about an entire day worth of content into about 5 minutes.
Your question is more about marketing and digital marketing in particular.
The whole process starts with understanding who your target client is. Let’s imagine you’re buying chocolate. You could go to the grocery and purchase a giant bag of Hershey’s kisses. You can buy the 4-pound bag for about $23. You could also go out and buy a specialty hand-made box of three unique truffles for about $20. These are vastly different products. They’re targeted at different customers. The difference in price on a per pound basis is more than 20:1.
The same is true for a short-term rental. If your property is a commodity, then you’re going to be positioned in the market as a commodity. You’re going to be one of those Hershey’s kisses in the bottom of the bag, indistinguishable from the next hoping that you’re the one who is going to get picked today.
But if your property has distinguishing features, then you’re set apart from the rest. If your property is a ski-in ski-out property, 300 feet from the base of the gondola that takes you to the top of the mountain, that’s a unique product. There might be 500 short term rentals available at the ski resort. In that case you’re chance of being picked is 1 in 500. But if your product is that unique ski-in ski-out chalet, then your chances of being picked improve to 1 in 3 or 1 in 5. I like those odds a lot better.
If you’re serious about being in the short term rental business, then you want to think about dynamic pricing. This is similar to what the airlines do. It’s no secret that it’s less expensive to fly on Wednesday than on Monday or Friday. Likewise, you may price weekends higher than weekdays.
There are tools that help that process of determining the best pricing. One that I recommend is a company called Airdna. The have over 25 performance metrics for over 80,000 cities worldwide. They examine thinks like market occupancy, number of active listings, average daily rate, revenue per available room, booking lead times and so on. You can also get customized competitive data sets which allows you to get a much more accurate perspective on your specific segment of the market.
Some properties are seasonal with a peak season, a low season and two shoulder seasons. Your pricing strategy is going to vary depending on which season you’re in.
I own a portfolio of short term rentals in a seasonal market. We know that the highest nightly rate is in the 16-20 weeks during the summer. Demand is good during ski season, but a fraction of what it is during the summer, hence the lower nightly rate.
This is where the importance of product positioning comes back into play. I want my properties to have the best positioning in the market. I want the vacancy to go to the junk in the market. I want more than my fair share of the market during those periods of softer demand. Key to that is the reviews. So we will spend extra on a few items of furnishing. We will buy the most comfortable king sized mattress that money can buy. I don’t mind spending extra on that. I want you to get those guest reviews that say “Wow, this was the most comfortable bed ever.” If you have those reviews for your property, then you will get more than your share of the market.
Finally, I want you to make sure that you show up as a superhost in AirBnB. All these little things separate you from the rest of the properties that are just commodities in the market.
Sharon Restrepo is based in West Palm Beach, Florida. On today's show we're talking about market cycles and how to recognize the four phases of the market cycle. You can Sharon at takingthelandinvestors.com.
Chris Miles is based in Salt Lake City Utah. He made the transition from the monolith world of insurance and financial planning to main street investing in hard assets. He's committed to stopping the speculation and leveraging boring proven strategies that work repeatedly and predictably. You can reach Chris at moneyripples.com or listen to the Chis Miles Money Show on your favorite podcast platform.
Danielle asks: "I am considering purchasing a 4 unit apartment building that is approved for higher density to six apartments. How do I know what is a fair price to pay for the property?"
Danielle, this is a great question.
When we buy real estate for a long term hold, or a quick sale we use a very similar approach that is pretty standard in the industry. The method is called “Residual Land Value Analysis “. Click HERE for a copy of the spreadsheet
It’s a fancy term that basically means you need to work backwards from the answer to the question, or work backwards from the value of the finished product to the raw material that you are starting with.
On yesterday’s show we looked at the case of a simple new construction project or a flip. We did a bunch of math to explain how the residual land value analysis works. For those of you that want to follow along with a spreadsheet, there is an example you can link to in the show notes for this episode. Just go to the show notes, click on the link and you’ll get a copy of the example. The same spreadsheet that we used for yesterday’s show has a second sheet embedded in it with the buy and hold analysis.
On today’s show we are going to look at the case of a 4 unit apartment building in a hot area. The first thing you need to assess is the as is value. That’s based on the current rent. For your specific property, the rents are quite low at about $1,050 a month. The taxes are high and the expenses will probably run near 50% based on a building of that age. If we valued the property aggressively at a 5% cap rate which would be high for that quality of asset, you would find that the property is worth no more than $500,000. That is a long way from their asking price.
So now we are going to look at the residual land value analysis assuming you redevelop the property into a six unit apartment.
The property you found is in a great area that is in high demand. Rents for new product in the area are running at about $2.30 per square foot. We are going to build 4 apartments at 900 SF each with an additional overhead of 20% for the common area. We only charge rent on the rentable area of 3,600 square feet. Gross rent will be $100,000.
I’m going to cut a few corners here in the rental analysis like accounting for vacancy. The point is not how to model a rental, but the residual land value analysis.
The expense ratio is going to be much lower than the previous case because the rents are higher and you have a new building. We will assume a 35% expense ratio. We will use the same 5% cap rate as before. Once built, the building should be worth 1.4M
Your business is going run as a healthy business and I recommend that you set the profit margin for your business somewhere between 25-30%. I would start at 30% and as you get more experienced with strong and predictable systems you can lower your margin requirement.
Except in this case the notion of margin is different. We’re not selling the property. Instead we are going to refinance. We want to target a refinance at 70% loan to value so that you can recover 100% of the initial investment in the refinance.
If we take 70% of the value, then our maximum investment is $980k. Our loan closing cost is going to be about 3% of the loan amount or $35,000. We are now down to 935,000.
We are facing a year of holding cost, so we can budget $60,000 for that. We are now at 835k. Just like the case yesterday, we need design engineering and permit for $30k.
We can build a good quality B+ product these days for about $126 per square foot in many markets. We subtract the hard construction, foundation, and site servicing costs and that leaves a residual land value of $331,400.
This exact same calculation that applies to a flip or a new construction project for sale .
Go to the show notes with this episode to download the spreadsheet example.
Today is another AMA episode - Ask Me Anything
Danielle asks: "I am considering purchasing a 4 unit apartment building that is approved for higher density to six apartments. How do I know what is a fair price to pay for the property?"
When we buy real estate for a long term hold, or a quick sale we use a very similar approach that is pretty standard in the industry. The method is called “Residual Land Value Analysis “. Click HERE to download the Excel example for today's episode.
It’s a fancy term that basically means you need to work backwards from the answer to the question, or work backwards from the value of the finished product to the raw material that you are starting with.
So let’s construct a simple example of how to conduct residual land value analysis. For those of you that want to follow along with a spreadsheet, there is an example you can link to in the show notes for this episode. Just go to the show notes, click on the link and you’ll get a copy of the example.
We are going to run through the example twice. On today’s show we are going to examine the simpler case of a sale of the finished product, and on tomorrow’s show we look at the second case which has a couple of additional calculations when you are doing a long term hold project.
Imagine you found a property that is in a great area that is in high demand. You know that houses in the area are selling for $1,000,000 for a 2,000 SF home. How do you know what you can offer for the property in order to have a profitable project?
Let’s say that you have completed the comp analysis and you have a high degree of confidence in your ability to sell a quality product at that $1,000,000 price tag.
Your business is going run as a healthy business and I recommend that you set the profit margin for your business somewhere between 25-30%. I would start at 30% and as you get more experienced with strong and predictable systems you can lower your margin requirement.
So now you know the sale price is 1,000,000. If your margin is 30%, then your total investment should be no more than $700,000. That’s going to get you a profit of $300,000.
You need to subtract your transaction costs associated with selling the property like the realtor commission, the land transfer tax, the legal fees and so on. Let’s put all of that together and estimate it at 8% of your sale cost or $80,000. We are now down to $620,000. You expect to hold the property for a year and you are going to be paying interest on that money, as well as paying for property taxes and insurance. Let’s estimate that at $60,000. Now we’re down $560,000. You will need to pay an architect and engineers for the plans and permits. Let’s estimate that at $30,000. We’re down to $530,000.
We said the house is going to be 2,000 square feet plus a foundation and a garage. Our hard construction cost might be $150 per square foot for a product with somewhat better finishes and the foundation may cost an additional $50,000 to dig and pour. When we add all that up we are looking at $350,000 for the construction. There is additional site work to bring utilities from the edge of the property line to the foundation. We estimate that at $20,000. So now our total construction cost is at $370,000. We subtract $370 from our earlier subtotal of $530,000 and we get $160,000.
So the maximum price we would be willing to pay for the land in that instance is $160,000.
This exact same calculation applies to a flip. Your starting point might be a older home that needs a major renovation instead of a brand new construction. But the analysis is exactly the same.
On tomorrow’s show we are going to be going through a similar analysis for the case of a property that is a long term hold instead of a quick sale.
On today’s show we’re talking about whether diplomats from a foreign country are immune from complying with landlord tenant rules.
When a foreign diplomat approaches your property manager seeking to rent a house or apartment from you, several thoughts might cross your mind: What do I do if this person defaults on the lease? Will I ever be able to get them out of the property? Do I have to rent to them? What should I do?
If you refuse to rent to them because they’re a diplomat, then are you contravening laws against discrimination due to profession? After all, being a diplomat is a valid profession.
When faced with this situation, you have three options available:
- Enter into a lease with the individual
- Enter into a lease with the embassy or diplomatic mission directly
- Don't rent to them at all.
Each option has different benefits and drawbacks, and you should carefully weigh all factors before making a decision.
You might be thinking I don’t live in a capital city therefore I don’t have to worry about this. But remember, the laws around diplomatic immunity don’t just apply to a employees of an embassy. There are diplomatic missions all over the country. Major cities contain consulates in order to provide consular services for foreign nationals all over the world. Embassies and consulates can be great tenants. They are generally willing for high quality properties in great locations and are willing to pay top rental rates.
In a case back in 2018, an Ottawa based landlord upgraded the security for a tenant who was an employee of the US embassy in Ottawa to include bomb-proof windows and double bolt locks on the doors.
The tenant was repeatedly causing a disturbance for other occupants in the building. The tenant stayed past the agreed date to vacate the unit, and then skipped out without returning keys and still owed two months rent. Attempts to collect through the standard means were met with a letter from the tenants lawyer claiming diplomatic immunity.
About a month after receiving this response and the threat of a counter-suit, the matter was taken up in Ontario Superior Court. The Judge in the case sided with the landlord and said that diplomatic immunity didn’t apply when it came to rent. The court ultimately issued an order to garnish wages from the employee of the embassy.
Today’s there’s a new story is about a home located in Ottawa Canada. This time the roles are reversed. The property is owned by Saudi Arabia’s top diplomat in Canada. The tenant in question is An Ottawa military. They allege that their former landlord — Saudi Arabia’s top diplomat — acted in bad faith when he gave them a notice of eviction, claiming he intended to move into the home with his own family. Under Ontario’s landlord tenant laws, owner occupancy is one of the few legitimate reasons for eviction under the law.
The tenant was surprised to see the property listed for rent a few weeks later for $500 more per month. When confronted, the landlord offered for the tenant to remain in the property for an extra $500 per month, clearly in violation of the law around both evictions and rental increases.
The tenant filed a suit in the landlord tenant tribunal seeking damages of one year worth of rent. So the question is whether the landlord will claim diplomatic immunity. The question is whether diplomatic immunity applies to cases involving real estate law and in particular landlord tenant laws.
If you’re going to be doing business with a foreign diplomat, you want to get legal advice from someone who is knowledgeable in the field. The considerations are a little different from your average tenant. The possibility of claiming diplomatic immunity significantly weakens your recourse with any contract that is signed.
Our Book of the month is “To Do List Formula: A Stress Free Guide To Creating To-Do Lists That Work “ by Damon Zahariades. This is one of 11 books by the author. All of his books are centred around the topic of personal productivity, a topic that he clearly has studied deeply.
We’ve all experienced the frustration that comes from having that 15 minute task that ultimately took 2 weeks to complete.
If you are like many people, you have probably tried many different management systems for organizing your daily life. There are so many and quite frankly almost all of them have pitfalls and break down in some way.
Our book this month takes a deep look at 10 of these systems and provides insight as to why a particular approach doesn’t work in a sustainable way.
It starts with the simplest to-do lists and examines the more capable approaches to the more sophisticated systems like “Getting Things Done” by David Allen.
Todo lists suffer from a basic problem. They are often mixing tasks of differing sizes, differing importance, and rarely are they scheduled on the calendar in the way a meeting or a dental appointment would appear on the calendar.
If you’ve been listening to this show for a while you will remember that the book “Getting Things Done” by David Allen was the book of the month back in...
Todo lists either capture too little, or they create overwhelm. There doesn’t seem to be a happy middle ground.
The problem with many of the to-do systems out there is that they don’t help you establish a meaningful context. Years ago, Stephen Covey built a todo system around the concept of first things first. That’s based on the idea that items can be categorized in terms of both urgency and importance. That defines a 2x2 matrix of items that are urgent and important, important but not urgent, urgent but not important, and neither urgent nor important. While maybe academically useful, there is no connection to projects,
Effective Task management requires gaining clarity between what is a project, a wish, a trivial task, an outcome and a task.
Sometimes I see resolutions on a todo list. Resolutions are different than todo items since they usually involve a change in habit versus a normal todo item.
Outcomes that have multiple steps are not tasks, but projects and only tasks should make it on your daily todo list. Projects should have a project plan and a todo list is a poor substitute for a project plan.
I’ve personally experienced the many pitfalls that various todo list management systems have intrinsic to their design. They have left me feeling like I can’t keep up.
The book doesn’t prescribe a single specific one size fits all solution. Rather, it takes you through the thinking process that enables you to gain clarity on how to define a task for your todo list. If you have multiple projects that are competing for your attention on a daily basis, you will inherently experience conflicting priorities.
Many todo lists capture trivial tasks lasting 2 minutes in duration. The satisfaction of crossing something off the list creates a false sense of accomplishment when that big important task gets procrastinated.
Standard todo lists don’t distinguish between items that require input from others compared with items that can be completed in isolation. David Allen proposes a separate waiting-for list. But this additional list adds another layer of task management. Systems that are overly complex ultimately don’t get used because they are too cumbersome.
If you have a well-oiled system in place, your lists will help you to get important work done faster and with more efficiency. If your system is faulty, your lists can actually hurt your workflow, sabotage your time management, and demolish your productivity.
On today’s show we’re talking about Radon, but there are a number of examples of things that that cost far less to build into the design of a new project when compared with adding them after the fact.
Radon is a colorless odorless radioactive gas that exists in the ground, almost everywhere. It poses a health risk to humans because in today’s highly insulated homes, you can get a buildup or radon gas inside the home over time.
Long-term exposure to radon is the 2nd leading cause of lung cancer after smoking and the leading cause of lung cancer for people who have never smoked. If you’ve heard of someone getting lung cancer, who never smoked in their life. You might be wondering how it happened. It could be that Radon is the culprit.
As radon breaks down it forms radioactive particles that can get lodged into your lung tissue as you breathe. The radon particles then release energy that can damage your lung cells. When lung cells are damaged, they have the potential to result in cancer. Not everyone exposed to radon will develop lung cancer, and the time between exposure and the onset of the disease can take many years.
Radon occurs naturally. It forms when uranium, thorium, or radium, (radioactive metals) that are present in the earth breaks down in rocks, soil and groundwater. People can be exposed to radon primarily from breathing radon in air that comes through cracks and gaps in buildings and homes. Because radon comes naturally from the earth, people are always exposed to it.
The CDC published a paper in January of this year in which they note that Radon is so pervasive, the CDC recommends that all houses get tested for it. That’s right, they recommend that every single house in the nation gets tested.
Radon gets into the indoor air primarily through pores and cracks in the foundation under homes and other buildings. Usually, the air pressure in homes and buildings is lower than the pressure outside in the soil around or underneath the foundation. The pressure difference will create suction. Radon will come into the house through cracks in the foundation due to that suction. There are numerous paths.
The most common and effective method for reducing the risk of Radon poisoning is the installation of an active soil depressurization system.
This method involves installing a pipe through the foundation floor slab and attaching a fan that runs continuously to draw the radon gas from below the home and release it into the outdoors where it is quickly diluted. This system also reverses the air pressure difference between the house and soil, reducing the amount of radon that is drawn into the home through the foundation. One, or sometimes multiple, suction points are inserted through the floor slab into the crushed rock or soil underneath to effectively reduce the radon level in the home.
I recently saw a quote for the retrofit of such a system in a single family home for $4,600.
We’re talking about the installation of a PVC pipe through the concrete slab of the foundation with an active blower type fan that runs continuously. The fan costs about $250 to buy and has a 5 year warranty. We’re talking about 16 feet of PVC pipe which costs about $1 per foot. The installation of the entire system during the time of construction is almost zero. A vapor barrier across the crushed stone is also inexpensive and costs no more than a hundred dollars for an entire foundation slab.
If a property fails a Radon test, the rules in most real estate boards say that the realtor must disclose the result to a prospective buyer. The impact of a radon problem on resale value and marketability of the property should be clear.
The simple addition of these inexpensive remediations before you even know you have a problem can be a cheap insurance policy for maintaining the future value of the property.
Lisa Haisha is an author, actor, model, real estate investor, producer, director, angel investor, philanthropist, therapist, coach. It's rare to find someone who can effectively operate in so many different domains. Today's show is not real estate focused, but rather spending time to understand Lisa's journey and how opportunities opened up for her. Her approach is so unconventional that there are some powerful lessons on how to live. You can reach Lisa on Twitter at @LisaHaisha.
On today's show our guest Christian Szpilfogel is talking about how some of the newest innovations in automation can make the life of a property owner so much easier. We're talking about smart connected devices like thermostats, cameras, water meters, and a large variety of alarms. You can connect with Christian at christian@aliferous.ca.
On today’s show we’re talking about what happens when there are multiple levels of government involved in the purchase of a property. It’s common these days to find properties that are outside the boundary of a municipality. In that case, the rules are set by the county in which the property resides.
But there are so many cases where multiple levels of governing bodies are involved and it’s incredibly easy to make assumptions about whose rules you need to meet. Let me give you a few examples because I want you to be sensitized to the web of complexity the exists in reality.
Imagine you had a property that was legally in the county, but a city street needed to access the property was located in the city. The zoning and construction in that case would be approved by county as you would expect. But there could be an extra layer of city approval required since the property would rely upon a city service in order to access the property. The city may require you to conduct a traffic study in order to approve the extra traffic that would be in the future be loading the city owned street. But the city may overload its traffic approval by imposing additional requirements that have nothing to do with traffic whatsoever.
This may seem unfair at first. After all, the city has no jurisdiction over the property. But cities have a tendency to grow. When that happens, they want lands that are annexed into the city to follow city guidelines. So often these rules are imposed by contemplating the future possibility of annexation by the city.
I’ve seen cases where the property in the county may require you to drill a well and septic. City services for water and sewer may be close by. In order to use those services, you might be required to meet the city’s zoning rules for a property that is not in the city. These examples of government over-reach exist all over the place.
Earlier this week I had a conversation with the Mayor of a town. He acknowledged that the property was in the county. But the services were provided by the city, and the road is owned by the state. In order to gain access to the services, the property would need to be annexed into the city, and the state would need to approve access to the road. So if you wanted to put in an extra driveway, approval from a third level of government would be required.
We had another conversation with the planning department of a city in Texas. They acknowledged that the property was in the county. Subdividing the property would fall within the approvals of the county. Zoning would be approved by the county.
But the property falls within the extraterritorial jurisdiction of the city. That’s an important term that you need to become familiar with. Extraterritorial jurisdictions are the legal ability of a government to exercise authority beyond its normal boundaries. Any authority can claim ETJ over any external territory they wish.
For this particular 9 acre property in question, the county would happily approve the subdivision of the land into two parcels. The back parcel would gain access to the road with the granting of an access easement, a 40 foot wide strip of land for a nice wide driveway. So far so good. Everything seemed to check all the boxes.
But then the city planner notified us that the property fell under site plan control of the extra-territorial jurisdiction. In order to build on the property, it would require a minimum of 130 feet of frontage on the road. Anything less and the building permit would not be approved.
As you think about that, pay very close attention to all the different government and regulatory bodies that could control what you build on your property.
Happy Thanksgiving to our US listeners. Canada has its Thanksgiving about 6 weeks earlier. That’s because our growing season is shorter than the US with our more northern climate.
The concept of Thanksgiving exists in most cultures around the world.
The Harvest Festival of Thanksgiving does not have an official date in the United Kingdom; however, it is traditionally held on or near the Sunday of the harvest moon that occurs closest to the autumnal equinox.
Japanese Thanksgiving is called Kinrou Kansha no Hi and this year it fell on November 23 earlier this week.
Traditionally, the concept of thanksgiving is rooted in thanking for the bountiful harvest.
Some people are grumbling that they can’t get together with family during this time due to the pandemic. Some are grumbling that they can’t travel. If that’s your experience, it’s because you have an expectation that differs from the current reality.
I am present to that which I’m enormously thankful for. I take the time each day to pause and reflect on what I’m grateful for.
I’m grateful for my health, for my family. I’m grateful for waking up next to my loving wife every morning. She is a source of love, support, inspiration, sage advice, and the occasional poke when I’ve got it wrong.
I’m grateful for the opportunity to contribute to this world in a meaningful and positive way. I’m grateful for the journey that this life has given me so far. Has it been perfect? No.
I’m grateful for the support of my team members who are genuinely working to pick up the slack for the benefit of moving the projects forward. I’m grateful for their skill when we’re working with outside clients as well. I’m grateful for our investors who have put their trust in us. We’re working tirelessly to protect their investments.
I’m grateful to you the listener for dedicating a few minutes so we can spend time together every day.
I’m grateful to those of you who have reached out to me for help with your projects. I’m grateful for the opportunity to contribute. In several cases we’ve saved families from financial ruin. Those opportunities are particularly gratifying.
We actually get approached on a regular basis is to provide consulting for investors and sponsors who are having trouble with their projects. These requests have been so regular that we’ve decided to expand our business so that we’re properly equipped to provide excellent service, rather than just casually helping out on an exception basis. We have formalized our Consulting Division. It turns out that the needs of our consulting clients are often the same as for our own business.
Frankly when we find and fix a problem that the client didn’t even know they had, that makes for a very good day. I’m grateful for the opportunity to help aspiring developers get to the next level.
We’re not making any formal announcements at this point about the launch of the consulting division. That will come before the end of the year. Have a wonderful thanksgiving
Today is another AMA episode (Ask Me Anything). Ryan in Los Angeles asks:
“I'm astounded by your prolific podcasting and breadth of knowledge. You seem to be inside my head in that whenever I think of a question to ask, I usually find the answer by listening to earlier episodes of your podcast. Please keep up the amazing work.
Where do you go to or what do you use to curate your summary of daily or weekly news sources you read to stay abreast of your real estate and related economic news? I find myself being overwhelmed by having to pick certain sites (e.g., REIS, NMHC, John Burns Consulting, Marcus & Millichap, etc.) to read each week.”
This is a great question. Developing content for the show is an intentional process that consists of a balance of topics of different types. As much as possible, I would like the content to be evergreen, that is to say, timeless. Some episodes are precisely that, a timeless piece of content on a particular topic. For example, if you search back through the archives. There is an episode on water rights. That’s an example of evergreen content.
Some topics are tie into something that is trending in the news. For example, there will usually be an updated economic outlook once a quarter, or an interest rate adjustment. But this year, things have been changing so rapidly, that once a quarter isn’t enough. The impacts are being felt fast and furious.
I try to cycle through the major segments in the industry including residential, multi-family apartments, retail, hospitality, office and industrial.
To answer your question specifically, I have a number of sources that I refer to regularly to when I’m researching topics.
The major brokerage houses have research departments. I read those reports and often use them as a launch pad for deeper research. I also look at the reports from the research wings of Fannie Mae and Freddie Mac. The folks at Fannie Mae under chief economist Dr. Doug Duncan do some of the best research in the business.
I pay attention to what some of the most tenant friendly politicians are saying. For example I regularly receive press releases from certain elected officials at the Federal and State level. They often put out a press release when they table draft legislation.
I follow the work of Dr. Chris Martenson, Dr. John Campbell, Simon Black, David Stockman, Jim Grant the author of Grant’s Interest Rate Observer. I follow John Mauldin. He’s an economist who is one of the best connected guys in the business. He has central bankers on speed dial on his phone.
I speak with other investors. I speak with Robert Kiyosaki, Russell Gray, Robert Helms, Brien Lundin, folks who are specialists in their specific area.
I also mine Business Insider, the Wall Street Journal, Apartments.com, the Financial Times, the Globe and Mail, the National Association of Realtors. What I’ve shared is a subset of a long list of regular sources.
But when I find a story that I think will be interesting, I’m not merely retelling the story from a newspaper. I will go to the original sources and construct a completely new perspective on the story based on my own observation. For example, the story on yesterday’s show was about a landlord defending a discrimination complaint in New Jersey. It was reported in a local Northern New Jersey publication. I went to the 10 page transcript of the settlement ruling from the New Jersey Attorney General’s office in order to make sense of the story.
If the source of the story is in a fringe publication, I will look and see if the story has made it into some of the more mainstream publications. I don’t want to be seen as part of the lunatic fringe. There are some days when I’ve completed the research and the summary for an episode and I decide against publication. Those are difficult decisions.
Thank you Ryan for a great question.
From time to time we come across the weird and wonky news story. Today’s show is precisely one of those. It’s one of those stories that seems to defy logic. But then again, in the litigious good ol USA, even the most seemingly benign things can be cause for a lawsuit.
The owner of Ivy Lane Apartments in Bergenfield New Jersey settled a discrimination complaint and agreed to pay $30,000 to a man who applied to live in the apartments. The fact is, he didn’t actually apply. He called the leasing office and asked about living in the apartment complex.
According to the story, Ricardo Moran visited Ivy Lane Apartments to ask about renting a one-bedroom unit and alleged that the management company, Tower Management said he needed to meet a $33,000 minimum yearly income requirement. which didn't take into account public assistance. Mr. Moran, who has a disability, planned to pay at most $386 out of pocket to cover the monthly rent of $995, paying the rest with Section 8 vouchers. He left Ivy Lane without filling out a rental application, according to the details in the 10 page court filing. He also never mentioned that he would be using a section 8 voucher to make up for his income shortfall. He simply left and assumed that he would not qualify.
According to New Jersey law, it is unlawful for any person to refuse to rent property to a prospective tenant because of source of lawful income, including a Section 8 housing voucher, to be used for rent. But the tenant was never refused because they never actually applied. They made an assumption based on an incomplete conversation. Somehow, the property management company was alleged to have discriminated against the prospective tenant.
The motion was started in April of 2010 and was finally settled more than a decade later in October of 2020.
Some property management companies have a practice of looking up the records of the landlord tenant tribunal for cases having been brought against a prospective tenant. Unless the tenant was evicted, the fact that they appeared before the tribunal can’t be held against the tenant. Even if there are a dozen such cases against the same tenant, unless one of those cases resulted in a judgement against the tenant or an eviction, that information can’t be used in making a tenant qualification decision.
The New Jersey Attorney General’s office has held up the case a setting a precedent in the State for how discrimination cases should be handled.
I’ll be the first to say that anti-discrimination laws are vital and important to maintaining a just society. I can’t stand it when I see examples of injustice because someone has been discriminated against for their gender, their religious beliefs, their cultural background, sexual orientation or any lengthy list of possible discrimination. In this particular instance, the tenant was not turned down because they never actually applied. Holding the landlord responsible in this instance seems to cross a line in my view. But then again, I’m not a human rights lawyer and perhaps I’m missing something.
So why am I telling you this? As a landlord, as this case demonstrates, you might be held liable for something that you said, or more importantly didn’t say when it comes to human rights complaints.
If the tenant has simply asked whether a Section 8 voucher could be used in place of the income qualification, the whole decade long legal case could have been averted. The case puts the responsibility on the landlord to communicate the rental policy fully and completely in writing.
So Tower Management wrote Mr. Moran a check for $30,000 and updated their policy and provided training for their property managers on the policy.
On today's show, I’m making a prediction on the economic outlook for Q4 and the broad impact I project it to have on real estate markets.
The economy in Q4 is going to take a hit. We saw a resurgence of employment, a modest increase in consumption and a return to limited travel in Q2 and Q3. But new unemployment claims remain historically high. Prior to the pandemic, the US economy registered an average of about 250,000 new unemployment claims in a normal week. Since the pandemic, new jobless claims have been above 700,000 every week. The first 6 weeks of the pandemic registered 32 million job losses. We are still in a very troubled economy from a labor standpoint.
The other major driver of the economy is consumption. The law of averages tends to apply. If the population hasn’t increased, and people are still eating three meals a day, the amount of food consumed on average won’t fundamentally change when averaged over the course of a year.
Toilet paper sales surged in Q2 when it looked like there might be shortages. Those who were in the business of selling toilet paper might have felt like they won the lottery. But on average, if toilet paper sales surged in Q2, it makes sense that they might fall below average in Q3 or Q4. On average, toilet paper consumption at the final point of use, next to the toilet over the longer term isn’t going to increase just because there was a lockdown.
There is a business cycle in retail that has historically held true. Many retail businesses generate 50% of their annual profit in Q4 during the period between Thanksgiving and the end of the year. But this year could be different. We have many areas going into a new wave of Covid-19 outbreaks. This will mean a reduction in business activity, a reduction in social interaction, a slowdown of commerce. If family members are not traveling for the holidays in large numbers, what will that mean for retail sales?
If family gatherings are going to be scaled back this year, it makes sense that gift giving will also be scaled back. Some gifts will be sent by mail or delivery service. But it makes sense that fewer gifts will be bought this year. The big question is whether people will treat themselves to a gift on a larger scale to make up for it?
It’s clear to me that retail sales in North America in Q4 will be down from last year. It doesn’t take a huge crystal ball to predict that outcome.
So what does this mean for you as a real estate investor?
It means that some tenants will struggle to pay rent. I know of several landlords who are now getting eviction judgements against tenants who have stopped paying, depending on the jurisdiction.
Those property owners whose cash reserves are depleted may face a more dire situation. Lenders will face the difficult decision whether to extend forbearance terms or declare the loans to be in default. In my opinion, you need to be hunkering down for another economic winter, amassing cash reserves in order to weather another storm of unknown duration.
Dax Mitchell is based in Fort Worth Texas where he specializes in industrial assets. On today's show we're talking about the various segments of the industrial market and the market outlook that has emerged in a hot segment. Dax can be reached at Mag Capital Partners. His website is magcp.com and he can be reached by email at dax@magcp.com.
I had a conversation with George Ross earlier this week where we talked about the outcome of the election. George offered his perspective on the election outcome and what it might mean for real estate investors.
On today’s show we’re talking about the tax changes that could affect real estate investors following the US election. The 2017 changes to the tax code brought a number of new initiatives that were very beneficial to real estate investors. Top of the list were three changes.
1) Bonus Depreciation
2) Opportunity Zones
3) Step up in basis
Robert Kiyosaki’s Rich Dad advisor on accounting is Tom Wheelright. Tom has is the author of the best selling book called Tax Free Wealth. It’s newly updated and current to the tax code changes as of 2018. Tom has taken the time to read through the proposals from the Biden campaign to understand what they could mean for real estate investors. Tom’s analysis is that each of these moves would be bad for real estate investors. We should be moving to take advantage of them in 2020 while we still can.
Of course we don’t know for sure what the new administration will do. What was promised during the election campaign may or may not be implemented in practice.
The Biden campaign vowed to reverse the Trump tax changes and go a step further by eliminating the sheltering of capital gains under section 1031 of the tax code, the so-called 1031 tax deferred exchange. But even if bonus depreciation gets cancelled, 1031 gets cancelled, and step up in basis gets cancelled, there is a good chance that opportunity zones would survive. According to a new report in the industry magazine called “Accounting Today”, there is an article that sheds some light on the creation of the opportunity zone concept.
One of Biden’s top economic advisers co-wrote the white paper that led to their creation. Vice President elect, Kamala Harris, has pointed to Opportunity zones as a way to spur entrepreneurship. And their campaign website listed ways of reforming, rather than repealing, the policy.
Steve Glickman, is a former Obama administration official who pushed for the incentives. He now runs a consulting firm called Develop Advisors, specifically for investors looking to create opportunity zone funds. Steve used to be the leader of the Economic Innovation Group, a bipartisan Washington based research and policy organization. When he was at EIG, he was the architect and EIG conceptualized the program and drafted the underlying legislation. It was cosponsored by Tim Scott from South Carolina and Cory Booker, a Democratic Senator from New Jersey.
Last month, the Government accountability office issued a 28 page report on Opportunity zones. In that paper GAO is identifying two matters for congressional consideration, including that Congress consider providing Treasury with authority and responsibility to collect data and report on OZ’s performance, in collaboration with other agencies. As part of that deliberation, Congress should also consider identifying questions about OZ’s effects that it wants Treasury to address in order to help guide data collection and reporting of performance, including outcomes.
enator Scott has said his top priority is adding reporting requirements. A bill he introduced in December would direct the Treasury to post data annually on investment funds claiming the breaks, and to track job growth, poverty reduction and other economic indicators at five-year intervals. Oregon Senator Ron Wyden, the top Democrat on the Senate Finance Committee, proposed a reporting bill with lots of other restrictions attached.
It’s possible that we may see a re-assignment of opportunity zones.
Critics have taken issue with the selection of certain zones, such as a trendy arts district in Los Angeles and swaths of Brooklyn. And some have suggested replacing those that don’t meet traditional ideas of struggling neighborhoods with zones that do.
Today is another AMA Episode. Ramon from Los Angeles asks,
I have several investment properties with reasonably low debt, <50% LTV, >1.6x DCR. With interest rates so low and the potential for inflation caused by central bank currency printing, I am considering refinancing a few properties to increase their debt, 70% LTV, 1.2x DCR. In addition to letting this potential inflation help wipe away the debt over time, I will get the added benefit of pulling cash out to take advantage of opportunities which may become available if distressed sellers start to sell and foreclosures begin to hit the market. On the other hand, by doing this I would be adding risk by increasing my debt service at a time when there is downward pressure on rents and increased rent collection risk. What is your perspective on responsibly loading up on as much low interest debt as possible?
Money comes to you in one of three ways.
1) Earned income
2) Residual Income
3) Capital Gains
The choice of how much debt to take on is a function of several factors. If you take on more debt, the residual income from the business will go down. A lower debt service and a higher debt coverage ratio means higher cash flow for you at the end of each month. If your goal is cash flow, then taking on more debt is going against your residual income or cash flow objective. But if you’re willing to defer a portion of the residual income in order to grow the portfolio and increase your total portfolio, that could be a winning strategy.
I’m going to make up some numbers following your example. Let’s say that you have a portfolio of $10M and you’re going to refinance the portfolio to increase the loan to value ratio from 50% to 70%. So you’re going to take on an additional two million in debt. The debt coverage ratio will fall from 1.6 to 1.2. You’re quite right in pointing out that the lower debt coverage ratio has more risk associated with it. The risk is that the portfolio might experience negative cash flow if you have something unexpected happen.
You’re going to borrow an extra $2M within that $10M portfolio in our example. This will give you the ability to put down up to $2M on a new property which could significantly expand your portfolio. But as you rightly pointed out, you would be taking on more risk.
What if instead of sinking all $2M of new money into a new project, instead you invested $1.8M. You could put the extra $200,000 in a reserve account to protect the portfolio from any short term cash crunch, if the need arises. It will require a lot of discipline not to spend that money.
To summarize, borrowing additional funds to buy another project, and increase your war chest cash reserve on your balance sheet could be the best of both worlds. You can improve the safety of the entire portfolio and at the same time, acquire another project.
The world is filled with news articles that don’t make sense. I get bent out of shape when I read an article that is downright ignorant. When I say ignorant, I mean lacking in basic education. The worst part is that these articles are getting wide circulation and feeding mis-information on a large scale.
On today’s show we’re talking about one such article about the condo market published earlier this week in the Huffington Post. There have been numerous articles that are similar speaking about the fall in rents in New York, San Francisco, and other expensive coastal markets.
The article is entitled,
“Canada’s Condo Markets Face Perfect Storm As Rental Rates Tank, Costs Jump”
The story goes on to say,
“Add yet another to the many imbalances in Canada’s pandemic economy: Renters are catching big breaks as rental rates drop, while condo owners ― particularly investors ― are looking at potentially rough times ahead.
In fact, for condo owners, just about everything that could go wrong ― from bad construction and rising insurance costs, to rental rates that can’t cover mortgage payments ― is going wrong.”
Stories like this are just so ridiculous. They imply that the pandemic is to blame for the plight of these condo investors. The implication is that these were good investments to begin with, and the pandemic turned them into bad investments.
The fact is, these investments would have never met my criteria. Let’s look at some specific examples. In Toronto right now there are about 30,000 condo’s for rent in the core of the city. That’s a lot of inventory. No surprise that rental rates have fallen.
The city of Toronto attracts about 125,000 new residents a year and in a traditional year, there are about 35,000 units of new construction. The imbalance between demand and supply is one of the main reasons that prices have been continually rising. But immigration is down this year because of the pandemic. So fewer people are moving into the city and a lot of that new supply coming into the market is competing with existing inventory.
For those of you on this podcast, nobody is going to be shocked to hear that $1,600 a month in rent on a $500,000 investment is not going to pencil. You don’t need to pull your calculator out to know that those ratios don’t work. But here’s the crazy thing. Realtors all over are selling these types of properties to unsuspecting amateur investors. They won’t cash flow, but appreciation has meant that all you needed to do was sit on them and time would take care of everything. The memory of down years is a distant memory.
When you invest in shares of Tesla, you look at the last few years and the stock has consistently gone up. Maybe you decide to buy shares of General Electric. You tell yourself that General Electric is now a bargain after having fallen 75% from it’s highs a few years ago.
All of these plays are pure speculation of the same type that wall street investors use every day. These investments are not professional investments. They’re speculations, and are not based on fundamentals.
When I make an investment in a property or a new construction project, I’m very clear on where the profit is going to be generated. That doesn’t mean that you won’t encounter surprises or changes in market conditions. But at least I’m clear on the day to day cash flow. I’m not speculating that prices will go up, simply because they’ve always gone up.
When I underwrite projects, there is no speculation on the value going up. The investment has to make sense today, in today’s dollars with today’s market conditions.
On today’s show we’re going to take a brief detour from the world of real estate investing to unpack one of the largest technology announcements to come out this year. Unless you are involved deeply in the guts of the high tech industry, you may have a hard time understanding the significance of the latest Apple announcement.
Prior to moving into the world of real estate investing, I was a microprocessor designer and I used to manage microprocessor development teams. I have processors designed into all kinds of applications all over the world. This is a world that I know deeply, so I thought that taking 5 minutes to share a perspective on the latest announcement by Apple would be a good use of 5 minutes.
So here we go.
Last week Apple announced that they were moving away from the Intel architecture of chips to the ARM architecture. The question is, “What does this really mean for you as a user of these devices?”
A few years ago, they upgraded the operating system on the iPhone to include many of the elements from MacOS. There are three primary operating systems in use in computers today. Windows which has majority share of the desktop computer market, Android which has majority share of the mobile devices, and Unix with all of the various linux variants that make up the majority of the server world. The Mac Operating System was based on Unix technology. It's the most robust industrial strength operating system out there, and is the least prone to security breaches. So when Apple introduced many of these elements to the iPhone, the iPhone really became a robust computer.
Apple is trying to find a way to blur the lines between the desktop computing platform that you find on their desktop computers and notebooks, and the mobile computing platform that you experience on the iPhone and iPad family of devices. Mac applications don’t work on the iPhone and iPhone applications don’t work on the Mac, up until know.
The second major difference comes in the realm of battery life and overall performance.
The way to think of the difference between the Intel chips and the newly designed Apple chips is like comparing the difference between a Ferrari and a Volkswagen. The Ferrari is much more expensive. It’s a much faster car under perfect conditions like a race track. But in real world rush hour traffic conditions in Los Angeles or Dallas, a Ferrari and a Volkswagen will perform remarkably the same. The Ferrari might beat the Volkswagen through a few traffic lights, but the real difference will be small. Most importantly, the Ferrari will use a lot more fuel to get the same job done. So which car is truly better? The answer is it depends. The Intel chips are more like the Ferrari and the Apple M1 chip is more like the Volkswagen. The Volkswagen will use a lot less fuel.
The Apple M1 chip will consume less power than the Intel chip and therefore will have longer battery life. Apple is claiming up to 18 hours of video streaming on a Macbook. No other device on the market comes close to that kind of battery life.
On today’s show we’re talking about a single word. The problem with this single word is that it’s ambiguous.
We often think that we know the language and what it means. But the truth is unless you’re really clear on exactly what you mean, very simple words can lead you down a dead end path.
Today’s show is focused on a simple word that has four letters.
When projects run into difficulty, the culprit is often a failure in the plan.
This year, in the year 2020 with all of the global dislocations that have befallen our economies most business leaders would bristle at the notion that the plan was to blame for the difficulties being experienced. We’ve had a global pandemic. We’ve had government mandated shutdowns. We’ve been ordered by our governments not to conduct business. How can you sit on you high horse and say that the plan was to blame? I heard a business leader tell me in the past week, he said “We had a plan, and the plan couldn’t be executed.”
The Project Management Institute is the globally recognized leader in project management certification. If you’re going to be a professional project manager, you’re going to take a bunch of courses and at the end take a lengthy exam. Finally you’re a professional project manager.
The PMI has a lengthy publication called the Project Management Body of Knowledge. This document breaks down project management into 5 distinct process groups, 10 knowledge areas, and 49 distinct processes. The project plan itself has an outline of 10 chapters.
According to PMI, a plan is a formal, approved document used to guide both project execution and project control.
A plan is a deliverable. It’s a document which you can point to. It’s a noun.
Therein lies the problem. When you have a plan, then the work to produce the plan is done.
When you think that the plan is a noun, you completely miss the fact that the word plan is also a verb.
A verb is an action word in most languages. You can conjugate the verb.
When you think of the plan as a noun, it often has a finite end-point. The plan is complete, it’s done. We now have a plan. We obviously don’t want to do an incomplete job of planning, no more than we want to do an incomplete job of anything. In order to achieve excellence, things need to be taken to completion.
But plans are different. Plans, despite our ideals are never done. They’re continually being pushed off track by forces. I may have a plan to sail the ship from New York to Gibraltar. I plot the course based on the direction I need to go. But there’s wind, there is current, there are local waves that can instantaneously turn the ship so that from one second to the next it’s not facing the intended direction. You have to always be adjusting course. In fact, you are almost always off course. There are a few miniscule instants in time when the ship is actually on course. The rest of the time it’s off course, trying to get back on course. Once you get out on the water, the weather you thought was going to be part of your journey changes. You may have to take a detour of 1,000 miles in order to avoid that hurricane that changed direction.
You see, in order to be useful in the real world, the word plan is a verb first and a noun second. The folks at PMI are great. But they’re academic. They’ve studied project management about as deeply as it is possible to do so.
We see a verb being more empowering than the noun.
On today's show we're talking about goal setting for 2021. This is an exercise that needs to start now, not on December 31. Marc and Nicky are repeat guests on the show. They're having a one day virtual business goal setting workshop on November 28. You can connect with them at ecircleacademy.com/appointment
Ali Boone is CEO at Hipster Investments where they specialize in turnkey investments. On today's show we're talking about Ali's new book, "NOT Your-How To Guide to Real Estate Investing".
Connect with Ali and get a copy of her new book at https://www.hipsterinvestments.com/espressobook
Ramon from Los Angeles asks,
I am in contract to purchase a 6-unit value-add multifamily property in a rapidly gentrifying area of Los Angeles. It is a rare true off-market deal that is well priced (at least pre-covid). With 5 of the 6 units vacant I can immediately renovate most of the units. I own other property in the area and posted test ads so I feel like I have a good sense of the current rents. I am projecting a pro forma 6.3 cap rate, mid-to-high single digit cash on cash return and mid teens 5-year iIRR with further upside as the area improves and if I can bring the one currently occupied unit to market rent. Pre-covid this definitely met my investment criteria. However, given all the risks around covid, I am struggling with those criteria. Rents might continue to fall if vacancy increases. Assuming, I am able to lease up at my projected rents, collection risk is much higher than usual in this weakened economy. In addition, if foreclosures start to hit the market there may be there may better deals in the next 6 to 12 months. All that being said, this deal is trading below the price of comparable properties with low-paying tenants, the ability to execute my business plan immediately as a result of the vacancies is very rare, interest rates are low and I can hopefully benefit from the growth in this sub market for years to come. One way to think about all of this is as short-term noise - that it makes sense to buy a solid deal and not try to time the market? On the other hand, should I be getting "paid" more for all of this risk? Based on other deals that are selling the market doesn't seem to think so. I once heard a saying that if the answer isn't "hell yes" then it's a "no". Maybe that is good advice in this situation.
Ramon this is a great question. Real Estate as always is hyper-local. I don’t know the specifics of the neighborhood you’re working in. We’ve seen that during the pandemic there has been migration. That has meant migration from more expensive cities to less expensive cities. It has meant migration from the most expensive areas to more affordable areas within the same metro area.
There are a couple of factors that can play in your favor.
1) If you design a product that is going to be more desirable than competing product in the market, you have a distinct advantage that will take a long time for the rest of the market to copy. That isn’t to say that the rest of the market can’t copy it, just that it takes time for the rest of the market to catch up.
The quality of the property management can be a game changer when it comes to having a better product in the market. Most of the time when people leave a property, a disagreement with property management has been a factor in the decision. Good property management can give you above average results and poor property 1) management can completely destroy your investment. These are timeless fundamentals.
What I’m going to share with you now is another test that you can apply. Congratulations on test marketing rents in the area.
What if you went to the investor community in your area and offered to sell the project to other investors, complete with your design concept, financial model? You could wholesale the deal to them. Now you don’t have to actually sell the deal, but use the process of offering the deal as a source of feedback to see what others think of the deal.
But when you offer the deal, don’t set your assignment fee in the deal. Simply show them your analysis for the finished product and ask them what they would offer you for the deal. Some may offer less than you paid for it. Others may offer you $5,000 more than you paid. Others may offer you $50,000 more than you paid for the deal. The information in that feedback is like gold. You have a choice. You might choose to wholesale the deal, or keep it for yourself.
Today is another AMA episode (Ask Me Anything). Kara asks,
I’ve been approached by a borrower to lend funds to purchase a property. I’m not interested in taking risks, so I figure if I limit the loan amount to 80% of the property value, and secure the loan in first lien position I’m going to be safe. I don’t have the time or systems to fully qualify the borrower. The property is a fixer upper which will require the borrower to bring additional funds to repair the property. He intends to hold the property as a long term rental and eventually refinance with bank financing in order to repay the initial loan. Apart from mortgage security, what else should I be concerned with?
This is a great question.
My recommendation is that you work with a licensed mortgage professional. That’s their business. For the listeners to this show, I don’t want you taking what you hear on today’s episode and making loan decisions directly. I’m not a mortgage professional and I don’t profess to be. I’m merely giving you ideas for you to discuss with your mortgage professional that might give you additional protection.
A lender is only ever asking one question. If I lend you money, how will I get it back. The more sophisticated the lender, the more ways they have of asking that same question. How will I get my money back if things go well? How will I get my money back if things don’t go well?
Whether you write one loan or 100, you’re in the lending business. In order for you to have a robust and safe lending business, you need systems and processes. That means being very clear on your lending criteria. I’m going to touch on a few, but there are many more to be considered. These are for example purposes only. Again, consult your real estate lawyer and your mortgage professional.
Let’s talk about the things that can go wrong and how you need to protect yourself in the lending criteria and in the loan agreements. You can learn an awful lot about this business by reading commercial loan documents to see what terms a lender has embedded in the loan documents. Every single one of those terms are there for a reason. They’re there to protect the lender.
You’re correct in saying that by securing your loan on title with a mortgage does provide some protection. But it’s not absolute protection. Only by understanding the weaknesses that a mortgage can have, can you plug those holes that exist.
Let’s start with the loan amount. You mentioned that you were willing to loan up to 80% loan to value. In my mind, the notion of value can be highly subjective. There have been documented cases of appraisals coming in above the true market value. In that case, the unsuspecting lender can be taking on much more risk without even knowing it. My recommendation is that you write your loan terms at a lower percentage. But not only that, you may consider limiting the loan amount to the lower of, say 70% loan to purchase price, or 70% loan to value. Whichever of those two numbers is lower, that would be the maximum loan amount.
You mentioned that the property is a fixer upper. Every time you have someone working on the property, there is risk of a mechanics lien being recorded on title. Your mortgage might be in first position, but a mechanics lien would come ahead of a mortgage in the hierarchy of payment. You need systems and process to control the payment of contractors and subcontractors.
Even with asset based lending there is a certain amount of due diligence that needs to be performed on the borrower. The lending business has a lot of moving parts.
These are just a few of about a dozen things that can go wrong even in the world of secured loans. Again, I’m not a lawyer, nor a mortgage professional. If you’re going to write a loan then you probably want to get into the lending business with all of the systems, processes and protections that come from being in the lending business.
On today’s show we’re taking a fresh look at the impact of the pandemic on business activity. Conditions on the ground are evolving rapidly and it’s been some time since we’ve looked at the implications.
We have major parts of Europe back in a full lockdown situation. I have two cousins in Milan who both contracted the disease in the past 10 days. One is doing well, the other one is struggling.
Since the start of November, Covid-19 cases in the US have increase by more than 25%. We have hit record rates of infection in the US even though we’re not yet into the cooler weather across much of the country. The largest outbreaks are in Texas, California and Florida all of them southern states.
According to the data reported by John Hopkins, new daily records were hit in Maine, Pennsylvania, Colorado, New Mexico and Tennessee.
Through the month of September and much of October we saw infection rates increasing dramatically. But there wasn’t a corresponding increase in the number of people in hospital or in Covid related deaths.
That gave rise to a sense of complacency. We’ve been hearing that Covid has been not that big a deal. Well now we have a record number of people in hospital in the US as a result of Covid-19.
The headlines have been promoting the promising results from the latest vaccine trials. But as you know, vaccines only work for a single strain of a disease.
Denmark is home to 5.8M people and 17M mink. It turns out that the Corona Virus has made the leap from humans to mink. Now in order to make the jump from humans to mink, the virus needs to mutate. The Danish government has confirmed that the new mutation of the disease has made the jump from mink to people and there are 12 confirmed cases.
The Danish government has imposed strict lockdowns on those people, including contact tracing. The impact of a new large scale outbreak of this mutation has not received wide news coverage. The potential for this mutation to render a vaccine useless cannot be overstated.
The Danish government are taking steps to cull all of the mink on 207 farms out of 1,000 farms where the disease has been detected. We are talking about killing millions of animals. There has been debate on whether to cull all 17M mink on all of the farms in Denmark. In this day and age, I have no idea why there is a need for mink to be raised in such large quantities on farms. The fact that they’re considering this step tells me that the Danish government recognize the seriousness of the situation.
All I can tell you is that this is a rapidly evolving situation. I know that I’m continuing to take regular doses of vitamin D, and continue to take precautions to limit social contact. The research shows statistically much better outcomes for those with high levels of Vitamin D. Hopefully that’s enough to protect my family. But we also need to be concerned with the global picture from a virus that knows no borders.
So what does this mean for you as a real estate investor, or a business owner? It means that the uncertainty we’ve experienced in 2020 is likely to continue for a while longer. You might have been planning for a period of increasing economic recovery starting now. I’m here to tell you that may not happen.
It’s entirely possible we will see more severe lockdowns and outbreaks of the disease in the coming weeks and months. We have already established that Covid-19 was not just a blizzard that would melt away in a matter of days. It has already proven to be an entire winter. You should be preparing your business for the possibility of a long economic winter.
On today’s show we’re talking about the dilemma of choosing suppliers and choosing specific products. There is a world of choice and prices vary widely. It comes down to making a value determination whenever you’re choosing a particular product.
The importance of that choice depends on who you are and what you’re going to do with it. If I’m going to play a game of basketball, I’m going to make a difference choice on which ball to buy compared with Lebron James. To me a basketball is worth an hour of recreation. To Lebron, the basketball is worth millions.
On today’s show we’re going to be looking at dishes. You might be wondering why we’re looking at dishes. Well, our team is in the planning phases on a hospitality project. This will require investment in many different aspects. Everything from kitchen equipment to seating and tables for the dining room, to glasses, dishes, cutlery and napkins. There are hundreds of details to be planned in this project.
Even though we’re going to be talking about dishes, as you’re listening to this, I don’t want you to focus on dishes per se. What I want to emphasize is the process that will be used in the final product selection for the dining room.
We believe that everything in the dining room needs to form part of the experience. The design of the menu, the training of the staff, the décor, the room temperature, the comfort of the seating, the manner and speed with which the diner receives their bill. All these details matter. So too does the choice of dinner ware.
The dining room will have a certain theme that is a combination of casual and upscale. So we don’t want a classic white dish. We don’t want an overly formal plate.
We found a supplier in Vermont that had the look we were after. The reviews of the product were excellent, and the quality looks top notch.
But prices were high. A single dinner plate varied in price between $25 to $29 dollars. A serving platter was priced at $82. We would need to spend over $15,000 just in dishes alone.
Research showed that we could order products from China online where prices were $1-$2 per plate. But the minimum order quantity was 1,000. Even if we ordered a quantity of 1,000 and only used 200, we’re still talking about a price of $10 per plate compared with $25. We found a supplier in China that had a product we liked. The look seemed in keeping with the brand and theme of the dining room. If we host a large event and need more dishes, we would have them on hand and would not need to rent any dishes.
But of course you don’t want to make the decision based on price alone. We have to consider the weight of the dishes. If the dishes are too heavy, that could be a workplace safety issue for our serving staff. If the dishes are too heavy they might need to be heated before serving the meal, otherwise the meal will get cold quickly. If the dishes are too light, then they will appear cheap and give the diner the impression that they’re getting less value for their dining experience.
The dishes have to be dishwasher safe and not leach any toxic chemicals. They need to be able to withstand the repeated temperature changes that come from the dishwasher. Those thermal cycles are the #1 thing that shorten the lifespan of a dish. They will eventually get small cracks in the glaze and break. The glaze needs to be robust enough that the plates won’t chip with regular everyday handling clearing the table. The color of the plate needs to complement the food so that when you have a meal on plate, the plate frames the meal and complements the colors of the meal without stealing attention away from the meal.
All of these details are about designing an end user experience. You see, design doesn’t have to cost extra. It just requires you to pay attention to the details and think through the experience from the perspective of the end user. It’s not complicated, it’s just rarely done.
On today’s show we’re talking about the morning after. We have a nation where nearly half the population is elated, and nearly half the nation is disappointed and maybe downright angry.
If you’re a real estate investor, or a real estate developer, you’re probably wondering what the future holds. You might be wondering if Joe Biden will make good on his election promise to increase taxes on business, and whether he will make good on his promise to eliminate the capital gains tax deferral that has been available in the US under section 1031 of the tax code.
You might be wondering if the push to improve the energy efficiency of housing will bring new incentives to build new housing to replace some of the nation’s oldest and least efficient buildings.
If you’re happy or if you’re saddened by the outcome of the election, both those reactions are linked to your hopes and expectations. I said your hopes and expectations.
Those hopes and expectations have only one origin. They were the product of your own mind.
Neither candidate can influence the election at this stage. It’s simply a matter of counting. The election outcome is reality.
If you’re feeling any stress around the election, it’s because there may be a gap between your expectation and reality. Stress cannot exist without that gap.
When that gap exists most people feel pressure to close that gap. Since there are only two variables, expectation and reality, there are only a few possible choices on how to close the gap.
1) You can change the reality. This is possible in some instances, but it’s rare. It usually involves breaking the laws of physics.
2) You can lie to yourself and others that the reality has indeed changed.
3) You can alter your expectation.
Your expectation is rooted in your belief about the way things should be. Maybe you believe that our political leaders should behave themselves a certain way. Maybe you believe that the laws should be written a certain way so as to make them more fair. Maybe you believe that there is an injustice that needs to be corrected.
Some people are so wrapped up in their belief about the way things should be that when they don’t match, something’s wrong.
We’re here in the middle of November, the weather was sunny this past weekend and the temperatures were in the 70’s Fahrenheit, above 20 degrees centigrade. Earlier in the week it snowed. I heard some people in the neighborhood say how it was too hot this past weekend, or that it was too cold earlier in the week.
Do you realize how silly that statement is? Does mother nature care what you think about the weather? Are you going to tell mother nature that you’re right and she got it wrong? There is no good weather or bad weather. There is only weather. The term good weather is rooted in your expectation and has nothing to do with the weather.
Sometimes you can wait a bit and the weather might change. It’s raining today, so I’ll wait for a sunny day before going to the beach. That strategy is called wait and see.
But sometimes you could be waiting for a long time. If you’re waiting to go to the beach, you might be waiting another 7 or 8 months.
My good friend Robert Helms has a great quote. He says ,”Think and Act is better than wait and see”.
If you apply that thinking to going to the beach, then you might board a flight to a Caribbean Island and get to the beach right away .
Given the current reality, what is the best move that I can make for my business, for myself, for my family and for my stakeholders?
Your current circumstances don’t define your destination. They merely define your starting point. The obstacles don’t define your destination either. They’re simply something to be overcome. You decide your direction, and if you’re truly committed to it nothing will ultimately stand in your way.
All the way from Kansas City, Bob Fraser has taken the entrepreneurial journey through several industries. Over the past 8 years he has specialized in real estate Notes as a business. On today's show we're talking about the strategies that are working in today's market. You can connect with Bob at aspenfunds.us.
Gray Robinson is a recovering lawyer (or perhaps a relapsing lawyer). On today's show we're talking about burnout and how to manage the stress of a demanding role. This is a must-listen episode for any professional, entrepreneur, or business owner. Gray can be reached at lawyerlifeline.net.
Yesterday Zillow announced their Q3 financial results. This is a company that has been one of the few that benefited from the market conditions in 2020.
The company has grown to 5,000+ employees. They had a record quarter in Q3. On their earnings call the company shared a perspective on the overall balance of supply / demand that many investors don’t often pay attention to.
The pandemic has turned the market on its head and it’s difficult to make sense of what we’re seeing in the market. The abrupt changes are the result of many contradictory forces, both headwinds and tailwinds as we’ve talked about on recent shows. The folks at Zillow pointed out on their investor call that there are 5 million more people in their prime home buying age in the market than there were in 2010. Demographics suggests that the low number of home buyers over the past decade in the wake of the financial crisis has created a wave of pent up demand which is only now starting to get satisfied.
Zillow offers is a service the gives a seller cash offer without having to open their house to showings.
Zillow closing services is providing closing services for 98% of their transactions of their zillow offers business. Sellers to Zillow make up 0.2% of their total transaction volume.
On today's show we're talking about what can happen when you compete with your customers.
This is a business lesson that many companies learn the hard way. Last month Zillow announced that they were getting into the brokerage business.
Back in 2014, Greg Schwartz, Zillow's then-chief revenue officer, stated Zillow was "a media company that helps people find homes."
How does Zillow make its money? They don't collect real estate commissions. They sell the leads collected on their website to licensed realtors who pay a fee to Zillow for those leads. It’s up to the real estate agents on the ground to do the heavy lifting, to drive the buyers to showings of the properties.
But the marketing fee for the leads is small compared with the real estate commission earned by the real estate agents who actually transact the deals. In a buyer’s market, the majority of the work is performed by the buyer agent.
For now Zillow is only using in-house agents on the properties is buys directly.
Zillow is only interested in buying specific types of homes. They look for homes that are relatively new, in good condition, and that are within what they consider to be “high opportunity” markets where the chance of a quick re-sale is possible.
Dominance in a segment doesn’t mean absolute power. Remember, platforms rely on all their stakeholders in order to be successful. The company has three main lines of business.
Entering into the brokerage business means that Zillow is now competing with their customers. Real Estate Agents who have benefited from getting leads from Zillow in the past have recognized that zillow has become too powerful in the market and will eventually replace their partner agents with salaried in-house employees who carry a real estate license.
So the question is will the agents allow their newest and largest competitor continue to be their partner? Some will rationalize that Zillow doesn’t really compete directly with agents. But as they learn, grow and mature as a brokerage, they can shift their focus quickly.
History has shown competing with your customers to be an unstable practice.
On today’s show we’re talking about the impact of the election. Let’s ask a simple question.
As a landlord, do you screen your tenants based on political party affiliation? I already know the answer. Of course you don’t. That would be just as illegal as discriminating on the basis of gender, or skin color or religious beliefs.
You can’t paint an entire state a single color. California has a reputation of being staunchly liberal. But they passed a politically conservative proposition 22 that would exempt Uber and Lyft drivers from be classified as employees. This is sure to create a new legal minefield in the years to come as more businesses seek exemptions from the law enacted last year that classified contract workers in the gig economy as full-time employees with all of the rights and obligations of full-time employment.
With 64% of the polls reporting as of the morning after the election, Joe Biden had received 65.2% of the popular vote in California. That leaves 1/3 of the California population having voted for Donald Trump. 65.2% of voters in Oklahoma voted for Donald Trump and 1/3 having voted for Joe Biden.
The rhetoric about civil war is ridiculous. There is no enemy. They’re your neighbor, or your son, your cousin, maybe your spouse or mother or father. The tragedy is that whoever wins, there will be roughly half the country disappointed in the outcome.
You may not agree with their opinion, but you must defend their right to have their opinion no matter what. That’s the essence of a free society.
But even a free society needs to have limits. Remove all the rules and you risk chaos and anarchy. The state of Oregon became the first state in the nation to decriminalize the possession of all illegal drugs.
Oregon’s Measure 110 makes possession of any controlled substance, including heroin, cocaine or methamphetamines, a violation punishable by a maximum fine of $100 or a completed health assessment.
The emphasis in the election coverage seems to focus on the executive branch. But the true governance of the country is the result of all three branches of government. It requires the Congress, the Senate and the White House.
As of this writing, the Democrats have retained control of the Congress, the Senate votes are not fully counted yet, and the White House is leaning heavily in Joe Biden’s favor, but still not counted.
The Senate race has not fully been decided. It looks likely that the Senate be retained by the Republicans, which means four more years of legislative gridlock.
Colorado voted on whether to allow the release of thousands of wolves into the wild. The wolves were native to the area until hunting brought them to the brink of extinction.
It’s looking like my pre-election prediction is going to be pretty accurate. There will be more printing of money. There will be more legislative gridlock.
The early signs are that legal challenges are underway in two states and a recount is going to happen in at least one state.
This could be another election where the outcome is decided by the courts.
The silver lining is that there has not been election violence so far.
The Securities and Exchange Commission issued new regulations today that affect real estate investors and exempt offerings. The full news release can be found at https://www.sec.gov/news/press-release/2020-276
On today's show, I'm going on record to predict the outcome of the US election. Check it out.
Today’s question comes from Richard in Ottawa, Canada. Rich asks,
With materials costing more and labour being harder to get, wouldn’t it make sense that high end/newer homes property values will go up over the next 12-18 months? Doesn’t less supply = higher demand?
Rich this is a great question. Supply and demand are independent variables. Less supply doesn’t actually mean higher demand. We’re concerned with the balance of these two independent variables. More supply than demand and prices will fall. More demand than supply and prices will increase.
You are correct in pointing out that construction costs have increased. There are two reasons for that.
- We have experienced supply chain disruptions which have affected materials prices.
- There is a shortage of labor
Paradoxically, the labor shortage exists at a time when we also have millions of people unemployed. When the pandemic hit we actually saw labor prices drop to more historic levels as people in construction saw projects being put on hold.
If you peel back your question to the most fundamental, it seems like you’re really asking whether making an investment in a particular segment will be a safe investment in the newt 18 months. It’s a little like asking to predict the future. None of us really know.
Economists try to understand the current market conditions and construct a model for how the economy functions. If that model is accurate it can be useful for predicting the near future as long as the major variables don’t change. Therein lies the difficulty. We have a lot of variables that could be easily described as headwinds or tailwinds. The direction of the economy and the local market conditions will be the sum of all those headwinds and tailwinds to see what the net result will be.
1) Because of the pandemic, most people who might consider moving have put those plans on hold. They’re staying put. That has taken supply of homes for sale and for rent off the market.
2) The low interest rate environment has definitely been a tailwind.
3) We have seen prices increase across many markets in North America. The national average is 11%. But this isn’t uniform at all. Some cities like Nashville and Austin continue to experience population growth.
Let’s look at the headwinds.
- We have millions of people unemployed. We have political gridlock in Washington and we have a minority government in Canada where the threat of the government falling is increasingly likely. We have businesses failing all over the place.
- We have oil prices falling which means billions of dollars in write downs in the energy sector of the economy.
- We have between 8-9% of the residential mortgages in the US in some form of distress. We have millions of tenants who are behind on their rent payments. In our own province of Ontario, we have a backlog of over 80,000 eviction motions in front of the landlord tenant tribunal. These properties have not hit the market yet. They represent a shadow inventory of sorts that will eventually appear on the market in distressed condition.
- Travel is restricted due to the pandemic, and therefore immigration is well below historic levels. That too is a headwind.
- People are dying in large numbers as a result of Covid-19. The US has seen nearly 0.25M deaths. When people die, that brings more inventory into the market increasing supply. That’s another headwind, albeit a small one compared to the others.
- Finally, the US Federal election is likely to bring an environment that will not favour the housing market.
So we’re trying to make sense out of all these variables and predicted how they will all play out. There are a lot of variables and the outcome is highly uncertain. Remember, back in 1929, the economy was booming. Everything looked rosy and optimistic, until it didn’t.
Our book this month is called “Leaders Eat Last” by Simon Sinek. Simon shot to fame in the wake of his first TED Talk in 2010 entitled “How Great Leaders Inspire Action”. His second TED Talk in 2014 was called “Why Good Leaders Make You Feel Safe”. It’s no surprise this our book this month is also on leadership.
The foreword was written by Lieutenant General George Flynn of the US Marine Corps. The opening paragraph of the Foreword says
"I know of no case study in history that describes an organization that has been managed out of a crisis. Every single one was led. Yet a good number of our educational institutions and training programs today are focused not on developing great leaders but on training effective managers."
This one opening paragraphs sums up the essence of the book.
In the book, Simon emphasizes the humanity of relations as being essential to leadership.
In the book, Simon emphasizes the humanity of relations as being essential to leadership.
Every single employee is someone’s son or someone’s daughter. “It is we, the companies, who are now responsible for these precious lives,”
To see money as subordinate to people and not the other way around is fundamental to creating a culture in which the people naturally pull together to advance the business. If they don't feel safe in the organization, they turn their energy inwards to fighting internal battles instead of focusing on the threats to the business from the outside.
As organizations scale, we start to abstract and no longer see people as human. We are now customers, shareholders, employees, avatars, online profiles, screen names, e-mail addresses and expenses to be tracked. The human being really has gone virtual. Now more than ever, we are trying to work and live, be productive and happy, in a world in which we are strangers to those around us. The problem is, abstraction can be more than bad for our economy . . . it can be quite deadly.
The more abstract people become, the more capable we are of doing them harm.
The Titanic carried as many lifeboats as was required by the law, which was sixteen. The problem was, the Titanic was four times larger than the largest legal classification of ships of the day. The Oceanic Steam Navigation Company, the Titanic’s owner, adhered to the outdated regulation (in fact, they actually added four more inflatable rafts). Unfortunately, as we all know, on April 14, 1912, just four days after leaving port on its maiden voyage, the Titanic struck an iceberg far from any shoreline. There were not enough lifeboats for everyone and more than 1,500 of the 2,224 passengers and crew on board died as a result. A ship four times bigger than the largest classification carried only a quarter of the lifeboats they actually needed.
In fact, additional space was added aboard the deck of the Titanic in expectation of a “lifeboats for all” requirement. But lifeboats were expensive. They require maintenance and could affect a ship’s stability, so executives at the Oceanic Steam Navigation Company decided not to add the lifeboats until the regulation said they had to. Though there were not enough lifeboats for all the passengers on board the Titanic, the company was in full compliance with applicable rules.
Adrian Panozzo has scaled his business over the span of ten years using the BRRR (Buy, Renovate, Rent, Refinance, Repeat) strategy by concentrating on a smaller multi-family properties. During this time he was a full time police officer in Toronto. His investment market of Hamilton Ontario has a history as an industrial city with steel production, transportation and logistics at the core of the city's economy. This strategy could be transported to virtually any market in North America. To connect with Adrian, you can email him at executiveproperties@rogers.com
Risk Management is one of those topics that seems dry and esoteric to some. It’s a subset of project management. But risk is one of those things that is ever-present, depending on how you plan your projects. On today’s show we’re going to look at a deep dive on one specific risk that actually came true.
But before we talk about that specific story, let’s define what we mean by a risk. A risk is something that could happen that is outside your plan. If you’ve already planned for it, then by definition it can’t be a risk.
When we talk about risk we divide risk into likelihood and impact, and then we categorize the impact according to the type of risk that it represents.
It might be a cost risk, or a time risk, or perhaps it could impact the quality of the finished product. There are a number of categories that could apply to any given risk. Again if you want to learn more about this, send me an email to risk@victorjm.com and I’ll send you a link to the webinar on risk management.
So here is the story. My partners and I are building a campus of residential assisted living and memory care homes in Lake Charles Louisiana. If you’ve been following the news over the past couple of months, you’ll know that this market has been hammered not by one, but by two major hurricanes in the span of 6 weeks. This market sustained an incredible amount of damage.
Fortunately, our construction project suffered virtually zero damage from both hurricanes. We did suffer delays from the storms. With the extreme amount of rain, the site drained well. But the community was without electricity for 36 days and we could not find housing for the construction crews to actually come back into the local market to work on the construction of the buildings. In the end, the workers brought RV’s and are staying at an RV Park that we own in order to make progress on the construction.
The demand for roofing materials and roofing labor meant that our roofing contractor refused to honor their contract. Our assessment is that they would rather get a higher rate for emergency roof repair work compared with the price they had quoted us for the new construction roofing.
The impact of the hurricanes was twofold. The first was in a delay in the project. The delay was caused by lack of labor to do the work. The second is the lack of materials which could cause more delay and an increase in project cost. When the demand for roofing materials shot up, you simply could not source the desired product at any price, and the pricing for inferior product jumped locally as demand far exceeded the available supply.
That meant looking further afield for both labor and materials. Just because roofing materials are expensive and in short supply along the gulf coast.
As you are listening to this, Southeast Louisiana and Mississippi just got hammered by yet another hurricane, Hurricane Zeta on Wednesday of this week. While New Orleans is three hours away from Lake Charles, we now have a category 2 hurricane that ripped a lot of roofs in the New Orleans and Biloxi Mississippi markets, putting even more pressure on demand for roofing labor and materials.
There is very little we can do to recover the six weeks that were lost. But we can prevent even more delay due to the shortage of roofing labor and the shortage of roofing materials. We can also protect the project from a cost increase by sourcing the materials from another location. All of this can be mitigated by replanning this part of the project and by taking all these new factors into account.
We can limit the impact of these storms in both cost and time based on replanning this aspect of the project to treat the risks not as a risk, but as a certainty of having occurred. Once the risk is embedded in the plan, it’s no longer a risk by definition.
On today’s show we are talking about the fall in prices. There is a wide range of opinion on where real estate prices are heading in the next 12 months.
Prices have continued to rise during the pandemic despite massive job losses, economic contraction, and falling revenues.
The long predicted fall in prices is now just starting to become visible. My family lived in NYC for about 25 years. My aunt and uncle lived on fifth avenue and 72nd street overlooking Central Park. That part of fifth avenue is residential because it’s overlooking Central Park.
So the shopping street is one block east on Madison Avenue. A group of three properties recently came on the market back in August. They’re located on Madison Avenue and 70th street. But before we talk about those properties, let me complete the picture of this neighborhood.
Manhattan has many different areas. This is one of the most expensive areas, but not the most expensive area. It’s not Billionaires row which can be found about 12 blocks south on 59 th street.
This is maybe the second or third most expensive areas in the city. After my aunt and uncle died, their apartment was sold to Keith Richards from the Rolling Stones. Prices in this area have averaged over $6,000 per SF for much of the past decade. In the last couple of years, prices have risen to over $7,000 per square foot and in some cases even flirted with $8,000 per square foot.
Not surprisingly, prices for retail space one block away have tracked these sky high prices. Prices in the area for commercial space peaked about six years ago when another building six blocks away sold for a massive $7,589 per SF.
Now this most recent sale on Madison and 70th was at a price of $1,340 per SF. This is a drop of over 83% compared with prices 6 years ago.
Now I know what you are thinking, $1,340 per SF is still a very big number. Some of you are having a hard time considering that to be a bargain.
When I saw the story of this property cross my desk, I saw something in the story that most people probably missed. Most are shocked by the drop in price.
I saw the fact that there were 20 offers on the property. This was an auction environment. To the other 19 buyers, this property was worth even less, probably much less. When you have 20 offers, you are still in that auction environment. In an auction, the buyer almost always ends up paying too much.
I regularly speak with investors who keep telling me that they are having a hard time finding deals. My message to them is consistent.
The smart money is being patient. The smart money didn’t win the bidding war for this distressed property on Madison Avenue, even with a deep discount to the local market.
These distressed properties are not appearing because of the freeze that governments have tried to impose on the markets.
The industry has used the term shadow inventory in the past to describe properties that have not appeared on the market. But we don’t quite have a shadow inventory yet. I’m going to define a new term which I’m calling the invisible inventory. That invisible inventory will first transition to the shadow inventory before it transitions to the the real market inventory of distressed properties.
So be patient folks, the wave is coming. We are seeing just the tip of the iceberg.
The day of reckoning for residential tenants is coming and it’s just around the corner. Governments all over are left scrambling trying to handle the expiration of the moratorium on evictions.
But just as the day of reckoning is looming for tenants who are behind on their rent, some politicians are working behind the scenes to protect tenants who have been impacted by the pandemic. Still others are using the pandemic as a pretext to over-reach and actively penalize landlords.
In my home city of Ottawa Canada one City Councilor put a motion in front of city council’s Community and Protective Services Committee. Motions recommended by the committee eventually go in front of city council for a vote. The wording of the motion called on the province to ban all residential rental evictions, except in case of threats to public safety, until the COVID-19 pandemic is effectively contained. At the end of a long meeting, the committee carried that motion.
If this motion were in fact to be approved by city council, this means:
· If there is an agreement to terminate the lease, the tenant doesn’t actually need to leave and can stay as long as they like with no fear of eviction.
· If a tenant sends the landlord a notice to terminate the lease, they don’t actually need to leave when they said they were going to, and they would have no fear of eviction.
· If a tenant exercises bad behaviour and is disturbing the peace, they can’t be evicted.
· If a tenant simply refuses to pay rent with no demonstrable financial hardship, they can’t be evicted.
Since none of those reasons have anything to do with the pandemic and the economic impact resulting from the pandemic, why would government have the right to eliminate one of the few remedies at a landlords disposal?
One of the lawyers who represents the landlord community called that city councilor and convinced them to change the wording of the motion to make it better balanced for landlords.
The original wording was so broad and encompassing that it went far beyond protecting tenants from the pandemic.
But here’s where the story took a turn. The city councilor agreed that the suggested wording changes were an improvement. But then later in the day changed their mind and reversed their support for the revised wording changes.
Here is where I started to lose faith in at least one person who was elected to a position of power to make decisions.
The argument is that housing is a basic human right.
In a city where the winter temperatures drop to -40 degrees, I agree with that notion completely. Housing is a basic human right.
But there is a difference between saying housing is a human right, and specifically targeting business owners to guarantee that human right.
Food is a human right too. I don’t see government stepping in and telling the grocery store owner that they have to allow anyone who comes into the store to steal as much as they like with no consequence.
I don’t see governments telling the car manufacturers that basic transportation is essential to life in our society and therefore they must let anyone who walks in and needs a car to help themselves to a car they like on the lot.
I don’t see governments telling the lawyers that since justice is a human right, lawyers must allow their clients not to pay their legal bills.
This distorted motion is going to be voted at City Council within the next day. I have no idea which way the vote is going to go. I hope that the remainder of city council will know how dangerous this motion is and defeat it.
So why am I telling you this? I can guarantee that similar discussions are underway at virtually every city council and town council in the world. It’s your job to get in contact with your local politicians and educate them on the alternative solutions
On today’s show we’re talking about hunting versus farming. Hunters go out in the morning, they catch their prey. They cook a big meal and they eat for a day, maybe longer. But the work of producing the food magically happened somewhere else. The same is true for fishermen. They catch their prey, but they don’t nurture it or do any of the hard work over a longer period of time to actually produce the food. They simply go out and catch it. They might lure it in and trap it. They might happen across it and tackle it to the ground. Hunters are transactional. They are opportunists.
Farmers on the other hand work in harmony with nature. They know that you can’t grow anything anywhere. There are certain locations that are better suited to one type of crop versus another. You’re not going to grow rice in the rain forest. You’re not going to get Maple Syrup in the desert. If you want to make great tomatoes, you’re looking for a unique combination of soil composition, rainfall, sunshine. There is a season for planting. There is a season for weeding. There is a season for harvesting.
You wouldn’t dream of planting seeds as the weather gets colder in the fall. You wouldn’t dream of harvesting in May in the Northern hemisphere. There is a season for everything.
By now, you’re probably wondering what this has to do with real estate investing. There are hunters and farmers in real estate investing as well.
You know the hunters. They’re the ones who have the business cards that say “We Buy Houses”. They’re looking for deals below market value. They’re going to flip the contract to another buyer for an assignment fee. They’re very transactional. They eat for a day, or maybe a week. But then they have to go do it all over again. There’s nothing wrong with being a hunter. Just understand that hunting is an earned income. It requires you to get up off the sofa and go out into the wild and hunt your prey. If you don’t hunt, you don’t eat.
There are farmers in real estate investing as well. They might be involved in new construction. Farmers are long term landlords. Farmers focus on value creation over a long period of time. Farmers invest in properties years before they expect to harvest.
Well, real estate investing has seasons as well. There are seasons for planting, and there are seasons for harvesting. That doesn’t mean that you need to sit idle when the seasons are changing. Right now I believe we are in a season for harvesting. You could also be looking past the current season and be planting for harvest in 5-7 years from now.
But if your goal is to work the earth like crazy, slam the seeds into the ground, water every hour and hope to harvest in a few weeks, you’re probably going to be disappointed. Farming doesn’t work that way.
We know that better opportunities are just around the corner. Waiting can be incredibly frustrating. It seems like inaction. Waiting feels like analysis paralysis.
You would never tell a farmer to get off their butt and get out into the field and start planting new seeds in the autumn. It doesn’t make any sense. The seasons are clear.
When I speak with established investors and developers who understand the economic cycle, they’re very clear on the seasons as well.
You can start a project that will complete in another two years or even five years. But a project that is projected to complete in the next 6 months is incredibly risky. You stand the chance of being caught out of step with the seasons.
Even hunters need to pay attention to the seasons. There is a hunting season. You don’t hunt for deer in March. There is a season for hunting as well.
You can still undertake projects in today’s environment. You just need to be mindful of being in harmony with the season.
Video conference fatigue has definitely set in. I found myself NOT participating in three conferences this past week that I really wanted to attend.
I regularly attend the New Orleans Investment Conference each year in New Orleans. It’s the longest running investment conference in the US. The conference organizer Brien Lundin is a friend. Spending time with the attendees is one the highlights of the year. Conferences always have two components: The speakers and the attendees.
I love spending time with the attendees. I find that conferences compress timeframes when it comes to relationship building.
I love spending time with Chris Martenson and Adam Taggart of Peak Prosperity. They had their conference this past weekend.
The Podcast Movement conference is underway and there are some amazing speakers. The content looks fantastic.
Instead I attended two masterminds this past week.
One is with Kyle Wilson. Kyle used to be business partners with Jim Rohn before he died. Kyle has attracted some of the most amazing people into the mastermind. Kyle has been a past guest on the show on Nov 4 of 2018. I find the time we spend together to be uplifting, grounding, nourishing of the mind and spirit.
There were so many profound things said during the mastermind.
It got me thinking about folks who regularly post quotes on social media. Quotes are fun and thought provoking. But they rarely have lasting impact by themselves. I found that quotes DO have lasting impact when you know the author of the quote, but most importantly the context in which the statement was made.
This week, during the two day mastermind there were so many quotable moments.
I’m going to share three quotes with you from this past weekend. But all of them have a context. So here we go.
The quote first is by Robert Helms. We were talking about the uncertainty that is present in everyday projects. This could be a project delay introduced by the city. It could be the result of a regulation change, a hurricane, or perhaps a pandemic. The reason doesn’t actually matter.
These surprises are like a bend in the road. Robert said “A bend in the road is not the end of the road, unless you fail to make the turn.”
So here we are in 2020, with a bend in the road. So the question for you is, “Are you prepared to make the turn?”
Later in the session we were talking with Dr. Tom Burns. Tom Burns was a guest on the show about a week ago and he has a new book “Why Doctors Don’t Get Rich” launching on October 27. We were talking about how Tom always seems so calm and never in a hurry. Tom is a real estate developer and also an orthopaedic surgeon. I asked Tom how he doesn’t allow the pressure of deadlines to affect his day to day life.
He said very simply. “My Time is not defined by other people’s priorities.” He went on to explain that he rarely feels time conflicts. When his children were young, he would reschedule patient surgeries if it was his day to read stories to the first grade class. He would forego income, and inconvenience his patients because he was clear on what his priorities were.
The third quote is from Mitzi Perdue. Mitzi was married to Frank Perdue from the Perdue Chicken fame. When her husband was in his early 80’s Mitzi and her husband Frank worked together on preparing an ethical will. Now an ethical will is all about legacy. Frank was a wealthy man and no doubt he left a sizeable inheritance to his children.
But there’s a difference between inheritance and legacy. Inheritance is what you leave your children, whereas legacy is what you leave within your children. So the ethical will was all about legacy. I’m going to share one of the items from his ethical will.
If you want to be happy, think about what you can do for others. If you want to be miserable, think about what is owed to you.
Our guest today is a repeat guest. George Ross is 92 years of age and has seen more in his business life than virtually anyone I know. On today's show we're talking about how to communicate any semblance of certainty to investors.
Ted Thomas is a nationwide expert on tax lien certificates and tax deeds. To connect with Ted or to learn more you can find him at tedthomas.com
On today’s show we’re trying to make sense of some of the latest statistics that are being reported in terms of national home sales. A new report yesterday in the Wall Street Journal reported that home sales rose to a new 14-year high in September, bolstered by robust demand and a shortage of homes for sale that is making the housing market one of the brightest spots for the U.S. economy. Existing-home sales are up 9.4% in September from August to a seasonally adjusted annual rate of 6.54 million, the highest rate since May 2006, according to the National Association of Realtors. The September sales represent a 20.9% increase from a year earlier. The numbers of August sales were similarly glowing. The August existing home sales were up 9.1% compared with 2019. All of this points to a booming housing market, one of the brightest spots in the economy. But here’s the problem. Depending on how you slice and dice the data you can construct a different narrative, a different explanation of what it happening. We all know that we went through an artificial downturn in housing sales in the Spring. This was the result of widespread shutdowns of the economy and the shelter in place orders that were in effect for close to 90 days across major parts of the nation. If you compare sales in the first 9 months of 2019, to the first 9 months of 2020, we have not yet matched the sales volume of 2020. In fact, in the year to date we have only sold 97.9% as many houses compared with 2019, a reduction of 2.1% compared with this time last year. Are we having a booming market? Are we just catching up from the shutdown in the spring? The number of home sales in 2018 were higher, 2017 were higher, 2016 were higher. You would have to go back to 2015 to find a rate of home sales that are on par with the year to date numbers for 2020. Yes, we’ve had a strong recovery in home sales. But comparing the September 2020 statistics to the same period last year makes no sense. It’s not a reasonable comparison. It’s a little bit like putting a dam in a river that flows continuously. You then open the dam and say “Wow look at how much water there is.” No kidding Sherlock. It may be amazing how much water is flowing, but not surprising. The pundits that are used to reporting statistics a certain way, are continuing to do so. Why? Because that’s how they’ve always done it. There’s nothing normal about 2020 in any way. So if you’re going to quote statistics, you need to look at the big picture. I’m tired of seeing the weekly unemployment numbers being reported by the bureau of labor and statistics. Fewer people filed for unemployment this week, so they conclude the economy is on the mend. These types of reports are ridiculous to be quite frank. It’s not just the National Association of Realtors who do this. Virtually every real estate board is quoting statistics the same way. Why? Because that’s how they’ve always done it. Even in my home city of Ottawa Canada, the same thing is happening. Last week, the September numbers were published for my home town. The numbers are amazing. Sales volumes are up 35.1% compared with the same month in 2019. Hurray. But if you zoom out and look at the big picture, sales volume is down 4.9% compared with the comparable first 9 months of 2019. Look folks, I have no problem with taking a look at statistics. They can be very helpful in determining what is happening in the market. But when statistics are published, I urge you to apply your own thinking and analysis to what the numbers mean. Don’t get me wrong, I don’t think anyone is out to mislead you about what is happening in the market. Don’t just accept a journalists interpretation as the truth because it may not be the entire picture.
On today’s show we’re talking about the role social media may be playing in our world becoming increasingly polarized.
The extreme viewpoints that are making headlines in the US have been shocking to say the least.
I never thought we would see the day when armed citizens were lined up outside polling stations. This is the United States of America, not some third world banana republic. Some think that extreme views are strictly a US phenomenon.
But I can tell you that the same trends are happening in Canada and the UK.
These TV shows are being carved up into segments anywhere from 2 minutes in length to about 15 minutes in length. That’s about the attention span of the person scrolling through social media feeds.
So now let’s talk about what you and I get to see on social media. The social media algorithms are designed to maximize your time on the platform. Their goal is to hang on to your eyeballs for as long as possible. The longer you are staring at the screen, the more ads can be presented to you, and the more ad revenue the social media platform will get.
When you’re looking at social media, the content being presented to you is not the product. This is a backwards economic model. It’s modeled after the free TV model.
You see when you go to the department store and buy a toaster for $30, the toaster is the product. You are the customer and there is an exchange of value, money for product. That’s how commerce works.
But when you attend a free seminar, or watch a TV show with advertising, or spend time on social media with advertising, YOU are the product. That’s right, you are the product. The customer is the advertiser, and your attention span is the product that is for sale.
So the algorithms are designed to maximize your attention span. If your interest is in model trains, the algorithms will show you more model trains. If your interest is in gardening, you will eventually see more gardening posts.
That feeds what is called confirmation bias. If you believe the earth is flat, then you’re going to see more posts that confirm the earth is flat. You won’t tend to see those posts that confirm the earth is round. In your world, the earth is flat.
Social media algorithms have tried to become socially responsible in the presentation of news content in particular. So lately, you’ve been presented with some of the opposing viewpoints, in an effort to try and balance things out.
But there’s a problem. Rather than opening your mind to the opposing point of view, many of these differing viewpoints are some of the most extreme. When you see the extreme viewpoint, it generally isn’t convincing. It has the effect of being repulsive. When the opposing opinion is repulsive, it has the effect of hardening the original viewpoint even further.
Finally, we are seeing a lot of controversy surrounding both Facebook and Twitter for having censored content. Many of these decisions are being made by people, and not a software algorithm. The question of political bias cannot be swept under the rug. This further erodes trust in what is being published, which creates the pretext for rejecting what is being served up on social media as fake news. That only serves to harden positions even more.
I don’t have the answers here. I come from the tech world and I can imagine being in the software design meetings where algorithms are discussed. Social media is not to blame per se. I feel like we’re witnessing a train wreck on a social level in slow motion. Perhaps the only antidote is for each of us to seek out the opposing view point, but the moderate centrist viewpoint, not the extremes.
The hospitality industry has been decimated by the Covid-19 pandemic perhaps more than any other industry. This spans everything from the major hotel brands to the individually owned short term vacation rentals.
There is no doubt that we are entering a second wave of infection across many countries. We’re all tired of this and want it to be over and for life to return to normal.
On today’s show we’re talking about a major change at AirBnB. They have introduced a new cleaning protocol that all hosts must agree to implement and certify in order to retain their listing as an active host. All hosts are required to agree to these COVID-19 safety practices by November 20, 2020. Hosts who don’t complete this requirement before the deadline may be unable to accept new reservations.
The AirBnB cleaning process is a 5 step process. Airbnb developed their cleaning protocol based on CDC guidance and in consultation with experts in the fields of sanitization and medicine, such as Ecolab and Dr. Vivek Murthy, former US Surgeon General.
They have two handbooks, one for regular AirBnB listings. This one is 36 pages in length and a second one for hotels that is 41 pages in length. The difference between the two handbooks has mostly to do with the common areas and the hotel check-in process. Where possible, hotels should implement contactless checkin, using electronic lock codes with a smartphone, checkin using an app, and tap for payments. Make sure that guests know which services are available such as room service, the gym or the pool which might be closed for protection of guests.
There are helpful videos, and detailed checklists for hosts to use every step of the way. I read through both handbooks and I have to tell you, I was pretty impressed by the thoroughness of the protocols they have recommended.
I particularly like the checklists.
One of the biggest mistakes that people make is sanitizing before cleaning. That does nothing to stop the spread of viruses and bacteria. A surface needs to be clean first before it can be sanitized.
This is a basic principle. I know this from my days when I used to brew beer and make wine. If the bottles were not sanitized, you would end up with a bad bottle of beer or a bad bottle of wine. But before the bottle could be sanitized, it needed to be 100% clean. There could be no mold residue in the bottle, no bits of food or organic matter. Using a sanitizer like a chlorine or a sulphate solution would not do its job unless the bottle was 100% clean first. These early lab experiments gave me an appreciation for what clean really means. If I cut corners, I would have a bad bottle. The microbes didn’t care if I was in a rush. You see there are just some processes that are pretty unforgiving when it comes to contamination. If you’ve ever had a bad bottle of wine, it’s because something wasn’t clean before the wine got into the bottle, or the cork didn’t seal the bottle and something got into the bottle. They don’t care what brand of wine, if it’s a $10 bottle or a $1,000 bottle. They don’t care if it’s a French wine or a California wine.
Here we are in the middle of a pandemic and those microbes don’t care either. We are in a war on clean, at least for the foreseeable future.
The choice of November 20 as the cutoff date for AirBnB hosts to comply with the new protocol is not an accident in my opinion. November is traditionally a slow month in short term rentals, especially in the vacation short term rentals. But we’re coming up on the busy US Thanksgiving weekend when people travel to visit family. Poorly cleaned short term rentals could turn Thanksgiving into the super spreader holiday of the year.
Hi Victor-
Your podcast is fantastic - a perfect balance of brevity, and information without any noise or fluff. My question is:
I have a multifamily renovation in progress which I want to refinance upon completion with 10 year fixed rate debt. As you mentioned, interest rates will likely increase post-election. Since my future rate will be based on the 10 year treasury, what investment could I make today that would earn money if rates when up, to off-set my future increased interest costs? Almost like interest rate insurance...
Thanks again for everything you do for the RE community.
Tom,
This is a great question. To be clear, my goal in answering the question is not to offer advice. That’s the job of a licensed commercial mortgage broker professional in your local market. I’m merely offering my experience and observations on what I’ve found to be effective in the past.
I don’t know the specifics of your project, but I’ve secured financing for new construction on numerous occasions. Whether we are financing for value added projects or new construction projects, they can be treated very similarly.
For example, let’s imagine you bought a building for $1M and you brought $300k in cash and borrowed $700k. Your debt would be at a 70% loan to value ratio. You might spend a further $400,000 in improvements. But after improvements, your building might be worth, say $2M in this example. You might be looking to refinance the project at the same 70% loan to value which would give you loan proceeds of $1.4M. At that point, you can repay the initial loan of $700k, and the equity of $700k and replace all of that with a new loan of $1.4M maintaining a 30% equity ratio with no cash tied up. That would be your classic infinite return that most investors are after.
The bank is also likely to offer a loan with two thresholds. It might be the lower of 80% loan to cost or 70% loan to value.
If we go back to our example of the $1M property with $400k of improvements. In this instance if the total cost is $1.4M, they would only lend $1.12M or 80% of the total investment.
The loan would be approved based on today’s interest rates but would be divided into two phases. There would be a construction phase that might be 12-18 months, followed by a permanent financing phase.
Here is the trick that I’ve had some success with. Rather than refinance the loan, you can keep the first position loan in place.
The loan would be approved based on today’s interest rates but would be divided into two phases. There would be a construction phase of 12-18 months, followed by permanent financing. On hitting your leasing threshold, the loan will convert to the permanent financing and your payment will be the principal and interest payment over the full amortization period. So far so good. But you’ve got a problem. You have a good loan at a good interest rate and for a decent term. If you refinance early, you're facing a large pre-payment penalty. Instead, go back to the same bank after one year of stabilized performance and ask them to increase the loan amount to match the 70% loan to value. But rather than a refinance, the bank is going to record a second mortgage behind their first mortgage. It’s the same lender, so the lender is not really in a subordinate position and therefore no less secure than the senior loan.
If all goes well, the property will value at the $2M that you think it will, and the bank will write the loan on the difference between $1.4M and the original loan of $1.12M. That new loan of $280k when added to the first loan will get you to a full cash out refinance without having to refinance. You lock in your interest rate on the first $1.12M, and you accept the risk that you might pay a slightly higher interest rate on the $280k second. But the overall ratio is still only 70% loan to value, so it should still be an aggressive interest rate.
On today’s show we’re taking a look at what’s happened in secondary and post-secondary education. Late last week The National Student Clearinghouse Research Center published data on the enrolment levels at universities and community colleges across United States.
In most economic downturns there is a loss of employment and out of work people use the opportunity to retrain. In past downturns, university enrolments have been seen as recession resistant. Enrolments have gone up as out of work mature students decide to focus their efforts on an area of the economy that has higher demand than their previous job.
This year has been different. Undergraduate university enrolment is down 4% compared with the same time last year. First time enrolments are down 16.1%. This number is significant because it will trickle through the system for the next four years.
Graduate student enrolments grew by 2.7% this year. So perhaps students who might have entered the work force elected to take their education one step further. Graduate students usually make up about 15% of the total university and so the positive contribution of these new graduate students to the overall student population is estimated at 0.4%.
Enrolment of international students is down by 7.5%. This makes sense with the global travel restrictions that come with the pandemic. But the percentages mask the economic impact. Tuition levels for international students are traditionally higher than those for local students. So the economic impact is disproportionately high.
The profit margin at most universities has historically been estimated to be in the 10% range. In the wake of the 2008 financial crisis, these grew to about 15%. At the end of 2019, profit margins across the industry were at an alarming 3.5%. Today average profits margins are averaging below 4.5%. So if enrolment is down in these bricks and mortar universities that have high fixed costs, many of them will be falling below profitable levels.
Universities are real estate anchors in most communities. Neighborhoods and commercial main streets are built around them.
The schools at greatest risk are the public schools and the private non-profit schools. But virtually no school is immune. The story of James Madison University, in Virginia is one of many possible case studies. They made the decision to extend spring break and graduation. By the middle of March, they had transitioned all of their classes online. They might be considered one of the most agile schools during this pandemic. They issued refunds for housing, food and parking and no refunds for tuition. The school lost $30M dollars in just 9 weeks.
According to credit rating agency Moody’s, 30% of colleges were running deficits before coronavirus. Not only that, 15% of public universities had less than 90 days of cash on hand!
This is despite the fact that college tuitions for a four year degree have multiplied by 1600% over the past 40 years. Universities used to rely upon the notion of scarcity. You could only have so many students in a class. For example, the law school at Yale has about 200 students. The classroom was only so big. That scarcity meant that they had to limit enrolment. But now, with the global reach of the internet, there is no real limitation on the number of students that can be reached. The incremental cost of adding a student in a virtual environment is small.
There is a prediction that as the internet democratizes knowledge, about 25-30% of universities will close permanently in the next few years.
As you are evaluating communities to invest it, you’re probably still assuming that the university is an anchor tenant in the community and more importantly that it will endure past the pandemic. I want you to examine the financial viability of the local college or university as part of your due diligence in any local community in which you invest.
Dr. Tom Burns is founder and partner in Presario Ventures, an Austin Texas based apartment development company specializing in Class-A new construction projects. In the mornings, he is a practicing orthopaedic surgeon. Tom just wrote a book "Why Doctors Don't Get Rich" which illuminates the path for other doctors, dentists, lawyers to replace and displace their professional income so that they can practice their profession for the love of it, and not for the money. This is such an inspirational story. You will hear Tom's humility in this interview.
The book launches on October 27 and you can be one of the first to get a copy at richdoctor.com.
John Cooke specializes in disaster restoration and hazardous materials situations. His team of over 400 staff get involved in all aspects of property maintenance from commercial cleaning to assisting families during the depth of insurance claims. On today's show John and I are discussing how to clean in a Covid-19 environment. What are some of the right solutions and how to apply them. This was a very insightful conversation and I learned far more than I was expecting to.
You can reach out to John at inquiry@smottawa.com or directly by phone at 613-244-1997 where he can connect you with trained specialists in virtually any market in North America.
Today’s show is another AMA episode. Today’s question comes from Saadya in NYC.
“I’m looking to conduct my first commercial deal. What is the most important thing to look for in that first project?”
Well Saadya, this is a great question.
When it comes to having a successful project, there are three main factors to consider.
1) The submarket
2) The people involved
3) The deal specifics
You’re based in Brooklyn. The NY area is highly transient. It’s such an expensive market that people tend not to stay for long unless they really have to. It takes a strong consistent income stream to justify the cost of living. I know of so many people that live in NYC for just a short period of time.
Real Estate is hyper local. I would recommend you choose a location that is experiencing population growth and job growth behind it. I would stay away from areas that are losing population. I like Philadelphia which is not too far from where you’re located. I would stay away from the expensive bedroom communities North of NY and in Connecticut. The taxes are too high, despite the fact that many people from NYC have moved to those communities this year during the pandemic. I don’t believe the growth in those communities will be sustained. I would choose a community that had strong growth prior to the pandemic, and then that growth continued or accelerated during the pandemic.
2) I’m fond of saying that a good deal badly managed is no deal. So the key is to make sure that you recruit the best quality people into your team. There are a shocking number of poor quality people in this industry, and a few outright crooks.
3) The deal itself. This is where most rookie investors start. They make it all about the deal. Let’s be clear, on your first few deals you will make some mistakes. It’s super important that those first few deals have next to no downside risk and lots of upside. You will need that to act as a cushion against the inevitable mistakes that will happen.
So you’re looking for a deal that is off market. Even in today’s environment we have a lot of money chasing deals. It’s still an auction environment. You don’t want to be bidding against other more experienced investors who might be willing to pay more. You almost always end up paying too much in that environment.
You want to find those special cases where there is a problem to be solved. It might be an estate sale where the property is physically distressed or financially distressed in a good area with strong fundamentals. It might involve rescuing a property that is in pre-foreclosure. You would have the opportunity to be solving a problem for a family that is in a difficult spot. The moratorium on evictions and foreclosures is masking the depth of distress that is just beneath the surface. These business and real estate failures will create a re-pricing of assets in the near future. I can’t tell you exactly when that will happen. It could be in the next 90 days if government continues to gridlock on any decision making. It might be longer, perhaps 6-9 months away. But the tidal wave of distress is coming. It might involve a property that must be sold because of a divorce, or a discord between family members. That represents an opportunity to step in a save a family member from financial ruin. A friend of mine calls that doing good, and doing well at the same time.
This year is creating a number of precedent setting situations.
The Senior Housing industry is under extreme financial pressure these days. Prior to the pandemic they were experiencing dropping occupancy as more and more new supply entered the market, faster than demographics could support increased demand. Some markets have experienced occupancies in the 80’s and 70’s. The most over-built market in the US right now is San Antonio Texas where occupancies were averaging in the low 80’. Then the covid-19 pandemic hit.
The combination of a tight labor pool and falling occupancy are the main pressures senior housing operators currently face, and those pressures are not going away anytime soon. Staff who are concerned about workplace safety and contracting Covid-19 are demanding higher pay.
The increase in expenses, combined with falling occupancy and price concessions has hampered providers’ ability to raise rates. That’s resulting in NOI erosion and margin pressure.
On today’s show we’re talking about the impact of the moratorium on evictions on senior housing. Senior housing is partly a residential situation, but it’s primarily a service business. To be clear, we’re talking about the private pay, premium end of the market. In those properties, the real estate component represents maybe 20% of the cost of delivering the service in most cases. Labor typically accounts for about 60% of operating expenses, and providers are facing major workforce pressures at the moment. Of course the pandemic itself has increased operating costs for assisted living and skilled nursing operators as additional protocols have come into play.
If a resident stops paying, the question is “What is an operator to do?”
Does the operator put a claim on the estate of the senior citizen? Do they seek a court order to garnish social security payments? Do they seek a court order for capital encroachment if the senior has any savings? Do they evict? The image of an eviction of an elderly person with multiple infirmities is horrifying to say the least.
It may be too early to determine what the law means for residents of senior housing communities across California and similar rules across the nation, but those in private-pay senior housing should be studying its details.
We have a situation where there are millions of people unemployed. It’s often the adult children of seniors in assisted living who pay the bill. The seniors themselves are already on fixed incomes.
Overall, the California law gives tenants broad protections from evictions,
The new law provides eviction protections through January 31, 2025, but in order to be protected you must (1) return the declaration of COVID-19-related financial distress hardship declaration within 15 days after receiving any eviction notice, and (2) pay 25 percent of each month you could not pay from September 1, 2020 through January 31, 2021 by January 31, 2021.
This raises a number of legal questions regarding how services are delivered in senior housing. Should there be a residential lease for the accommodation portion, followed by a separate contract for health care services?
What is classified as rent perhaps should be brought into alignment with the actual cost allocation between rent and services. Considering that the average stay in assisted living could be in the range of 24-36 months, the idea that residents could choose not to pay their fees for 17 months and then only be required to pay 25% in order to extend the eviction moratorium for another 4 years. It would then require the senior living operator to sue the estate in order to get paid.
We’ve been hearing for months how interest rates are going down and how the Federal Reserve is going to maintain rates at near zero levels until well into 2022.
That all sounds like good news for real estate investors who are looking to borrow funds at the lowest possible interest rates.
As we’re talked about before, the interest rate charged by the banks is often tied to one of two benchmark rates.
Shorter term loans and variable rate loans are usually tied to a short term benchmark like LIBOR which is the London Interbank Overnight Rate.
Permanent financing is usually tied to the yield on the 10 year US Treasury Bill.
When the Congress enacted legislation back in March to protect the US economy that involved a massive amount of printing of money. The total in new spending was $2.3T dollars. Most of that money was issued in the form of Treasury Notes having a short term of one year or less. As those notes become due, they are being repriced as longer term debt which carries with it a less frequent need for renewal.
Over the past 80 days, the yield on the 10 year treasury has gone from 0.52% to 0.79%. That increase in almost 1/3 of a percentage point translates into interest rates for permanent financing that are 1/3 of a percentage point higher.
There are three scenarios to consider.
1) A Republican sweep of the White House and both chambers of government
2) A split of the chambers of Government. It may not actually matter as much who wins the White House.
3) A Democratic sweep of the White House and both chambers of government.
Let’s look at all three of these scenarios. According to the polls, a Trump victory in the White House is looking less likely. It’s highly unlikely that Republicans would win all three. Whether Joe Biden or Donald Trump is the next President, both will continue printing money. The big question is how much.
The second scenario with a split between the House and the Senate will result in legislative gridlock. We’ve seen that in the past 7 months with no new money being pledged to recover from the pandemic. The level of acrimony between the parties has become the new normal in government.
The third case, involving a Democratic sweep of the White House and both chambers of government has the potential to unleash an unprecedented level of spending. It’s that third scenario that has the markets worried. We are already seeing signs of inflation even though it’s being downplayed by politicians. Inflation is the hidden tax that most people can’t isolate. When a can of tomatoes at the grocery store goes up by $0.50 most people blame the grocery store for the price increase. They rarely put the blame on the Secretary of the Treasury, or the Chairman of the Federal Reserve, or their representative in Congress.
When those trillions of dollars get printed, the debt goes somewhere. So far, the US has been able to export the debt over the past 30 years. China’s central bank and Saudi Arabia have been willing buyers of all that debt. But the willingness of those countries to fund US deficits seems to be evaporating.
For now, we’re in the middle of a global pandemic. All economies are suffering. When asked the question about which currency to buy, there doesn’t seem to be a stronger currency emerging. The Euro is in bad shape, the Yen is hopelessly over-leveraged, and international investors are not about to put their trust in the Chinese Central government.
As we get closer to the election, and even after the election whoever wins we can expect the yield for 10 year Treasuries to go up. You have a small window in which to lock in historically low interest rates. Even if the Fed keeps rates low, I believe Treasury yields will go up, and therefore interest rates for investors.
Commercial brokerage house CBRE conducted a survey of CBRE investment and valuation professionals in the last two weeks of August.
One of the top items that I saw in that survey was the word risk. As we’ve talked about several time recently, risk has become top of mind for most investors this year.
There are a number of sentiments in the survey that are worth noting. We’ll start by talking about investment market conditions.
Survey respondents report that a disconnect between buyer and seller expectations has emerged, with more than 60% of buyers looking for discounts from pre-pandemic prices versus 9% of sellers willing to offer them.
One-third of survey respondents were underwriting with the same rental income assumptions as in Q1, with the remaining two-thirds adopting more conservative assumptions. Half of those with unchanged underwriting assumptions were in the industrial sector.
CBRE professionals indicate that investors are placing greater importance on certain investment criteria than before the pandemic, particularly tenant credit quality (cited by 85% of respondents), length of remaining lease term (64%) and building occupancy (64%).
Roughly two-thirds of survey respondents believe that investment activity will recover to pre-pandemic levels within one year. But that sentiment varies widely by asset class. Let’s dig into the details.
When asked how it will take for market conditions to return to pre-pandemic levels, the answer varied widely by asset class.
In the office asset class, 72% of respondents said it would take more than 12 months for offices in the central business districts. For offices in suburban settings, 48% said it would be more than one year, versus 52% who said it would take less than a year.
In the retail sector, 58% of respondents said it would take more than one year for market conditions to recover to pre-pandemic levels.
In multi-family 84% said it would take under a year and 45% said it would take less than 6 months.
Industrial seems to have hardly skipped a beat during the pandemic.
When asked about the factors influencing investment decisions, respondents said that three new factors loom large when looking at new investments.
1) Building occupancy
2) Length of time remaining on leases
3) Credit worthiness of the tenants
These factors seem much more important than in the past.
There is no question that the business outlook is considerably more negative, especially in office and retail.
On today’s show we’re talking about chaos. This year has been anything but orderly. The handling of the pandemic by governments all over the world has been met with raging opinions across the board. There are those who believe governments are not doing enough to keep us safe. There are others who believe the entire response to the pandemic is overblown.
In order to effect the best decisions the right things need to happen, and they need to happen the right way. You will never please everyone. But if the rules appear arbitrary and inconsistent, that very fact will reduce faith in the rules and reduce compliance with the rules.
The level of frustration in the population stems from the seeming contradictions in public policy. It’s difficult to reconcile those contradictions.
There was the time when public officials told the population that masks were a bad idea. That guidance made no sense. It was not honest, and anyone with a shred of intelligence knew it. Now masks are mandatory in many places, but not all places.
A full scale lock down of the population was seen by many as being heavy-handed. Taking a walk in the forest, distanced from others was not putting anyone at risk of either spreading nor contracting Covid-19. But for a time, it was against regulations in many states, towns and nations.
It’s pretty clear that we are entering a second wave outbreak of Covid-19.
But our governments are acting in an inconsistent way. My own provincial government closed down restaurants, gyms, and strip clubs this weekend for at least the next month. But they kept schools and universities open. This defies logic. In response to the restaurant closure, I know of several people who chose to go out for dinner in a restaurant for one last “hurrah” before the restaurant closures. If it’s not safe to go in a restaurant on Saturday, then it’s probably not safe of Friday night either. If smart educated people are defying logic, then they’re not believing what government is saying to them.
We’ve been seeing that the majority of new cases in younger people. Yet, we’re doing nothing to reduce social contact in younger people. In our school system student in 4thgrade need to wear masks. Students in 3rd grade or younger need to wear masks. I know of one teacher who teaches a split class where half the students are in third grade and half and in fourth grade. Half the students are wearing masks and the other half are not.
In Europe, there is a patchwork of regulations that are difficult to understand, and again seem to defy logic.
The loosening of restrictions this summer helped Europe’s economy and partly saved the tourism season that is critical in countries such as Italy and Spain. But it also contributed to a sizable jump in the number of infections. Countries such as the U.K., France and Spain are now logging confirmed infections close to or above last spring’s numbers.
Restricting arrivals from outside Europe isn’t an effective containment method when you have a rampant pandemic like we are seeing right now in most of Europe. Travel restrictions from abroad work in places like New Zealand and Australia where the case counts are extremely low and they have effectively kept Covid-19 out of the country. But when you have a full-on pandemic and you can travel freely within the EU, the logic makes no sense.
If you’re confused by now, you’re probably getting the idea that governments are having a hard time getting their arms around making decisions.
I follow Dr. Chris Martenson and Adam Taggart at Peak Prosperity. They have a very solid science based video series on Youtube that is published regularly with the latest on what has been learned. I also follow the work of Dr. John Campbell in England who has done a great job of curating the scientific and medical studies on the pandemic.
Phillip Vincent is the principal at MomsHouse.com where they specialize in helping families transition the elderly from their single family home to assisted living. During those moments, the families are experiencing a complex web of problems and Phillip's focus is on solving their problems. You can learn more and connect with Phillip at momshouse.com.
Valerie Malone is the principal at Quill Decor where she specializes in interior design for short term rental properties. Her clients are all across North America, even though she is based in Cambridge in the UK. On today's show we're talking about the design elements that make for a winning short term rental property. You can connect with Valerie at quilldecor.com.
One of the consequences of 2020 is that taxes are going to change in the coming year. I’m going on record as predicting that regardless who wins the Federal election in November, taxes are going to change. I know that I’m not saying anything terribly earth shattering. I suspect you all expect that.
Tom Wheelright is one of the most well known accountants on the conference circuit. He’s one of Robert Kiyosaki’s Rich Dad Advisors and I love the degree to which he explains the tax code. Some people think of the tax code as a way for governments to extract money from the population. There are two ways you can look at a tax rate. You can look at it in absolute terms as a percentage, or you can look at the rates relative to what they were last year. Did the rate go up or down and by how much? Often politicians tend to focus on revenue collection, but they ignore the side effect which can be difficult to predict.
But Tom has a secondary definition which I find equally useful. The tax code can be seen as a series of incentives. In that secondary definition Tom makes it clear that you’re not taxed on how much money you earn. You’re taxed on how you receive that money. Structure matters more than dollars in this instance. If you receive money as employment income, versus interest income, versus active business income, versus capital gains they all get different tax treatment. The most favorable tax treatment can be considered an incentive to adopt the most favorable structure.
This is something that governments sometimes forget. All levels of government collect tax. Some tax consumption. Some tax property ownership. Some tax income. There are taxes everywhere.
Most cities calculate the amount of property tax owing based on a tax rate which is multiplied against the assessed value of the property.
The tax rate can vary by area depending on the type of property and the costs associated with the infrastructure in that area. For example, some areas with new schools or higher water costs may have a higher tax rate. Some rural areas that don’t have water supply or trash collection may have a lower tax rate. In my home city, the tax rate averages about 1.07%. The city of Vancouver which is one of the most desirable and beautiful cities in the world has a tax rate of 0.26%.
Houston Texas has one of the higher tax rates in the country at an average of 2.09%. But Texas has one of the lowest state income tax rates.
Illinois has a high state tax rate and the second highest property taxes in the country.
California has relatively low property tax rates at 0.76%, placing them in the lowest third of state property taxes. But they have the highest state income tax rates.
The state that created the largest incentive for people to leave was New Jersey. They have the 6th highest state income tax rate, and the highest property tax rate in the nation.
When you look at Florida’s average property tax rate placing it 26th among states in the Union, combined with a zero personal state income tax rate, is it any wonder that you hear so many New York, and New Jersey accents in Florida? The incentive was for people to move to Florida.
Think of Taxes as merely incentives, and make your decisions accordingly.
On today’s show we’re talking about the top 4 causes of erosion of our scarcest resource. Whether we’re talking personally or more broadly, the scarcest resource is time.
Time wasters are the among the most tragic of outcomes. After all, that’s all we have is time. Time is the great equalizer. Many of those who have managed to amass wealth have learned to manage their time better than others. They use their wealth and their time together in concert to create leverage. They spend money to save time. They invest time and money together to multiply their business and life objectives.
But there are things that happen in life that can derail focus and cause massive amounts of time to slip by. On today’s show we’re going to focus on the top three causes of time erosion.
1) Low Value Activities. There are so many activities that make up part of daily life. Some people spend time mowing their lawn. That’s minimum wage work. If your time is worth $10 or $15 an hour, then by all means you should mow your own lawn. But if you aspire to more, then you should delegate that work to others who can do it for less than your time is worth. I rarely go shopping these days. I try to order almost everything I can online. It might be for pickup at the grocery store.
2) Emotional Disruption
When people get uncomfortable, they often seek distractions in order to manage their emotional state. Some people spend time on social media. Some turn to alcohol, or watching TV, computer gaming or any of a number of distractions. There is a massive difference between idle time wasting and regeneration. Regeneration is an important and vital activity. Time wasting has little regenerative quality to it.
3) Health
A health issue can cause a massive disruption in one’s life. This could something as simple as a common cold which can sap you of energy to a more serious situation. My sister recently had a bout of appendicitis. I’m happy to say that the surgery and treatment she received post-op has been successful. She fully on the mend. That single event has taken her offline for a minimum of three weeks. The last health issue I had was back in high school when I too suffered with intestinal issues that caused me to miss about 3 weeks of school. Today here in 2020, even a mild symptom that matches the Covid-19 description is cause for self-isolating for a minimum of 14 days. If you test positive for SARS Cov 2 you’re going to be infectious for a period and could lose
4) Conflict
Conflict can sap you of energy and focus. I know that whenever my wife and I have a disagreement, which doesn’t happen often, I have witnessed 3-4 hours just vanish into thin air. We’ve both got much better are coming back from those hardened positions and resolving conflict more quickly.
But conflict comes in all shapes and sizes. If you’re party to a lawsuit, that process can drag for months or years. The amount of lost time and energy in dealing with a lawsuit can be astronomical.
Right now, there is nothing more important for society than dealing with the Covid-19 pandemic and the impact to the health of people and the health of the economy. But the US is in the middle of an election cycle. The last time there was consensus and collaboration among lawmakers was in the early Spring when the Cares act was signed into law on March 27.
The past six months have seen nothing new to help the economy. In fact, the White House reported today that they’re not even going to try and get consensus on helping the people until after the election. That’s another month wasted. In the meantime, the economy is suffering, people are losing their jobs, businesses that can’t make it in the current environment are closing permanently.
The most important thing you can do with your time is manage your time, energy and health.
On today’s show we’re talking about the materials cycle. Construction costs are influenced by the cost of materials. These commodities vary due to short term supply and demand fluctuations.
Last year, the industry was buzzing about the rising cost of steel due to the trade negotiations with China. A lot of the steel used in US construction is sourced in China these days and the tariffs on imports meant that Chinese steel would be more expensive. The price of US Steel went up to match the higher price of Chinese steel.
It seems that every time a major hurricane makes landfall in the US, there is a spike in the price of lumber. These storms create extreme demand for construction materials, especially in the Southern States. The ripple effect is felt through-out North America. We saw this after Hurricane Harvey soaked Houston. We saw it when Hurricane Laura smashed through Southwest Louisiana last month. I have friends who have been grumbling that prices for plywood have tripled since earlier this year. I even saw 2x4 lumber priced at nearly $8 per stud last week. I’ve never seen lumber studs priced that high.
I’m going to introduce you to the metric for lumber commodity futures. Lumber commodity prices are measured in USD per 1000 board feet.
Over the past 25 years, these prices have fluctuated in a range between $200 per 1000 board feet to $400 per board feet. As recently as March of this year, prices were below $300. By 14th September of this year prices hit an all time high of $984 per 1000 board feet. Two days later, by the 16th of the month, prices had fallen nearly $380 to $600 per 1000 board feet.
Lumber futures prices fell 3% just today in the time it took me to record this podcast episode. The question is twofold:
1) What is the right price for planning purposes if you have a new project that you’re undertaking?
2) How do you plan your project to take advantage of the most advantageous pricing.
When prices spike, it’s because of a short-term supply demand imbalance. The choke point in the system are the lumber saw-mills.
There is actually a surplus of trees. The past three decades saw more acreage planted than at any time in history. Many of these investments were made by those seeking a recession resistant investment. Trees grow by about 15% per year, regardless what the economy is doing. As many sawmills sought greater efficiency and lower cost over the past decade, many smaller sawmills closed down. The result was a significant reduction in sawmill capacity across the industry. That sawmill capacity was better tuned to the average demand and resulted in better profit margins for the sawmill companies. This reduction in capacity also exposed the industry to greater price volatility for finished products. That’s exactly what we’re seeing right now.
If you’re a developer, rehabber or builder who relies upon price stability in order to make your margins, how do you plan your projects?
This comes down to an exercise in risk mitigation. If you know you’re going to use lumber in the next year, and your cost of borrowing funds is, say, 5%. You can store lumber for up to a year for a very low cost. If you can get your lumber at a price that meets your budget, you should consider locking in at that price, or pre-purchasing the materials and storing them yourself in order to guarantee that security of supply.
If you failed to do that, then waiting a few weeks might be the smartest thing to do. In any industry that is sensitive to commodity prices, you need to pay close attention and manage your supply chain accordingly. Southwest Airlines was the most profitable airline in the US for nearly a decade simply because they had done a better job of securing long term fuel contracts at a price that made sense for them.
On today’s show we’re talking about how multiple layers of red tape can kill a project. Today’s show is a real-life story of a project where the additional layers of red tape literally killed an industrial project.
This is a project that should have been able to be built by right. When we say by right, we mean that the zoning lists a number of permitted uses. If your intended use falls within the zoning rules, you don’t need to ask further permission, apart from a building permit.
A building permit is required to make sure that any improvements to the land comply with the building code. The city provides a fairly clear list of what types of improvements require a building permit, and those that don’t.
If you’re building a new structure such as a house, a garage, a warehouse. Any of those things would clearly require a building permit.
In this case, the land in question has multiple zonings. Part of the land is zoned industrial and part of the land is zoned rural. On a portion of the rural land is an environmental protection overlay. Clearly, there are development restrictions in the environmentally protected zone. The industrial zone has a number of permitted uses which include:
· animal hospital
· auto dealer and service station
· Cannabis Production Facility
· kennel,
· light industrial uses
· parking lot
· retail store
· storage yard
· truck transport terminal
· warehouse
Our initial plan for the property is to land bank the property and simply put a storage yard for equipment, boats, and RV’s. This seemed like the lowest possible investment that would allow the land to carry itself while waiting for potential future development opportunities.
The city provide a sample list of items that don’t require a permit. They go onto say that if you’re not sure, to call the building department and to speak with a plans examiner. Projects that don’t require a permit include:
- New flooring
- Fences
- Painting and decorating
- Landscaping
So we thought, great. We have a land that meets zoning. We have a project that doesn’t require a permit. We confirmed that with the city. We should be able to start construction of the fencing and bringing gravel onto the site.
The seller of the land provided copies of old surveys, an old environmental impact study, the previous zoning applications and so on. There was nothing in those reports that gave us cause for concern. We read the rules that we thought applied to our case. Everything was showing green lights for the project.
We called the environmental consultant who wrote the original reports that the seller provided us. It was at this point that we were made aware of additional rules of which we were unaware. That phone call turned out to be a massive education.
It turns out that the rules also say that if any portion of the land is environmentally protected, no matter how far away you are from the environmentally protected zone, the entire parcel of land is subject to site plan control by the conservation authority. That means that even half a mile away from the environmentally protected zone, you can’t erect a fence without going through the entire conservation authority process.
This story is a lesson in due diligence. It means going a level deeper than just reading the reports. It means talking to the experts in the field to make sure you’re not missing something. I feel like we dodged a bullet on this project. We could have been tied up for a year or more in government bureaucracy just to erect a fence. Not only that, we would have been tied to that bureaucratic process for the entire life of the project. Doing anything on the property would involve going through that process each and every time.
This is another AMA episode. Anders from Ottawa asks.
You can now report rent payments and non-payment to the Landlord Credit Bureau and this will be reported on the tenants Equifax credit report.
It sounds like a great incentive for tenants to pay rent on time.
Do you see any drawbacks for landlords except the cost ($19.95/month) and some administration?
The landlord credit bureau is a concept that was founded in Canada back in 2012 by a retired Royal Canadian Mounted Police officer who specialized in fraud prevention and a retired corporate lawyer turned technology entrepreneur. Both men were frustrated by their own experiences as landlords, LCB shines a spotlight on good and bad tenant behavior.
Over time, the LCB has established a relationship with Equifax, one of the credit reporting agencies in order to have rental history become part of the overall credit report.
The LCB suffers from a couple of problems in my opinion. The grand vision for LCB is a good one. The question is how to get from the startup phase to broad market adoption. Eight years since inception, the program is still in startup phase. In order for it to be useful for landlords, the landlord credit bureau needs wide-spread adoption.
I could say the same thing about a number of new technology initiatives that suffer from being below critical mass. If 1% of tenants are members, then chances are high that when I get a vacancy in an apartment, the new prospective tenants won’t be in the system. Facebook by itself has no value. The biggest part of its value is based on the fact that it has 2.7B users. If the Facebook software existed in its current mature form with all kinds of features, but it had no adoption, it would be worthless.
Think about other platforms that have achieved wide adoption. Think about Youtube, or Facebook. Both these platforms went several years with a free service in order to maximize market penetration before figuring out how to monetize the offering.
If I’m a landlord, and I have a good tenant, I’m not going to pay $20 a month out of pocket to report on my good tenant. The value proposition for landlords having good existing tenant relationships is simply not there. The landlord credit bureau might be useful to me in 10 or 20 years time when enough people have adopted it that I get some real value from being a member. I’m not going to be a member for 20 years hoping that someday it might be useful. If I’m a large landlord with hundreds or thousands of units, maybe I will get more value. But the pricing goes up if you have more units in your portfolio.
The concept is good, but the problem is in their business model. In my opinion, they should find another way to monetize the offering that eliminates the membership barrier.
Think about it this way. If I have a vacancy as a landlord, I’m going to be thinking about solving that problem. I have two problems in fact.
1) When am I going to get a tenant?
2) Am I going to get a good tenant or a problem tenant?
At that moment, I’m probably willing to spend money to solve that problem. I might be willing to spend $200 for a package of credit searches during that 30 or 60 day period of vacancy. But I might not be willing to spend $20 a month for the possibility that someday down the road I might get some intangible benefit.
It’s the difference between vitamins and pain medication. When a landlord has the problem, they’re more likely to spend money to solve the problem. If they don’t have the problem, they probably won’t spend the money on the vitamins that have an uncertain benefit down the road.
The landlord credit bureau is a business, and I fully respect that they need to make money to survive. . My personal opinion is that they need to refine the business model to better connect with a value proposition that both landlords and tenants will find compelling.
George is a repeat guest on the show. We are all so blessed to have access to a gentleman of such wisdom. He is distinguished by virtue of having represented some of the most iconic names in New York real estate. He worked for Sol Goldman, who was one of the pre-eminent landlords in New York for more than a decade. He worked for the Wilpons family who own the NY Mets baseball team. He taught negotiation at the law school at NYU for 20 years. He is best known for his role in the Trump Organization and as a judge on the TV show "The Apprentice".
On today's show we get George's thoughts on the Presidential Debate held earlier this week and a very important life question.
Enjoy today's discussion with George.
Zandiee Hurtado travels the world while managing her real estate portfolio. She built her business on the premise of owning seller financed loans which pushes the responsibility for the physical management of the properties on her clients. She has mastered the art of lifestyle design using real estate investing as the tool to accomplish her life goals. You can find her on Facebook by her name Zandiee Hurtado.
Today is another AMA episode. Karla asks,
My husband and I are renting out our old house. In the process of switching a homestead home to a rental home I am doing due diligence. What are your recommendations regarding requesting quotes for a rental home insurance? What are the often overlooked things we should pay attention to when deciding the insurance company? Thank you
Karla, This is a great question.
I’m not an insurance expert by any means, and I certainly don’t want you to make any insurance decisions based on something you heard on a podcast. I’m happy to share what I know so that you can ask some good questions of your insurance broker.
Rental property insurance comes in a couple of different flavors. A single family home could fall under a residential policy and many insurance companies offer a consumer product that is geared towards this type of property. But understand that these policies resemble a residential policy much more than a commercial policy. Some residential insurance policies allow you to add a second rental property to your domestic policy. They can sometimes be bundled with the insurance policy of your primary residence.
A proper commercial policy is focused on insuring not only the physical asset, in this case the home, but the breadth of the business. You’re in the rental business and you want to insure the business, not just the house. The policy might include a loss of rents clause, whereas a residential policy may or may not. Recognizing that this is a rental property means that if you had a fire or flood, and let’s say that the property could not be inhabited for 6 months during the repair process, you would still need to pay your mortgage and you would still need to pay your property taxes. Some companies sell mortgage insurance separately.
The second thing to consider is the style of policy. Some policies are drafted as named peril policies. This type of policy insures against specific named risks. For example, there could be coverage for fire, flood, vandalism, and so on. But if that risk isn’t listed, you’re not insured. The second type of policy is a broad form policy. In a broad form policy, you’re covered for everything except specific exclusions. For example, you might be insured for anything except say named storms. So if a storm is given a name like Hurricane Laura, or tropical storm Beta, you would not be covered in that instance.
When I get a quote from an insurance company, I always ask to see a copy of the full policy. This request is usually met with surprise from the insurance broker. The rate sheet rarely lists the terms of the insurance policy. It sometimes provides a summary of coverage limits, but you can’t cover the full depth of the policy in just one or two pages.
Insurance companies are good at selling you on fear. For example, I was recently offered a supplemental insurance to cover damage from riots. But this insurance would only kick in if the riot damage exceeded $110 billion dollars in national riot damage in aggregate during a single year. The first $110 billion in riot relief would come from government, and the insurance would kick in after that. How much would the insurance company charge for this amazing protection? $150.
They would gladly take my $150. Most clients never bother to actually read what they would be getting for their $150. It’s a policy that would be virtually impossible to collect on, and if you did manage to collect, it would be years after the settlement.
Again, my objective in this discussion isn’t to tell you what kind of insurance to get. It’s to let you know there are choices. Unfortunately, there is no shortcut to truly understanding what insurance coverage is being offered. Asking lots of questions of your broker and reading the policy is the path to understanding the best type of insurance to buy.
Our book this month is Be Present In This Moment, a Practical Guide to Mindfulness by Tessa Watt.
The author Tessa Watt is based in London England where she has been practicing and teaching meditation for 20 years at the London Shambala Meditation Center. This book is not a new book. It was published in 2012.
Mindfulness is growing in popularity as a technique which teaches us to appreciate our life. This Practical Guide explores how to listen to your body to reduce stress and anxiety in all areas of your life; how to focus better at work by becoming more aware of what is happening in the present, and how to enjoy life more by bringing mindfulness into everyday actions. Free of jargon but full of straightforward advice, case studies and step-by-step instructions, this book makes the practice of mindfulness accessible.
Through mindfulness, you’re not trying to get calm, or relaxed or to become a better person. You are befriending the person you already are, and the place where you are, and you get to experience the present moment as it is. You’re not thinking about how you wish it would be, or how it could be, or how it was. You are simply experiencing the present moment as it is.
Mindfulness is an exercise in slowing down the mind, letting go of the racing thoughts. It’s not a theory, or a science. It’s a practice. I think of it like doing push-ups. Push-ups are something that done regularly. You don’t just do 10 perfect push-ups and say OK, good. I’ve done it, and now I’m set for life. Push-ups are the development and strengthening of a muscle. Mindfulness is just like that.
I’m a busy guy and my mind is full of projects. I find myself bouncing from the next initiative to be taken on a development project, to how I’m going to solve a staffing shortage, to how I’m going to solve a capital shortfall on another project, to the next topic for a podcast episode.
One of the most powerful exercises in the book is surprisingly simple. It involves eating a single raisin. Most of the time when I eat a handful of raisings I grab a handful out of the bag, and slam it back barely paying attention to what I’m eating. I’m probably on the phone while I’m grabbing a snack and raisins are not crunchy so they won’t interfere with the phone call. But this exercise is different. It involves eating a single raisin. You want to look at it carefully first, examining the exterior texture, the wrinkles, the shininess of the skin, the softness. Is it soft and malleable or hard and dry?
Mindfulness means paying attention in a particular way, on purpose, in the present moment and non-judgementally.
The exercise involves exploring the raising with all the senses. When you put it to your mouth, first run it along your lips. Notice how you mouth reacts to the raisin. Maybe your mouth starts to salivate. When you put the raisin in your mouth, taste it with different taste receptors in the mouth, on the tongue, on the cheeks. Bite into it and observe how it squishes.
You probably never knew there was another way to eat a raisin. There is the usual way, and then there is a mindful way that involves being fully present. How did this raisin experience compare with your memory of eating raisins?
I’ve spent a lot of time studying the habits of high achievers. Ray Dalio from Bridgewater Associates, the largest Hedge fund in the world credits his success to his mindfulness practices. So many of the members of the mastermind that I belong to say the same thing. I hear over and over again how the shift to mindfulness practices changed their lives. How it improved their relationships, how it lowered their stress level, and how it brought inner peace.
This book is a workbook, designed to improve your mindfulness practices and create stronger habits.
Yesterday it was reported in the Wall Street Journal that JP Morgan Chase was going to pay $920 million to settle a market manipulation investigation DOJ, CFTC and SEC tied to manipulation of precious-metals and Treasury markets.
These market manipulations were tied to a practice called spoofing.
Spoofers typically send large orders to futures exchanges intended to change the appearance of supply and demand. If prices move in response, the spoofers may succeed at their goal—getting a smaller order filled. They then cancel the larger order as quickly as possible. The law was changed in 2010 and forbids the practice of sending misleading orders that traders don’t intend to have executed. The problem with spoof orders is that it leaves the counterparties with a loss on the cancelled orders.
The practice which is illegal is alleged to have occurred hundreds of thousands of times.
The Commodity Futures Trading Commission provides oversight over the commodities market for precious metals. Not only did JP Morgan pay a fine, they also admitted to misconduct. Three traders, two of whom still work for Chase and a third who left the bank in 2009 were charged criminally in the case. The charges were filed in Chicago Federal court about a week ago.
In addition to spoofing and other federal offenses, the indictment charged all three men with racketeering, a claim that is more typically found in cases against organized crime entities. Authorities said it represents the first time that defendants accused of spoofing electronic derivatives markets have been charged with racketeering.
While the government has been active in outlawing the practice in commodities trading, the practice is believed to be widespread and largely unmonitored in the market for federal treasury bills.
Spoofing is closely linked to a form of market manipulation that we experience all the time. It’s rooted in a psychological concept called anchoring. Anchoring sets an arbitrary expectation by drawing an imaginary line in the sand.
If you go to one of the department stores that’s not bankrupt and buy an Armani suit, you might find it on sale for, say $1,300, marked down from $2,000. It’s a bargain at $1,300 and so you decide to buy it. But wait a minute. Who said it was $2,000? Was the $2,000 real or was it a fabrication designed to manipulate the consumer?
Would the buyer truly pay $1,300 for that same suit if they thought the retail price was $1,200, or $1,300 or $1,400?
How often do we see manipulation in real estate markets? Have you ever seem multiple offers for the same property? One or two offers are substantially below the asking price and then one offer comes in at a more reasonable, but still low number? The seller, starts to get conditioned to the idea that their asking price is too high and feels compelled to take notice of the lower offers as being representative of what the market will bear. Acting out of fear, they accept the reasonable offer. The same buyer of course was behind all of the offers and they simply wanted their third offer to be accepted.
The one thing that causes these manipulations to be effective is another human emotion, called FOMO, or fear of missing out. FOMO, combined with anchoring is at the root of most market and negotiation manipulations.
Property managers often schedule multiple tenant appointments at a vacant apartment for the same time. If some of these prospective tenants are not real tenants, they can create the false perception of high market demand for the apartment. The property manager might say, there are many people interested in this apartment. You should apply in the next hour if you have any hope of getting the apartment.
You can start to spot these manipulations with a bit of training.
Earlier this week, it was reported that UBS and Credit Suisse were in preliminary merger talks. These two banks are Switzerland’s largest banks and they are also longstanding competitors. If combined, they would become Europe’s largest bank. Both banks have major international interests including in the US.
A few years ago, two of the banks I deal with were involved in a merger. To be fair, it was DNB First that acquired East River Bank. All of the East River Bank branches were converted to DNB First. You would think that the impact of this would be minimal since we were customers of both banks.
Of the two banks, DNB First was much more aggressive in their lending practices and we definitely preferred DNB First over East River. But several of the senior executives from East River Bank were given responsibility for the loan committee at the parent company. The loan underwriting team from East River Bank was given responsibility for loan review reporting to their former bosses, now in charge of the loan committee. Needless to say, the loan underwriting practices at DNB First changed and became much more conservative.
Nearly every middle-market bank in the industry is looking to either acquire another bank or be acquired, and it’s likely that yours is no exception. Many banks see an acquisition or merger as a chance to expand their reach or scale up operations quicker. Yet, a bank acquisition is not without its drawbacks as well – particularly for the unprepared banking customer.
So why would banks be merging in today’s environment?
Many banks were consolidated in the wake of 2008, not because they wanted to be acquired, but because the banking regulator forced the issue through their stress tests. If a bank’s balance sheet was suspected of being weak, the regulator required an increase in the bank’s equity in order to keep operating.
There are numerous banks in Europe where we will see this kind of consolidation in the next 18 months. For the moment, in the US, the Federal Reserve has agreed to guarantee the debt of the banks on a large scale. We don’t really know how this will play out in the long term.
Integration risk is a major danger in bank mergers. In some cases, banking executives don’t commit enough time and resources into bringing the two banking platforms together – and the resulting impact on their customers causes the newly merged bank to fail completely. Sabadell bought TSB from Lloyds in 2015, the UK parent bank provided a £450-million “dowry” fund to facilitate the three-year integration project to move TSB’s customers onto Sabadell’s system. Once complete the integration was expected to save £160 million a year. But by 2018, following the migration of 1.3 billion records, its customers reported a host of major glitches. Online banking customers were locked out of accounts or even saw the accounts of other users. The ensuing problems cost the chief executive his job.
Joseph from Boulder Co asks:
My question is about the viability of shipping containers as building material. I have seen amazing things being done with them and I'm wondering if it would work for our current project.
We have the intention of creating a glamping vacation rental getaway (620 - 1240/sf) for parties of 4-8 people gearing towards millennials and tiny home fans. (Attached is a typical 2/1 draft design)
Concerns we have are:
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refinancing after project is up and running to get initial investment money back to investors.
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construction cost with containers vs standard building materials. Our partner builder has done builds in CA for $110-130/SF hard cost.
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city/county planner objections to use of material
I appreciate any thoughts you have. Thank you again for all your work and content.
Joseph this is a great question:
In my experience shipping containers make for a robust structure. I love the idea from the perspective of re-using materials that might otherwise go to the scrap heap for recycling. But here’s the problem with shipping containers. They’re 8 feet wide. When your building block for your room is too small to fit basic furniture, the resulting finished product has extremely awkward room sizes. For example, if you’re making a bedroom, you need a minimum of 11.5 feet to fit a bed, a walking space and a dresser in that dimension. If you want a queen sized bed with two bedside tables, you need a minimum of 9 feet just for the furniture to fit in the room. If you want a bit of breathing room it needs to be larger. In both cases, the minimum room dimension is above 8 feet. So you’re going to be cutting out a wall, a thick steel wall. That’s an expensive cut. Now your room is 16 feet wide. That’s a nice dimension, but it can lead to a larger footprint than you’re after.
Wood framed construction is not that expensive. I’m building apartments and single family homes all day long for about $120-130 per SF. So there is no savings in the overall cost of construction by using shipping containers compared with conventional stick built. Let’s look at a standard 8 x 20 foot container. They can be purchased for $2,500 each plus delivery. I just took delivery of one of these and paid $300 delivery. If you look at the cost per square foot for a structural box, you’re looking at $17.50 per SF.
Most of the cost of construction is embedded in the infrastructure and the finishes. The total cost of framing is about 15% of the total project cost in a regular stick built home. But even when you’re building with containers, you need some framing for the interior walls. This might be wooden strapping which is less expensive than structural framing. But it’s not zero. When you’re building with shipping containers, the insulation becomes key. Metal containers are highly conductive. You need channels to route the utilities like water, sewer, electricity, and HVAC. In order to get sufficient insulation, you end up with thick walls, or expensive insulation. If you have thick walls, now your interior room dimensions shrink and you end up with a smaller room below the 8 foot dimension.
Framing makes up a small percentage of the overall construction schedule. Most of the time is consumed during the rough-in and interior finishing stage. Even if you set the framing portion of the schedule to zero, you would not save more than about 20% of the overall schedule, with virtually no savings in investment.
I want to thank you Joseph for a great question. It’s one of those ideas that intuitively looks like it should be a benefit, that doesn’t get realized in real world practice.
Jorge is a multi-family investor, developer, and property manager based in Dallas. He manages a portfolio of over 2,000 units in multiple markets including Houston, and most recently South Dakota,. To learn more, you can visit elevatecig.com.
Paul Hopfensperger has swum the English Channel three times. I can't tell you how difficult this achievement has been. Today's story is such an inspiration. Paul is so humble and you're going to love this conversation.
Enjoy...
On today’s show we’re talking about how feedback delays affect speed of decision making.
Today’s show is an explanation of how control systems operate. We’re going to start with a pretty simple control system that most of us are familiar with. Imagine you’re behind the steering wheel of a car. In fact, some of you are probably in your car as you’re listening to this. When you turn the wheel to the left, the car goes left. Turn the wheel right, and the car performs as expected. The delay between turning the steering wheel and the effect on the direction of the car is pretty short. It’s well under one second. It feels pretty instantaneous. Imagine for a moment that instead of that instant response, there was a two second delay. You turn the steering wheel, and two full seconds go by. one one thousand, two one thousand, and then the car starts its turn. Think about how much more difficult it would be to make driving decisions if there was just a two second delay. Now extend that delay to 10 seconds. How much more difficult would it be if there was a 10 second delay between making the decision to turn the car and you starting to see the effect of your decision. Hopefully you’re getting the idea. I’d like you to keep that idea in the back of your mind.
We’re going to apply that same concept to the control system that is steering our economy. Specifically, the impact of government decisions to increase or relax social isolation regulations. This is another control system, just like steering a car.
If you turn the wheel to the right, you have more social isolation, you reduce the spread of the disease. If you turn the wheel to the left you have less social isolation, the disease spreads more quickly.
The government is monitoring data coming from the testing that’s happening all over the country. They are seeing the number of reported cases increasing. They’re looking at the number of people being admitted to hospital. All of this data is being used to make a decision on how strict an isolation policy is required to stop the spread of the pandemic.
So the question is, do they need to impose a stricter social isolation policy? The economic damage that results from a complete shutdown is extremely painful and there is not consensus among the population that a full lockdown is warranted.
So let’s figure out how government officials can even hope to make a decision before seeing the effect of that decision.
The incubation period of Covid-19 is averaging about 7.7 days. That’s the amount of time between someone contracting the disease and the onset of symptoms. If you get tested, you will get your results in about 4 days. You’re now at 11 days. It takes a while for symptoms to worsen. So you’re at another 10-12 days before being admitted to hospital and then another few days before being admitted to intensive care. On average, we’re at three weeks from infection until someone ends up in hospital. The average hospital stay for Covid 19 is 23 days. So let’s add this all up. We’re looking at an average of 44 days from the time someone catches the disease until they get released from hospital or they die.
So in order for a trend to establish itself, you need to wait nearly double the delay before you have a visible trend resulting from the decision. That’s a total of 88 days for government to gather enough data before they make a second decision. So let’s say that on day 1, they see case numbers creeping up to unacceptable levels. Government officials make a decision to turn right to shut down the economy. It’s going to take another 44 days for the first effect of that decision to show up.
Based on these simple facts, it’s no wonder that governments are over-steering in their attempts to control the pandemic. It would be impossible not to. Once they make a decision to increase social isolation, their next decision is at least 88 days away.
On today’s show we’re talking about the true costs of borrowing.
Borrowers often look at the interest rate when it comes to figuring out the cost of borrowing. On today’s show we’re going to look at the hidden costs associated with signing a new loan.
Loans come in all shapes and sizes. Most of them come with some form of up-front fees. These fees can be inclusive of disbursements. In other cases, these direct costs associated with the loan are added to the up front fees.
These fees include a lender fee. On top of the the lender might charge you for preparation of the loan documents. In that case, the lender’s legal fees are passed on directly to the borrower. If the lender wants additional title insurance, you’re going to pay for that too.
The latest fee in the US for some insured loans include the Adverse Market Refinance Fee. This fee is an additional 0.5% of the loan amount and is added to the upfront fees.
This new fee was announced back in August and was supposed to be effective September 1. But an outcry from borrowers pushed the effective date of the new fee until December 1. A survey of a few mortgage brokers suggests that the additional fee might be added to the upfront closing costs, or in some cases, the lender will aim to recoup the fee by adding it to the interest rate over the term of the loan. The fee is ultimately charged by Fannie Mae to the lender and it’s up to the lender to collect the fee however they choose to do so. So the bank may choose instead to spread the fee over a 5 year term and increase the interest rate by 0.1% to cover the additional fee.
That fee sounds painful, but it pales in comparison to some of the back end fees that can be assessed for early termination of the loan.
It’s pretty common to have a sliding scale termination fee if you refinance before the end of the term of the loan. For example, if you have a 7 year loan you might have a termination fee of 5% of the loan principal if you terminate in the first year of the loan. That would drop to 4% in year 2, 3% in year 3 and drop to zero by year 5 of the loan. If you’re going to sign a new loan that is going to be at a lower rate than your existing financing, you want to look at the total difference in cost.
Let’s say that you have an origination fee of 1% for the new loan, and let’s say that you’re terminating your existing loan early and have a 2% pre-payment penalty to pay. You’re now looking at 3% in up front fees. In order for that new loan to make sense, the interest rate would need to drop sufficiently to result in a meaningful saving. But you also need to look at it from a cash flow perspective. The lender fees need to be paid up front. So let’s imagine for a moment that you’re looking at a $1M loan. Those 3% in fees come to $30,000 that you need to fund at loan closing. If you don’t have that much available in cash, you’re going to have a hard time closing the refinance.
You might have done the analysis which shows that over 5 years, a 2% annual savings in interest on a $1M loan would save you $100,000, minus the transaction fees of $30,000 for a total savings of $70,000. But you still need to come up with the $30,000 + additional closing fees in cash.
Remember that in today’s environment some lenders are looking for borrowers to escrow larger amounts for maintenance reserves and for interest reserves than in the past. This is all part of a more conservative underwriting environment. So you might be facing a larger cash infusion for the refinance than you might have previously considered.
We are in one of the lowest interest rate environments ever. But to take advantage of it, you may need to pay careful attention to the entire capital structure and ensure you don’t fall short.
On today’s show we’re talking about getting access to high value market data for free.
I’m a big believer in getting access to market data and using that data to make decisions. I also believe that independently developed market studies are essential to make sure you’re not deluding yourself.
Whenever there is a new commercial project undertaken, you can bet that there is going to be a third party market study. These studies are both expensive and time consuming. Before you take a project through the entire process of entitlement and a capital raise, you will want to commission a market study. But before you commit significant resources to a project, it might be nice to get a hold of an existing study that would help you understand the dynamics of the market. That kind of early look at the market can save you a lot of time and money by allowing you to validate and refine your product concept. On today’s show I’m going to give you a shortcut.
We know that work performed by government bodies carries with it a requirement for transparency. That doesn’t mean that governments publish all of the work they do. In fact they don’t publish that much. But you can often get a hold of information from government bodies through a formal access to information request. Almost all levels of government have a formal access to information process.
So if you’re looking for market studies that can cost anywhere from about $5,000 to $50,000 to produce, you might just find that the information you’re looking for already exists and can be secured by simply asking the relevant government department to send it to you.
Now a market study and an appraisal are not the same thing. But they often can contain the same information.
I recently made a request to a government department for a market study in the industrial sector. They responded that they didn’t have the specific market study I was looking for. However, they did have an appraisal for several comparable properties in the area. Would I like to see a copy of the appraisal instead?
Clearly the answer was yes.
The appraisal was a 54 page document that was jam packed with sufficient market data to meet my needs at the start of a project.
It showed more information than I was expecting. It showed annual absorption of square footage by neighborhood within the city. It showed total inventory and vacancy by neighborhood. It showed average rent per square foot by neighborhood.
What did this document cost me? It cost a single email and about 10 days, and a follow-up email. The appraisal was a little more than a year old.
Would I ultimately commission my own market study? Of course. But to get a project validated and to help refine a product concept, that document was more than sufficient.
Technology is testing the boundaries of new business models, and the pandemic is creating sufficient disruption to accelerate the adoption of these new business models. I had dinner delivered to my house last week from a restaurant. The restaurant is only about a 2 minute drive from my house, but having dinner delivered during an evening when I had a packed schedule was incredibly convenient.
A new startup company is hoping to become the Uber of evictions and post-eviction cleaning.
There are approximately 4.5 million homes in the US in some form of financial distress. One startup is treating the dire situation as a moneymaking opportunity for gig workers.
The company, Civvl is recruiting freelancers to sign up as eviction crews for landlords and lenders, calling it the “FASTEST GROWING MONEY MAKING GIG DUE TO COVID-19.”
Civvl is a company that started its online presence back in May of this year is hiring gig workers in all 50 states. Their website says that they’re accepting new gig workers in all 50 states and Canada. But when I attempted to register on their site, it was not capable of accepting a Canadian address.
While there is a large scale moratorium on evictions, some evictions that do not fall under the moratorium are happening. The company aims to provide services in 4 separate areas:
1) Process Serving
2) Foreclosure and eviction clean-outs
3) Property Inspection
4) Eviction Standby and assistance
The system basically aims to match landlords and lenders with process servers and cleaning crews who would be involved with the eviction process. The agents would not be responsible themselves for the eviction of tenants or the eviction of occupants in the event of a foreclosure.
At the heart of the system is an iPhone or Android App that agents have running on their phone. When a new gig comes into the system in a geographic area, potential agents are notified of an incoming gig and then they have an opportunity to snag the gig. Pricing is negotiated between the user of the service and the agents who take the gig.
I’m personally not ready to hire an unknown gig worker to serve legal documents. Yes, that will probably be less expensive than hiring a professional process server. But if the service doesn’t follow the process to the letter of the law, the landlord or the lender runs the risk of having the service being invalidated. In that situation you would believe that the notice was served, when in fact you would not be in compliance.
Hiring someone from an app to complete an eviction clean-out would probably be an ideal service as long as there is enough resource available at a decent price in order to hire reliably. This is something that I would be inclined to use as a lender or as a landlord.
I read through the company’s 28 page agent agreement that any gig worker would have to sign prior to becoming part of their network.
I don’t know whether Civvl is ultimately going to be a good service or not. But we are living in a time of innovation and there is no doubt that new business models will emerge for services. I’m not here to offer advice. But rather this is an idea and information that you can keep on your radar.
There is a black knight at the black jack table. At first this statement might seem a little obscure. But stay with me on it and you’ll see it.
If you’ve been listening to this show for a while, you’ll know that I’m a big believer in economic fundamentals. I’m a believer that 1+1=2 and the math needs to balance at the end of the day. I have this strange belief that in order for an investment to return a profit, the company needs to generate positive net income. For an investment to go up in value, that income needs to increase. If the income drops, so too does the value of the company.
The power of the purse is vested with the federal reserve. This year the Fed made a commitment in March to deploy hundreds of billions of dollars to prop up the economy. The Fed promised to buy corporate bonds and exchange traded funds that invest in portfolios of corporate debt. The Fed can’t buy the debt of individual companies. But they can buy funds.
The central bank tapped BlackRock to help advise it and buy the bonds and funds on its behalf, though the central bank retained ultimate authority over what to purchase. So while they met the letter of the law to ensure they’re in compliance, they’re certainly not living up to the spirit of the law. I’ve said this before, if you went to Las Vegas to play a game of black jack and one player at the table had the ability to add cards to the deck at will, some thugs would take that player out back and break their knees. But that’s exactly what the Fed is doing. They’re printing money and using that funny money to skew the card game in the favor of whoever they designate should be the beneficiary.
The Federal Reserve had budgeted up to $750 billion for these asset purchases. In the end, the thaw in markets meant the Fed only spent about $13 billion of the $750 billion it had designated for corporate-bond and ETF buying. The positive signal sent by the Fed was enough to bring capital back into the market. Investors believed that the Fed would buy all this toxic equity and provide an effective backstop to investors from losing money.
Whether that was true or not is immaterial. The fact is, investors believed it to be true and that was enough to have money pour back into equities.
For the past three weeks we’ve seen an 8% pullback in stock valuations, including a 3% drop just today. But the problem is that none of these valuations are connected with the profit producing capacity of these companies.
The folks at Blackrock have amassed another $57 billion in new investment during the past quarter and how have 7.3 trillion dollars worth of assets under management.
Just because everyone is piling into the stock market without regard for company fundamentals doesn’t mean you should do it.
Jonathan Tuttle is based in Chicago Illinois where he invests in mobile home parks nation wide. On today's show we're talking about mobile home park investing and gaining insight into how that market is evolving. You can reach Jonathan at midwestparkcapitalfund.com
Mike Simmons is from Try Michigan. Today's conversation is all about how to scale your business from a solo-preneur to a larger business.
You can connect with Mike at mikesimmons.com
Today is another AMA episode (ask me anything)
Ryan asks:
"I live in Los Angeles and have been working on my education and networking to break into the Commercial Multifamily Investing space (particularly in Arizona); however I do have an opportunity to possibly break into ground up development of built to rent units here in Los Angeles. A buddy of mine who develops (completed 24 units, 6 units and currently raising capital for 33 units in decent areas such as West LA, Hancock Park) is willing to let me tag along on his projects to learn while being a passive investor.
Any advice on which path to choose (B & C class MF in AZ vs. ground up build to rent here in Los Angeles, CA)? I am leaning towards MF in AZ given the business friendly atmosphere there, but it's hard not being in the market."
Ryan this is a great question.
You’ve presented your question as one of two choices. Either new construction in Los Angeles, or B & C Class in Arizona. For reasons that I’ll go into in a minute, I probably would not choose either of the two asset classes you’ve presented.
I’d like to encourage you to consider additional alternatives. In fact, I’d suggest that before you commit to a single project, you get clear on the type of project that is going to meet your investment criteria. In my world, an investment needs to follow the laws of supply and demand. That means I want to be in a market with growing population, growing employment, and a shortage of supply for housing.
Los Angeles lost population in 2018, 2019, and it has lost population in 2020. In fact, LA ranked fourth in the nation in terms of population loss in 2018. All other things being equal, that means that prices will drop for both rentals and purchases. The problem with rentals in an expensive market like Los Angeles is that the cost to deliver a finished product is quite high compared with the net income you can generate. In addition, many submarkets are rent controlled. That means that the properties often don’t meet their potential because the rents are being artificially held down.
I’m not a fan of C-class properties in Arizona. I’ve owned investment property in both Maricopa County and Pinal County. The problem with C-class is that the income strength is not there. If you’re renting property to people who don’t have stable income, then your investment is at risk every month. If they’re relying on government subsidies, you’re renting to people who are broke. They’re not going to take good care of your property. I’ve never lost money in A-Class properties. But I have lost money in C-class. You will find that C-class properties tend to have more than their share of surprises and unplanned maintenance.
In terms of meeting your investment criteria, it’s important to get clear on what constitutes a good investment for you. I can’t decide that for you, I can only share what my investment criteria are.
1) I’m looking for projects that generate 30% net profit margin within 12-24 months. That means I’m buying at enough of a discount that I can generate that 30% margin after all expenses and interest carrying costs.
We’re at a unique cross-roads in history. This is an exceptional time to start in investing. We are on the cusp of a repeat of 2008 all over again. Except this time it is happening in slow motion. We know it is coming. We can prepare. The moratorium on evictions, and the moratorium on foreclosures are both holding the market in a form of financial hibernation.
I would hate to see you jump into the market a few months too soon in what amounts to the absolute top of the market, only to have a huge number of distressed properties hit the market all at once. When that happens, even with low interest rates, the laws of supply and demand dictate that we will see a precipitous drop in prices in some markets.
On today’s show we’re talking about the latest guidance from the Federal Reserve regarding interest rates. Yesterday the Fed announced the result of their latest committee meeting. They reaffirmed their guidance on maintaining interest rates low for the next 18 months, and then they extended that guidance by another year until the end of 2023.
The Fed talked about the role for monetary policy which simply describes interest rates. The Fed has made it clear that simply lowering interest rates won’t do much to further stimulate the economy. Whether interest rates are 2% or 0% isn’t going to all of a sudden get people to run out and make new investments in The Fed chairman also spoke about fiscal policy. This is controlled by the Treasury department’s spending of money to stimulate the economy. Naturally the Fed has a hand in this as well because the treasury is empty and any spending requires the treasury to come back to the Fed with cap in hand asking the Fed to print more money. Right now, political wrangling has created a stalemate whereby the losers are those who are in need of financial help. The politics of an election have come ahead of helping a crippled economy. After nearly a month with little congressional progress on a renewed assistance package, the economy is in peril from lack of government action.
So interest rates are at historic lows. What do you do with that information? What decisions should you be making knowing that interest rates are going to remain low for some time to come?
As I see it, low interest rates may possibly reduce your income if you’re in the business of lending money.
But if you rely on debt to fund the growth of your business, then you have a series of decisions to make.
1) The best think you can do in this environment is reprice existing debt into a lower interest rate vehicle with as long a horizon as possible.
When you borrow money in an inflationary environment, you are basically shorting the dollar. You banking on those future dollars being worth less than today’s dollars. If your interest rate is, say 2%, and let’s say that inflation is running at 3%, then the debt is being devalued at a faster rate than what you’re paying in interest. The money is essentially free at that point. I believe we are at the cusp of free money for that reason. But even more important than shorting the dollar, refinancing the debt into a lower interest rate facility gives you stronger cash flow and makes your business more resilient to economic shocks. We are not out of the woods yet with the pandemic and all the economic side effects. Lowering the cost of your debt is just plain responsibility.
2) It’s tempting to go and secure additional debt to grow your business. After all, the debt is so cheap, it’s tempting to go get as much capital as possible to take advantage of the low interest rate environment.
But here is where you need to think carefully. What is the purpose of the debt?
Is it to provide a cash buffer for the business? Is it to fund a growth in the business that is based on verifiable sustained demand? Is the growth speculative?
In today’s environment of uncertainty, you want to be establishing clear criteria for how you make investments. When are you going to make incremental investments? Have you established a high bar for making investment decisions?
Investments are made within a context. That context makes a number of assumptions.
For example, in 2010 the context was a distressed market where assets could be purchased for 30-40 cents on the dollar. Today’s context isn’t fully known or understood.
For that reason, my guidance is that new projects need to be undertaken very carefully. New debt should first be used to reprice existing debt and improve cash flow.
On today’s show we’re talking about where are we with this darned pandemic that has dominated this year 2020.
There are lots of conflicting data points and individuals, business leaders, public health officials, elected officials, and investors are trying to figure out where this is all heading. This is an area I’ve been studying deeply for a long time.
The Corona Virus is new in the past year, it’s not that well understood to the medical community, and it threatened our global society with a very high mortality rate. We’ve had a bit of a reprieve over the summer months.
The weather is getting cooler and people are spending more time indoors. We are seeing infection rates rising dramatically in many countries including Spain, Israel, France, India and Brazil.
The United States will pass a grim milestone in the next day or so with 200,000 deaths so far this year from the pandemic.
There are some potential vaccines undergoing early clinical trials, and it’s reported that a few hold considerable promise. However, even if these are found to be effective, it will be many more months before they can be manufactured in sufficient quantities and administered to a large enough percentage of the population to have a meaningful impact.
We’re hearing of outbreaks in the school system as children return to school. We’re hearing first hand accounts of outbreaks in university residence buildings.
So where does that leave us? It’s possible that we have a second wave coming. Some point to the Spanish Flu pandemic of 1918, which infected 1/3 of the world’s population in four successive waves. It was the later waves of the Spanish Flu that were the most deadly. Is history about repeat itself with the Covid-19 virus?
I’ve been following the work of Dr. John Campbell from the UK. He has been reporting on a number of recent studies showing the correlation between the severity of Covid symptoms and Vitamin D levels. There are numerous studies showing that there is a strong link to severe Covid symptoms and vitamin D deficiency. A recent small scale experiment of 76 patients conducted in Spain showed that out of 50 Covid patients chosen at random who were given the best available treatment and high doses of vitamin D, all survived, and only one out of 50 deteriorated to where they needed to be admitted to intensive care. Out of the remaining 26 cases, all were given the best available treatment, and no vitamin D supplements. From this control group 13 / 26 deteriorated to where they needed intensive care and two died. Fully 50% ended up in intensive care.
You can find the videos from Dr. Campbell on Youtube at https://youtu.be/iNji13yoW9g
Over the past week, Dr. Campbell has presented numerous other papers and studies from the Journal of the American Medical Association, two large scale studies from Israel, to name just a few. It’s strange that the WHO, the CDC, the Oxford Center have not initiated a large scale clinical trial of Vitamin D. But the studies to date seem pretty compelling.
I’ve maintained for a long time that it would take one of two things to bring the pandemic to an end from a social and economic impact.
1) Full herd immunity. Either everyone got it, or large scale deployment of a vaccine
2) An Effective treatment
If you look at the statistics coming from Europe, we see that case counts are rising dramatically. Paradoxically the death counts have not been rising correspondingly.
It’s too early to declare the pandemic over. Some of the studies have shown Vitamin D to be effective as both preventative and as a therapeutic. Vitamin D is produced within the body by exposure to sunlight. As a supplement, it is readily available, and is easily manufactured in high volume.
On today’s show we’re talking about the usefulness of your property and how the title report can help you understand what you’re buying.
You’re buying a piece of property. You pay the purchase price, and now it’s yours. But the truth is, it’s not that simple. There are so many things that can encumber the use of your property.
All kinds of things that affect your property can be recorded in the official records of a property.
To start with, the title report can tell you a lot about your property. There is an enormous amount of complexity in what seems like a pretty straightforward transaction. Sometimes these reports can be lengthy and boring to read. But they contain a ton of information about the history of a property. I recently received a title report that was 96 pages in length. It had all kinds of details, including when transfers happened between family members, loans taken out against the property, when they were repaid, when the owners were behind on their taxes, or their water bills. So much information is contained in the property records.
The first and simplest item is the deed. This is the ownership. Who owns it and under what kind of structure is it owned? Is it owned by a person, an entity like a company, or a land trust. If the property was transferred as a result of a foreclosure, the new owner would be listed on the property. But some areas have a right of redemption period after the transfer whereby the original owner can get their property back. For example, there is a rule in Philadelphia that says if a property is sold at the Sherriff’s tax sale, and the original owner was not properly notified of the impending sale, they have a right of redemption period whereby they can pay the back taxes owing and get their property back. How long is that redemption period? Get ready for this. It’s 21 years. That’s right, 21 years.
There is additional complexity coming from the various forms of encumbrances that can be attached to a property. This can be a lien. But there are other forms of encumbrances. There could be a right of way or an easement. These are sometimes used to provide utility companies the right to have a pipeline, or an electric transmission line cross your property. It might be a right for a neighbor to access your property for a driveway in order to prevent their property from being isolated.
Sometimes there can be a deed restriction recorded on title. It could literally say anything. It might say that the property is transferred on the condition that the any structure built on the property must be painted yellow. You can literally put that kind of restriction on a deed. That restriction might be temporary or perpetual. Unless you perform a full title search, you may not know what burdens you are signing up to. They’re contained in the history of the property.
I’m dealing with an issue on a property right now where one of the owners granted an easement to the electric utility company to have wires crossing the middle of the property. That easement was granted in 1938 and the property owners were paid a grand total of $4 for the right of way from the utility company.
From a practical standpoint, the electric utility is highly unlikely to ever enforce their right to access the property. But if I build a house in the easement, they could theoretically come to me one day and ask me to demolish the house.
Then you have to consider what new regulations might be in place. Just because a house exists on a property, doesn’t mean you’re permitted to modify what’s there. Many elements of the building code allow existing structures to continue in their current location. These are the so-called grandfathering clauses. But sometimes, the new rules say that if you make any modifications to the property then the new rules apply.
Pay very close attention to the title report and I recommend that you read every word contained in it.
Today is another AMA episode (Ask Me Anything). Brad from Ottawa asked me to look at a prospectus for an international hotel fund. He is asking for my opinion on the offering.
Clearly the global environment for hospitality has changed dramatically. Nobody knows what the new normal will be for hospitality following the pandemic. We’re talking about hotels in warm weather getaway destinations. We don’t know what airline capacity will be in the coming months or years for those destinations. Without knowing the airline capacity on those routes we have no way of assessing the demand for hotel nights. There’s no basis for building a new hotel without that data.
The offering memorandum document is out of date with respect to the current market conditions. There’s no way that an investor should be even thinking about putting capital into a new construction hotel.
I want every listener to understand that I’m not preaching about someone elses’s project.
I say this even for myself. I have a development project in the core of the city in one of the hottest neighborhoods. My original plan was to build a 4-star hotel in that location. It would have been the perfect location and an ideal product in that location. I really wanted to build that 120 room hotel. And then the pandemic hit. I know that in an environment where hotel occupancies worldwide are below profitability for the existing hotels, there is no basis for engaging anyone in a discussion about building a new hotel.
The most knowledgeable investors for hotels are those who have invested in hotels in the past. Many of these investors have decades of experience having invested in the hotel sector. It makes sense to talk to those investors and ask them about their strategy for hotels going forward.
Understand that we have a set of market conditions where a large percentage of existing hotels are in default on their debt. The actual percentage depends on the location. On August 28 of this year, just a few weeks ago we dedicated an entire episode to what is happening in the CMBS market for hotels. In NYC, the default rate is 38%, in Houston 66%. While these hotels have not gone into foreclosure yet, I predict that some of them will. When they do, there will be high quality assets for sale in the market at a discount. In that environment, would an investor rather acquire an existing hotel for a deep discount or would they roll the dice on a new development project that won’t generate revenue for another 2-3 years?
I’ve been saying this for a while. Now is the time to be patient. I’ve had a number of conversations with investors in recent weeks where they’ve had funds available. It seems like the money is burning a hole in their pocket and they want to put the money to work. I totally get that money sitting in a bank account is earning essentially zero interest. I have the same situation and it’s tempting to put the money to work.
I know we’re in what appears to be a hot market. In the residential market prices are continuing to rise, largely fueled by low interest rates. But that doesn’t translate into higher prices in the investment market. As investors we value property based on its income potential. In my home city, sale prices for condo’s are up 24% this year over last. That means that at the entry level of the market, people are willing to pay more and they’re gobbling up inventory in order to avoid being priced out of the market. But that has nothing to do with the valuation of rental apartments. Unless rents have gone up 24%, and I can tell you that they have not, the valuations for rental properties has remained steady or perhaps gone down a little. The valuations for hotels have gone down a lot.
This talk was given earlier this week at the Durham Real Estate Investors meeting in Toronto. When we think about project management, there are so many facets to consider. The goal of this talk was to give attendees something tangible and actionable to use the very next day.
Enjoy...
Britnie Turner is CEO of the Aerial Development Group in Nashville, Tennessee. She is also the founder and CEO of the Aerial Recovery Group. On today's show we're talking with Britnie and her chief of operations Jeremy Locke about the initiative that she and her team are taking to aid in the disaster recovery from Hurricane Laura in Lake Charles Louisiana.
If you want to learn more, you can direct message @AerialRecoveryGroup on Instagram, @BritnieTurner on Instagram. You can also find out more ways to help at laura.usastronger.com.
On today’s show we’re talking about the law of large numbers. The law of large numbers is a mathematical theorem in statistics thatdescribes the result of performing the same experiment a large number of times. According to the law, the average of the results obtained from a large number of trials should be close to the expected value and will tend to become closer to the expected value as more trials are performed. But we’re not going to be talking about statistical theorems today.
We’re talking about the ability of the human mind to process large numbers when presented with these big numbers.
We have so many facts and figures that are so big that they become incomprehensible. If I said to you 100,000 or 1,000,000,000, the impact is almost the same.
I mean think about it.
The wildfires in California have burned 2.3 million acres so far this fire season. Most people can’t process what that means. Yes, I know it’s a lot. But how big is 2.3 million acres. It’s not a unit of area that most people can process, let alone multiply by a large number.
An acre is a unit of area that measures about 208 feet by 208 feet. In a dense urban setting you will often get between 6-8 houses per acre, and 12-15 townhouses per acre. An acre isn’t huge, but it’s not small either.
Maybe square feet are easier to understand. A square foot is a unit of area that measures 12 inches by 12 inches. Or if you prefer metric, it’s a unit of area that measures 30 cm x 30 cm. We’re talking wildfires that have burned 100 billion 188 million square feet. Somehow, I’m not finding it any easier to comprehend how much has been burned in California in this year’s wild fires. Perhaps it’s easier to talk in square miles. This year’s fires have burned about 3,600 square miles. Even that is hard to process. If I told you that this is an area equivalent to 12 times the size of New York City, it’s starting to get easier to understand. Or if I told you that it’s about 40% of the total area of the Dallas-Fort Worth metro area, you’re now starting to be able to comprehend it. In truth, I haven’t told you anything different in any of these examples. But when I give you a frame of reference, it’s starting to become easier to process.
So far this year, the Corona Virus pandemic has killed 196,000 people in the US over a six month period. Exactly how many people is that? Yes, that’s a lot of people. It’s a massive human tragedy. It’s three times more American soldiers than were killed in the Vietnam War. That doesn’t really help either.
Think about taking Fenway Park in Boston where the Boston Red Socks play. You would need 5.2 stadiums the size of Fenway park to hold that number of people. That’s a jarring visual image.
Numbers by themselves are abstract, even for mathematicians to comprehend the scale and proportion.
If I told you that the newest Amazon fulfillment center to be built in my home town was 1 million square feet, how many people could truly comprehend what that means? But if I told you that you could put 60 NHL hockey rinks in the same area, or you could fit 17 football fields, it is starting to get easier to understand.
So why am I telling you this?
As you communicate with your investors, with your stakeholders, with your business partners, or with you grandmother, don’t throw numbers at them. Make sure you create a frame of reference that is understandable when you communicate a number.
Have an awesome 86400 seconds.
Today is another AMA episode (Ask Me Anything) John from New York asks:
With states, cities and towns possibly being under financial pressure due to decreased business during pandemic, how would you underwrite the purchase of a multifamily asset? How much of the increased tax can be passed along in a rental increase?
John, this is a great question. If you look at most cities, they get their cash from one of several sources.
1) Property Taxes
2) Service Fees
3) Other Levels of Government
4) Borrowing
Despite the pandemic, I don’t expect property tax collections to go down very much. Eventually, the city will get the property taxes, whether it means a tax lien on a property, or an outright tax sale, the city will get their money.
Service fees are the area that have been hit the hardest during the pandemic. Services fees include everything from the revenue collected when a someone rents a meeting room for an event, to parking tickets, to library fines. This is where cities have experienced the most impact during the pandemic and it’s also the area where the cities have reduced staff. You don’t need to hire life guards if the swimming pools are closed this year.
Transfers from other levels of government have been largely unaffected.
Borrowing is restricted to capital projects in most cities. Most cities are prohibited from borrowing to fund day to day operations. The only way to cover the shortfall is to either raise property taxes or to beg another level of government for more money. How each city will deal with the problem will vary from one to another. Nashville increased their property taxes by 34% in their most recent budget. Hopefully most cities don’t experience that kind of increase.
One problem in your question is how can you pass on these costs to tenants and recover some or all of the income lost to higher taxes? Some jurisdictions have rent controls. Where you’re from in NY is famous for its complex web of rent control regulations. Where I live in Ontario Canada, the province limited rent increases to zero % for 2020, arguing that the pandemic has caused enough pain for tenants. In most communities, taxes, utilities, insurance, have all increased rates in the past year. A zero percent rent increase is basically legislating landlords to lose money.
So back to your question which is how to underwrite a new project?
When there is uncertainty, you need to build safety into the project. That means increasing the debt coverage ratio to ensure you have a higher profit margin and lower debt service.
Most lenders require a debt coverage ratio of 1.2. Let’s look at a simple example. Let’s say that your project generates 120,000 in profit before debt service. In that scenario you would have $100,000 in debt service and $20,000 in free cash flow. But that’s the minimum your lender would allow and it doesn’t leave much margin for things to go wrong. For example, if your property taxes went up $10,000 and your occupancy dropped, and you had some unplanned maintenance, you could find yourself in a negative cash flow situation.
I would urge you to borrow a little less money, and bring more equity to the table. You might lower your borrowing from 80% loan to value to something lower, like maybe 65% or 70%.
You would want to target a higher debt coverage ratio like 1.5. In that scenario you might take that same $120,000 profit and target $80,000 of that to go towards debt service and $40,000 in free cash flow. The stronger cash flow on paper makes the project more resilient towards surprises. You could need that extra buffer. In our projects we are targeting higher debt coverage ratios above the minimums in order to bring that extra level of safety into the projects.
On today’s show we’re talking about an event that took place about a month ago. It made a few headlines at the time, but there’s been very little said about it ever since.
There’s a global debate raging on the best way to handle the global pandemic. Let’s be clear, there is no good solution. There are three trade-offs to be made.
1) Protecting health for people who might be susceptible.
2) Minimizing damage to the economy through social isolation and quarantine activities
3) Protecting the health care system from being overwhelmed with hospitalizations
Unfortunately, what is a scientific and economic problem has become politicized. At the end of the day, the virus doesn’t care what passport you hold, what political party affiliation you have, where you live, whether you’re old or young.
Last month, there was a motorcycle rally that was held in Sturgis South Dakota over a 10 day period in which nearly 500,000 people descended upon a small town of about 7,000. This annual event brings people from all over the country.
A new paper which examines this event was published last week by the IZA Institute for Economic Development, funded by The Deutsche Post. The paper is DP No. 13670 entitled: "The Contagion Externality of a Superspreading Event: The Sturgis Motorcycle Rally and COVID-19".
The Sturgis Motorcycle Rally represents a situation where many of the “worst case scenarios” for superspreading occurred simultaneously: the event was prolonged lasting 10 days, included individuals packed closely together, involved a large out-of-town population. Attendees to the events were only required to show that they had a mask in their possession, but were not required to wear it. The only large factors working to prevent the spread of infection was the outdoor venue, and low population density in the state of South Dakota.
A month after the event, it looks like the number of cases in the community multiplied by a factor of 4-5. To be clear, the case counts in Meade county prior to the motorcycle rally were low. There were approximately 2 cases per 1,000 population. After the rally, the number grew to 9 cases 1,000 population.
Not only that, but the event was also responsible for the spread of the disease in the communities where attendees originated from.
The study used anonymized smartphone data from SafeGraph, Inc. They used the SafeGraph data to measure the number of non-resident visitors to the census block groups (CBGs) where Sturgis Motorcycle Rally events took place, (ii) trace those attendees back to their home counties, and (iii) measure stay- at-home behavior among residents of Meade County.
South Dakota is one of the least densely populated states in the country. They naturally had social distancing built into their society. For that reason, South Dakota has had no restrictions on restaurant closings, no restrictions on social gatherings, no restrictions. They put the responsibility in the hands of residents and visitors to act responsibly. There is no mask wearing mandate, and there is no work from home requirement.
The makeup of attendees was 0.9% from the local county, about 8.5% from other counties in South Dakota and close 90.7% from out of state. All of this data was provided by the smartphone pings.
The authors of the study concluded that the Sturgis Motorcycle Rally generated public health costs of approximately $12.2 billion. The authors financial conclusions were flawed in my opinion, but the rest of the study was solid.
This study is the first real petri dish experiment of a large gathering involving large numbers of people to a live event, and involving travel from many parts of the country into a single location. Since the study was published last week, I expect that it will play a role in shaping public health policy for governments around the world.
There’s no question that there is a monumental shift happening in the world of commerce. Much of this is driven by the continual need to cut costs. Retail space which touches the end consumer is still relatively expensive. In fact, rent for a retail business rates among one of its top expenses. Not only that, the density of merchandise per square foot is quite low. After all, you want to be able to browse the aisles and see what you are about to buy without visual clutter. Clutter creates confusion, indecision, and ultimately undermines the buying experience.
We know that e-commerce is gaining market share. It’s not just the convenience of buying online. Even the bricks and mortar retailers are realizing that they need to reduce their retail footprint in order to compete. The purpose of the showroom has changed. It’s now just what’s required to showcase the merchandise, and not to hold inventory. The space is too expensive.
If you want to have a large catalog, and you want to drive a lot of volume, then you need a large space. Customers want to be able to enter a store without feeling crowded. Think of Ikea furniture stores from Sweden that have designed their stores to showcase how to use their product. But the stores themselves relegate the majority of the inventory to an attached warehouse where the product is flat-packed and stacked to minimize the warehouse footprint.
Last month, Colliers International published their industrial market update for the second quarter. This year, despite the pandemic, there has been a market absorption of 104M square feet of industrial space so far in 2020. There is 170M square feet of new supply that has entered the market during the period, and there is a further 314M square feet under construction. The new supply represents the eighth quarter in a row where supply has exceeded demand. Vacancies are trending upwards, despite the robust demand growth. Vacancies were 5.5% for the quarter up by 0.5% from the same period last year. Clearly supply is getting ahead of demand in some areas.
You see, in every sector you need to look at both supply and demand. Some cities have a very large industrial footprint. I’m thinking cities like Dallas and Houston which each have about 896M SF and 615MSF respectively. Now industrial demand breaks down into several sectors, including warehouse, flex, and manufacturing. The growth in the Dallas market in Q2 was 10M SF which represents an addition of 1.1% of the total market inventory in the second quarter. But if you compare with other markets like Austin Texas which only has 56M SF in the entire market, it looks like Austin is under-supplied compared with its population. Austin does have some major players with companies like AMD, Dell, Whole Foods, having sizable industrial footprints. The announcement of Tesla’s new factory in Austin is sure to bring more activity to the market. There is a shortage of industrial zoned land in the community and there is a need for additional last mile logistics space for many e-commerce businesses.
As with any business, you need to understand your customer, and you need to understand the supply demand dynamics of the local market.
Like retail, industrial projects are often tailored to a specific customer’s needs. Making an investment requires a deep understanding of the market dynamics for both supply and demand. Repurposing a warehouse from one customer to another is generally not that difficult. But location is important, outdoor storage is important, turning radius for trucks is important, freeway access is important, and transportation for employees to get to work is important. For example, if the employees in a warehouse need a car to get to work, then they will need to earn more than those who can take public transit.
While the August numbers for unemployment look encouraging, there are signs on the horizon of a fresh wave of corporate layoffs that will deal another blow to the global fragile economy. Some of the layoffs are merely announced and have not taken place yet, so they won’t appear in the official statistics until September, October, and in some cases after the US election.
Some businesses in the resorts and hospitality industry have now started to make temporary job cuts permanent. MGM Resorts sent layoff notices to 18,000 people a little over a week ago. The airline industry is poised to cut hundreds of thousands of jobs starting on October 1. The US Federal government’s cash injection for the airlines runs out on September 30 and there is no new money on the horizon that would seek to prevent a massive shrinking of the airline industry. United Airlines is letting 16,000 people go. American is letting 19,000 people go on October 1. Boeing is cutting 10% of its workforce. That’s going to have a trickle down effect to the hundreds of companies that supply parts to Boeing.
But it’s not just airlines and hotels. Ford Motor company is letting 1,400 people go through early retirement, a reduction of 5% of their workforce. Daimler, which owns Mercedes Benz may cut up to 30% of its global workforce. Coca-Cola is offering buyout packages to 4,000 people. We don’t know yet how many will take up the offer and how many will be forced to leave in the end.
Salesforce.com is letting 1,000 people go. LinkedIn has cut 6% of its global workforce. Warner Media is letting 600 people go starting in August. NBC Universal is expected to cut about 10% of its workforce.
The big issue for most of these businesses is the massive amount of debt that is being carried on the balance sheet. When revenues are a fraction of the pre-pandemic levels, these businesses are insolvent. They had the ability to withstand a few months of bleeding, but we’re now 7 months into the pandemic with no clear end in sight.
Frequent listeners to the show will know that I went on record early this Spring and predicted an 18 month economic winter. If my prediction is correct, then we will start to come out of this mess sometime in mid 2021.
We are in the middle of an election campaign in the US. Despite this, there are signs that the government will not be able to prop up the economy through the length and breadth of this pandemic induced downturn. They can prevent distressed properties from coming on the market by artificially freezing evictions and foreclosures. But they can’t do that indefinitely. Otherwise they create an environment where there is no consequence to defaulting on debt. The Fed simply won’t buy all the toxic debt in the world. This means that there will be a downturn in real estate. We’re seeing the beginnings of it in the hotel industry, in retail and in office asset classes. Eventually the job losses will cascade the pain into the residential housing market. That’s unavoidable, even if the short term metrics show a hot market. These job losses will ripple through the economy and real estate prices will not be immune. Your job is to start amassing cash to rescue the right projects when the time comes. That will be an exercise in patience and waiting for the opportunities to arrive.
Carina Guzman hails from Ottawa Canada where she specializes in all forms of land development. This includes land assembly as well as raw land development. In particular she has specialized in transit oriented land plays. This is a very smart strategy that can work in any community that has a strong transportation infrastructure.
Melanie Finnegan is based in Orem Utah where she specializes in tax lien investing, specifically on land. You can learn more at taxlienprocess.com or at taxlienwealthsolutions.com. Today's conversation was packed with valuable strategies on how to multiply your investment.
We’ve been saying it for a while. There is no such thing as returning to normal. What will emerge from this pandemic is a new normal. Exactly what that will look like is anybody’s guess. But there are some clues that the pandemic has amplified.
If you are the Owner of Class A office space, that has become a hazardous occupation.
Existing deals are getting undone on a weekly basis. Back in May, Shopify announced that all 5,000 of its staff would be working from home permanently.
Last week, Pinterest Inc. announced it has terminated a 490,000-square-foot lease signed just last year. It’s a mixed-use development slated to replace the San Francisco Tennis Club near the company's headquarters campus.
Pinterest's agreement involved a one-time payment of $89.5 million in the third quarter of 2020 to break the lease. The termination means that Pinterest will no longer be liable for future minimum lease payments of about $440 million.
One of the largest law firms in Toronto made a decision which we don’t believe has been publicly announced to keep their lawyers working at home. They are planning to reduce their office space requirements by two floors in a Class A office building. The resulting savings are estimated at about $1.4M in leasing costs per year.
Moody’s Analytics estimates that the value of office buildings across the U.S. will fall by 17.2% in 2020.
A recent report from CBRE shows that on average, new leases are being signed with an average rent concession of 8.9 months of free rent in the second quarter of this year. That’s up from an average of 8.4 months of free rent prior to the pandemic.
Facebook announced that they expect half of their workforce to work from home over the next decade.
Suburban office parks have lost their luster for a variety of reasons, including a growing preference among younger workers for life in more dynamic urban centers than in sometimes staid and sleepy suburbs. And the rapid pace of technological advancement has made the need for many clerical and processing jobs and the real estate to house those workers increasingly obsolete.
These buildings are about as useful as the fax machines that you can still find hidden in the closets of some of those buildings.
Many companies chose to relocate their offices into the downtown core in order to attract a younger workforce that wanted to be located in an urban setting. So the trend was back into the urban core.
But today, if you drive around NYC, you will see that nearly 90% of office workers are not coming into the office. WeWork has about 2M square feet of empty space in NYC.
The folks at Twitter have told their workforce that they can work from home if they choose. When they do re-open, they expect to occupy only about 20% of their current office space.
Google announced a month ago that they would keep nearly 200,000 employees and contractors working from home until at least next July.
Is the office model dead? No. But the model for working is changing and companies are definitely going to reduce their footprint. They will reconfigure office space to include more meeting rooms, temporary offices and more configurable flex space for those times when collaboration is needed.
What we’re seeing right now is an acceleration of a trend, and a significant downward shift in the value of office space, not only the suburban office space, but also prime office space in the urban core.
Today is another AMA episode.
Carolyn asks. I’m not an expert in Excel and I paid to purchase an Excel based tool for analyzing multi-family apartment projects. I’m still learning about everything the tool can do. What is your recommendation for analyzing project?
Carolyn, this is a great question. In my experience, there are several different types of analysis that need to be performed depending on the exit strategy for your project.
It’s that exit strategy that fundamentally changes the type of analysis you’re going to do. If the project has a long term hold component, then you want to model the construction phase, the leasing phase, the steady state operation, and finally the exit. But the exit will be different depending whether you sell the building, or refinance it.
We tend to break down the project into those individual phases. Each phase has to be analyzed separately and each phase has to work on a standalone basis.
For example, it won’t help to have a great long term hold if you can’t get through the leasing phase. Leasing won’t matter if you can’t get through construction, and so on.
I find that most of the pre-packaged software solutions assume a single model. They assume a straightforward purchase, improvements, and sale. But the truth is that most projects are really executed in phases. The financing of those phases will often vary. For example, you might purchase the land with a small amount of equity. You might raise additional financing to go through the zoning process with a small interest reserve for the debt during that phase. From there, you will raise additional equity and debt for the construction phase. Once construction is complete, you might have a short term bank financing, and then after a seasoning period you would re-appraise the property and replace the financing with permanent financing.
For that reason, we create our own custom spreadsheet each time we undertake a project. Each of these phases look like a separate project with their own financial metrics and criteria. A separate financial model is needed for each phase of the project, and then they need to tie together.
When you add the different types of financing terms, that affects how the project is modelled. I’ll give you a simple example. Let’s say that you have two classes of investors, the first class of investors are straight equity investors who have a share of the ownership of the project. The second class of investors might be preferred investors. They have a rate of interest calculation on their investment and perhaps a lower ownership. Maybe their interest rate only starts to accrue when you get the building permit and then becomes payable to the investor when you get your occupancy permit, and then the interest accrual terminates when the refinance into permanent financing is complete.
What I’ve described is a perfectly normal situation. But I can guarantee you that very few of the canned software solutions out there will model this correctly.
By the time you’ve figured out all the formulas in the spreadsheet you just purchased don’t model your specific situation properly, you have expended the same effort as if you would have created the spreadsheet yourself.
When you’re dealing with investors, or even if it’s your own money, you need to understand the formulas in the spreadsheet and make sure they accurately reflect what is actually going to happen in your project. If the financial model is different from your assumptions, then you’re going to have a problem. It’s a problem that could have been avoided if you had an analyst who is an expert both in Excel and underwriting projects of your type. That analyst needs to audit the spreadsheet multiple times until they are no longer finding mistakes in it.
I realize this is probably not what you wanted to hear. But it’s my best advice based on seeing many projects.
Today is another AMA episode (ask me anything).
Kristi from Dayton Ohio asks:
I had to let my most trusted foreman go. I was really sick for 3 months last March and this man became my right hand man. I let him have more control of my job sites than I normally give any employee because I trusted him.
He also became our friend and would frequently send food and candy home for me and my husband. I stopped talking directly to my employees and only communicated with my foreman.
We went through 38 employees since January. I had multiple complaints from my employees that my foreman would yell at them, have unrealistic expectations, and wasn't doing any work on any of the job sites, he was only giving orders.
My first mistake is that I thought the job my foreman was doing for me was more important than listening to my employees who had reached out to me. I let my foreman fire the people who weren't working out.
I decided to watch the work he did during a course of a week.
During this week of observation, hardly anything got done, the work he did was shotty, and he tried to take credit for others work. There was no one else to blame for the short comings. He had to go. Where did we go wrong?
Our book this month is Dream Big by Bob Goff. Bob is someone who lives his own life out loud.
After graduating law School, Bob decides to take a 3 month vacation with his family and visits a remote part of British Columbia.
He has taken the personal initiative to build a lodge in a remote ares of British Columbia. He buys a 2500 acre parcel of land and spends 5 years building the lodge.
On a visit to Uganda, he witnesses the atrocities being committed by so-called “witch doctors” against young children. He influences the Ugandan parliament to enact legislation to outlaw these practices and then undertakes to prosecute one of the witch doctors under that new law. He then realizes that prosecution is not the answer, so he starts a school for Witch doctors so that by educating them to be better witch doctors, they will no longer commit atrocities against children.
He started a school in Afghanistan for girls.
He has brought warring heads of state to his lodge in BC and negotiated peace treaties with zero authority to do so.
A short time later, he was appointed as the Ugandan ambassador from Uganda to the United States. He is a US citizen, an non-Ugandan, and is representing the Ugandan nation as Ambassador to the US.
Bob has truly done the impossible, simply by daring to dream big. But when he talks about dreaming big, this is not the idle dreamer he’s talking about. He’s talking about becoming clear on your life’s purpose and then aligning your actions to be congruent with your life’s purpose.
This book is not a typical formula based self help book, even though it might sound like it from the outset.
Before you can awaken to your life’s purpose, you have to get clear on who you are, and who you want to be. This is a deep exercise in introspection and self awareness.
Knowing where you are is an essential part of developing that self awareness. But we’re not talking about where you are geographically, we’re talking biographically.
Once you know that, you want to get clear on what you want, what you really want out of life. No we’re not talking about a new Porsche. That’s a distraction. There’s nothing wrong with wanting a Porsche. But if that’s your driving ambition, then you’re not awake to your life’s purpose.
We’re not talking about what you want to do either. Some people wrap up their purpose in doing.
A better approach is to determine who you want to be and use that to inform what you want to do.
Now Bob, is a person of Christian faith. He does make references to that faith in the book. I’m not of the same religion as Bob, and his references to his faith might be problematic for some. They were not for me.
Regardless what you believe, his exercise in clearing your life of everything and putting back only the things that truly matter is critical to fulfilling your life’s purpose. You can’t accomplish anything of significance if your life if cluttered with too many distractions.
Bob Goff personifies the word Audacity. He takes the time to get clear and do the unconventional if it furthers his dream. But these are not just idle dreams.
You see if Bob had done just one extraordinary thing, like opened a school in Afghanistan, that would be cool. But he’s a serial dreamer who has figured out how to execute one audacious idea after another. Has he failed? Sure. He’s failed plenty. But no different than the best baseball players in the world are batting less than 500. Michael Jordan, one of the best basketball players of all time, has lost more games and missed more shots than anyone. But then he’s probably taken more shots than anyone.
The size of your ambitions don’t necessarily indicate the difficulty of achieving them. Think instead of the magnitude of the impact they’ll have on your life and the lives of the people around you.
Today is another AMA episode - “Ask Me Anything”.
David asks,
I know that every year you have a goal setting workshop. You most likely established some very detailed short and long term goals.
How have these goals been impacted with the current change in world events?
David,
That’s a great question. 2020 is emerging for many as one of the most uncertain years in recent memory. It started with the Covid-19 back at the end of January.
Last week, it was Hurricane Laura, decimating one of the communities that I have several projects underway. I would not have predicted that I would spend days with my mental energy consumed by hurricane and its aftermath.
As you rightly pointed out, I’m a huge believer in goal setting. In fact, one of my goals this year is to hold my annual goal setting workshop in the first week of December. We plan to hold it in the beautiful Banff National Park area where we have a portfolio of properties and we can minimize the risk of disease transmission. But from where things stand right now, I’m not sure if we will get to even hold a face to face event.
I can tell you that it is difficult to hold an effective event that requires deep introspection when done over a virtual environment. There are simply too many distractions in the home office.
We will see if we hold the goal setting workshop this year, and if so, how we will do it.
So back to your question. In the last week of November of 2019 I spent three days on the beach in Mexico with a small group of like minded entrepreneurs setting goals. It’s a deep exercise in which you focus on getting alignment of your values.
There are two types of goals that you can set. You can set attainment goals.
These goals are things that have a tangible outcome. You might set a goal of buying a new house or buying your first investment property in 2020. That would be an attainment goal.
The second type of goal is a habit goal. This is where you might set a goal of meditating daily, or running two miles each day, or getting 8 hours sleep daily. That’s a habit goal.
So when we talk about goal setting in 2020, we need to look at both attainment goals and habit goals.
In my case, most of my attainment goals for 2020 are progressing but are delayed. The truth is, we are still on track to accomplish those goals on a later timeline.
One thing that many people struggle with is abandoning a goal when the original objective can no longer be met.
In our culture we have a highly competitive social conditioning on ideas like success and failure. So much of that definition is based on comparison culture. Did you meet your objectives for the quarter? Did you win the basketball game? Did you meet your sales quota for the month?
On July 1 we reviewed the book “The Infinite Game” by Simon Sinek as our book of the month. In that book, Simon distinguishes between the finite mindset and the infinite mindset. In the infinite mindset, you are not playing the win-lose game. You’re playing the game of continuous improvement. You’re focused on how you’re using your most precious resource, that is time.
The fact is, much as we would like to be in control of our lives, that are some things we can control, and other things we can’t. Getting clear on what we can control is essential to making those choices. It’s easy to get into a mindset that says your hands are tied. The truth is, you have a lot more choice than you might think. Surprises can invert your priorities in the short term. In an uncertain environment, my focus is on my habit goals.
Chris Arnold is a real estate investor based in Tulum Mexico. He's a specialist in using old fashioned radio to market his real estate business. Today's conversation on using radio is packed with wisdom on how to market effectively. You can learn more or reach Chris at wholesalinginc.com/reiradio
David Holman is based in Portland Maine where he runs Holman Homes and Katahdin Property Management. On today's show we're talking about the experience of renting to new immigrant families. You can reach David at KatahdinManagement.com. Such a great conversation.
In June of 2019, the Securities and Exchange Commission issued a draft working paper in which they solicited feedback on a possible change to the definition of an accredited investor. The idea was to increase the number of investors who would be eligible for making main street investments. Over the span of several months, the SEC collected input from the investment community. Thousands of people send comments on the proposal, including yours truly.
Yesterday, the SEC announced the new definitions.
I’m going to quote directly from their press release. You can read the full press release here.
"The Securities and Exchange Commission today adopted amendments to the “accredited investor” definition, one of the principal tests for determining who is eligible to participate in our private capital markets. Historically, individual investors who do not meet specific income or net worth tests, regardless of their financial sophistication, have been denied the opportunity to invest in our multifaceted and vast private markets. The amendments update and improve the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in those markets."
The details of the new definitions are contained in the accredited investor definition in Rule 501(a):
- add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order. In conjunction with the adoption of the amendments, the Commission designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons. This approach provides the Commission with flexibility to reevaluate or add certifications, designations, or credentials in the future. Members of the public may wish to propose for the Commission’s consideration additional certifications, designations or credentials that satisfy the attributes set out in the new rule;
- include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund;
- clarify that limited liability companies with $5 million in assets may be accredited investors and add SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs) to the list of entities that may qualify;
- add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered;
- add “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act; and
- add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.
So what does this mean for syndicators? It’s too early to say exactly. We are waiting on guidance from our own securities lawyers on how to interpret the new changes. We’ll do another episode in the near future once we have some legal opinions to share on the topic.
From my perspective, this is a welcome change that will become effective 60 days from now.
On today’s show we’re bringing you an up to the minute update on the major hurricane that slammed into the Gulf Coast overnight.
We’re talking about a major category 4 storm called hurricane Laura.
About half a million people were evacuated from the low lying coastal area. Some people I spoke with drove as far as Austin Texas, 5 hours away in order to find a hotel room.
We have several projects in SW Louisiana. So what was happening in Lake Charles is of direct personal interest. We have staff, residents, suppliers, lawyers, accountants in the market that we speak with on a daily basis.
The short time available for preparing for the storm illustrated where we had weaknesses in our emergency preparedness. For example, in the future we will have a checklist for protecting key pieces of equipment, and records. When the staff closed down the office, we can only hope that they took the appropriate precautions. Some things will have been done well and others, perhaps not. We will certainly do a lessons learned and put some process into emergency preparation. But the important part is that we will carry that beyond our Lake Charles team into the other geographies. Some of those areas also have tropical storm threats.
We knew there would be major power outages across the region and we took additional precautions by disconnecting the power to our buildings and powering down the water treatment plants and sewage treatment plants. These systems will be restarted in an orderly manner when power is restored following the storm.
The national hurricane center published a map showing the impact of the storm surge, even 30 miles inland from the coast. That forecast predicted widespread flooding across several hundred miles of coastline, and up to 30 miles inland. If you stayed in the Lake Charles area, you’re getting wet.
Now that the storm has passed, we know that the major impact was from the wind and that the storm surge was much less than predicted. Overnight we had reports of downed trees, of many broken electrical utility poles and downed power lines. We saw many broken windows and lots of debris scattered through the streets. One of the things that makes these storms so damaging is that the wind changes direction. Once the eye of the storm passes over you, many structures have been weakened or compromised. Then the backside of the storm brings back the hurricane force winds from the opposite direction and that’s when the real damage happens. You have a weakened structure that can’t handle being hit a second time from the other side.
Whenever there is a major storm, people dig out their insurance policies and start reading policies, if they even have the full wording of the policies at all.
Most of the time when we buy insurance, the insurance broker sends a one page quote with a signature line at the bottom. We always ask for the full policy and we’re often met with surprised reaction. What that tells me is that most people don’t really know what their insurance coverage is.
Many policies have exclusions or limitations for named storms. Certainly Hurricane Laura would meet the definition of a named storm.
Most policies have limitations on their coverage for water damage. They make a distinction between wind damage and water damage. If your building was damaged by wind and then water got into the building because of the wind damage, that would be covered under wind damage. But if the water came up from below, either because of a storm surge or because of a sewer backup, then that would be covered under a flood insurance policy. The insurers make a distinction on where the water came from when it comes to insuring that risk.
As far as we know, all of our staff complied with the mandatory evacuation orders and will be fully ready to get to work on the cleanup in the coming days.
On today’s show we’re talking about what is happening in the world of hospitality. The American Hotel and Lodging Association is an organization that represents the hotel industry in North America. The AHLA reports that since the public health issue began escalating in mid-February in the U.S., hotels have already lost more than $46 billion in room revenue.
This figure is devastating with hotels currently on pace to lose up to $400 million in room revenue per day based on current occupancy rates and revenue trends.
Earlier this year I attended a virtual conference of hotel owners. In that conference, the owners talked about their forecast for the remainder of the year and the measures they had taken to protect the solvency of their businesses.
Most hotel owners had assumed occupancy of 50% for the year, and had assumed that they needed enough cash to survive until September.
Well, here we are in the last week of August. Last week, financial analytics firm TREPP issued a report on the delinquency rate in hospitality industry for those hotels that have debt in the CMBS market.
The numbers are somewhat shocking. To be clear, we’re talking about hotels that have CMBS loans. We have no reason to expect that hotels with other forms of debt would intrinsically be in better or worse shape. They should be about the same, but we don’t have hard data on that aspect.
The report highlighted 10 metro areas across the united states.
The New York area had about $1.5B in delinquent loans representing 53 hotels and 39% of the market.
Second was Chicago with $976M in delinquent loans spread across 28 hotels representing 54% of the hotels in market being delinquent.
Houston has $664M of delinquent loans across 40 hotels representing 66% of the market.
As a point of comparison, the delinquency rate in December of 2019 prior to the pandemic was 1.34%. The overall lodging delinquency rate increased to 2.71% in April and to 19.13% in May.
The percentage of loans that are 30 or more days delinquent is 23.4% as of July 2020. This is the highest percentage on record. We have about $20.4B in hotel loans that are delinquent 30 days or more. At the height of the post 2008 financial crisis, there were $13.5B in delinquent hotel loans.
We have a serious economic crisis underway and governments the world over are busy fighting over votes. This is like re-arranging the deck chairs on the Titanic while the ship is sinking.
I was invited to attend a webinar tonight to discuss the investment opportunity for a new construction hotel in San Antonio.
The numbers in the projection were glowing. It’s as if they forgot there is a pandemic underway. They’re assuming it’s all over by the time the hotel is built and that travel patterns return quickly to pre-pandemic levels. That’s far from assured. Why? Because the airlines are shrinking their businesses as well. If there is less air travel, then there is less demand for hotel rooms.
The question is, why would an investor who wants to invest in hotels put money into a new hotel, when they can probably buy any one of several thousand distressed hotels for pennies on the dollar.
For those who truly understand the dynamics of the new travel industry, there will be opportunity to make some spectacular investments. But this will require some guts and some well placed bets before the outcome is obvious.
My friends Jarrrett and Raja are magicians. They live in Las Vegas and they’ve had a magic show at the Stratosphere Hotel. They’ve been semi-finalists on America’s Got Talent. They’ve been featured frequently on the TV Show Masters of Illusion. They’ve even appeared on the TV Show Shark Tank. I’m sorry to disappoint you that when the canvas booth goes up in flames and the girl disappears from the booth and appears seconds later across the room floating in a water tank that’s inside a Grand piano, it’s not magic. It’s an illusion.
Well folks, magic doesn’t happen in real estate either.
I get so many questions from listeners that follow the same theme. I see real estate listings from brokers that assume magic happens. When I say magic, I truly mean magic.
Let’s imagine that you were running a retail store. Customers come into the store. They buy your product at the retail price and you purchased the inventory at a wholesale price. Your profit quite simply is the retail price, minus the wholesale price, right?
No, of course not. You have to pay rent on the space for the store, and you have to hire cashiers to take payment, and inventory managers to manage the inventory levels and purchasing of new inventory. You have to spend on marketing and advertising. All of that costs real money. If you don’t account for the actual management of the business in your business plan, then you’re relying on work getting done by magic.
I really want to banish the term passive income from the dictionary because it doesn’t exist. All of these businesses are active businesses.
There was a question from Joe who is evaluating a 20 unit mobile home park. The mobile home park is at 80% occupancy and has $59,000 in gross income. After expenses, the park nets about $37,000 a year in net income. The 20 unit park is on an 8 acre property. At a purchase price of $375,000, Joe is wondering if this is a good deal.
The problem with this deal is that it assumes that magic is happening. If you don’t have a person dedicated to managing the business, then nobody is managing the business. A 20 unit park is not large enough to hire a dedicated manager. So that means hiring a part-time manager, and a part time maintenance person. That’s a problem.
If you finance $300,000 of the purchase at 5% interest, you’re looking at an additional $24,000 in debt service. So the cash flow is now $13,000. That assumes that nothing goes wrong, that you don’t lose another tenant, that the septic system doesn’t need repairs, or that the water well doesn’t face contamination from an agricultural source.
So often, I see these financial projections put together based on a snapshot of recent performance. But the problem is that these snapshots are incomplete. There are categories of work that attract real expense. The projection of $37,000 in profit and a 10% cap rate is a pure fantasy. There is no money allocated in the expenses for cutting the grass on 8 acres. That amount of landscaping will cost nearly $1,000 a month if the grass is cut weekly.
The point here is not to dig into the weeds on this particular deal, but to frame the problem.
Last week, I visited a historic manor inn. The Inn is in a wonderful location. It’s a perfect venue for hosting weddings. It has been beautifully decorated and the rooms would attract a high nightly rate during peak season. It’s a perfect setting for corporate retreats. What’s the problem? It only has 11 guest rooms. It’s too small to be economically viable. Unless the operator lives onsite or nearby and acts as an owner/operator, the economics don’t work.
This is the problem with projects that are too small. They rely on real work happening that isn’t allocated in the operating budget. When something happens for free in a business, that’s magic. We all know that magic doesn’t really exist. It’s just an illusion. There is a sleight of hand happening.
Today is another AMA Episode (Ask Me Anything).
Paul asks:
"I have been acquiring gold/silver since December of last year. Outside of a small physical holdings possession what do you recommend for storage for a larger portion of your holdings? I have heard Russel Gray talk about holding gold/silver and then borrowing against it to buy real estate. I love the idea but my search hasn’t found a trusted institution to do this? I believe you have mentioned in your Podcast you have bought from your bank. Would you be open to sharing your thought on how to find a custodian to store and borrow from your own precious collateral?"
Paul, this is a great question. In fact there are a couple of questions wrapped up in this question.
Let’s take a step back and talk about the purpose of holding physical gold. Of course, the amount of gold that you hold will ultimately influence your decision on where to store it. Gold is a store of wealth. It’s money, one of the only true forms of money. Although the government would like to have you believe that it’s not. It used to be of course.
When you buy gold, there are many forms you can buy gold.
Most people buy gold certificates. We don’t recommend it. Just because most people do it, doesn’t mean it’s the best thing to do. When you buy gold certificates, you’re buying a futures contract on gold at the spot price for gold. But the biggest problem with certificates is that you’re only holding a piece of paper. The piece of paper is essentially an IOU. This is not different than holding US dollars which are an IOU. It is subject to counterparty risk. The IOU is only as good as the company providing the IOU. The 2008 financial crisis showed us how even a legendary name like Lehman Brothers with over 150 years of history could leave an investor exposed.
I’m personally a fan of holding the real metal.
So when you buy gold, the question is where to buy it from? There have been a few isolated cases of counterfeit gold being sold on the open market. So you need to buy from a reputable dealer. Generally, these dealers buy directly from the mint, or from a distributor who buys from the mint.
I like holding gold at private security companies where the records of who holds the safe deposit box is kept private.
Your second question is where to store gold that his being held as collateral? You have a few choices.
- You can allow the lender to hold your collateral if you trust them.
- It’s more common to have collateral held by a third party who is in a fiduciary role where the functioning of that trustee is documented in a trust agreement. There are trust companies that can act as the trustee for precisely that purpose. They charge a fee for that custodial role and you need to decide if that fee is worth the additional security of having the collateral being held by the trustee. Sometimes the trustee can be an individual like a lawyer, if you are confident in that person fulfilling their role as trustee. After all, lawyers do have trust accounts where they hold money on behalf of their clients. This is conceptually no different.
Let’s say that you want to invest in real estate. You might have some gold and you don’t want to sell the gold. Clearly you’re going to pay a higher interest rate to borrow funds with no security. You can use the real estate as collateral for a portion of the loan. But the remainder, the equity is the more expensive money to find. What if you could borrow money against your gold to fund the equity portion of the purchase?
Ari Rastegar specializes in upgrading and repositioning multi-family apartments to A-Class finishes at discounted prices in secondary markets. He's based in Austin Texas which is on the cusp of becoming the 10th largest metro in the US. You can reach Ari at https://rastegarproperty.com/.
Today's show is an excerpt of a conversation with George from earlier this week. George taught negotiation in the law school at NYU for over 20 years. The outline of his course formed the basis of his best selling book on negotiation, which was published in 17 languages by John Wiley and Sons. On today's show, we're looking at a real life case study on how to negotiate the purchase of a property. George provides his perspective based on his years and hundreds of transactions in which he was a principal negotiator. Today's show is filled with pure gold. Enjoy...
On today’s show we’re talking about a new policy that positively affects owners of short term rental properties.
As of August 20, 2020, Airbnb announced a global ban on all parties and events at Airbnb listings, including a cap on occupancy at 16. This party ban applies to all future bookings on Airbnb, and it will remain in effect indefinitely, until further notice.
Today’s show is an excerpt of an interview that I had with a news reporter for CBC Radio and TV in Montreal on the topic of AirBnB’s new policy.
On today’s show we’re going to take a brief history lesson for the year 2020.
We saw the first outbreaks of the pandemic in China, followed by countries where the infection had spread. These included Korea, Italy, Japan, Spain and France. Soon after followed Switzerland, Belgium, Sweden, the US and Canada.
For much of the Winter and early Spring, North America was about 3 weeks behind what was happening in Europe. Critics in North America tended to dismiss what was happening in Italy as something that was specific to Italy. It won’t happen here in the US or Canada because Italy has an older population. It won’t happen in Canada because there is less population density. It won’t happen in the midwest of the US because there is already social distancing built into the way people live.
Yet, there is a trend in almost every conversation...and that is the person agrees that the pandemic is a problem, but it won’t be a problem here. Why?
There’s always a reason, until they’re wrong. At the other end of the spectrum, there are those who say there was no need for a large scale lockdown. The number of cases didn’t explode in their community and the damage to the economy was needless.
So here we are again, with a near doubling of new cases in France and Spain in a very short time period. Many European countries have implemented new travel restrictions based on the increased number of new infections.
Spanish authorities have flagged social gatherings—in nightclubs and among family and friends—as the primary source of infection. In France, high-risk workplaces and medical facilities have been the top sites for disease clusters.
I was reflecting on those situations when I used to catch a cold. So far this year, I have not caught a cold. The last cold I caught was in July of 2019 when I attended a wedding. I haven’t had one since.
Before the pandemic, I rarely used to catch a cold. If I did, it was because my children brought it home from school. Sometimes I would catch a cold from attending a conference, or perhaps someone seated nearby on an aircraft was coughing and sneezing. Catching a cold required contact with those who are infected. I know I’m not telling you anything earth shattering.
So now, we have schools going back into session. Some schools have already started holding in person classes. We have differing protocols from one school board to the next. Some schools are requiring children to wear masks. Others have established plastic partitions in the classroom. Others are reducing class time to three days a week.
Some have chosen a mix of hybrid online and classroom teaching. Some schools have reduced the number of subjects being taught at a time. The hope is that by concentrating the full year math course into a full-day 6 week period, the amount of social interaction will be reduced. These measures might help. But it’s fair to say that we are heading for another wave of increased covid-19 infection.
Where this will hit, and when, or how broadly is anyone’s guess.
Just like in the Spring of this year, we looked to Europe to see our future.
I’m going on record, right here, right now as predicting that we will see another wave of infections. Those businesses that rely upon social gathering or movement of people will take another hit. That means a further setback for travel, hospitality, food and beverage, car rentals, and live entertainment.
Some geographic areas have the core of their economy built on tourism. I’m thinking of places like Las Vegas, Orlando, many islands in the Caribbean, coastal beach towns. These sectors of the economy are going to be hit again.
If you want to see your future, look ahead to Europe.
On today’s show we’re talking about what it takes to increase profitability or reduce the cash burn rate in the pandemic environment. Many businesses have taken advantage of the government programs that have provided emergency funding. But the indications are that emergency government funding is going to reduce or come to an end over the coming months. Now is the time for businesses to tighten their belts and focus on expense reduction before those subsidies expire.
The biggest expenses for most businesses are debt service, taxes, employee salaries and other fixed costs like contracts.
At a time when businesses are being tested for resiliency, this is the time to focus on improving profitability. That means a combination of tactics and strategy. Strategy is all about improving revenue, new marketing, new sources of income.
These approaches can have a big impact on business performance. But when you focus all of your attention on the strategy, these changes sometimes take longer.
There is also something to be said for working on the short term tactical. If you have suffered a loss of revenue during the pandemic, you are probably dealing with a drop in cash flow, or even negative cash flow.
That means focusing on expense reduction. It’s amazing how much a company can accumulate in terms of discretionary expense over a period of time. Expenses that made perfect sense on the day they were approved, might be of lesser value a year later. Subscriptions are one of the biggest culprits. Now sometimes these expenses are small, which is why they’re allowed to linger, month after month.
I’ll give you a good example. My company hosts its mail with Google using their business applications suite. Each email account costs $6 per month. For the quality of service, Google delivers a tremendous amount of value for $6.
But there are two items that make a big impact on the profitability of a real estate project.
- Lowering interest costs
- Lower property tax costs
Many cities are under pressure to cover revenues lost during the pandemic. They’re not allowed to borrow funds to cover operating expenses. As a result, you can expect significant property tax increases. There are two ways that cities increase taxes. The first is by increasing the tax rate charged against the assessed value of a property. The second way is by increasing the assessed value. The tax rate is something that is debated at city council and passed into municipal law. But the property assessment valuation is a hidden tax increase. If they deem that your property went up in value by 10%, well then your taxes just went up by 10%. The responsibility rests with you as the property owner to contest the valuation increase and maintain a lower valuation for tax purposes. Large developers that I know maintain a full-time position for the sole purpose of contesting property tax valuations. On a large portfolio, the savings more than pay for the salary for that person, and still result in a net tax saving to the owner. So you want to be contesting your property value assessment and making arguments that your property has been unfairly assessed.
The second big saving comes in lowering your debt service. That can come in several different ways.
- You can refinance over a longer amortization period. This will go a long way towards reducing your monthly principal and interest costs.
- We are in an era of historically low interest rates. These rates are projected to persist for the next couple of years based on guidance from the Federal Reserve, and numerous other G20 central banks around the world.
If you have high interest bridge loans, you want to negotiate better loan terms with your existing lenders, or replace those loans with lower cost debt.
While I don’t pay close attention to the stock market, there are a few rare exceptions that are worth noting. One of them is Warren Buffet’s Berkshire Hathaway. Buffet and his partner Charlie Munger don’t invest in the stock market. They buy companies, and happen to trade the shares through the stock market if they’re publicly traded companies.
Berkshire Hathaway filed their 13F form with the SEC for the past quarter ended June 30. In that form, they disclose their holdings. From that form you can compare their current holdings with the previous period. It’s an exercise in addition and subtraction to figure out what they did during the quarter.
There are a few items that are noteworthy from that report.
BH unloaded more than a quarter of its stake in Wells Fargo. They also sold about 61% of its position in JPMorgan Chase, and dumped its entire stakes in Goldman Sachs. They also sold their stake in PNC Financial.
Finally, they also exited their holdings in the airline industry including American Airlines, Delta Air Lines United Airlines and Southwest Airlines.
It marks a rare moment when BH has lost money on an investment.
So that’s what BH is getting out of. What’s interesting is what BH has been buying over the past 90 days. They spent $563 million on a position in Barrick Gold. While the position is only about a 5% stake in the company, there are a few things significant about this.
- When you are buying a gold mining company, you’re really buying gold at a discount. The process of mining gold only makes sense if the cost of getting the gold out of the ground is substantially less than the cost of buying gold on the open market. The recent run up in gold prices makes this an even better buy.
- The disclosure is only reporting the purchases up to June 30. Another 6 weeks have passed and it’s likely that they have increased their ownership position since then.
Barrick is a well managed company. They don’t take a ton of risk when it comes to exploration. They take a disciplined approach to mining.
So Buffet has decided that the airlines are going to take far too long to bounce back to invest in them. The banks and financial services represent a sizeable downside risk as we go through this economic cycle.
Gold is a good buy. When you buy anything, the idea is to know what it’s worth when you buy it.
For example, I can value an apartment building based on rents, expenses, and market cap rates. The analysis is never perfect, but I can project future cash flows and market-based asset prices, and derive an appropriate value for what an asset is worth.
But gold does not intrinsically generate cash flow like a business or rental property, so that analysis doesn’t work.
People often try to predict the price of gold by examining certain financial benchmarks.
For instance, in theory there are some loose relationships between the gold price and the money supply. But these relationships are far from perfect.
There’s another theory that gold prices increase because the dollar is weak. But this relationship is also far from perfect.
Finally, there’s a theory that the gold price is correlated with ‘real interest rates’, i.e. the rate of interest after adjusting for inflation.
This relationship is also far from perfect;
The bottom line is that there’s no magic formula to tell us what the gold price should be. Dollar weakness, real rates, and money supply are all useful indicators. But they’re not predictors.
For the most part, the price rises when people lose confidence in the financial system, in their government, in their central bankers, or in each other. And that’s what we’re seeing now.
Ignore Warren Buffet at your peril.
On today’s show we are talking about how the narrative in your mind is selecting the data from which to make decisions.
To properly frame today’s discussion, we need to look at two things:
- The data itself
- The way you process the data
Let’s start with the data. There is no question that the data showing up in the market is contradictory in so many ways. We have the stock market in record territory and at the same time we have economic contraction and unemployment in record territory.
We have record low inventory and rising prices in many real estate markets at the same time as we have millions of properties in financial distress. But almost none of those properties are appearing on the market as distressed properties.
We have rising real estate debt and falling consumer debt.
We have signs of economic recovery and looming signs on the horizon of a second wave of infection coming in the pandemic. Although it’s too soon to say whether that is indeed what is happening.
We have some school boards reopening and others not. How many people will be home schooling their children this year and what will be the impact on the employment workforce of those millions of individual decisions?
People are for the most part paying their rent. What will happen when the emergency financial aid comes to an end?
It’s truly difficult to make sense out of all of these conflicting data points that under normal conditions would be useful in determining the current state of the market.
Ok so the data is confusing to say the least. The question is how are you processing the data and deriving conclusions based on that data?
To answer that question we’re going to look at how people listen. Whether you’re listening, or reading, or watching, you’re processing what is coming at you in one of eight different ways. What I’m going to share with you now is something that I developed a decade ago called the 8 forms of listening.
I’m going to mix a metaphor here. When I’m talking about listening, I’m also talking about reading or viewing. So here we go with the 8 forms of listening.
1. Ignoring listening
2. Partial listening
3. Selective listening
4. Active listening
5. Empathic or sympathetic listening
6. Know it all listening
7. Pretend listening
8. Focused listening
Today's guest went to Stanford Business School in 2011 and started an online used car company after graduating in 2013. Nicholas raised a total of $10M, went through the startup accelerator Y-Combinator and sold his business to Carvana in 2017.
After the sale of his company, Nicholas started investing into real estate projects in Phoenix. The founder realized that real estate is a fantastic assed class for entrepreneurs.
After leaving Carvana, Nicholas and his former co-founder Chris joined forces again to build a digital platform to refinance auto loans, called WithClutch.com.
Gary Pinkerton's career trajectory into real estate was definitely not typical. He spent 26 years serving as a Submarine Officer in the U.S. Navy, including commanding the nuclear attack submarine USS TUCSON from 2009-2011 and retiring as a Captain. On today's show we are talking about making career transitions in mid-life and how to navigate the uncertainty of that transition. You can learn more about Gary at www.garypinkerton.com or connect with him through his website. Gary is also the host of the Heroic Investing Show with co-host Jason Hartman. You're going to love this heart centered conversation with Gary Pinkerton.
On today’s show we’re going to ask a fundamental question about business structure. I’m not going to answer the question. But give you something to think about.
The potential problem arises when you have a mismatch between a short term revenue commitment from your customers and a long term expense commitment in your business. These situations arise all over the industry.
Starbucks signs a multi-year commercial lease for a location. But the customers are not making a long term commitment to buy coffee. A customer commitment to a coffee is a 15 minute commitment. Somehow, the folks at Starbucks are comfortable and confident with the notion that someone who bought a coffee today is likely on average to buy a coffee tomorrow even though there is no long term commitment to do so.
In the co-working space, companies like WeWork and others in the same segment are experiencing a dramatic drop in revenue because customers in many cases had a 30 day commitment to the space. Whereas the co-working landlord had made long term financial commitments. Critics of the business model point to the 30 day commitment as the Achilles heel of these companies. I too have been a critic of WeWork for that reason.
But the exact same theoretical problem exists all over the place. The entire Self Storage industry is based on the notion of customers renting a storage locker in 30 day incremental commitments, and the storage company has a long term commitment to the business.
The entire hotel industry is based on clients making a one night commitment. You can cancel free of charge up to 6PM on the night of arrival. Yet the hotel owner builds a multi-million dollar, building complete with swimming pools, conference facilities, a restaurant and a big fancy lobby. All of this for a one night commitment of revenue.
Most of the time these mismatches between a short term asset and a long term liability work out just fine.
Then again, in the rare case it results in complete business failure. The entire rental car industry is suffering terribly because of this fact. Hertz Rent A Car is in bankruptcy because they have long term commitments to their bond holders to the tune of $19B dollars. Here too, customers commit to rent cars one day at a time.
The airlines purchase an entire fleet of aircraft where each aircraft costs a couple of hundred million dollars. Many of these purchases are financed. In some cases, the planes are leased and there is a long term lease. The customer on the other hand is committing to fly to London and back over the next couple of weeks.
Maybe you’ve purchased a property and put it into the short term rental market with AirBnB or VRBO. You have mortgaged the property to get some bank financing for the next 25 years. Again, the customers are committing to a couple of nights stay at your beautifully furnished vacation rental by the lake.
You’re starting to get the idea.
It’s easy to look at WeWork or Hertz and have sage wisdom on the folly of their business model. It’s easy to be an armchair quarterback and say how you would do it better.
But the reality is so much of the business world and the lending world has accepted the notion that a mismatch between the lifespan of an asset and that of a liability can be different. But that mismatch has some risk inherent in it. The greater the mismatch in time, or the greater the volatility of the revenue, the greater the risk.
The risk is of a pandemic, or a terrorist flying a jet into a building, or armed conflict, or social unrest. Any of these things can result in business disruption that can expose the risk to the revenue stability. Again, I don’t have all the answers. But it’s something to think about how you mitigate that risk, incredibly small as that risk may seem on the day you sign on the loan agreement.
On today’s show we’re talking about how to interpret price volatility.
Property prices tend not to be that volatile from one day to the next. If your goal over the long term is to acquire property, you’re happy that prices rise when you’re selling, you’re happy that prices rise when you look at your statement of net worth. But if you’re looking to acquire more, you are happy when prices fall so you get some bargains.
We’ve seen the price of gold fall from a high of 2084 on Aug 6 to below $1,900 in less than a week. That’s a 10% drop in a week. I bought more gold this week. It was more expensive than the gold I bought in March and less expensive than gold a week ago.
For the speculator, these price swings are headline news. Price swings cause anxiety and they drive emotional decisions. But for the professional investor who truly understands the fundamentals of the market, these moments are like finding your favourite food on sale at the grocery store. The reaction is, Wow, I just got a bargain. It’s not life changing. You just got something that you were going to buy anyway on sale.
I just placed an offer on some land. Prices are rising in the market and the level of competition for quality properties has risen dramatically. When a bargain comes along, you execute. One builder I spoke with this past weekend had 200 offers in the first hour for 8 building lots that were released on Saturday at 11AM.
A professional investor is looking past the next few hours, or the next week, or the next month. They’re focused on portfolio building. The professional investor knows that real assets are a hedge against inflation.
We also know that there will be a flight from the world’s weakest currencies to the world’s strongest currencies. Much as the US dollar is a hot mess right now, it’s hard to identify a currency that better. While the US dollar is being devalued by excess printing, the demand for US dollars outside the US seems to be growing as fast as the Fed can print them. Printing money is a strategy that works for a period of time, until it doesn’t.
Printing of money has the effect of making the currency less valuable. An original oil painting is worth the most. A limited edition print copy of the painting is worth less than the original, but will still have some value. An unlimited number of photocopies renders the copies virtually worthless. So it is with currency.
When we sell assets, we don’t aim to sit on the cash for very long. We aim to sit in dollars for a short period of time and then exchange for another hard asset fairly quickly. Now is the time to accumulate dry powder and to be ready to execute on opportunities when they present themselves.
The thought experiment goes something like this: “Which came first, the chicken or the egg?”
Some people decide to go around that circle a few times and then give up. Others will go to Charles Darwin’s “Origin of Species” and argue that the Chicken evolved from a prehistoric bird dating back to the time of the dinosaurs. Others will tell you that the Chicken, like all living things are creatures of God and it was God that gave life to the Chicken.
But if we put that philosophical argument aside for the moment, we can safely say that if we have an egg, there’s a good chance that once it hatches, we will have a full grown chicken in a few months. It’s also pretty clear that if you go to your local farmer and buy an egg, you’re going to pay less for the egg than you would pay for a full grown chicken. Yes, I know, the egg will become a chicken, but it’s not a chicken now.
The discount for an egg compared with a chicken is much more than simply the time value of money over a few months. This is such an important idea that I’m going to say it again. The discount for an egg compared with a chicken is much more than simply the time value of money over a few months.
When we’re talking about an egg and a chicken, it’s pretty clear that an egg is not a chicken, a chicken is not an egg, and they’re priced differently for a very good reason. They’re not the same thing, even though the egg might become a chicken in the near future. Once the egg hatches, it becomes a chick. You might pay a little more for a chick than an egg, and you would pay an even higher price for a full grown chicken.
So why are we talking about chickens on a real estate podcast?
Because when we find undeveloped land for sale that has not been approved for development, you are finding the land equivalent of an egg. Yes, you can go through the zoning approval process. You can have the site plan drawings completed. You can hold the community meetings and collect the feedback from the community. You can develop the storm water management plan so that your newly developed property won’t cause flooding on your neighbour’s property. Once the property has been approved for development, and the site plan has been approved, and the building permit has been issued, the land is clearly worth more because it’s a large step closer to being a full grown chicken.
I was recently offered a property that was zoned DR. DR stands for development reserve. That means that it is land that the city has designated for development. But it’s not approved for development yet. You would have to go through the process to get the land rezoned. The city will eventually approve that land for development, when city council decides that its ready. Maybe that means when there is capacity in the local schools. Maybe they’re waiting for an upgrade to a water main, or a larger sewer pipe. There can be all kinds of reasons why a city might delay the approval of a particular land use.
This particular seller was valuing the land as if it had already been fully developed, and all the services were in place. But the truth is, this land was not a full grown chicken. It was still very much an egg. I’m not going to pay the same price for an egg that I would pay for a full grown chicken. Needless to say, I didn’t buy that property from her. She said that she was expecting another offer that very same day. I wished her the best of luck.
I’ve had so many conversations with land owners in the past week where the land owner is trying to sell a chicken, when in fact, all they have is an egg.
I don’t care whether you buy a chicken or an egg. Both are perfectly valid purchases. Just don’t pay the price for a chicken, when all you’re buying is an egg.
Today is another AMA episode, Ask Me Anything
Joseph asks.
A friend of mine has contacted a person who is both a coach and a source of turn-key properties. My friend likes the idea of a one-stop-shop to get their start in real estate education and investing.
The arrangement involves paying a coaching fee and then partnering 50/50 with the coach / trainer on each turnkey property.
I did what searching I could do (some of this on bigger pockets and just random google searching); the reviews seem to be all over the place. The BBB doesn’t list him as a bad business person. I’m concerned for my friend though who worked hard to save up the cash to do this.
What do you think of this arrangement?
Joseph, this is a great question.
First of all, the coaching fee you quoted seemed fairly low. It’s certainly a lot less than I charge, but then I don’t work with rookie investors.
It sounds like your friends are trying to accomplish a few things at once.
- Learn about real estate investing.
- Buy some investment property.
- Minimize the time they invest in the management of the properties.
There is a lot of confusion in people’s minds about what an investment really is versus an active business. The confusion arises because “Real estate can be a good investment.” The fact is, a rental property, whether it is turnkey or not is an active business. Sometimes an operator aims to make it appear like a passive investment by calling it a turnkey property.
Working with an experienced professional property manager who is acting in the best interests of the property owner is the key.
Here’s the problem that I see with the proposed structure.
- There is an inherent conflict of interest. The person providing the education is teaching the student to buy the coach’s product. I don’t like the structures where there is a knowledge imbalance and the student is assuming a disproportionate amount of risk. The coach needs to be in a pure coaching
- If the coach is putting up 0% of the money and remaining in the deal for a 50% stake, then the risk is high. If the coach is putting up 50% of the money for their share, then the interests of the partners are aligned and the coach has significant skin in the game.
In order to be successful in your real estate investing business you need three things. These are the same three things you need to be successful with anything in life.
- You need the knowledge. This you can get from courses, from books, from your local REI Club, from podcasts. And yes, you can get knowledge from a coach as well. But sadly that’s not enough for you to be successful.
- You need the emotional fortitude to be successful. That’s a matter of getting your emotions under control so that they’re not driving your business decisions.
- You need to become immersed in the environment where you’re hanging out with other real estate investors on a regular basis and masterminding around what’s going on in your business. Joining a real estate mastermind can be a really effective way of accomplishing this.
Simply hiring a coach may not give you all three of these things
I’m a believer in hiring a coach. I have a handful of clients who having approached me have hired me as a coach. I don’t advertise that service at all. The coaching fee that your friend was quoted is very reasonable. But it’s hard for me to assess what they’re getting for that price. To recap, I don't like structures that have an inherent conflict of interest.
On today’s show we’re talking about the health of a high turnover businesses. One business in particular that has been very hard hit during the pandemic is senior housing.
Under normal circumstances, those entering assisted living are there on average for about three years. Some facilities offer respite care, but most residents are there until they move into a skilled nursing facility, or if they decline quickly, they go into hospice.
Senior housing relies in a continual flow of new residents coming into the homes to maintain their occupancy. Generally speaking, there has been a lot of construction of new senior housing in anticipation of the baby boomers aging out of their homes. It’s expected that the size of the senior housing industry is going to double over the next decade. So much of this excess supply will eventually get absorbed.
So here we are in 2020, in the middle of a pandemic that has impacted many senior care homes. The stories of homes that have been devastated by outbreaks of Covid-19 have made headlines. There have been a handful of really badly managed situations, acute staff shortages, resident neglect and high death toll.
On the other hand, the vast majority of facilities have continued to be well run, and have not experienced any Covid-19 outbreaks. But the headlines have stigmatized the entire industry.
We are now 7 months into the pandemic and a number of residents have left the assisted living community where they resided. This may have been due to a deterioration of the pre-existing condition, it may have been as a result of Covid-19, and it may have been as a result of family pulling Mom or Dad back home.
Senior facilities continue to operate under strict lockdown protocols. That means that someone new coming into a facility must quarantine for 14 days. After that, they may have contact with other residents in the facility. But family is still barred from visiting indefinitely. The lack of human contact for the elderly can be emotionally devastating.
Families are simply not electing to put a family member into assisted living under these circumstances. While facilities have been open to accepting new residents for some time, the number of new residents has been a trickle compared with normal conditions. That means that senior housing as an industry is going to experience declining occupancy until well after the pandemic is over. Some newer facilities were in the middle of their lease-up when the pandemic hit.
According to a report in Senior Housing News, 53% of communities are continuing to report declining occupancy.
Ventas is a large national operator. They’ve seen occupancy drop from 85% in some of their facilities to about 80% since April.
WellTower, another large player with 612 senior housing operations in their portfolio reported a 79.4% average spot occupancy rate for its portfolio in July, a significant decrease from the 85.8% occupancy rate it reported in February before the pandemic hit.
We believe that the big box operators are going to get aggressive in their marketing in the coming months as they try to fight for market share under these challenging conditions. We also believe the economic model is going to change.
The number one cost in assisted living is staff. Labour costs are on the rise in the industry as caregivers and personal support workers demand higher wages to compensate for the added costs and risks associated with working in the pandemic environment. These higher costs are ultimately going to be passed on to customers, except in those cases where there is a government or insurance contribution. Labour rates are rising faster than the cost of living allowance that both government and insurance have built into their rates. The result will be a profit squeeze for operators. Some who are already suffering due to lower occupancy will get hit again as their profit margins get eroded.
This weekend we're talking about using video for marketing yourself and your business. Greg is based in the San Francisco Bay Area. He is a specialist in using video to market for real estate. He can be reached at Greg McDaniel on Facebook, GregMcDanielREU on Instagram, or by text at 925-915-1978.
Dan Rochon is a specialist in video marketing for real estate, based in Northern Virginia. He's the author of The Real Estate Evolution and the curator of the Consistent Predictable Income (CPI) Community. You can reach Dan on Facebook or connect with him through his website at www.therealestateevolution.com.
On today’s show we’re talking about navigating the fine line between collecting commercial rent and pushing your tenants to close their doors.
The financial stress is all over the world of commercial. Rent collection used to be automatic at this time last year. Revenues are down for most businesses. Most importantly, even if a recovery is underway in some businesses, the worry remains that the recovery won’t last. We could experience a second wave later this year. We could see a subsequent shutdown. We see government programs to assist businesses drying up. In many cases, small businesses failed to meet the eligibility criteria for government assistance.
Commercial tenants are asking for rental concessions. They are clearly experiencing hardship.
Vacancy in commercial space is also a reality of the current environment. Solving the cash flow problem involves a two printed approach.
- Getting existing tenants to pay the rent
- Finding new tenants to fill the vacancy.
It’s often tempting to believe that you won’t find new tenants in today’s environment. While it’s true that so many businesses are having a hard time, there are still businesses looking for space in the current environment. That means getting aggressive on pricing and concessions in order to attract them.
Today we’re looking for tenants that are doing a bang-up business. At a time when the economy is on life support and the unemployed number in the millions, it’s hard to imagine businesses that are booming. But they do exist.
In one of our properties we had a single vacant retail space. We managed to find a tenant that was in desperate need of additional space. We had space that was ideally suited and they moved in a matter of weeks.
At the other end of the spectrum we have tenants that have been forced to close during the pandemic. They’re being kept afloat by government emergency benefits. They’re paying a fraction of their rent and they seem to be teetering on the brink of closing.
We asked them to pay the full rent this week, and they said that they simply don’t have the cash. They would have to close their door permanently.
So we accepted partial payment and have applied for another round of government relief on our rents. It’s a lot of paperwork for another 30 days of rent relief. The cycle of negotiation with this tenant will repeat in another 30 days.
At this time, the name of the game is survival. It’s not a time to optimize and maximize highest and best use revenue. It’s a time to be pragmatic.
We entertained several potential tenants for the vacant space. One was a construction firm that would have used the space as an office and material depot. They were looking for a low rent situation and there was concern that the traffic of equipment and materials would be incompatible with the existing tenants in the building.
We entertained the owner of a coffee shop who had a space rented a few blocks away at a much higher rental rate. She was losing money and could not afford her rent. She was looking to break her existing lease and get into a lower cost lease. When we evaluated her financials, it was clear that moving to a lower cost space would help her situation. But the deal breaker was the realization that she would have needed to sell an unrealistic amount of coffee in her old location, just to fund the monthly rent, without paying staff, buying food or generating a profit.
So the additional rent from our new tenant is being used to cover the negative cashflow and is making it easier to negotiate rent concessions with the existing tenants. We’re not making money at the moment, but we’re not bleeding red ink either.
Today is another AMA episode.
Today’s question was actually asked twice by two different people. The questions are virtually the same to I’ll answer it only once. Both Chad and Michelle asked
I have a portfolio of smaller multi-family properties duplexes, triplexes and some singles. I’m thinking of putting a blanket mortgage across the entire portfolio. The question is how to value to the portfolio? Should I be valuing each individual property independently or using a cap rate calculation to value the portfolio?
This is a great question.
Let’s start with discussing how an appraiser would look at valuation for a property. They use three methods.
Generally speaking, appraisers determine the value of a property using one of three methods.
- Replacement Cost
- Comparable Sales
- Multiples of net income
The problem exists when the three methods don’t agree, which of the three do you select? Generally, the appraiser will choose the lowest of the three. But here too they need to apply judgement and discard the one that doesn’t apply.
The biggest problem in particular for commercial real estate is that in many cases there are no truly comparable properties in the same area. In those cases, a like for like comparison is truly impossible.
If your property is a 10 unit building, there may not be any other 10 unit buildings in the area. There might a 12 unit, a 16 unit, a 20 unit. So what do you compare? Do you compare price per unit? Do you compare price per square foot? Are the properties truly comparable meaning are they of a similar vintage with similar levels of finish and attracting a similar tenant base? If not, then they’re not true comps.
The appraiser will then look at replacement cost. They will look at the finishes of the building, and make a cost per square foot estimate construct the a new version of the same building today. Often times, buildings are trading below construction cost because they might have been built some number of years ago and the increase in value has not kept pace with the rising cost of new construction.
Finally, the third method is multiples of net income. This is where a property is valued on its ability to generate profit. That is, after all why we real estate investors are in this business altogether. The appraiser will look at what, say, B class apartment buildings are trading for in the area. It might be 6.5% cap rate. They will then analyze the financials for your building and determine the income and the expenses for the property based on a bank approved model for properties in the local area.
Now your case is a little different. If all the properties are within a small radius, say, a few blocks of each other, then you can effectively treat the portfolios the same as you might a single building. If all the properties are of a similar vintage and the apartments are positioned similarly in the market, then you can compare them together as a group.
The approach you’re suggesting is something we’ve done for nearly a decade. In our case, we rebuilt a portfolio of properties in a small geographic radius of a few blocks in Philadelphia. Almost all of the units were rented to students, and they were all pretty similar. The rent for each bedroom of student housing was very similar. The lender was comfortable with putting a blanket mortgage across the portfolio.
You also need to be aware that the lender may want to look at the yield on cost instead of the cap rate. You might not be familiar with the term yield on cost. It’s a calculation which is similar to the cap rate calculation.
Some lenders like to be conservative and don’t want to lend you so much money that you cash out of your initial investment. They may want you to keep some of your own cash in the deal. It comes down to the specifics of your deal and what your lender will allow.
When we think of hotels we tend to think of a few large brands that dominate the market.
Marriott is the largest after having gobbled up with Starwood Group which had all the Sheraton brands. Hilton is #2 with about 30 brands under its umbrella, and Intercontinental Hotel Group which owns Holiday Inn and a host of brands is number three. There are remarkably few independent chains left. Hyatt remains largely independent. The Accor Group in France owns brands like Mercure, Ibis, Novotel, and Sofitel to name just a few.
Some would think that the hotel industry is highly consolidated with a small number of players. From an operations standpoint, there is a lot of consolidation of brand ownership. But that doesn’t mean a lot of consolidation of hotel ownership.
Some hotels are owned by the brand, but in fact most are franchise arrangements. Hotel owners are investors, like us, who happen to specialize in owning hotels instead of apartment buildings.
There are all kinds of different plays in hotel ownership. Some specialize in resort properties. Others specialize in local hotels, the ones that crop up all over the city. These serve a small radius and have anywhere from 80 to 150 rooms. Some are combo hotels where you might find two hotels side by side on the same property with different brand positioning. One might be a suite hotel for more extended stays, and the other might be a more budget hotel for shorter transient stays.
There are business hotels in the central business district or in the shadow of business parks. There are hotels that cater to convention centre traffic. All these segments are distinct businesses with unique client needs and distinct business models. Today, in the pandemic environment, most are hurting quite badly.
There are a few rare exceptions. Some hotels that are driving distance from major population centres and are in vacation areas like Myrtle Beach are doing comparatively well.
The rest are all losing money. I’ve been in discussion with a number of hotel owners over the past several months. Most had built a 90-150 day cash buffer into their plan. That assumed that they would have low occupancy. They assumed that the return to normal would start in late Spring and that by the fall, occupancies would be back to normal levels.
Hotels are small businesses. They tie up a lot of capital and they have a lot of debt, but they don’t employ that many people. The largest number of staff members are fairly low wage earners. The huge fixed operating cost and debt service that hotels face is the one thing that they can’t do much about.
They can cut costs temporarily by cutting staff. They can reach some agreements with their lenders for a few months. But that will save maybe a third of the expense for a finite period of time.
Most of the hotel operators I spoke with said that they had enough cash to last until the fall, maybe September or October.
It’s now August and there are no signs of significant recovery in the travel industry, and recovery in hospitality is definitely levelling off.
We also see a difference in demand based on property type. In the midscale and economy segments, occupancy is roughly double that of the luxury segment. That means that corporate travel and luxury have not really started to pick up yet.
This is going to be a long and slow recovery. The only thing driving the market right now is the summer vacation demand. This will diminish as schools reopen in August and will shrink further after labor day. Corporate travel shows no signs of picking up. Therein lies the worry for many hotel owners. The resurgence we are seeing is going to be short lived with a drop in occupancy starting in September, followed by a more severe drop if we see a resurgence in the number of Covid-19 cases.
We will start to see high quality assets at discounted prices in the near future.
Today’s show is called 52 offers. You might be thinking that the number 52 relates to a deck of cards. Not in this case. On today’s show we’re talking about a property that this past weekend had 96 showings and today had 52 offers. Mine was one of them.
I was certain there would be multiple offers and we knew the property would sell above asking price. We did our due diligence, a thorough job of estimating the work.
The house was a total mess but salvageable. There was a gaping hole in the roof. The house had been left to fall apart. The mess on the inside had the makings of a horror film.
Amidst all the clutter, garbage and debris, there were items in near perfect condition. The had to be at least $10,000 worth of tools and equipment that could be sold on the open market. It’s a sad story. The owners are sick. One is in hospital and there is a power of attorney to oversee the sale.
So the question is how to read the market? Our offer price would be influenced heavily by what the finished product would sell for in that location.
The asking price was about 45% of the after repair value. Clearly there was a fair bit of room to do a quality job of the renovations. The structure of the house had been damaged in a few places due to the intrusion of water. But these problem areas were localized. The entire house would be gutted and refinished.
The hot market conditions means that there were only 4 houses on the market in the same area of the city. Interest rates are at historic lows and the cost of renovating this house compared with the cost of building a new house in the city made this a compelling project.
We normally don’t go after flip opportunities. They’re labour intensive for the return on investment. But this one seemed compelling if we could get it at a fair price.
With 52 offers, there was a good chance we would not be the winning bidder. Someone is almost always willing to pay too much.
That’s the auction environment. As it turns out we did not submit the winning bid. On one level, I’m happy that we didn’t win. If we did, it meant that we were probably paying too much.
We offered $63,000 above the asking price. We knew offers would be above asking and that by itself would not be a huge differentiator unless we offered a crazy high number. We offered to buy the property on an as-is, where-is basis. There were no conditions to the offer. That too would not be a differentiator. We expected the other offers to be unconditional.
Our bid contained two items that were designed to differentiate from the other bids that might have made a difference amongst bids.
The experience of this bidding war says a number of things about the market. It says that despite the depressed economic conditions, there is an intense level of competition in the local market. It will be hard for something appearing on the public MLS to ever be a bargain with that level of competition. There are simply too many people searching for too few opportunities.
Generally speaking, we don’t bid on single family homes. Our projects are overwhelmingly multi-family. But every now and then we will look at single family opportunities when the market conditions seem to point toward the conditions being favorable. This is one of those times when property values have increased more than 20% in some local segments in under a year.
The only meaningful way to redevelop a property in today’s environment is to find opportunities that are off-market, or to build new construction. But new construction homes won’t complete for close to a year once the permitting process and the design process is complete. The market conditions could change dramatically in that time. We could see a further reduction in inventory, or perhaps we could see many properties come on the market.
We’re prepared to wait and stick to the discipline of our numbers
On today’s show we’re talking about how our economy depends on the printing of money. Let’s put this in perspective. The fortunes of entire industries rest on whether governments around the world are going to print a virtually unlimited amount of money in order to get the economy back on track.
The political impasse in Washington over how much to spend and for how long is a case in point.
The bureau of labor and statistics published data that more than 2/3 of those who are receiving unemployment benefits are making more money in unemployment benefits than when they were employed. Why would they want to go back to work? The unemployment benefit is breeding dependence. Many politicians see the need to cut the benefits to incent people to go back to work.
Canada has traditionally been among the most liberal countries when it comes to social programs. Here too, the government has announced that they will be terminating the emergency relief benefit for employees and transitioning to the predecessor employment insurance program which has a finite period of 14 weeks for recipients to get a check.
We know that the unlimited money printing can’t last forever, and at the same time, the printing of money has created such a dependence that it will be difficult for governments to stop.
In the US, there are about 32 million people out of work as a result of the pandemic.
The economic damage falls into two categories:
- Temporary damage
- Permanent damage
Temporary damage happens when a business is forced to close temporarily. A dental practice might be a good example. The reception staff and the dental hygienists would be on a temporary layoff but would be still considered “employed but not at work”. They would be collecting employment benefits during the furlough, but it’s reasonable to expect that a dental practice will continue when allowed to re-open.
Permanent damage happens when a business that has been operating for decades, closes its doors permanently. Those jobs are gone and are not coming back. Lord and Taylor just filed for bankruptcy. This iconic department store that started in NYC may not re-emerge from bankruptcy. It’s too soon to tell. You can’t just assume that the salesman selling mens suits at Lord and Taylor can now go get a job in an Amazon fulfillment center because that’s where the retail jobs have moved.
Right now the Federal Reserve is doing what it can to maintain the reserve currency status. There is a list of 15 countries that the US lends money to through the Swap Lines that are managed by the Fed. The big issue is whether the US dollar will lose its reserve currency status. Right now the Federal Reserve is doing what it can to maintain the reserve currency status. There is a list of 15 countries that the US lends money to through the Swap Lines that are managed by the Fed. These lines of credit are typically 30 days in duration and friendly countries to the US have the privilege of rolling over the loan for another 30 days. The Fed has permanent swap arrangements with Canada, England, Japan, Europe, and Switzerland. When interest rates hit rock bottom in March, that list of countries was expanded by 9 countries on a temporary basis to include Australia, Brazil, South Korea, Mexico, Singapore, Sweden, Denmark, Norway and New Zealand to tap up to a combined total of $450 billion dollars. Note which countries are not on the list. Cash strapped Argentina is not on the list. Nor is Russia or China. None of the Pacific rim countries like Vietnam, Thailand, Cambodia, none of the African nations.
At what point will those countries who didn’t get a free loan from the Fed turn to China or Russia for financial or military assistance? There is a game of geopolitical chess underway and it involves buying loyalty from friendly allies, to the tune of $450 billion dollars in the past few months.
Barry Wolfe is with Marcus and Millichap in Ft. Lauderdale. He specializes in retail assets and spent his entire career, including his early career as a lawyer working on retail assets. On today's show we're talking about the current state of retail.
On today’s show we are reviewing “Yes to Life, in spite of everything “ by Viktor Frankl. Viktor Frankl is best known for hist book “man’s search for meaning “ which chronicles his discovery of the meaning of life during his 3 years in 5 different concentration camps during WW2. During that time he saw his parents killed and his pregnant wife. Somehow he managed to survive.
The book Yes to Life was curated by Daniel Goleman who assembled a series of lectures given by Viktor Frankl in 1946, only a year after the end of the war, and before the publication of Frankl’s groundbreaking book. Daniel Goleman is a best selling author known for his own body of work including the books “Emotional Intelligence “, “Primal Leadership “ , “Focus”, and “Altered Traits” to name just a few.
After the War, most people who survived the atrocities emigrated to start a new life rather than reintegrate in the community that allowed such horror to take place. Frankl on the other hand returned to his native Vienna where he became professor neurology and psychiatry at the University of Vienna. He would look into the eyes of colleagues who claimed ignorance of the Nazi machine, even when they were part of it.
He developed a new body of work in understanding psychotherapy called logo therapy. He held visiting professorships at Harvard, Stanford, Southern Methodist and Duquesne universities.
For four decades he made countless lecture tours all over the world. He received in total 29 honorary doctorates. He authored thirty-nine books which have been translated into 50 languages to date.
The book “Yes to Life” brings forward some of Frankl’s clearest thinking in the immediate aftermath of the holocaust.
In our social media infused, consumption driven, Netflix intoxicated world, we rarely slow down enough to ask existential questions.
Frankl is clearly focused on answering the very fundamental question about the meaning of life. Since death is certain, does not life itself become meaningless? Does death not make all our beginnings seem pointless from the start, since nothing endures?
Let’s ask the question the other way around. What if we were immortal? But if we were immortal we could postpone everything. It would never truly matter whether we did a particular thing right now or the next day or the day after or in a decade. There would be no reason to do something right now or experience something right now. There would be an infinite amount of time.
The fact that we are mortal and our time is restricted and our possibilities are limited is what makes it meaningful to do something. Therefore our mortality form the background against which our act of being becomes a responsibility.
We do not judge the life history of a particular by the number of pages in their life story, but by the richness of the content it contains.
Every hour, every minute loads our existence with the weight of a terrible and yet beautiful responsibility. Any hour whose demands we do not fulfill, or fulfill halfheartedly, this hour is forfeited ,for all eternity.
Life can only become more meaningful the more difficult it becomes. The athlete, the mountain climber who actively seeks more difficult tasks, creates difficulties for themselves.
If life has meaning, then suffering must also have meaning. Our modern culture seems obsessed with having a happy life, a life free from stress with all the creature comforts. Compared with our great grandparents, most of us live like royalty, and yet how many are happy?
Frankl makes the case with example after example that people created their own sense of meaning from within. They didn’t rely upon external circumstances to establish that sense of meaning. Their own agency created the meaning even under the most adverse conditions.
Though written in 1946, these lectures stand as a timeless piece of work.
Frustrating when your Podcast hosting company has a problem preventing new shows from being published to the feed. Listeners must be wondering what's going on....
The hosting company acknowledged the problem and are working on it.
Now that parts of the economy are opening up, we’re starting to see the opening up of the courts as well. We’re continuing to see rising cases of Covid-19 which has claimed 155,000 lives in the US since March and 9,000 lives in Canada.
With that we’re starting to see litigation associated with the Covid-19 pandemic. A report in the Wall Street Journal on Thursday reported that hundreds of lawsuits have been filed for damages caused by the pandemic.
Employers across the country are being sued by the families of workers who contend their loved ones contracted lethal cases of Covid-19 on the job, a new legal front that shows the risks of reopening workplaces.
Walmart, Safeway, Tyson Foods, and some health-care facilities have been sued for gross negligence or wrongful death since the coronavirus pandemic began unfolding in March. Employees’ loved ones contend the companies failed to protect workers and should compensate their family members as a result. Workers who survived the virus also are suing to have medical bills, future earnings and other damages paid out. Fortunately, we haven't had any outbreaks in our facilities.
There are stories in the WSJ article that frankly are heartbreaking. There are stories of people who were told to report to work or be fired. Some employees were told that protective masks would not help and not to wear a mask.
Clearly we have millions of people who have been exposed to a high risk pathogen without the appropriate precautions. But this is not just an issue of workplace safety. The virus doesn’t care if you’re at home, at work, at a social event, lounging by the swimming pool. If you’re a tenant in a multi-family apartment complex, you need to feel safe in your own home. You need to be safe in the common areas.
If it can be shown that a landlord acted negligently and a tenant slips and falls on an icy walkway, you can expect a lawsuit. It stands to reason that if you follow the same chain of logic that if a tenant uses the gym amenities and contracts Covid-19, then there might be a case against the landlord. The risk of lawsuit is very real.
If you own a multi-tenant building, whether it’s an office building, or a residential building, you have risk of litigation if someone gets sick. You need to make sure that common areas and public bathrooms have a much higher standard of cleaning than normal.
There is a real cost to these additional protocols. In the office building that I manage, we have instructed members of the public who might enter the building to call in advance. They are to wait in their car until their appointment. They will be escorted into the building and directly into their appointment. The waiting rooms are closed, the chairs are off limits with yellow caution tape.
Senior homes are another area of risk. There have been numerous outbreaks in nursing homes in Europe, Canada and the US. Tragically, these outbreaks have ripped through the populations in these long term care facilities and the loss of life has been staggering. Here too, this is an area of risk.
What about hotels? The common areas, the food and beverage establishments all represent an area of risk.
The legal system is all about what you can prove. It’s not about what you know, it’s what can be independently verified. You definitely want to strengthen your cleaning and sanitizing protocols. That alone may not be enough to prevent you from being sued. It’s important to post placards and communicate your policies. If you’re communicating what you’re doing, and documenting it, there’s no guarantee that it will be enough to prevent someone from becoming sick. But it becomes harder for someone to argue that you were negligent.
On today’s show we’re talking about Freedom of Speech and what it means to be neutral.
The year was 1889 and Almon Strowger was the local undertaker in Kansas City Missouri. Clients would call the operator and ask to be connected with the undertaker. The operator was called Mabel. They were all called Mabel. In those days, the operator would patch you through by pulling a wire out of the console and connecting the call manually to the destination. The problem is that one of the operators was married to the other competing undertaker in town and Almon Strowger was losing business to his competition because, in his opinion, the operator was giving calls intended for him to the competition, her husband. So Almon Strowger invented the first mechanical electrical phone switching system that would allow users of the phone system to dial the number of the destination and the connection would be made with no human intervention and no bias. The machine was truly neutral and would connect the parties following the commands of the person dialing the number. The Stronger Step By Step Exchange was eventually sold all over the world and became the dominant phone system around the world for close to 70 years. The system was eventually replaced by a digital exchange invented at Bell Laboratories and at Bell Northern Research. These systems maintained the neutrality inherent in the initial system devised by Almon Strowger. If you called Fedex, you were sure that you would be connected with Fedex and not UPS or DHL. So that’s the concept of neutrality, and the phone network solved that about 130 years ago
Now let’s talk about freedom of speech and we’ll come back to talking about Strowger later on.
So exactly what does Freedom of Speech mean?
Most Western democracies have some form of Freedom of Speech enshrined in the constitution. That’s true in the US, Canada, the UK, most of Europe and so on. So what exactly does that mean?
It means that you can’t be persecuted for what you think or what you say. There are limits on those freedoms. You’re not free to harm others through your speech. For example, you can’t frivolously yell “Fire” in the middle of a crowded movie theatre. You can’t make defamatory statements which aim to damage the reputation of another person or company.
You literally have the right to stand on a soap box in a public place and make a speech. In the good old days, that might have been on the Boston Commons, or perhaps in Central Park in NYC, or on the Mall in Washington DC. Today, that means on the Internet, perhaps on social media, or who knows, a podcast.
The makers of social media platforms are the modern day manufacturers of the soap box. The manufacturer of the soap box clearly can’t be held responsible for what someone standing on the soap box says. They merely cut some wood and screwed it together to form a box.
Arguably, social media is private property, not public. The use agreement between users of the platform and the owners of the platform is between a company and the user.
This is clearly a legal gray zone. Something said on social media is not truly public, but in many ways it is public.
There are so many messages being put out on social media. How is a piece of software supposed to figure out what’s a legitimate use of the platform and what is in violation of the use standards.
The amount of fake news is astounding. This week, the CEO’s of Amazon, Apple, Facebook and Google appeared before congress to answer questions about the amount of power and influence they wield to shape public opinion.
They are the modern day Mabel. By curating what’s displayed on the platform, they’re filtering out what you get to see. When that happens, then free speech gets suppressed, neutrality is gone and Mabel is back in control of how calls get routed to the undertaker, and how propaganda gets presented to the voting population.
As students prepare to go back to school, the question on the minds of many student housing operators is “Has a university education changed forever?”
Universities in the US represent about 20 million students, faculty and staff. That’s almost the same as the population of Chile in South America or Romania in Europe.
those planning to reopen campus to students have different ideas about how best to do that. Duke University announced Sunday that it would limit campus housing to mainly first-year students and sophomores, rather than bringing back juniors and seniors as well. Stanford University will alternate groups of students by class year for each 10-week academic quarter; Harvard University plans to allow mainly just first-year undergraduates on its Cambridge, Mass., campus. The neighboring Massachusetts Institute of Technology campus is hosting mainly seniors.
Cornell currently plans to return students to its Ithaca, N.Y., campus, with a mix of face-to-face and online classes.
The University of California, Berkeley announced last week that fall classes would begin online, and said face-to-face instruction won’t start until the Bay Area’s Covid-19 resurgence is reversed.
At Temple University in Philadelphia they are going to be making changes at the individual course level. They plan a return to campus in the fall.
Some will be In-person classes: These are the typical, traditional classroom or seminar-style classes, but they will take place in rooms adjusted to allow for each student and the instructor to maintain six feet of distance from each other.
Hybrid classes: These classes will blend in-person and online learning in an effort to reduce the number of students on campus and in classrooms at once.
Online classes: These classes will be conducted fully online.
I know of several students who elected to take a year off. They didn’t want their university experience to be compromised because of the constraints being imposed by the pandemic.
There is a perception that watching a video online is a lower value experience than an in person experience. If you’re a student and you were expecting to pay a huge sum of money, possibly going into debt to sit at home and attend classes by video conference, there’s a good chance you’re going to think twice about making that investment in that way.
Now if you’re in a faculty like medicine on dentistry, many of those classes can’t be taught in an online format. You’re not likely to take a year off from medical school waiting for the pandemic to pass.
The folks at UT had already transitioned 52% of the classes at their Arlington campus to having an online option prior to the pandemic. They too will have a mixture of on campus classes, hybrid classes and fully online classes. Some of the hybrid classes will conduct the lectures fully online, but hold the labs in the lab with smaller lab numbers and increasing the times available for the labs.
One thing is clear, the attendance on campus this year will be lower than in past years. If you’re a student housing owner or operator, you have to be thinking about three questions:
- How will I get through the 2020/2021 academic school year?
- What will university life look like after the pandemic?
- How long will we be living with the pandemic?
If there is going to be long term vacancy in student housing this year, how will the monthly income be affected? Not just will you be one of the unlucky ones experiencing a vacancy, but will operators vying for a smaller student population drop prices in order to attract tenants?
Student housing operators are accustomed to renting by the bedroom and they typically get a premium over a market rate rental.
On today’s show we’re talking about the discipline of making decisions based on the numbers. In the past couple of weeks I went through a process of underwriting a property that is a rare property. We’re talking about a property at 316 Water Street. As you might have guessed by the name, the property is on a body of water. This was a distressed property that was a bank power of sale. In my home market prices have shot up significantly in the past year. The average price is up 14% in the past year. The largest price increase has been at the bottom of the market. We’re seen prices at the bottom of the market up more than 25% in some cases. A detached home of any description is selling above $650,000. Imagine my surprise when my wife came across a distressed property, a little bit outside the city that was listed for $219,000. Even rural properties are being priced similarly to properties in the city. There is just no inventory. Not only was this property at a good price, it was actually on 3/4 of an acre on a beautiful body of water with a permanently deeded conservation area across the river. The area on the far side would never be developed. Immediately in front of the house the water is quite shallow and you would never have powerboats nearby. Fishermen would come within a few houses with their trawling motors but again, they’re pretty quiet. The property had a row of mature trees at the water’s edge. The house was about 15 feet above the river and very safe from the risk of flooding. At first the house looked like it could be an opportunity for a flip. Valuations for a single family home on the water we’re accustomed to building in higher volume. So while some of the trades would be competitive with volume pricing, we also knew that trades like plumbing and electrical would be more expensive. The biggest variable was in determining the scope of work. With a bank power of sale, the property is being sold as-is, whereis with no warranties of any kind. So if there was any doubt about a particular part of the property, we had to assume a rebuild. The bank gave us a week to complete our due diligence. A total of 20 trades would be required to complete this project, not much different than constructing a new house. We felt that if we could keep the renovation and repairs below $200,000 we would have a very viable project. A house on the water would sell easily for $600,000. As time went on, we started to put our budget together, it was looking increasingly like the project would exceed the original idea of getting it done for under $200,000. The house had a lot of problems. This would be a full gut of the property down to the bare timbers. It would mean a new roof, new flooring, new plumbing and electrical infrastructure, new HVAC, new exterior siding, new windows, a new attached garage. It would need a new water well and a new septic system. As a rural property, there is no municipal infrastructure. There was a condemned addition on the house. The separate garage structure was also condemned. The chimney was condemned. The house was sagging in places, but overall, the house was pretty robust. The walls were over 12” thick. There was considerable moisture in the basement, and the basement had not been cleaned from the dog breeding operation that had been underway. Entering the house safely required special breathing apparatus with N95 filters. We considered demolishing the house and building a new house with a better orientation facing the water. Both my wife and I were captivated by the allure of buying a waterfront property for considerably less than the going rate in the market. Our heart said yes, and the numbers said no.
Ben from Oklahoma City asks
We are looking at building a residential assisted living center consisting of 12 residential care homes. What are your tips on mapping supply and demand for the market. Our current approach is googling and building a list and talking with folks that are already in the assisted living industry for the market. Do you usually commission a 3rd party to do a market study? What are your criteria for hiring and finding someone to complete that study? Thanks!
Ben, this is a great question.
You are focusing on residential assisted is very smart. The assisted living market is part of a continuum of care that starts with independent living with a very light amount of services at one end of the spectrum and skilled nursing at the other end of the spectrum. Assisted living fits somewhere in the middle.
The first step is to get your own market intelligence. That consists of talking with lots of people in the local market.
You want to find out which banks have funded the local projects. This is done by simply searching title and seeing who has the mortgage recorded on title. You can then talk to those banks and get their assessment of the local market conditions.
Next we talk to people who operate the local facilities, including staff. Do they like their job? How long have they worked in their current job? Is there high staff turnover?
You and your wife should visit all of the possible competitor facilities in the market as a secret shopper. You can interview each facility under the guise of looking for a place for a family member who is getting older and will need a place soon. When you do, find out the current occupancy of all the competitors. But most important, make an assessment of their strengths and weaknesses.
If the market were to become saturated and oversupplied, you need to know what it will take to compete to win and get more than your fair share of the market.
Then to answer your question directly. Yes, we always commission a third party market study. This is done for every major project. Some accounting firms and brokerages have consulting divisions that specialize in market studies. In the assisted living world, there are also consultants that have industry recognition.
You perform a market study for three different purposes.
- Make sure you’re not deluding yourself into thinking that you have a viable project. It’s easy to get project fever and become emotionally attached to a project.
- Your lender may require it.
- If you’re raising capital from investors, it’s a good practice from two points of view. You can show your investors that you’re taking their investment seriously. The market study is part of your fiduciary responsibility to them. The market study which shows demand for your product can be part of your communication with your investors as to why the project might be a good investment.
The market study is going to look at other elements. They’re going to examine the demand and the ability to afford your product. So they will look at the number of people in the age demographic. But they will also match the age demographic with the income of the kids. Because often, the funding for the assisted living stay is coming from the next generation. If the parents don’t have the money, maybe the kids do. So you will get a comprehensive picture of the market. The market study will look at the capture rates for independent living as a leading indicator of what the capture rate might be for assisted living a few years down the road. They will also look at the capture rate for assisted living and compare that with industry averages for a healthy market.
Jyoti is an analyst with Trepp in New York City, specializing in commercial mortgage backed securities. On today's show Jyoti gives a basic tutorial on the CMBS market and how it operates. If you want to learn more, reach out to her at info@trepp.com.
George is a repeat guest on the show. He's best known for his role as Executive Vice President in the Trump Organization. He's the best selling author of two books on real estate and negotiation. He taught at the law school at NYU for over twenty years. In business for over 60 years. At 92 years of age, one of the wisest men I know. On today's show George discusses the current market conditions, the moratorium on evictions and foreclosures and what to do about it.
On today’s show we’re talking about your frame of reference. The price of silver has gone up 28% in a little over two weeks. But we’ve been saying for a long time that silver is undervalued relative to gold. Two months ago gold was trading at 115 times the price of silver. In historic terms, that’s a nearly record breaking ratio. Either gold was over valued or silver was undervalued. Through much of history the ratio between gold and silver has been hovering in a range between 50 and 70. Sometimes it would go outside that ratio. For example, in the period from April 2010 to May 2011, the ratio dropped from 65 to 30 before rebounding back to 60 a year later. When silver was trading at such a discount, buying more silver seemed like the obvious thing to do.
Markets are truly inefficient. Even markets with high degrees of liquidity and millions of participants can get off balance for a period of time.
If you’ve been listening to this podcast for a while then you’ll know that I’m not a huge fan of the Wall Street Casino.
While the price of silver has nearly doubled since March of this year, that may be an illusion. That’s because your frame of reference is dollars. Frame of reference is extremely important. Some people measure their wealth in terms of dollars. Others may choose to measure their wealth in ounces of silver and gold.
You see, you might be standing still as you’re listening to this podcast. Or you might be seated at your desk. If you’re in your car on the freeway, you might be driving 60 miles an hour. But of course none of those are correct. You’re on the edge of the earth that is spinning at about 460 meters per second or about 1,000 miles an hour. It doesn’t feel like you’re traveling that fast, because of your frame of reference. It turns out that 1,000 miles an hour isn’t quite right either. You see the earth is spinning around the sun at a speed of about 30 km per second or about 67,000 miles an hour. It all depends on your point of reference. Some people choose to keep dollars as the point of reference.
But dollars are constantly in motion. They’re continually declining in value. Dollars are not money, they’re merely currency. In order for something to be considered money it must perform two vital functions. It must serve as a means of exchange and as a store of value. Dollars are a very effective means of exchange, but not a very good store of value.
So far, we’ve been successful in exporting our inflation. When you go to Walmart and buy a pair of shoes that were made in China, or perhaps an electronic gadget, the supplier to Walmart gets paid in US dollars. That supplier has no real use for US dollars so they go to their local bank who exchanges the dollars for Remnimbi. China’s central bank ends up with a surplus of dollars. So they go in search of assets they can buy with US dollars. For years, they’ve been buy US Treasury bills. It’s the perfect solution. The trade deficit with China results in China buying the surplus debt of the US Government. All those extra dollars in circulation get taken out of the economy in the West and end up buying the excess government debt. It’s a system that works perfectly until it doesn’t.
When you put dollars in the bank , you’re exposed to counter party risk. If the bank goes bust, then you don’t have any money, you merely have a claim on money that is actually the bank’s money that you have put on deposit with the bank.
When you hold the physical metal in your hand. There is no counter party, and therefore there is no counter party risk.
So back to the frame of reference. My analysis is pretty simple: the more money that central banks print, and the more debt that governments take on, the more valuable gold and silver will become. Said another way, : the more money that central banks print, and the more debt that governments take on the less valuable the currency will be.
On today’s show we’re taking a look at what’s happening in the housing market and make sense out of some pretty confusing data. Last week we reported that lumber prices have increased to record levels, driven by outdoor construction projects at restaurants, the low inventory in homes for sale, and numerous home improvement projects are driving demand for building materials.
On a recent project that I’m building, I’m receiving quotes of 5-6 weeks delivery for wood siding that normally should be a two week delivery item.
Construction trades for large projects in my market are booked for the next 18 months. We just had a builder in Utah decline a very attractive land purchase that had been previously committed. When that happens, it’s usually because they’re worried about making a financial commitment to building houses. In this case, they declined because they’re so busy with existing construction jobs that they don’t have the capacity to even start those jobs in the foreseeable future.
The headlines read that housing sales volumes for existing houses jumped 20.7% in the past month.
Driving sales are apartment renters seeking more space, young families moving to the suburbs, and wealthy city dwellers looking for second homes, brokers and economists say. At the same time, the supply of houses for sale remains low, with the pandemic making potential sellers cautious about letting people tour their homes. The demand for houses is there.
To put this in perspective, home sales are still down 11% compared with this time last year, which was a slow year by many measures. So arguably the market has the ability to support a higher level of activity without being considered overheated.
Home sales had been in a two-year rut heading into 2020, weighed down by perennially tight supply and historically high home prices. Even solid U.S. economic growth and low unemployment couldn’t get sales moving back in 2019. That seems like a lifetime ago.
Homes typically go under contract a month or two before the sale closes, so the June sales data largely reflect purchase decisions made in April or May when we were still in a stricter lockdown environment.
Some agents and brokers I’ve spoken with are optimistic that the usual spring demand has been pushed to the summer, and that momentum is building. The spring is normally the busiest season for home sales, as buyers with children want to move into new homes before the school year starts.
My take it that the market is being constrained on the supply side. People are not moving in the same numbers that we’ve seen in historical years. That’s reduced the supply of houses coming on the market. We often see this happen when prices rise. People want to move but don’t because they can’t find anywhere to move to. They bought their house a decade ago at a good price, maybe $150,000 or $200,000. Their home has increased in value and now would command a sale price of, say $500,000. But the seller is still living in a house that they paid $200,000 for. If they buy something new, they’re looking at prices starting at $500,000. Yes, they have a lot more equity to work with. But they often don’t see the purpose behind getting a larger mortgage and buying a house with a larger price tag. They’ll move because they’re forced to move for employment or a life event, but not for a change of scenery.
I’m currently in negotiation with a home owner whose name is Andy for a property that’s on the edge of a larger development site. Andy and his wife bought their house for $350,000. Prices in the neighborhood have skyrocketed to more than $1.2M. They don't want to pay that much for a new house. So they’re deciding not to sell and stay where they are. That’s another house that will not go on the market this year.
On today’s show we’re taking a look at what’s happening in population migration.
Over the past 20 years population growth among secondary and tertiary markets has outpaced that of the country’s large primary metros.
A new report from Marcus and Millichap shines a spotlight on a trend that has been accelerated by the events of this year.
Over the past two decades total population growth was 70 percent higher in secondary and tertiary metros than in gateway cities. Since 2014 that ratio has climbed to over 200 percent.
In my opinion, the number one driver that has enabled growth in secondary and tertiary markets has been the installation of fiber infrastructure for communications. When you have a fiber connection to your home or office, you have communication speeds that are among the best in the world regardless of your location. Speed of electronic connection is on par with the importance of physical presence.
The fact is, you will always need to meet with people who are more than driving distance away. There will always be people who are more than flying distance away. Even before the pandemic, I was routinely spending hours each day in video conference meetings. The pandemic has merely accelerated a trend that was already underway.
In my opinion, the Marcus Millichap report is over-simplifying the trend. They mention that New York and Chicago have lost about 600,000 population in the past 5 years. But high taxation and difficulty of doing business have played a major role in that trend. The beneficiaries have been cities in lower tax environments. These include the primary markets like DFW, Atlanta and Houston, and the secondary markets like Austin, Nashville, Charlotte.
On today’s show we’re talking about how the Pandemic is going to shape the near future for real estate investors.
Our entire economy situation, both in the US, Canada and much of Europe is based entirely on the printing of money by central banks.
Our entire economic system is fully dependent on the free flow of low cost debt. Every major sector of the economy has a financing plan associated with it. Virtually every facet of every family of every business is being supported by debt, and now government subsidies. Let’s look at debt for a moment.
Of course there are two types of debt, there is good debt and bad debt. Good debt is the kind that is paid off by an income producing asset. Bad debt is consumer debt that is strictly to pay for luxuries that people can’t afford to buy today. Some economies are more highly debt dependent than others.
For example, I walked into an electronics shop in the downtown area of Cancun Mexico, that is outside the tourist zone. The prices for most items were not listed. The only price listed was the bi-weekly payment if you financed that particular gadget. I saw the same thing at the supermarket. You could buy a motorcycle at the supermarket. The price listed was not the purchase price, but the bi-weekly payment. People were being socially conditioned to judge affordability based on how much of their bi-weekly paycheck they could allocate to that luxury. The same thing happens of course in the US, Canada and Europe, only to a lesser degree. When you go to the car dealership, the sticker price displayed on the vehicle is often the cost of a lease payment.
We can’t shut of the credit markets without creating economic collapse. But we have to acknowledge that we are way too dependent on credit for things that really should not be financed.
Our society has a planning horizon of two weeks. That sounds harsh. But there’s an element of truth to it.
The real question as to what will happen as a result of the pandemic rests on two fundamental questions:
1) When will the stimulus money stop?
2) When will the confidence in the currency collapse?
The US has largely exhausted the payroll protection program funds. They extended the period of time that payroll funds can be used. But they haven’t allocated any additional funds to the program or allowed borrowers to get access to more than 2.5 months worth of payroll. We are now 5 months into the pandemic.
The number of people collecting unemployment benefits started to decline in June but is now growing again.
The pandemic unemployment benefits in the US are set to expire at the end of July in less than ten days. There are still more than 32 million people collecting unemployment benefits between the regular state run programs, and the pandemic programs. Turning off the taps to relief money would create mass riots.
Deciding new benefits will be government's task in the next week. The next question is whether to give the money to households or to employers.
In Canada, the emergency relief benefit being paid to businesses has been extended until the end of the year. I had a conversation with a restaurant owner yesterday who share that 75% of his payroll if being covered by government funding.
In April, at the peak of the shutdown, he thought his business was over. Today, he has opened up seating for 150 outdoors. He’s doing a robust take-out business, and the tables are busy and he’s making more money today than in his best months prior to the pandemic. When the subsidy disappears, he will need to reduce his staff by 50%.
As real estate investors, our income comes from our tenants. Our tenants get their rent money from their job, or lately from an unemployment benefit. As investors we need to acknowledge the uncertainty that depends entirely on what governments will decide in the coming week regarding further stimulus money.
On today’s show we’re talking about how shopping has changed. But not just shopping in general. We’re talking about how my shopping has changed forever.
Last week, my wife and I were on vacation. We chartered a boat on an inland waterway in central Ontario. We were going through the locks and my wife lost grip of the boat hook and it fell in the water. Normally, a boat hook is a specialized item that you can only find at a marine chandlery. They can be expensive, usually starting at about $75.00. She was pretty upset and was worried that the charter company would charge us a large amount of money to replace the lost boat hook.
So I went on Amazon and found a basic telescoping boat hook of similar quality to the one that now is sitting at the bottom of a lock.
We ordered a replacement for $31.00 and with free shipping it arrived at the charter company before the end of our trip. I solved three problems with that online order.
1) I replaced the lost boat hook
2) I eliminated the fear and uncertainty that my wife was experiencing around the lost boat hook.
3) I saved at least 50% compared with buying from a retail marine chandlery
The owner of the charter company was hugely appreciative that we ordered the replacement. It solved a problem for them and frankly they were surprised to receive an anonymous boat hook in the mail without warning. This is the new world of retail.
If you own a retail store or a chain of stores that offers a variety of products at high margins that are easy to ship without being needed immediately in expensive retail locations, then you're in big trouble.
There were items that I religiously said I would never buy online. Top of that list was clothing and shoes. I find it difficult to buy shoes that fit. I often will try on a dozen pair of shoes before I even find one that fits. The idea of sending shoes that don’t fit back in the mail seems offensive to me and I won’t do it.
This year, I had a pair of running shoes that had worn out. There is one manufacturer that I can count on to fit my foot. Rather than go to the store and try on running shoes, I decided to try buying online. I ordered the same size from the same manufacturer that I already had. It was a new model, but I reasoned that the sizing should be consistent within the same manufacturer over time. The purchase price online was less than the retail store, and I spent a total of 4 minutes on the transaction. Two days later, the running shoes arrived and I spent less time than it would have taken to drive to the store.
So the emotional obstacle to buying clothing online has largely been overcome, at least in my case. Will I buy a new dress suit online? Probably not. But I would buy a dress shirt online from a brand that I know. I would buy somethings, but not all things. I maybe would buy half of my clothing online in the future.
If you’re a clothing retailer and you lose 50% of your sales to people like me who now buy things online, you’re going to suffer. In fact, you’re probably not going to survive financially. Is retail dead? No. But how many retailers can survive a 50% drop in sales volume? Those that remain will thrive, but only once the industry has shrunk enough to allow those remaining to survive.
As real estate investors we need to pay attention to the changing landscape of our communities. If the smaller family run retail businesses die off as they seem to be doing, who will occupy all those retail store fronts?
The change in retail will change the flow of traffic in the community. It will change how people choose to live in a particular location. They want amenities nearby that they care about. They definitely don’t want vacant abandoned storefronts
John Fortes has been syndicating apartment projects for a small number of years. He's a relative newcomer to the world of syndication. Listen to how he rapidly made the transition from investing in single family to multi-family properties. John can be reached at JohnFortes.com. He's also the host of the Passive Investor Show. You'll want to check out that show as well.
Steffany Boldrini is a former technology entrepreneur and host of the Commercial Real Estate Investing From A-Z podcast. She is based in San Francisco and on today's show we are talking about what's happening in several asset classes in the San Francisco market including the residential rental market, and the commercial rental market.
The much feared W shaped recovery is upon us. Attempts to open up the economy and to restart the floundering food and beverage industry have hit a snag. This past week saw a record number of new infections across multiple states in the US. There is understandably a degree of Covid-19 fatigue in the population. Summer is in full swing and people want to enjoy the outdoors. The question is how to do it safely?
The US recorded a stunning 130,000 new cases of Covid-19 over a two day period this week alone. Hotspots include the populous and economically important states of California, Florida, Arizona, Texas and Louisiana. Texas, California and Florida are all reporting record numbers of deaths so far in the pandemic.
In a world where scientific data seems to be politicized, it’s hard to get reliable data. In a world where economic data seems to be politicized, it’s hard to make sense of anything.
In a world where getting reliable data is increasingly difficult, several software as a service companies can offer a window into what is happing in the economy. It seems that data often is presented with an agenda, or a narrative. On this show we aim to share data, mixed and confusing as it may be and allow you to draw your own conclusions.
OpenTable is used to reserve a table your favourite restaurant. I use it frequently when I travel. Data from OpenTable showed that people were venturing back out to restaurants at the end of May and early June as the economy reopened. But in the last few weeks, reservation bookings on the platform have slipped, especially in states that have rolled back reopening plans, such as Texas, Florida, and Georgia.
Homebase, a time scheduling and tracking software used mostly by small businesses, saw the number of hours worked plateau in the last week of June, which is likely to continue, according to data from the company.
The pace of improvement of businesses reopening and workers coming back in June slowed from a month earlier, according to Homebase's monthly report. In May, the number of employees working improved 37%, while in June, gains were only 6%.
In addition, Homebase is seeing declines in growth in states with higher COVID-19 cases, such Arizona, Florida, and Texas.
It’s unlikely that we will see a national shutdown like we saw in March. The appetite doesn’t seem to be there in the White House. It’s likely that we will see numerous state level and local shutdowns in hot spots as outbreaks flare up.
The slowdown in infections that was predicted during the warmer summer weather hasn’t materialized. In fact, we’re seeing quite the opposite.
Many school districts across North America are making plans for the upcoming school year. Some are opening two days a week. Some are going 100% online for the start of the school year. Others are opening fully with attempts to increase social distancing in the classrooms. The number of families where both parents work is going to be further impacted by the decisions made by school boards. Some families don’t have the luxury of finding child care.
So what does this all mean for real estate investors?
This is starting to feel like 2008 all over again. I’m seeing distressed properties coming on the market, below construction cost. In earlier months, properties like this would have been snapped up in hours. Now, they’re staying on the market for days before being snapped up.
If a deal meets our criteria we'll place an offer. Otherwise, we'll pass. There will be plenty of opportunity over the next couple of years.
We are living through one of the most perplexing periods I’ve ever seen. On today’s show we are talking about how in the middle of an economic downturn, some indicators suggest a red hot market.
Restaurants, Construction Companies, and DIYers Drive Demand
Lumber and plywood prices are hitting record highs as various sectors of the economy respond to the pandemic.
Restaurants and bars are buying wood to build makeshift outdoor seating options. In many parts of the country, including in New York City, outdoor dining service is permitted, but indoor operations are not. Additionally, home builders are purchasing large amounts of wood as they respond to rising demand for new homes. Low mortgage rates and a desire to be able to social distance in a single family home has led to an increase in construction. Additionally, people stuck at home this summer are working on home improvement projects and flocking to stores like The Home Depot (HD), Lowe’s (LOW)
Lumber futures have risen over 85% since April 1. July futures hit $499 per thousand board feet last week, and September futures reached $481.90.
Mill companies like Georgia Pacific have seen their shares rise due to booming demand for lumber since June. In March, as shutdowns hit the US, wood prices tumbled and share prices of companies like Georgia Pacific fell nearly 40%. Home sales slowed, as did construction. In response, many mills scaled back production. Now, these trends have been reversed, and mills are doing their best to keep up as construction companies, restaurants, and individuals flock to buy lumber. GP shares are up 50% in the past month.
All of this points to strong demand. These statistics mirror my own first hand experience. Last month, I purchased a small quantity of cedar lumber to build some planter boxes for my wife. All of the major suppliers of cedar lumber were out of stock with no forecast for new inventory. I was eventually able to buy what I needed, but it took several attempts to source the building materials.
I’m also seeing significant shortages in construction labour. If the project is small, consisting of half a day of work, finding labor is relatively easy. The weekend warriors who have full time work will often moonlight on small jobs. But if you have a significant job, be prepared to schedule the job several months out from now.
Other factors that can drive a spike in lumber prices include summer storms. In past years we have seen a significant jump in prices following a major hurricane. We are just starting hurricane season and have yet to experience any major storms making landfall in North America. It could be that we have a lighter than average hurricane season, but it’s too early to tell. It’s conceivable that we have some weather events at the same time as we are dealing with the COVID-19 pandemic.
The demand for detached housing seems to be stronger than ever in many parts of the country. We have seen a big drop in demand for high end rental apartments in the most expensive cities like New York, San Francisco, Miami, and Seattle.
If you looked only at the construction metrics in the economy, you would think we are in the middle of an economic boom. There are no signs of 11% unemployment, or of distressed properties hitting the market.
There are 4.5 million properties in default on their mortgages in the US. There are a likely similar number of rental units with tenants in default on their leases. Because there is a freeze on evictions, we won’t know the real statistics for many more months. It’s hard to make sense out of this economy.
If you are sitting on a construction quote that is more than 30 days old, chances are high that you will need to get a new bid for your job.
Dominic asks,
Dear Victor,
Thank you for the ongoing excellent content.
While awaiting projects to invest in that make sense to me, I’ve been looking at various places to hold capital.
Do you have any thoughts regarding the “infinite banking” concept using whole life insurance policies as a collateralized asset?
The pitch seems to be that these policies provide tool to park unused funds with some dividends. When a suitable investment comes along, the insured borrows from the insurance company with the cash value acting as collateral.
The pitch being “your money is working in two places”, earning dividends within the policy while also being deployed in a higher return investment. Other advantages being potential tax advantages on accrued values, some asset protection as insurance policies may be exempt from some collection actions, and generational wealth transfer.
In concept, this seems to me to be similar to leveraging collateral of other assets, such as real property, precious metals, etc.
I would be very interested to hear if you have any thoughts on the utility of this.
Dominic, this is a great question. Let me preface my comments by saying that your question really gets to the heart of personal philosophy around money and around how to best invest. It’s a little like asking whether the image on the magazine cover is beautiful.
I personally am not a fan of life insurance policies in general. But that’s just me. Remember, life insurance companies make a profit. There is no free lunch. When you borrow against your life insurance policy, it’s my understanding that the value of the policy is reduced by the amount you have borrower. You are correct, borrowing from your life insurance policy can be a quick and easy way to get cash in hand when you need it. You can only borrow against a permanent or whole life insurance policy. Policy loans are borrowed against the death benefit, and the insurance company uses the policy as collateral for the loan.
But you need to read the fine print. Some policies penalize you more than just the money borrowed.
Those who advocate life insurance as an investment usually justify it on the basis that the cash balance of the policy grows inside the policy tax free. The argument is that if you don’t touch the cash for a long time (20 years), you get growth of the cash. If you don’t collect on the policy, then you can often negotiate flipping the policy into an annuity with the life insurance company. Earlier this year we did an analysis of annuities from life insurance companies and we found the quoted rates of return to be approximately 1%. The yield was better in US Treasury bills. The only reason to put the money with an insurance company is if you have zero financial discipline and can’t leave the cash in your own bank account.
As an investment vehicle, life insurance policies have very high fees. These fees are much higher than a mutual fund on Wall Street.
If you're horrible at money management but can swing your premiums for the long haul, then a whole life policy could serve as a means of forced savings, since you'll eventually have the option to tap your policy's cash value.
My personal preference is to buy term life insurance and then make investments separately. True real estate investors have the ability to generate much higher returns than an insurance policy. The amount of money required to make a solid real estate investment is far beyond the cash value of most life insurance policies.
There’s a mismatch between the amount of capital in a life insurance policy and the cash required for real estate investing. Savings as the path to building wealth in real estate is the slow train. You won’t be able to realistically save fast enough. If you develop the skill to raise capital, then you can multiply your returns much faster than is possible with savings alone.
On today’s show we are talking about how to look at a property through the lens of a developer.
So often when I talk to the seller of a property, they will tell me about the zoning of the property and how the property has so much potential.
Sometimes they will tell me what is possible with a zoning change. Some have even gone so far as to tell me what another property sold for that was approved for a 20 story apartment building. Somehow that is supposed to justify their asking price.
The value of a development property is based on what you can actually build on it, not what you might dream of building, or what you might want to build, or what the city might approve in a decade from now.
My first question is where will the parking be located and how many spaces are possible?
That will ultimately determine the density and the number of dwelling units that are possible.
Some areas will allow for one parking spot per unit, whereas others want more.
If the property has a mixed use component, you need to factor in the parking for the commercial elements.
Some downtown projects that are close to public transportation will sometimes allow for less than one parking space per unit. I always want to supply at least one space per unit. Zoning is all well and good, but the market wants parking.
In a market downturn, I want to eliminate the fundamental objections that a prospective resident might have. Let the vacancy go to the properties that lack parking, or to the ones that lack modern amenities.
The second thing I look at is access. Where will cars and pedestrians access the property and does the flow actually work? Is there an existing curb cut in the sidewalk, or will we need to apply for one?
The third thing I look at is the overall dimensions of the property including the setback requirements and the height restrictions. The other restriction is the floor area ratio. Simply put, if your floor area ratio is, for example 3, and the building is going to cover 100% of the land, then you will only be able to build 3 stories. If the building covers 50% of the property, then you might get 6 stories, subject to any other restrictions.
Sometimes a larger property doesn’t translate into a larger building. You see an apartment has certain natural dimensions. It would be rare to design an apartment that is longer than about 35 or 40 feet in one direction. If you want two apartments separated by a hallway, the ideal dimension for the width of the building is around 75 or 80 feet. If the property is too wide or deep in that dimension, you won’t be able to make a larger building.
At the other end of the spectrum, there are properties that are too small to make into an apartment building.
Some properties are restricted by the size of shadow they cast on neighbouring properties. In that case a shadow study might be required to prove you won’t be adversely affecting the neighbours.
When you look at a property that has development potential, understanding the true scope of its potential is an exercise in understanding the constraints. Are all the utilities available at the property line? Is there an overhead electrical transmission line that you will have to work around?
The key is to work with an urban planner, or an architect who specializes in the type of building that you have in mind. When you are talking to the right person, you will know it instantly. They will be looking at the project through the lens of a developer to understand the constraints and clearly know the limits on the development potential.
If you are going to do the work to get the entitlements on the property, then you as the buyer are creating that value. The seller gets no part of the value increase because they didn’t do the work to create the value.
On today’s show we are talking about how to deal with inertia when you hit an obstacle. There are two types of inertia. The first one is obeying Newtonian physics. But we’re not going to focus on that one. Hitting an obstacle when you’re in motion usually results in a crash. But we’re not talking about physics. We’re talking about when your project encounters an obstacle. We’re talking about finding that perfect balance of persistence and knowing when to pivot.
As syndicators we have to keep our fiduciary responsibility to our investors at the forefront of our decision making process. That consists of a combination of preservation of capital and maximizing investor returns. We also have a responsibility to the employees of the organization and the residents of our properties.
So along comes a pandemic and financial performance suffers. Agreements that were in place prior to the pandemic evaporate. The choices are simple.
- Keep pushing on the current path.
- Slow down and wait for the obstacle to clear
- Give up
- Change course
I have several projects that have been impacted by the pandemic. In one case, there is a dramatic decrease in construction capital available for that project. So we decided to pivot and deliver a different product in that location. Our original idea was to build a 4 star hotel. But at a time when hotel occupancy is at historic lows, it’s very difficult to engage people in investing in a new construction hotel. So much of the hotel capital is waiting for the deluge of distressed properties that are expected to hit the market in the coming months. So if a hotel doesn’t work this year in that location, what should we build?
We feel that a high rise building in the core of the city is best suited to provide one of three products.
- Hotel
- Apartments
- Condominiums
All three were analyzed at the start of the project. So a pivot to one of the alternate options was straightforward. We knew that all three products were viable in that location,
When a lender on another project surprised us with a much higher interest rate and higher fees, we had to change gears again. The reason for higher rate was the uncertainty introduced by the pandemic. The appraiser gave a low valuation compared with the historic data. His rational was the uncertainty introduced by the pandemic. The appraiser reduced the rents in his model compared with the actual rents in the market. He also changed the cap rate compared with the market in order to account for the uncertainty associated with the pandemic. The net result was a financing that was simply unworkable. Again, you have here choices,
- Keep pushing on the current path.
- Slow down and wait for the obstacle to clear
- Give up
- Change course
Trying to convince a lender to fundamentally change their terms rarely works. A bad quote from one lender is hardly a reason to give up. Changing course is the only sensible option.
We have another project where the negotiations on the land have been underway for an extended period of time. In the end, the land owner put the land under contract with conditions with another buyer. The seller put the chances of the buyer closing at 50%. But somehow he had convinced himself that he had made the best choice.
Obstacles appear in every project, often without warning. Sometimes it’s a regulation change affecting construction. At other times it’s an increase in interest rates. This year it’s a pandemic.
The question of when to push, when to wait, when to quit, and when to pivot presents itself with every obstacle.
Yonah Weiss is an incredibly well connected member of the real estate community, not just in his home town of NYC, but nationally as well. He specializes in cost segregation in addition to his role as a real estate investor. On today's show we're talking about cost segregation and how it can be a powerful tool for improving the tax efficiency of a real estate investment. You can reach Yonah at yonahweiss.com.
Today's show is an excerpt of a conversation with Keith Elias held earlier this week at the Ottawa Real Estate Investors Organization. Keith heads up the Player Engagement Department at the National Football League. He's a former real estate syndicator, and a former running back with the Giants and the Colts. Our conversation sets a powerful context for living. Rare to have such an intimate conversation about meaningful topics so publicly. Thank you Keith for sharing.
On today’s show we’re talking about the many impediments to getting stimulus money. One of the newest programs is the Main Street Lending Program. This program is designed to help medium sized businesses that have been impacted by the Covid-19 Pandemic.
When you look at any business, there is the basic financial score card consisting of the income statement and the balance sheet. That’s every bit as true today in a moment of crisis as it would be in more normal times.
Businesses that have experienced a massive drop in income as a result of the pandemic have taken a hit on the income statement. The income statement speaks only to income and expense.
The balance sheet captures the assets and liabilities. How much cash does the company have? How much does the company owe? What cash is expected to come in the near future? What fixed assets does the company own that have intrinsic value. All these items are shown on the balance sheet.
If you have an income statement problem, perhaps a drop in revenue or an increase in expenses, the best sustainable solution is also found on the income statement. You need to find a way to increase revenue or cut expenses.
All too often, the proposed solution to an income statement problem is to lend the company money. If the problem is truly a short term problem, then a short term loan might be a good solution. But simply taking on more debt may not be the right long term solution.
Under the Main Street program, banks will lend between $250,000 and $300 million to businesses that were creditworthy before the economic crisis began. A Fed facility will then buy a 95% stake in those loans, leaving originating banks with 5% of the credit risk.
Out of the 11,000 federally insured banks and credit unions, 260 lenders have completed the registration process, while another 174 are still signing up. There are not many lenders in the program.
The participation in the program has been very small so far. So I decided to take a closer look to see why the program might be having trouble getting off the ground.
I went through the lending criteria for the various main street programs. I have to tell you that the rules are incredibly complex and the documentation required to qualify for the loan is heavy weight to say the least. There are over 30 documentation deliverables that must accompany each loan application. The restrictions are immense.
In fact, it took me nearly an hour to fully come to terms with the lengthy list of restrictions. Virtually every sentence reads like another rule that would disqualify a wide category of borrowers.
Knowing how businesses operate, I can’t see many real business agreeing to the terms of these loans. Not because the terms are all that unsavory, but because they’re that difficult to meet.
I predict that we will see this major loan program go largely unused. The will be a large number of businesses that could use the money that can’t access it and will go into bankruptcy anyway.
There are government programs for specific big businesses and industries like the airline industry. There are unemployment benefits for workers that have lost their jobs. The PPP program was a small program that provided a small amount of lifeline stimulus, but not enough to really save a business.
The big question is the missing middle. Those tens of thousands of medium sized businesses that each employ hundreds or thousands of people. They’re the forgotten ones that will be left out in the cold.
As real estate investors, we’re making daily investment decisions based on what’s happening in the larger economy. If business failures are going to multiply despite government efforts to help, we real estate investors need to pay close attention. Our revenue comes from the combination of demand and ability to pay. Demand is irrelevant without the ability to pay.
That is the question.
On today’s show we’re Talking about one of the strategies that are working in today's changing market conditions.
Many markets are experiencing historically low inventories. We've gone through a period of reduced market activity, and this has resulted in shorter days on market, multiple offers and higher prices.
These are traditionally the perfect market conditions for buy-fix-sell projects. That is assuming you can make the numbers work. You need to buy at low enough a price, maintain the improvements within the budget, and most importantly make sure that the improvements will be accepted by the home buying community.
The worst situation is the one where you perform a substandard improvement. It’s not good enough to meet market demand, and it’s too new for a buyer to rip it out and replace it.
But understand, while the market conditions are looking favorable for flips, the market conditions could change quickly. If you’re going to do a flip, who is your ideal customer?
Some of the traditional sources of demand like immigration have been severely curtailed this year.
Despite the hot market conditions, there are signs of softness. We know there is a large backlog of properties in forbearance. Currently there are 4.3M distressed properties in forbearance in the US. There are also a large number of properties with tenants in default. Unless the government steps in to forgive these loans, we will eventually see an increased number of distressed properties coming on the market. When that happens, the market conditions for selling a slip could change quickly.
On the other hand, we could see a return to normal market conditions, a resumption of immigration, and another round of government assistance to protect property owners from foreclosure. There’s no point in providing help in the short term, and then allowing those properties to fall into foreclosure six months later. That investment in bailout funds would have been wasted.
We remain in a low interest rate environment and demand for housing is expected to remain strong, as long as the employment market regains strength. Low interest rates are driving demand for homes.
So let’s say you’ve decided that the market risk is acceptable. The next question is what kind of property to flip?
Much of the price increase in the market has been in the bottom 2/3 of the market. Buyers fear getting priced out of the market. So much of the increase has been at the bottom of the market. At the top of the market, with homes priced above $1M we have seen much less movement in price. Some would say that the more expensive homes have seen close to zero price increase. The result is price compression. The price per square foot for the larger more expensive homes is in fact much less than the price per square foot for the smaller entry level homes.
The key to a renovation project in this market is to make sure you get the property renovation done quickly. If a renovation is going to take more than 30 days, I would not take the risk. A flip project that is on a 6 month timeline would be incredibly risky in today’s fluid environment.
I would also make sure that when you structure your deal you maintain lots of margin. That means you can’t pay too much for borrowed money. You need to be aggressive on sourcing well priced materials, and you need to negotiate with your subcontractors and clearly define the scope of work so you contain the cost of the renovations.
You want to be assured that you’re selling into a segment of the market where there is still an extreme shortage.
The path from A to B is rarely a straight line. As humans, we like things to be nice and neat and orderly. Linear relationships are simple to calculate. They are simple to understand. We’re conditioned to think linearly. We have been conditioned to forecast the future based on extending a straight line from the past into the future. Most investment graphs imply such an exercise even when the usual disclaimer “Past performance is not an indicator of future performance” is attached.
We are about a month into the so-called economic recovery. Governments the world over have been pumping money into the economy to prevent economic collapse.
But we have conflicting data. The biggest factor affecting the economy is related to confidence. Some restaurants are open. My wife and I observed on the weekend that the outdoor patios had done a good job of spacing the tables far apart. The open air environment reducing the risk of transmission.
The warm weather brought people out into the parks. The parking lots were full and the Police were liberally handing out parking tickets to the cars that couldn’t find a legal place to park.
The beaches were full. The restaurants were busy. But then in California, the beaches were closed this weekend. The number of infections with Covid-19 keep rising in Arizona, Texas, Florida, Louisiana and numerous other hotspots in the country. The opening of the economy in several states has taken a step backwards as the US is experiencing record numbers of new cases each day. Texas and Florida rolled back their re-opening plan. New York City delayed the re-opening of indoor dining in restaurants. Several locations in Arizona also rolled back their re-opening plans. New Jersey is resuming summer camps and in-person graduation ceremonies.
In my home town, the school board is going to be reducing density in the classroom and having students attend classes physically two days a week. The impact on parents who can’t work from home is going to be significant. There will not be adequate child care which will limit the number of people who are able to return to work. As a minimum, some parents will need to stagger their work day so that at least one parent is at home to care for the children. Those single parents who don’t have the support of a partner will really struggle balancing work and raising a family.
The US economy recovered 4.8 million jobs in June and the unemployment rate fell from over 14.7% in April to 13.3% in May and to 11.1% at the end of June. 40% of the gains in employment were in the leisure and hospitality sector which includes restaurants and hotels.
The stock market is up again sharply in early trading this week on hopes that the recovery is taking hold. The market was up 1.1% on Monday morning.
All of these mixed signals are occurring at the same time. The Federal Reserve gave guidance that they won’t be raising interest rates until 2022. Yet the yield for the 10 year treasury note increased at the beginning of the week.
There are no foreclosures or evictions happening, but that’s because they’ve been banned. We have 80,000 eviction cases backlogged in the landlord tenant tribunal in my home province. We have 8% of mortgage loans in the US currently in some form of distress. They’re either in forbearance or in default.
We have some hospitals empty waiting for the onslaught of cases that never materialized. We have other hospitals in California at capacity.
The US has recorded 360,000 new corona virus cases in the past week, that’s an average of over 51,000 cases a day. So far in the past three months, the country has recorded over 133,000 deaths. That’s a terrible statistic.
When this started in February, I predicted that the deep economic impact would be at least 18 months in duration. From where I sit today, I re-affirm that prediction.
While the world has been distracted with the Covid-19 pandemic, and while much of the US has been consumed with rage, China as decided to ‘never let a good crisis go to waste.’
On today’s show we’re talking about the sweeping new security laws in Hong Kong and the impact of that on real estate in both Canada and the US.
When Hong Kong’s basic law came into effect in 1997, it left some unfinished business. There was supposed to be universal suffrage, the right for everyone to vote. That was never implemented. Secondly, there was supposed to be a new national security law. The first attempt to implement this in 2003 was abandoned when more than 500,000 people took to the streets to protest the proposed law.
Last week China’s central government imposed new national security legislation on the city of Hong Kong to stamp out a year of protests.
So far in the first week, it is estimated that several thousand people have been detained under the new security law.
So who is at greatest risk of being detained? Well, someone with a foreign passport could be charged with aiding a foreign government. Those with foreign passports have also been the ones who have been the most vocal opponents of China’s control of Hong Kong.
It is estimated that there are at least 300,000 and perhaps as many as 500,000 people who hold Canadian passports living in Hong Kong today. There are approximately 85,000 people with US passports living in Hong Kong.
If there is a crack down, it is reasonable to expect that a significant percentage of those who have the complete freedom to come to Canada or the US will do so. Of course, this is made a little more difficult as a result of the travel restrictions being imposed by the global pandemic.
If 300,000 Hong Kong residents were to come to Canadian cities, the demand on housing would be significant. The US has suspended the H1B Visa program temporarily during the pandemic. But if 85,000 Hong Kong residents were to descend upon American cities in a short time period, the impact would be significant
We already have market conditions with historically low inventory, rapidly increasing prices and properties routinely selling above asking price.
If we see an exodus from Hong Kong, I predict that it will happen quickly. Flights from Hong Kong are significantly reduced, but it will still be possible to have several thousand people a day leaving Hong Kong bound for North America. Despite the worries over Covid-19, I believe that people will fear prison in mainland China more strongly than the fear over catching Covid-19.
So here’s the question, “If you knew that there would be an exodus from Hong Kong into your home city, what would you do to be prepared?”
Which properties would you get under contract? Which real estate agents would you make sure to communicate with? What financing would you get lined up to take down properties in advance of their arrival?
On today’s show we’re talking about whether markets really need a market maker. But first we need to define what a market maker is. The role of the market maker is to introduce liquidity into the market. The problem in many markets is that too much time passes between the buyer and the seller getting together. This passage of time means that the market price can fluctuate up and down depending on the number of buyers and sellers and the spread between the bid and the ask.
Exactly what does the market maker do? They step in when there is no buyer and they buy, and they step in and sell first when there is no seller. The role of the market maker is to ensure that any time there is a sale, there is someone waiting to buy. Whenever there is a buyer, they step in and sell. In exchange for providing this service, the market maker makes a small profit margin. The market maker is not exposing themselves to undue risk because there is an expectation that the market will continue to operate in an orderly fashion.
The major stock exchanges around the world work on this premise. When someone buys shares of Tesla on the NASDAQ at the market price, they are buying the shares from the market maker, not the seller of shares. The market maker ensures that when someone put shares for sale maybe two minutes ago, there would be someone available to make the trade without having to wait for the trade to be fulfilled when a buyer materializes.
Markets of all types exist throughout the world without the role of a market maker. The real estate market in my local community has no market maker. When you bargain for a bushel of tomatoes at the farmers market, there is no market maker.
The Federal Reserve said on June 15 that it will begin buying individual corporate bonds under its Secondary Market Corporate Credit Facility. Let me get this straight, I could be a captain of US industry with the need for additional debt. The banks won’t lend it because there isn’t sufficient collateral. The income isn’t consistent enough to sell the bonds because we have a global pandemic on our hands. So the Fed will step in and buy that debt that is too toxic for real investors to touch. All of this is being justified as providing market liquidity.
The central bank also spelled out for the first time how it plans to implement its buying strategy, saying it would follow a diversified market index of U.S. corporate bonds created expressly for the facility. The Fed built the index internally, and a spokesman couldn’t immediately say whether its details would be made public.
So here’s the rule that needs to be followed. It’s listed under section 13.3 of the Federal Reserve Act. An index assures the Fed complies with the spirit of the law under Section 13.3 of the Federal Reserve Act which says emergency lending facilities must be broad based, and provides a mechanism for the central bank to avoid industry concentration.
A program or facility that is structured to remove assets from the balance sheet of a single and specific company, or that is established for the purpose of assisting a single and specific company avoid bankruptcy, resolution under title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or any other Federal or State insolvency proceeding, shall not be considered a program or facility with broad-based eligibility.
So here’s the deal. The Fed is going to make up an index that has a few companies in the index, or who knows, maybe even one company so they can stay in compliance with the letter of the rule in section 13.3 of the act.
That explains why the stock market indices are at such crazy levels, despite the economic downturn. The Fed is going to buy corporate America’s bad debt, and they’re going to do it with printed money.
That folks looks like a bailout, and definitely not like market maker activity.
Dan Butler has about 3,000 apartments under management in the Memphis market. Memphis is a difficult city from an economic stand point. He shares some insights on the pandemic and how his business has fared during this period of social isolation.
Gary Beasley is the founder of Roofstock.com, an online marketplace for turnkey rentals. This fascinating innovation has sold thousands of homes so far. You can reach Gary at Roofstock.com.
Evan from Toronto asks,
My wife and I, along with our Real Estate Partner, are looking to buy our first rental property in the GTA by the end of the year! We really like the BRRRR strategy but have some questions since we've never used it before!
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What have you found is the best way to structure private lending?
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What are the top three things that can go wrong?
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How do we find comps in smaller/more rural neighbourhoods?
Evan, this is a great question. But before I answer your specific questions, I want to set the context so that you look at the opportunity the right way.
You see the prices in Toronto are so high that it’s almost impossible to charge enough rent to recoup your investment in a reasonable timeframe. You end up tying up too much cash in the equity of a home in order for the numbers to make sense.
The driver for housing in Toronto has been population growth. The city has added about 125,000 population a year and has only added about 35,000 units of new construction a year. The supply isn’t keeping pace with the demand which is why prices keep increasing, commute times keep getting longer, and the boundaries of the city keep expanding.
When you’re paying $700,000-$800,000 for a townhouse, it’s hard to charge enough in rent to cover the cost of financing this project. The ratios are too far out of whack.
What is working in the Toronto market is to renovate with a sale to an end-buyer as the exit strategy.
You can go to lower density more rural areas, but they’re a long commuting distance from the core of the city. Low density also means low demand. There is so little developable land within commuting distance that the land is worth a lot of money. Construction is cheap by comparison.
I personally don’t think the BRRRR strategy works in Toronto.
Of course the market is in a strange state right now with the Covid-19 pandemic still affecting the market. We have less immigration which has been a traditional demand driver in Toronto. We also have a lot less foreign investment in the market.
The key to buying a suitable property in the Toronto area is to buy at a sufficient discount and to add enough value. You see in Toronto the municipal development charges, what are called impact fees in many cities are incredibly high. For a single family home you’re looking at a fee of $84,000 depending on the area in which you’re building a new home. So two identical houses side by side could differ in cost by $84,000. One is new construction and the other is replacing an existing house. You can do a lot of renovation for $84,000.
You could take a single story house, cut off the roof, add a second level and more than double the value of the house, without doubling the cost of the house.
You want to see what is working in an area and copy it. Don’t try to be a hero and blaze a new trail on your own. That’s a recipe for disaster.
The other main challenge in Toronto is finding high quality subcontractors and trades people that are reasonably priced. The guys that are good are already busy for the next two years with existing projects. Trades people are in high demand. Contractors are often looking for smaller projects as gap fillers in order to keep their people busy. They have to keep their people busy or they will lose them. But the flip side to that is that getting people to come to actually work on your project can sometimes be a problem.
Finally, you have to consider the sales tax. There is sales tax on new home sales, but not on the resale of existing homes. That adds another 13% to the cost of a new home in addition to the already exorbitant development charges. So you want to make sure you don’t renovate the house too much so that it is considered a new house. You want to be treated as if you are re-selling an existing house that has already paid the sales tax.
On today’s show we’re talking about the effect of the pandemic on rental markets across North America. The results are somewhat surprising.
The biggest worry has been whether tenants would pay rent despite the staggering job losses. It seems that the stimulus money that governments have been showering the country with have been effective in protecting rental payments.
The National Multifamily Housing Council Rent Payment Tracker found 94.2 percent of apartment households made a full or partial rent payment by June 27 in its survey of 11.1 million units of professionally managed apartment units across the country.
This is a 0.5 percentage point decrease from the share who paid rent through June 27, 2019 and compares to 93.3 percent that had paid by May 27, 2020.
While the rent collections for June were down 0.5% compared with a year earlier, we are seeing that some tenants are struggling to make payments on time and are paying later in the month than previously. But here too the difference from last year is small. The biggest drop in rent collections happened in March and April, before the unemployment benefits were fully rolled out. Collections have steadily improved in May and June with the June numbers being virtually identical to the 2019 numbers. There is one caution and that is what is happening in the smaller self-managed rental market. We’re hearing data that collections in that segment of the market are much lower. We will try to get more data on that segment for a future show.
So if rental collections haven’t really dropped, then what’s changed in the rental market?
According to a new report on Zumper published in June of 2020, we can see some changes in the rental market. Zumper’s National Rent Report analyzes rental data from over 1 million active listings across the United States. Data is aggregated on a monthly basis to calculate median asking rents for the top 100 metro areas by population, providing a comprehensive view of the current state of the market. The report is based on all data available in the month prior to publication.
Covid-19 has shifted demand away from the most expensive markets. When you look at month over month data, all of the top 10 priciest cities either had flat or declining rents. It seems the pandemic has shifted the demand for apartments away from the most expensive cities, since usually demand picks up as we head into summer but now the opposite is true. As more and more companies move into remote work, many renters don’t want to pay the big city price tag when they are unable to use the amenities and are looking for more affordable options outside of large, metropolitan areas.
The most expensive city in the nation experienced the largest year-over-year drop since we started creating these reports in 2015. San Francisco one-bedroom rent is down 9.2%.
Similarly, the 3 next most expensive markets, New York City, Boston, and San Jose, all had negative year-over-year changes for their respective one-bedroom rents as well.
Some cities have actually experienced rent growth during the pandemic. One city in which my team has projects is Spokane Washington. The Spokane Valley is an area where rents have increased 5.1% year over year for one bedroom units and 3% for two bedroom units. Much of that change is recent with rents having increased 3.8% in the past month for 1BR units and 3% for 2BR units.
In my opinion, there’s no question that changes in employment are affecting people’s choices of rental accommodations. These choices are being influenced by affordability. If someone loses a job, they’re going to be looking for less expensive accommodation. If they’re going to be working from home for an extended period of time, then they may choose to move from a high cost dense urban environment to a lower cost area where they can socially isolate and continue to work from home with more access to the outdoors.
The book this month is called The Infinite Game by Simon Sinek
How do we win a game that has no end? Finite games, like football or chess, have known players, fixed rules and a clear endpoint. The winners and losers are easily identified. Infinite games, games with no finish line, like business or politics, or life itself, have players who come and go. The rules of an infinite game are changeable while infinite games have no defined endpoint. There are no winners or losers—only ahead and behind.
The question is, how do we play to succeed in the game we’re in?
In this revelatory new book, Simon Sinek offers a framework for leading with an infinite mindset.
Leaders who embrace an infinite mindset build stronger, more innovative, more inspiring organizations. Ultimately, they are the ones who lead us into the future.
Infinite games, in contrast, are played by known and unknown players. There are no exact or agreed-upon rules. Though there may be conventions or laws that govern how the players conduct themselves, within those broad boundaries, the players can operate however they want. And if they choose to break with convention, they can. The manner in which each player chooses to play is entirely up to them. And they can change how they play the game at any time, for any reason.
Infinite games have infinite time horizons. And because there is no finish line, no practical end to the game, there is no such thing as "winning" an infinite game. In an infinite game, the primary objective is to keep playing, to perpetuate the game.
On today’s show we’re talking about some leading indicators that might predict what will happen in the housing market 3-6 months from now.
As we all know, there is a moratorium on evictions and foreclosures in most areas right now. In the US, the moratorium on evictions was extended again until at least the end of August.
The big debate is whether we will face a period of real estate asset deflation before we experience large scale inflation. Let’s look at the drivers that might be affecting the real estate markets. The big question is what will happen in the credit markets.
We have a 13.3% unemployment rate in the US and 13.7 percent unemployment rate in Canada. For now, unemployment benefits remain in place. But they won’t remain in place indefinitely. When they start to disappear we will start to see defaults in consumer credit, automotive credit, and eventually in mortgage credit.
But here is where the numbers get interesting. Only 15.9% of loans in forebearance made payments in June. That’s down from 28% in May and 46% in April. These forebearance agreements are finite in duration. The question is what happens six months from now.
More than 100 million auto loans and student loans have had missed payments since the start of the pandemic.
As of the end of May, 4.3M real estate loans were in default, and increase of 723,000 from the month before. More than 8% of US mortgages were past due or in foreclosure. That compares with a normal mortgage default rate of 0.42%.
There are now 4.3 million homeowners past due on their mortgages or in active foreclosure – including those in forbearance who have missed scheduled payments as part of their plans – up from 2 million at the end of March.
On a percentage basis, there are now 7.76% of homes in the US in a distressed situation. But the fact is, almost none of these are on the market, thanks to the moratorium on foreclosures.
As the amount of government bailout money dries up, the number of distressed homeowners will only increase.
Over the span of 5 years from 2008 to 2013, a total of 10 million people lost their homes in what was at the time the biggest distressed home market in history.
We have lots of people with traditionally good paying jobs that have experienced significant income disruption. We’re talking about airline pilots, dentists, dental hygienists, hotel staff, flight attendants, fire fighters, police officers, physiotherapists. The list goes on and on.
Airline pilots and flight attendants are obviously impacted by the pandemic. City employees like fire fighters and police officers is less obvious. The problem is that cities are forced to balance their budgets and most have experienced a 25% loss in revenue during the pandemic. As we reported last week, Nashville just passed a 34% property tax increase in order to try and make up the shortfall. Whether that truly solves their problem remains to be seen. Other cities have been forced to reduce staff significantly.
There are a few hotspots where the delinquency rate is much higher. Mississippi, Louisiana, New York, New Jersey, and Florida all have delinquency rates above 10.5%. Mississippi is close to 13% delinquency. You can expect that there will eventually be a sharp increase in distressed inventory working its way through the system.
At what point will the bailout money dry up? We are in an election year in the US and neither Republicans nor Democrats want to be seen as abandoning the population in a moment of need
While all the traditional real estate market indicators point to a strong real estate market in many cities including low inventory, low interest rates, rising prices, multiple offers. These conditions may be artificial and could be hiding a much different underlying condition.
On today’s show we’re looking at some of the leading indicators to predict what might happen in the housing market three to six months from now.
We’re currently in the middle of a moratorium on both evictions and foreclosures.
Let’s talk about rentals first. We will talk about foreclosures on Tuesday. The moratorium on evictions doesn’t mean that tenants don’t need to pay rent anymore. It simply removes one of the remedies that landlords have in the case where tenants don’t pay their rent.
In most states and provinces, there is a landlord tenant tribunal that deals with disputes between tenants and landlords. In Ontario where I live, the current landlord tenant board has a backlog of more than 80,000 cases.
The tribunal is not handling eviction cases, except in severe cases where safety is threatened. But a little known remedy within the tribunal system is to get the tribunal to render a judgement on arrears. The judgement simply states whether the tenant owes the money to the landlord or not. The landlord still can’t evict, but armed with the judgement, can take other collection actions. You see if the landlord can demonstrate that the tenant still has the means to pay, and is using Covid-19 as an excuse not to pay, they could likely win a judgement in their favor.
I’m going to cover two cases.
The first case involved a student tenancy where 4 tenants had entered into the standard industry lease, the terms of which bind all tenants on a “joint and several” basis. Prior to the lease commencement date, 2 of the 4 tenants informed the landlord that due to COVID-19 and the prospect of on-line classes, they would not require the tenancy and would not be moving in. Two tenants agreed to honour the lease and paid rent for the commencement of the tenancy. The defaulting tenants took the position that the application should be dismissed since they never moved into the unit: they were not “in possession”
In the second case, a tenant proposed to vacate without proper notice on the basis of his fear that the risk of COVID-19 in a multi-res building was very high and he wished to move his family into a lower risk environment. The tenant stopped paying rent and, since L9 applications don’t require advance notice, the landlord immediately applied to the LTB for judgment for arrears.
In an ARREARS application, the LTB’s only function is to determine whether there are rent arrears; furthermore, in contrast to eviction applications where the LTB has a discretion to delay or deny eviction and force the landlord into a repayment plan for arrears, in an ARREARS application there is no “overriding discretion” to refuse or delay a remedy, the only issue is whether rent is owing. In its analysis, the LTB Member stated:
"With respect to the health risks arising out of Covid 19, I am sympathetic to the fear this pandemic has placed on everyday living practices. However, once I have made a finding that the rent for May 2020 is owing, I do not have the jurisdiction to tell a Landlord that he must forfeit rent that is validly owing.”
Now I’m not a lawyer, and the law varies widely from one jurisdiction to another. You definitely need to seek your own legal advice and examine the facts that are specific to your case.
These two cases illustrate that there might be other remedies apart from eviction. Don’t just assume that a moratorium on evictions means that landlords are stripped of any tools to enforce a duly signed rental contract.
As cases like these become more highly publicized, you may start to see greater compliance. The fact that Ontario has a pending eviction case affecting about 4.7% of all rental properties in the province. The real number could be much higher. You see some landlords will not have even filed paperwork if they believe the application will be denied.
Check out your local remedies.
Rich Danby hails from my home city of Ottawa Canada and can be reached at rich@richdanby.com. On today’s show we are talking about how most goals for 2020 were impacted by the pandemic and what to do instead. How can you set goals in an environment of such uncertainty?
George is a repeat guest on the show. On today's show we're hearing George's take on the economic recovery and on negotiation with China. Fascinating perspective.
Vacation bookings usually happen months in advance. Employees book the time off work. They buy the airline tickets far in advance to get the best prices. Of course this year is different. But people still want a get-away, perhaps even more than ever. The perception is that it’s not safe to board an aircraft, that a cruise is risky. In fact, the cruise industry is largely shut down, and the airline industry is operating at about 20% of its capacity.
Most of the air travel is essential travel and it’s short to medium haul in nature. Air travel has all kinds of restrictions. You will be expected to wear a mask for the duration of the flight. Meal and drink service has been cancelled and this becomes impractical on a 13 hour flight to Asia or even a 9 hour flight to Europe.
People have decided to vacation close to home. That means driving distance. We are now in peak summer season and listings for most vacation properties show that they’re fully booked until the end of August.
The exception to this is in areas where there is a lot of condo’s like at ski resorts; there tends to be a lot of availability at ski resorts. The perception is that it’s more difficult to social distance in a condo than in a standalone cottage or lakefront home.
The other place where vacation rentals are easily found is in areas where government mandated travel restrictions are still in force.
We also find that boat and RV rentals are almost fully booked for the entire summer. The only ones available are the result of last-minute cancellations because of international travel restrictions. Those with long standing reservations seem to have hung on until the last minute to see if travel was going to be possible.
Some vacation markets rely heavily on air travel to fill the rooms in a market. Those areas are definitely going to experience higher vacancy during peak season and lower nightly rates. For example, we have a portfolio of vacation rentals in the Rocky Mountains near Banff Alberta. The local driving distance population centers of Calgary and Edmonton will provide a strong source of demand. But they won’t make up for the plane loads of tourists from Japan, China, and Korea that regularly frequented the area in years past.
Instead of the usual $650 per night rate, we’re seeing strong occupancy at a more modest but acceptable $250 per night rate.
Markets along the eastern seaboard like the Jersey Shore, and the Carolinas are seeing strong occupancy. Hotel occupancy in Myrtle Beach is close to pre-pandemic levels according to hotel data analytics company STR Global.
Urban vacations are not as popular these days with social distancing still an important criteria for many families. For example, hotel occupancies in NYC have risen from the lockdown low of 9% to a current occupancy of about 40%. Nightly rates in NYC have dropped from an average of $250 per night to about $125 per night. But since NYC was a hotbed of Covid-19 outbreaks, it’s probably not at the top of the vacation destinations this summer.
Some areas are opening up to tourists, subject to a negative Covid-19 test result that is less than 72 hours old.
Some tourists have entered Canada by car and told the border agents that they were driving to Alaska which is allowed. But it seems some of them have been found stopping in Banff National Park. If a visitor drives straight through to Alaska with only minimal stops for fuel and food, that is permitted. If a visitor stays in a hotel, then they’re required to quarantine for 14 days at a designated quarantine location.
Much has been written in recently years about the retail apocalypse. Earlier this year we shared the mind numbing statistics of retail store closures that amounted to over 10,000 retail stores in the US in 2019. The pandemic clearly hasn’t helped most retail establishments.
On today’s show we’re taking a closer look at what is happening in retail. These days, my email in inundated with listing offers for retail real estate. They aren’t bargains for the most part. I’m seeing pharmacy locations, banks, fast food establishments, convenience stores, has stations, and automotive service shops like muffler and tire shops. The list is long and varied.
These for sale listings are not bargains. I recently saw an offering for a 21,000 SF multi-tenant property that houses four large restaurants. The asking price is at $588 per square foot. This is well above replacement cost. Remember, these restaurants have been closed for quite some time and the metrics for restaurant dining post pandemic have not been established. It would be very hard for this investor to pay that kind of top dollar with the risk that is inherent in four new restaurants as tenants.
Simon Properties is the largest shopping mall owner in the US. In the past four years, Simon has acquired three of its tenants. Now they’re in discussion with Brookfield Property Partners to potentially acquire JC Penney. JC Penny is an anchor tenant in several of Simon’s shopping malls. When a mall loses its anchor tenants, the mall usually dies.
You see our credit system isn’t designed to handle an economic downturn. There is so much debt in the system that businesses can’t survive a drop in revenue. The businesses have borrowed money to fund their inventory. They’ve borrowed money to advance funds for their accounts receivable. They’ve borrowed money to pay for equipment, or perhaps the equipment is leased. Either way, the fixed costs of these retail businesses are high and these businesses are not resilient to economic fluctuations. The problem is further compounded by the fact that the mall owner can’t survive a long period of economic vacancy.
As a commercial landlord, I frequently face questions from tenants looking for rent concessions to help them with revenue fluctuations. The massage therapy office that rents from us needs rent relief. The clothing store needs rent relief.
We know that some stores will close as a result of the pandemic. Some stores simply won’t survive.
Here’s the scenario that I believe we will face in the world of retail. Retail space will get repriced, on a massive scale. There will be lots of pain along the way. Even those retail owners with firm leases will find themselves negotiating rent concessions on a large scale.
Let’s imagine that we have a 20% reduction in retail floor space as a result of the combination of the pandemic and the ongoing trend of local retail sales being replaced by online sales.
There might have been already a 10% vacancy rate in the market. Add another 20% and you’re near 30% vacancy. So now some of those properties go into default on their loans and the buildings are sold at a fire sale price, say, 50% off their construction cost in a foreclosure auction.
The new buyer owns these buildings at 50% of their replacement cost. They can charge a lower rent compared with the competition and still make a healthy rate of return. New tenants will flock to the newly available space that is priced 1/3 less than the comparable market. Tenants in existing spaces will renegotiate their leases. They will argue that the move to less expensive space is necessary for business survival. The existing landlord faces a difficult choice. The landlord either offers a rent concession, or they lose the existing tenant and revenue goes to zero. It’s a lose lose scenario for the landlord.
On today’s show we’re talking about the merits of two different approaches for raising capital.
It’s a bit like asking which is better, Ketchup or Mustard? Some people like ketchup, some like mustard, and some like both.
The two funding models are the blind fund and the syndication for each project.
Some syndicators have a preference for raising capital for each new project. Each project stands on its own and investors who qualify to invest in these exempt market offerings make the decision to invest in each offering independently. They diversify their investments by investing in multiple different projects.
Each project sits in its own separate entity and there is no chance of a problem in one property cascading and affecting any other property. There is a veritable fire-wall between each property.
This structure is ideal for many investors since it allows investors to make individual choices on which project they want to invest in.
The blind fund model requires a stream of similar investment over a period of time that matches the life of the fund. The benefit of a fund is that you raise the money into the fund at the beginning. Once you have access to the funds, you can execute quickly on deals. You don’t have to worry about being too aggressive when placing an offer. You know that you’ll be able to close since you already have all the funds you need to get the deal done.
In today’s environment, if you’re going to be in the market for distressed deals when they become available, you will want to have the cash on hand before you even place the offer. There will be competition for the best deals and they will go to the ones with the strongest track record for closing.
If you’re going to raise a fund, your investors are going to want to see a track record. Some investors will not invest in a company’s first fund. It’s not hard to see the paradox that this logic creates.
When you have a fund, there is an expectation that the fund will be generating returns for the investors. Between the date the fund closes and the money being put to work, the investment capital is sitting in the fund manager’s bank account and earning zero. All the while, the investors are expecting a return on investment.
It’s possible to raise too much money into a fund. If you can’t put the money to work, you might feel artificial pressure to accept a deal that doesn’t meet your standards because a deal that delivers 2% less than your target is still better than zero.
In a fund, you’re restricted to a stream of investment deals that meet a similar criteria. They might be multi-family apartment complexes in Arizona. Or perhaps you might do a fund that specializes in mobile home parks. You could have a fund that invests in assisted living projects, or hotels.
But if you’re a new fund manager, how do you create a new fund with no track record?
In our business, we actually have both. We have raised a fund, and we have also raised capital for individual projects.
Both have merits. But you also have to remember that a single project creates an aura of exclusivity, whereas a fund suggests that it’s open to all comers who qualify for the investment.
It comes down to knowing your investors. The investor who invests in a single project may not be the same investor who would invest in a fund. Funds tend to be a little more opaque than single projects. Some hands-on investors will want the higher degree of transparency and reporting that is associated with a single project.
Today's show is a real life story of a negotiation between Sally and Mark. It's about how negotiating leverage is the key to getting a successful deal done.
This question is from Meg in Westchester NY.
I listen to your podcasts regularly. I find them thoughtful and provoking and love that you get to the point in the short amount of time.
We are residential investors and primarily design and build new single family homes in Westchester NY. We have a very savvy group of buyers. With that, one aspect we have come to understand is that our buyers want functionality and flexibility in their homes and we strive to provide designs that accommodate this.
I was perplexed on your recent podcast when you were discussing how designers should consider supplying 2 offices and 1 bedroom in new apartments as opposed to 3 bedrooms. Maybe that can be an innovative marketing strategy but I don’t see why you wouldn’t want to ensure that all three rooms can be used as a bedroom or office. With the codes as they are, for a room to be a bedroom you have to have an egress window (or sprinklers) but not so for an office. So why not make sure you have the rooms set up so they can be used for either and let a buyer or renter determine what is best? We often end up choosing at least 1 bedroom that we label as bedroom/office to imply this flexibility. It is usually a smaller sized bedroom but very nice size office.
I was confused by your suggestion and was hoping to hear a bit more from you to clarify.
Thank you again for providing such insightful and current information on your podcast. It isn’t easy to find helpful real estate information without gimmicks .
Meg, thank you for a great question.
I love the Westchester area. My family is originally from NYC and I used to have a cousin who lived on Mamaroneck Blvd in White Plains. For the listeners at home, the Westchester area is a bedroom community for NYC and there are a lot of professionals, who live in Westchester and commute into Manhattan.
Meg you are correct that the building code has specific requirements for a room to classified as a bedroom. If you could meet all the necessary requirements for both a bedroom and an office, then naturally it would make sense to do so.
Designers of a bedroom tend to think about the size of room required for a bedroom. You need to support either a single or double bed, a night table, a dresser, and maybe a bookcase. They don’t think through the requirements for an office, or if they do it’s an afterthought.
If you were designing a room to be used as an office, you would be paying close attention to how the office would be designed. What styles of desks could be used in the room? Would the design be on a wall, or in the middle of the room? Would the desk be facing a window? Where would the door be placed? Where would the filing cabinet, the printer and the scanner be located? Where would the electrical outlets be located?, and the hardwired data connections? If there was to be a wireless access point in the room, where would it be mounted?
If the office was going to host regular video conferences, how would the lighting be optimized to provide a good video image? Will the lighting support a full day of computer work, or will there be glare on the computer screen during the afternoon hours?
You see it’s one thing to build a bedroom with a single electrical outlet every 12 feet of linear wall space as required by the electrical code. Its quite another to think through the placement of people and equipment to create a viable work flow. Would the flow be different if the client uses a sit-down desk versus a standup desk?
You see there are lots of three bedroom houses. There are very few one bedroom, two office houses. The person who needs two offices that are truly designed to be offices will pay extra to fulfill that need.
Robert is the best selling business author of all time and the author if Rich Dad, Poor Dad. He's the host of the Rich Dad Radio Show and you can find out more about him at Richdad.com.
Today's show is an extract from a keynote address I gave on the 2020 Virtual Investor Summit.
On today’s show we’re talking about the difference between price versus value.
So often I see new houses, new apartments that are very “traditional” in design. I have nothing against tradition. But it doesn’t take very much thought to imagine how a family will live in a space.
You can tell those who design based on a spreadsheet. They simply maximize the building envelope to what the zoning code allows. They maximize the height, they maximize the number of units and the number of bedrooms without any regard to how the space will live. They put the minimum sized closet that will legally classify the room as a bedroom. After all, the appraised value for a two bedroom apartment will be higher than for a one bedroom. It’s all about maximizing the appraised value.
Or is it?
Those of you who know me, will know what’s coming next. That’s right. I’m going to bring up the law of supply and demand. But I’m going to focus on a more granular segmentation of the law of supply and demand.
It’s not just the supply and demand of houses, or apartments that matter. It’s the supply of features amenities that matter.
In a dense urban environment like our projects in Philadelphia, we aim to include parking even if there isn’t much land available. You see there is so little parking available in the core of Philadelphia that it’s not just the supply of 2 bedroom apartments that matters, it’s the supply of 2 bedroom apartments with parking that’s the differentiator. Unless our society moves to a post-automobile form of transportation, the shortage of parking in Philly is going to continue for decades to come. If there were ever to be an elevated vacancy rate in Philadelphia, those apartments with parking will still always be fully leased.
The large garden style apartment complexes are increasingly participating in the amenities arms race. They’re adding a playground for the kids, a dog run, a splash pad for the kids, pickle ball courts. The list seems to grow longer with each passing year.
Go back ten years, how many people were taking delivery of goods and services through e-commerce? Is there a place for the delivery of large parcels to be held securely?
So back to tradition. The traditional home has a formal living room, a dining room, a kitchen, guest bathroom, master bedroom with en-suite bath, kids bedrooms, a laundry room, and a front closet.
But today, the hub of the house is the kitchen, larger than kitchens of previous decades. The living room is usually furnished and never used. The formal dining room gets used once every few months, if at all.
On today’s show we’re talking about a morning after shock. No we’re not talking about an earthquake. This is the morning after the City of Nashville voted in a 34% property tax increase.
You’re probably thinking. I’m glad I don’t live in Nashville. Folks, this event should be a wakeup call for cities all over the world.
There are a couple of vitally important questions we need to answer on today’s show.
1) Are the issues that triggered such a massive tax increase unique to Nashville or do they exist elsewhere?
2) What will be the impact to Nashville, the local economy, the price of real estate, and the growth that the city has been experiencing over the past decade?
So why did Nashville face such a massive tax increase?
The Council voted 32-8 to approve an alternative budget proposed by Councilmember Bob Mendes after a night of several failed budget proposals. The Mayor had proposed a budget that called for a 32% tax increase. That motion was defeated.
The Council weighed four different budget proposals, each of which called for a significant tax increase.
The full 9.5 hour meeting can be seen on youtube https://youtu.be/Mm4a_BIfr4oand the link is in the show notes.
At the root of the tax increase was a threatening letter from the State of Tennessee’s financial comptroller. The letter said in plain terms that if the city didn’t put enough money in their rainy day funds, the state could come in and take over the city’s finances. The state called the failure to act would be considered a surrender of the responsibility to govern which would trigger the state taking over the management of the city.
Clearly this is an issue that has been brewing for several months.
The new budget faced calls for defunding the Police and redirecting funds to community outreach. In the end, the full police budget was approved and an additional $2.5M
Council, in a surprise move, approved a plan early Wednesday morning to reroute $8.2 million from the school district's savings to a contingency fund in order to pay for teacher raises.
The budget shortfall was caused by a tornado in March, and the Covid-19 outbreak and over a 16 month period is estimated at a $470 million shortfall.
The problem with this tax increase of course is that the city can’t truly count on receiving all that revenue. At a certain point, families on fixed incomes won’t have the extra cash to fork out. Remember, property taxes are indexed to property value. Over the past decade, property values have increased dramatically in Nashville, as they have in cities all over North America. As property values increase, so too does the amount of tax collected.
Real estate investors who own rental property sign loan covenants that require them to maintain a minimum debt coverage ratio. The property tax increase will cause tens of thousands of property owners into a technical default situation with their lenders whereby they are no longer in compliance with the terms of their loans.
Then there will be those who truly can’t afford the increase. They will eventually lose the property to foreclosure, or at the tax sale for non payment of taxes. The new rate, $4.221 per $100 of assessed value.
We have also seen cases where properties that face high property taxes have in fact fallen in value. Some high tax locations like Chicago have certainly experienced this phenomenon. The city can try increasing taxes, but there is only so much money available in the general population.
On today’s show We're talking about the legacy of Covid-19 on the office market.
My company used to have an office location in Sunnyvale in the heart of Silicon Valley. My permanent office was near my home in Ottawa Canada. But I used to visit Sunnyvale frequently. I had staff there. The CEO of the company relocated the headquarters from San Diego to Sunnyvale. When I was visiting the Sunnyvale office, I would sit in a spare cubicle outside the CEO’s office next to the CEO’s assistant. When I was there, the CEO would see me and ask me questions, often as frequently as once an hour. My boss had his office next to the CEO. He too would talk with me far more frequently when I was physically no more than 10 feet outside his office door. But if I was in my home office in Ottawa, the CEO would rarely call me. We might speak once every few weeks. The frequency of communication varied dramatically depending on the physical presence.
Was that a failing of my CEO, of my immediate boss? No, they’re just being human.
If you’ve been listening to this show for a while, you’ll know that I’m a huge believer in the laws of supply and demand.
On today’s show we’re going to look at what’s happening in new construction of senior housing. In virtually every market I examine, I’m seeing signs of saturation. Despite this, new construction projects are everywhere. The projects completed two years ago aren’t full, and there are thousands of more beds coming into the local market. I’m left wondering what market study the lenders looked at before approving the project.
A new report just published by Marcus and Millichap aims to put some numbers behind what we’ve seen intuitively.
Units under construction represent approximately 10 percent of existing inventory, limiting the potential for a rapid turnaround in operational efficiencies any time soon.
In the most saturated markets, new units represent more than 13 percent of inventory.
Frankly, this boggles the mind. I’m asking myself how any self respecting lender would finance a new project with market numbers clearly showing over-supply.
I’ve been having direct conversations with senior living operators over the past several weeks to try and understand the dynamics in the market.
My take is that operators are vying for market share and are willing to take a hit on operations in the short term in order to be positioned to win the war when the largest wave of baby boomers hit assisted living. The size of the market is expected to nearly double over the next decade. Back in 2012, senior citizens made up 12.8% of the total population. By 2028, they’re expected to represent over 20% of the population.
Cap rates have started to compress. Assisted living assets are highly sought after, which has narrowed the average cap rate relative to independent living levels. Overall, the average cap rate for independent living trades is in the mid-5 to mid-6 percent area, assisted living assets trade for an average be- tween 6 and 7.5 percent, and skilled-nursing properties change hands at an average in the high-11 to high 12 percent area, based on location and quality.
Then along comes Covid-19. The truth is that 93% of assisted living facilities have evaded Covid-19 so far. The care facilities most impacted by the pandemic are those long term care facilities and skilled nursing facilities. Many people in the general public don’t know the difference between a skilled nursing facility versus an assisted living facility.
The memory of outbreaks in long term care facilities is going to remain in people’s minds for some time to come.
Staffing has been one of the largest challenges facing this industry under normal circumstances. Tens of thousands of employees walked off the job because of fear of catching the disease. Those who remained have demanded higher pay. Labor represents the single largest cost in an assisted living facility. Hourly rate increases in excess of 50% are expected later this year in order to attract and retain quality staff. This fact alone will challenge the economic model for assisted living. We are seeing long lasting economic impact to the sector as a result of the pandemic.
On today’s show we’re talking about the reversal of a two decade long trend in a matter of weeks. The question is, will the trend really reverse? Perhaps this is a short term reversal, to be followed by a continuation of the original trend. The trend we’re talking about is urban intensification. Most major cities stopped developing in the downtown core in in the 1960s. The suburbs began to sprawl and sprawl and sprawl. Farm land was gobbled up and replaced by nicely manicured streets with a single tree planted in front of each house. It would take another decade before the tree would look like a tree. That’s how you could tell the age of a neighborhood without looking at the houses. You only needed to look at the maturity of the trees.
The white two story houses of the 1950’s and 1960’s were replaced by more elaborate designs in the 1970’s and 1980’s. The new homes paid tribute to the two-income, two car desires of most households.
Between the suburbs and the downtown core most cities had a band of real estate that was neglected for nearly 30 years. These homes were built in the 1920’s through the 1940’s. It wasn’t trendy to remodel a historic home yet. They were just old and out of style.
But as the baby boomers have been retiring, they’ve been downsizing. They’ve been selling the four bedroom house in the suburbs and moving closer into town. They might be moving into a new condo, or perhaps into a new semi-detached house with a small rear yard and modern amenities like a roof deck. That band between the downtown core and the suburbs now has modern new construction town houses. These boomer buyers don’t want to mow the lawn and they don’t want to shovel the snow. The millennial buyers don’t seem to want the large houses in the suburbs either. It looked like the suburban home was going to become a dinosaur as tastes have changed.
Fast forward to 2020. We have a global pandemic on our hands. People are working from home and need more space for a home office. All of a sudden, that four bedroom house that looked too large is now the perfect house with two bedrooms and two offices where two people can be on a video conference call simultaneously without disturbing each other.
The lockdown situation meant that there were very few new houses listed for sale during the traditional Spring market. April inventory of houses for sale was the lowest on record.
We’ve seen a wave of new listings poised to hit the market in June. Perhaps this is the traditional Spring market, just delayed by a couple of months. For now, the inventory remains low and we are seeing bidding wars in a number of markets.
Major home builders have seen a wave of new contracts since the middle of May. Despite the major job losses, there are some sectors of the economy that seem to be booming. New home construction is setting up to be one of them.
Record low interest rates seem to be a contributing factor creating a large pent up demand. But there are so few homes for sale that would-be sellers are holding on. They could sell, but where would they move?
This was the same dilemma my wife and I faced earlier this year when we made the decision to sell our home. There were only 16 houses for sale in our area, a suburb of 200,000. Even through the lockdown, houses were selling above asking price in multiple offers with only a virtual tour and no open houses.
2020 is shaping up to be one of the busiest summers on record for real estate transactions.
Dr. Amy Novotny is from Sedona Arizona. She specializes in helping entrepreneurs manage their stress level. On today's show we're examining some techniques for reducing stress in our daily lives. Amy can be reached at:
pabrinstitute.com.
Ed Rogan is founder of the Penn Capital Group, a tribute to his native Pennsylvania. He lives in Philadelphia, but invests in Houston Texas and Huntsville Alabama.
Lots has been said about the history in the making, how we’re at an unprecedented time in history.
My parents grew up during the depression. While they both came from affluent families, my grandfather on my father’s side was a pharmacist, and on my mother’s side was an industrialist and inventor who ran several paper factories. Then WWII broke out and my parents came to NYC in 1939 with next to nothing.
Those years shaped a generation. People saved money. They didn’t spend. They kept spare parts that might be re-used someday if something broke. They even kept broken parts that might be re-used someday if a new part needed to be somehow manufactured. I never quite understood that one. My father would save scraps of paper and write the shopping list on them. He would save used envelopes and take notes on them.
Here we are in 2020. New patterns are being shaped. People have avoided human contact for nearly 90 days. Use of social media and online services have exploded. We’ve become more disconnected and Attention Deficit as a society. Alcohol consumption has increased in many communities.
The powerful lesson from 2020 is that anything can change, dramatically, at any time. Your business might be performing well one day, and shut down the next. You can’t have a plan that you can count on.
Over the past 50 years, we’ve had a continual, steady increase of debt. But since debt is borrowing from the future to make money available today, it only makes sense to borrow if you’re certain about the future.
Those companies that have the most debt, are those in the greatest difficulty during this period of economic disruption. Some of the largest organizations are entirely debt funded. They felt really certain about the future. But we know the future is uncertain. It didn’t take a pandemic to teach us that. The signs were there before. But only now are people really understanding uncertainty on a large scale.
Will people and businesses change their pattern of indebtedness in the future? Our entire banking system depends on people borrowing money. If people start saving and living within their means, how will that affect the economy over the long term?
The number of parents consumed by guilt that they can’t handle work and home-schooling their children. Some students are refusing to go to university until in-person classes resume.
Our society has pushed the elderly into care homes when the kids could no longer look after aging parents. The pandemic has injected a wave of fear across the entire industry. Assisted living homes are forcing new residents to quarantine for 14 days before coming into the home. For many who have high needs, a 14 day quarantine is a practical impossibility. The way we care for our parents may change. How it may change, remains to be seen. We won’t know for some time.
We have children of school age for whom their schooling experience has been majorly disrupted. Those in their high school years will feel this most acutely.
The millions of job losses will impact teenagers getting their first job. Those patterns of enterprising young adults entering the workforce are being disrupted during the formative years. Instead of mowing the neighbor’s lawn, they’re home playing video games or watching movies.
Many people are spending a lot more time in sedentary activities. They’re not getting out and exercising. The gyms have been closed and many are scared to go back even when they do open. The swimming pool is now a lot less important as an amenity.
These are all new patterns in the making. The longer these patterns take root, the more difficult it will be to establish new healthy patterns.
On today’s show we’re talking about how borrowing is like dating with the intention of getting married. No, we’re not talking about casual dating, or any extra-marital hanky panky. I know what you’re thinking. That’s a strange analogy.
You see at the heart of a loan is a relationship. It’s a relationship that culminates in a signature on several hundred pages of documents. The advancing of funds is like the honey-moon.
But before we get ahead of ourselves, let’s talk about the natural progression of the relationship. Imagine for a moment, the you have a friend who is going to introduce you to someone really special. They’ve told you about this person and they sound perfect. They share the same values, they like the same kind of cooking. Your friend keeps passing messages back and forth between the two of you. But the two main parties to the relationship haven’t spoken yet. You haven’t met, you haven’t gone on a date, you haven’t had dinner together, you haven’t been able to ask for yourself what the other person likes and dislikes. But still, your friend insists that this person is the one for you. You can stop looking, you’ve found your future spouse. Look no further.
In our example here, your future spouse isn’t really someone you’re going to marry. They’re your potential lender. You friend is the mortgage broker. The broker is in the communication path between you and the lender. You haven’t met the lender yet. You don’t know what the lender wants. You haven’t seen a term sheet, or a closing checklist. Still the mortgage broker insists that this is the perfect lender for you. Not only that, they insist that the lender is going to get you a term sheet in the next day, and they can close in just a few days. Two weeks go by, and you still don’t have a term sheet. You still haven’t met the lender. All communication has been through the broker.
When you build a relationship with the hope of marrying someone, there are a series of steps in the natural progression of that relationship. You would want to spend considerable time together. You might travel somewhere on vacation together. You might play a board game together. Seeing how competitive your potential partner is in a game of monopoly might tell you a lot about If you try to skip steps in that process, the risk of the relationship failing go up. If you try and rush it, the risk goes up.
I know that in certain cultures there are arranged marriages. The families act as brokers between the ones who are to be married. But here too there is a process. There are a series of steps that culminate in marriage.
When you’re contemplating a loan, the term sheet is the very first step. Upon signing of the term sheet, you’re now officially dating. You’re not engaged yet, that comes later. There’s a whole pile of due diligence to be done. You need to find out about your partners finances. Do they know how to manage money? Do they have good taste in food? Have you met their family?
Once the term sheet is signed, there might be a commitment letter. This is the point where you’re now engaged. Subject to a few due diligence items, you’re going to get married and you’re going to get the loan, you’re going on a honeymoon.
There are a number of items that are an expected part of the process. If one or more of those are missing, you can tell that you’re not heading towards marriage, and you’re not going to get the loan any time soon.
Perhaps your future spouse has given you a list of values that they find important in their future spouse. If you haven’t seen your future spouses’ list, then how do you know you’re right for each other?
That’s the same as the lender’s closing checklist. I know you’re thinking that the spousal checklist isn’t very romantic. I’ll grant you the possibility that the analogy doesn’t capture the romance aspect.
On today’s show we’re talking about the flexibility of being a real estate investor.
When I had a job and was short of money, I needed to wait until the next paycheck. If I really wanted to increase my income, I had to wait until I got a raise, or perhaps a promotion. I could take initiative as an employee and my employer would be appreciative of the extra effort. Somewhere down the road, I might get a raise or a promotion. Someone else was in control of that process. There was no direct connection between my effort, the creation of value, and the financial compensation for that extra effort.
After all, that’s the difference between being an employee and an entrepreneur.
Then about 10 years ago I made the switch from being an employee to a full-time real estate investor and developer. Let’s be clear, my income took a hit. I had saved a bunch of money hoping that my business would take off before my savings ran out.
Somewhere along the way, I came to the realization that each of the projects by themselves could generate some income. Some projects ran into delays and the income I was expecting from those projects didn’t materialize. At those moments it was tempting to go back and get a job with a steady 6 figure income.
But somewhere along the way, I realized that I could truly generate income at will. It could be the result of taking on a new project. If I needed an extra $5,000 I could host a workshop that would deliver something of value to people in my network. It could be a class on underwriting rental apartment projects. Perhaps I could say yes to the numerous offers of consulting engagements. Maybe I could flip another house, or wholesale a contract. I could generate income at will.
So here we are in the year 2020. Tens of millions of people are out of a job. But the vast majority of them are waiting on the sidelines, waiting for someone to hire them, waiting for someone to discover their hidden talents. That process involves sending out resumes to hundreds of places, hoping that your resume gets on a short list and maybe you’re invited for an interview.
I’ve been that hiring manager many times. When I post a job these days, I will usually get 50 applicants within a day or so. Of those, maybe four or five are a good fit and worth calling in for an interview. There have been times when I had to review 600 resumes in a single resume review session. When there are that many to review, you really don’t have more than about 5 seconds to spend with each one.
I feel bad for all those folks who took the time to send out their resume. We can’t practically response to all of them. For those who are looking to generate income, there’s an awful lot of waiting involved.
Let’s contrast that with the world of entrepreneurship. In my world, income involves solving problems. If that sounds abstract, let me make it clear.
You might be walking down the street and notice that a house has tall grass. You could walk up to the house, ring the doorbell and tell the homeowner that you couldn’t help but notice their grass hadn’t been cut in a while. Would you like me to take care of that for you? I would solve that problem for only $30. Some might say no, but I believe you wouldn’t need to visit too many houses before you had $30 in your pocket.
Maybe this example is a little too trivial. After all, you’re not going to go and start mowing people’s lawns.
Maybe your expertise is in project management. You might walk up to a real estate investor who is overwhelmed with flip properties and offer to solve the project management problem for them.
You see the secret to generating income at will is based on the power of using your senses and your curiosity to notice problems that need to be solved.
On today’s show we’re talking about what’s happening in the industrial and logistics market.
Last week, commercial brokerage house CBRE held a detailed webinar on what’s happening in the logistics market. There were over 1,200 attendees on the call. We’re going to summarize the perspectives on the industrial market.
How has federal stimulus impacted the economy? The stimulus has gone a long way toward smoothing over the impact of the pandemic. We are going to have a very negative year in 2020, down 6%. 2021 is expected to be a rebound of nearly 6% in GDP. We’re looking at two lost years of economic growth.
Much like the residential home market which has seen large drops in volume during the pandemic, Industrial transaction volume has been down by 2/3. The main reason for that is price discovery. Buyers and sellers haven’t figured out where pricing should be in the current market. The capital market for the sale of industrial assets has been fairly steady throughout the pandemic. When buyers and sellers come together, the cash is there to get deals done.
The top tier for investments are industrial and multi-family. The small number of rental defaults has shown a lot of stability in the multi-family market.
The top assets in industrial are for big box, cold storage. Lease rates are holding strong and increasing in some markets.
Sublease space is largely occupied space. Some companies are trying to temporarily downsize space requirements on an opportunistic basis. They’re not looking to sell space, but are hoping to cover costs within existing facilities by subdividing space.
Construction dropped by about 30 million square feet in the current quarter. But at the end of Q1, there were more than 300 million SF of space under construction. That’s an all time high. Pre-leasing is in the 30% range for that space. Record low vacancy of 4.5% across the industrial market. Compared with 2008, the market had 7.5% vacancy and very quickly moved into an oversupplied scenario. Ground-breakings have dropped in the most recent quarter and is expected to create a drop for new supply in a year.
The biggest demand driver is e-commerce. Amazon is by far the largest driver. Retail sales are expected to grow to 39% of the all retail over the next several years.
Final mile logistics is the biggest area of change. Walmart and Target are extremely effective omni-channels with instore pickup. Some independent third party fulfillment centers are coming into the market to provide omni-channel logisitics fulfillment and last mile inventory.
There are very few distressed properties appearing in industrial. Those that are appearing on the market are typically owner-occupied properties where the seller needs liquidity elsewhere in their business. In fact, this mirrors what I’m seeing as well. A friend of mine was looking at a manufacturing company with a weak balance sheet that was looking to do a sale lease-back of the factory.
Amazon is the elephant in the industry. The company has grown from adding 25 million square feet of space per year, to more than 50 million square feet of new capacity per year.
Amazon has grown from 70 to 255 operational delivery locations. In the coming year, Amazon has 45 new sites. They are mostly non sortable fulfillment centers. The sortable facilities are multi-story facilities. The sortable facilities ae more efficient because they have air conditioned space. Market rent is attributed to usable square footage. But the expenses are lower.
On today’s show we’re taking a look at the economic recovery. Some sectors will bounce back, and others will take a long time.
In real estate, we’re seeing some encouraging data during the month of May for several asset classes.
In the broad economy, the US lost about 30 million jobs in March and April. Canada lost about 3 million jobs. But in the month of May we’ve started to see the beginning of a recovery.
The US added about 2.8 million jobs in May, excluding farm employment. Canada added about 290,000 jobs in the same time period. May saw about 10% of the jobs lost in March and April return.
This is encouraging. Frankly, I was expecting that the wave of bankruptcies would create permanent damage to the economy..
Construction registered the strongest improvement among goods-producing industries with an increase of 464,000 jobs, or almost half the number lost in April. Despite the coronavirus shutdowns, house prices continued to rise, and some real-estate brokers and economists say they see signs that demand for new homes has started to rise in recent weeks. In fact, om May, we’ve seen demand for new homes surge 21% compared with the same period last year.
Mortgage applications for home purchases in the week ended May 29 also rose for the seventh straight week, up 5.3% from a week earlier and 17% from a year earlier, according to the Mortgage Bankers Association.
Several real estate brokers I spoke with in the past week are seeing a flurry of activity. One broker said that she sees a busy summer ahead with a large number of new listings coming in the second half of June. It’s as if the traditional Spring market is happening anyway, but just a couple of months delayed.
Those who wanted to move in 2020, are going to move anyway unless they lost their job. Many markets are still experiencing a shortage of supply and rising prices. In my home market, detached homes at the entry level of the market show the lowest inventory. Homes in this category are usually selling on the first day of listing with multiple offers. So far during the pandemic, we’re seeing a 6.1% price increase compared with the same period last year.
Let’s be clear, this is a couple of weeks of data. It doesn’t define a trend. If this is a wave of pent up demand, that wave could subside later in the year. If we have a second wave of the pandemic, we could see a significant slowdown in the fall and winter.
Last week Neal and I talked about the state of the capital markets. On today's show we're talking about which asset classes are hurting in the current environment, and which ones will thrive.
Colin Douthit is a property manager from Kansas City Missouri. On today's show we're talking about how to manage during this period of uncertainty, lost income, and disruption.
You can reach Colin at atlaspropertymanagement.com.
On today’s show we’re talking about the great ideological debate about help, government help.
Our economy has suffered the largest fall in activity in recorded history. All of this is in the name of saving lives. Economic suffering is preferable to death. I’ve heard many articulate that some death is acceptable as long as it’s someone else’s death.
There are over 40 million people in the US newly unemployed as a result of the pandemic. It’s not clear how many have been re-hired. There’s more than 7 million in Canada who have received some form of assistance.
The payroll protection program kept a number of people employed at businesses that were forced to shut down. Now that these government dollars have been largely exhausted, it’s not clear whether these people will be kept on the payroll.
A study by Forbes in 2019 found that 78% of workers were living paycheck to paycheck. That is to say they had essentially zero financial buffer. A more recent study by Nielsen showed that 74% of all employees were living paycheck to paycheck.
The fact is, there is no good solution. We have a pandemic on our hands. The art is in finding the least worst solution. governments have tried to protect the public from the pandemic by imposing restrictions on movement, which has obviously hurt the economy. They’ve tried to compensate with financial assistance.
So here we are, four months into a pandemic and three months into a steep economic downturn. The political appetite for opening the government coffers and showering the population with cash seems to be waning.
But those three quarters of the population who were living paycheck to paycheck, are still living paycheck to paycheck. They haven’t magically amassed a war chest of cash in the past few months.
Some people believe that we just need to re-open the economy and let the economy take care of itself.
Some believe that government help breeds dependence.
Some believe that people are hurting and they need government help and they need it now.
Some believe that as our economy changes and many repetitive jobs are being replaced by a piece of hardware we need a universal basic income to provide for our population.
Well guess what? If you go looking, you’ll find multiple examples to support all of these arguments. They’re all valid, but not universally true. More importantly, I’m seeing people expend tremendous amounts of energy and time talking about what someone else should do. The government should do something. Big business should step in and help. The landlord should give the tenants a break.
You see economic activity is not the result of money being dumped into the economy. It’s the result of money circulating in the economy. If the government gives me a check for $1,000 and I put $800 towards rent and I spend the rest on groceries, that money isn’t doing much for the economy.
If instead I come across a problem that needs to be solved, and people are willing to spend money to solve it, then I have an opportunity to generate income. If it’s a big problem and I’ll need help, then I can hire people and put them to work on solving that problem too. Now that’s starting to feel like economic activity, and money circulating through the economy.
After all, isn’t that one of the fundamentals of business? In fact, it’s more acutely true today than at any other time in history.
While some people are at home watching movies, I’m busier than I’ve been in a long time. We still have a number of active projects. We still are attracting investment. Using your personal sense of agency is the key to getting the economy going again, but only for things that are needed now.
On today’s show Matt asks,
I have been invited to come into a new construction project for an 8 unit apartment building as an investor. The hard construction cost is $1.2M and the total value of the project is about $1.8M after lease-up. We should be able to return the majority of the equity on refinance.
The investor who wants out made an initial investment of $250,000 and has been with the project since inception until now. They are asking for $310,000 for their 50% share of the project. The project qualifies for a 10 year tax abatement.
I’m hearing that construction costs are falling and am wondering if we should find a lower cost general contractor to complete the project.
I’m going to need to raise money from investors for the equity participation in the project which is proving difficult in today’s environment. Some of my investors are dentists who have been hit hard by the pandemic. Any thoughts on the project and the investment?
Matt,
This is a great question. There is no question that raising money in today’s environment is more difficult than it was even 6 months ago. Some investors are sitting on their cash waiting for deeply distressed bargains to appear on the market.
I’m familiar with the location of your project and I think you should be conservative in your underwriting for the investment. Assume that rents will be lower than the current projections. There has been a lot of new construction in the area and the numbers of unemployed will put downward pressure on rents. Assume that rents fall 10% compared with today for a building that will complete a year from now. If the numbers still work, then pull the trigger.
I understand that the current partner in the project wants to get bought out. They also want a profit, which is perfectly fair for value creation. But the value hasn’t been created yet because the project isn’t complete.
I would make a counter-offer to the current investor that they can get their initial capital back immediately.
The profit portion would deferred until a later milestone in the project. It could be paid when the building hits break-even leasing, or perhaps when the building achieves its certificate of occupancy. It doesn’t make sense that a partner cash out of a project and expect to collect a profit before the project itself generates a profit.
I think you can make a compelling argument that the partner’s profit be deferred until the project is complete.
If the investor objects that their profit isn’t secured, you can offer one of several solutions. You could offer a shareholder pledge. This would put shares of the company in trust and they would automatically transfer to the investor in the event that you default on your commitment to pay the profit at the agreed point in time.
You could also secure their profit on title with a mortgage. This mortgage would need to be approved by your construction lender, or it would be an un-recorded mortgage, only to be recorded in the event of default.
You also asked about getting a new bid on the project. We’ve seen labour costs reduced in several markets. This is the result of millions of unemployed people across the country.
We believe that putting people to work who have no work is an awesome thing to do. But you need to be careful as well. Most problems in projects are the result of making a bad hire. Since you’re not local to the investment, your risk is higher of problems not being caught in a timely manner.
That means you need a lot more formal process in place for management of construction funds, construction materials, and quality control. Don’t just hire a new general contractor because they gave you a low bid for the project. We’ve done lots of shows on the perils of the hiring the wrong contractor.
Could your well managed city be going bankrupt?
You see the federal government has the right to invent currency out of thin air. They can just print it. In modern day terms, that means changing a number in an account to say that you now have more money. The US Federal Reserve does this in the US. The Bank of England is responsible for this act of magic, and the Bank of Canada has the official right to perform this sleight of hand without going to jail.
But let’s talk about what a city is. A city is not constitutionally enshrined. It only exists, usually as a corporation, enacted by the state or provincial legislature in which it resides. The bylaws of the corporation are determined at the state or provincial level and they define the decision making power of the city council around how local regulations can be enacted and they define the rules around the collecting and spending of money.
You see, many cities were only allowed to borrow money for very specific purposes. I’m aware of a lot of cities that can only borrow money for capital projects. They’re barred by law, from borrowing money to fund operating expenses.
That seems like a prudent bit of fiscal management. A city that borrows money to fund day to day operations is heading for bankruptcy at some point.
Since the start of the pandemic, many cities have experienced shortfalls in revenue. A review of several cities showed that they were carrying little more than 40 days of cash burn in the form of liquidity. Under the current circumstances, that may not be enough.
Many cities collect about ¼ of their revenue in the form of service fees and user charges. Since the start of the pandemic, these revenues have fallen to nearly zero.
In addition, cities have seen a significant drop in tax revenue collected. Tax revenues account for about 50%-70% of a city’s total revenue.
Many cities have responded with significant workforce reductions. They’ve cut non-essential services like libraries, swimming pools, recreation facilities and so on.
They’ve maintained essential services like police, fire and various emergency services. They’ve deferred maintenance where possible.
But at a certain point, there are no more discretionary services to cut. First responders are key to protecting life and safety in our society.
So what happens when a city declares bankruptcy? First of all, unlike a corporate bankruptcy, there will be no liquidation. In the US, a city bankruptcy is governed by Chapter 9. A judge will be appointed to oversee the spending of monies and the rebalancing of the budget.
There will be no free pass that allows the city to abdicate responsibilities for providing municipal services. The City still has the obligation to get its fiscal house in order. It still have to balance the budget. It still has to settle with the claimants. The city still has to pay its legal bills, and the city still has to deal with its unfunded liabilities.
When there's a label put across a city or a county that says, you're in bankruptcy, it equates in the minds of the public to dysfunction. You couldn't manage your own business, so you end up in bankruptcy.
The lasting legacy of a bankruptcy is that the city is not a place to invest. It discourages people from moving there. It discourages the creation of jobs. It’s assumed that the place is economically depressed. Jobs start to leave permanently.
Then real estate prices start to fall. They fall because jobs are leaving
The inevitable cutting of essential services means reduced safety for residents who live there. You might see an increase in crime, in vandalism. You might see an increase in desperation within the population.
Even some of the best managed cities could stumble into bankruptcy. In these uncertain times, a review of a city’s financial state should be part of the required due diligence for a new project.
On today’s show we’re talking about running a virtual organization. For many the idea of working from home is new. It comes with its own benefits and drawbacks.
When you get in your car and transition from home to the office, your mind shifts. You get into work mode. On the drive to work, most people spend their drive time going over the plan and priorities for their day.
By the time they’re in the chair with a cup of coffee close at hand, they’re ready to tackle what the day has in store for them.
The office has structure, systems, and processes. If you need something, you swing by a co-worker’s desk and ask them for help. If you need to call a meeting, the conference room at the end of the hall can solve problems and create a collaborative environment.
The face to face communication means that you can read body language. New people in the organization need particular hand-holding and training.
A study published by MIT in 2006 showed that the probability of communication in an office setting dropped dramatically the further people are apart. By the time people are 160 – 200 feet apart, they don’t communicate at all.
So here we are in June of 2020, a global pandemic has forced millions of people to work from home.
The good news is, you’re saving all that commute time twice a day. You’re saving gas. You don’t have to get dressed up. You can be in comfortable clothing. You can work when you want to.Together with all that flexibility comes the dark side. The dark side is full of distractions. The garden that needs to be watered, or that unfinished home improvement project. It would be really nice for the deck outside to have some sun shade so you can conduct conference calls from your back yard.
Before long, you’re working until 11PM at night. The work day and the family day get blended together. After a few weeks, you come to the realization that your life has no structure. You used to be so disciplined.
What I’ve discovered is that no matter where you work, the systems and processes for managing your day should remain the same. But if you’re working outside the office, you need an extra discipline. That also means creating streamlined connections with people, and you need to create and maintain structures that work. That means starting your day consistently, and ending your day consistently. If you have zero commute time, then have a virtual commute. This is a ritual task that marks the start and end of your work day. It might be as simple as closing the door to your office.
Even before the outbreak, most of my teams have been thousands of miles from me. Conference calls, video conferences, and screen sharing have been normal for more than 20 years. Most of my team were on different time zones. They were in France, or India or Israel. It didn’t matter.
Within our core team, we use a walkie talkie application called Voxer. It’s a push to talk system. There are quite a few out there. We use Voxer, but there are many others to choose from. No time wasted calling someone on the phone, waiting for the phone to ring, waiting for them not to answer, listening to the voicemail greeting, and then finally leaving them a message that usually they don’t even listen to.
Sometimes we hold and entire conversation over the span of a couple of hours, just by messaging back and forth using voxer. It’s a private direct connection, faster than sending a text message. You can even perform group chats using the same software.
The key is to treat your team as if they’re with you all the time, the same as when you’re in the office.
Our book this month comes from one of the master story tellers of our time. The book is called “Ask: The Bridge From Your Dreams To Your Destiny”, by Mark Victor Hansen and his wife Crystal Dwyer Hansen. Mark was a guest on the show two weeks ago. He’s known for being the best selling author of all time with over 500 million books sold, many of them part of the Chicken Soup series.
Mark and Crystal believe that asking is the key to getting anything you want in life. But you need to know how to ask, and you need to know who to ask.
There are three people you can ask.
1) Yourself
2) Others
3) God
When children are young, they ask all kinds of questions. There is no filter. The questions just flow, one after another. But somehow as we age, asking questions doesn’t seem to be socially acceptable. How many people die inside at age 25 and then spend the rest of their lives trapped in a prison of their own making.
Mark and Crystal have discovered that there are 7 principal Roadblocks to Asking:
1) Unworthiness / Insecurity
2) Naivete
3) Doubt
4) Excuses
5) Fear
6) Pattern Paralysis
7) Disconnection
The power to unlocking the path to your destiny is found by asking. It starts by asking better questions.
What you focus on becomes amplified. It becomes your target. If you’re focused on the negative, then negative will be emphasized in your life. For example, if you ask “Will I go bankrupt?” will take you on a different trajectory than asking “How much wealth will you accumulate?”
They tell the story of Mitsy Purdue. Mitsy was the daughter of the founder of Sheraton Hotels. She had been struggling with failure for much of her life. The fear of failure was preventing her from moving forward, from achieving her goals. Then one day, she reframed what it meant to fail. At first, failure was defined as having been denied a request, of being turned down. But then she realized that when she got turned down, she wasn’t failing. She was paying her dues. The only failure was in not trying. Failure was in giving up. That simple reframe of failure changed the trajectory of her life.
She tells the story of how she met her second husband Frank Purdue. She was cultivating rice in California and hosting radio and TV shows. Frank was at the other end of the country raising chickens. The speed and certainty of their union was the result of asking clear questions.
On today's show George and I discuss the current climate for borrowing funds. His stance surprised me a bit. Check it out.
Neal Bawa is a Silicon Valley based syndicator, and educator specializing in multi-family asset classes. On today's show we're talking about the state of the capital markets and where investing is heading in multi-family apartments.
You can reach Neal at http://multifamilyu.com.
On today’s show we’re talking about stranded assets. These are assets that can’t be used at all. In some cases they’re merely under-utilized assets. You can find deeply discounted assets in today’s market. But only if you train yourself to look for them.
Underpriced assets have a substantial sunk cost in them.
The old school way of doing this was to go to the weekend garage sales and buy items of high value for pennies and re-sell them on Ebay for a higher price. The problem with this approach is that it requires a lot of time, the dollar values are low, and therefore the profit potential is low even if the percentage gains are high.
Buying gym equipment or bicycles will net you a few tens of dollars every time you stop in someone’s driveway.
These opportunities exploit inefficiencies in the market for used items. But I want you to think bigger. Think restaurants, hotels, boats, trucks, cars, ships.
Sometimes, the assets are not physical. It could be a list of customers, or a handful of high quality relationships. You see the value of a business is based on the quality of its customers. If you want to do better business, then find better customers.
The headlines over the past several weeks have focused on the tens of millions of people who have lost their jobs. That’s a tragedy by itself.
There’s been almost no mention of the tens of millions of customers who have lost their favourite restaurant, their favourite clothing store, the ice cream stand next to the barber shop. Oh and the barber shop is gone too. Who is out there serving those millions of clients who have been separated from the businesses they have been loyal to all these years.
the hidden assets which are less tangible could likely be purchased for zero dollars and nothing more than a royalty. The good-will that has been built over the years between restaurants and diners, between florists and funeral directors, between health food stores and those with dietary restrictions has real value.
Let’s look at back at the people who have been laid off. There are millions of front line workers, some of the bottom income earners in any business that have been impacted the most.
At the other end of the spectrum there are very senior people, those with immense technical and business know-how. These are the high six figure earners that the businesses could not afford to retain. Most importantly, these folks have immense connections. They have incredible relationships. These folks are probably not getting hired into another company in a comparable role anytime soon. They have a lifestyle and cost structure to match their previous salary. The relationships they have, could be the seed of a business transformation for those businesses that know how to leverage them. Many of these laid off workers are sales people who are used to working on commission. They’re used to getting paid for performance. They know that money doesn’t flow until something gets sold. Maybe a re-energized top notch sales team that costs you nothing to hire and only makes you money could help your business.
These are all assets that you can find at a garage sale. These are assets that are hard to connect with the right buyer. Because the right buyer is unlikely to stumble across them by randomly wandering around.
On today’s show we’re going to make an important distinction between two words that are often used interchangeably but have vastly different meanings.
The two words are “pain” and “damage”.
If you hit your thumb with a hammer by accident, you will experience pain. In fact, the pain will be so acute that you can think of little else for the next few minutes. Eventually the throbbing subsides and you can get on with your day.
I know the weekend handymen are cringing as I’m describing this. I know you can clearly visualize the last time this happened and the mere mention of it immediately takes you back to that moment when the hammer slid sideways off the nail and made contact with your thumb. No doubt you were in pain.
But if you hit it really hard and you actually break a bone, then the impact is much longer lasting. You might have done enough damage that the impact could be permanent.
The context of today’s discussion is not your thumb, but the economy. There’s no doubt that individuals and companies the world over are experiencing economic pain.
The bigger question is, where in the economy are we experiencing damage?
When Hertz Rent a Car has next to no clients for two months, they’re experiencing economic pain. When they’re forced to seek creditor protection using bankruptcy laws, they’re experiencing economic damage.
Some companies manage to convince a bankruptcy judge to restructure some debt and then re-emerge from bankruptcy as a viable business. This takes time. It results in a shrinking organization. In other cases, the bankruptcy judge will argue that the business is too far gone to ever recover and will be forced into liquidation. At that point, the damage is permanent.
Now you may not have the ability to singlehandedly save Hertz.
But companies don’t need to be over-leveraged like Hertz in order to experience damage.
I’m going to tell you the story of a restaurant named Stonefaced Dolly’s. This restaurant has been a fixture in little Italy for a few decades. It’s a family owned restaurant and multiple generations of the family are involved.
The problem is that the founder of the company is now 75 years of age. They have three locations. The owner is tired. He doesn’t have the energy to restart the business when the economy re-opens. He believes that re-opening is going to involve some heavy lifting and he simply doesn’t have the emotional fortitude to go through that at 75 years of age.
He is not alone. I’ve spoken with three restaurant owners in the past few weeks. All of them are thinking of throwing in the towel. They’re not bankrupt. They’re not in extreme pain. They’re just tired.
But when these businesses which have no succession plan, no sale plan, and no viable path to re-opening, they just die.
This folks is the very definition of a bargain. When a significant percentage of restaurants close because they can’t see a way back, those that remain will eventually have an incredible amount of business coming their way. That may not happen in a month, or maybe even six months.
Economic pain is becoming economic damage. That damage is occurring for a variety of reasons. In some cases, the businesses were carrying too much debt to survive the current market conditions. In some cases, their competitor got a bail-out check and they didn’t. But in some cases, the owner is just tired. The opportunities to find viable businesses for pennies on the dollar are becoming apparent even now in the early days of this pandemic.
Love the show. I could use your advice.
Last August I acquired a property in a tax auction at a bargain price in a class c neighborhood in a different state than where I live. This was my first venture into rehabbing a property and figured this might be a good way to learn with a fair amount of cushion for mistakes.
I found a contractor on Craigslist who was willing to work in this address (several were not). Work got underway quickly. Flooring, painting, kitchen updates and other misc repairs were all needed based on pictures the contractor sent over. He estimated about 20k worth of work. That seemed reasonable and he pulled permits and work got underway quickly.
As work progressed bigger problems arose. Contracts were drawn up for each project successively. He would call me at least weekly with updates to what was doing, supplies that were needed and different things that code inspectors wanted to see updated. Every time I thought everything in the house was finally ready something else would be found.
This all culminated in me finally growing very suspicious. I called the code office to find out where things stood and was devastated to learn they had never stepped foot inside the house. Moreover all the permits had been pulled in MY name without my knowledge. I had an investigator walk through the property and send more detailed pictures and the place is a mess. He did 85% of the siding work but cropped pictures of the final job and big chunk of the back of the property is unfinished. Lumber and materials are lying all over the job site. Between materials and labor and dumpster fees I have now put in about 2x what the property is worth fully renovated and really have nothing to show for it. Many of the materials I bought appear to be missing.
This is a big hit for me. Is there anything I can do? At the very least maybe I can get a tax write off?
I am obviously rethinking real estate altogether as an investment choice.
JP, This unfortunately is all too common a situation.
I’d like to zero in on a couple of things that you said. You’re talking about rethinking real estate investing. I’ve got bad news for you. What you’ve been doing is not real estate investing. You put yourself into the house rehabilitation business. That’s an active business that’s pretty similar to the construction business. You got into the construction business without even knowing it.
Your construction business had no quality control because nobody was staffed to fill the position. If that position had been staffed, there would have been no surprises.
I understand how painful this is right now. But if you stop, you’re going to lose 100% of your investment. If you have debt on the property, you’re going to be on the hook for that too.
There are only three viable paths from here.
1) Fire sale the property as is and take a substantial loss
2) Bring in a partner with additional capital to complete the renovation and then sell the completed property at a loss. This may be a smaller loss than a fire sale scenario.
3) Complete the project, and rent out the property as a long term hold income property. You told me in a subsequent email that you’re looking at a total investment of about $125,000 and a monthly income of about $1,400. That means you’re collecting about 1.1% of the property value in rent each month. That’s a good percentage. It has the potential to carry the expenses of the property and pay down the debt. You will want to get a low interest rate permanent financing structure in place at the highest possible loan to value ratio.
If there is still work to be done to complete the project, the ownership of the building permit isn’t a problem per se. In fact, in this instance it gives you the freedom to fire your contractor and you can hire someone else without having the original contractor transfer the permit.
Duane asks,
Just curious. Have you ever come across something that looks like a great opportunity, but was way beyond your capabilities?
Duane,
This is a great question. The short answer is yes. That’s the only way to grow. But the further you are from your proven capabilities, the lower your chances of success are going to be. So if you know going into the venture that your chances of failure are real, you want to make sure that:
1) You’re bringing the best people with the most relevant expertise onto your team to improve your chances of success
2) You want to limit the risk on the downside. So if you fail, the cost to you personally will be acceptable, and more importantly
It takes courage to do something that is unknown. After all, you might fail. Failure has all kinds of negative connotations in our culture. When you fail, you’re a failure. Even worse, you’re a loser.
On the other hand, if you’re a scientist running an experiment, then somehow experimentation is elevated to a higher stature. An experiment, by definition will have an unknown outcome. It may not be your desired outcome, but it will have an outcome and the main purpose of an experiment is to learn. Therefore, an experiment can never really fail.
So the question is how do you undertake projects that can be a little bit of an experiment?
I’ve done this several times in my career. For example, in the world of technology, the year was 2003. IBM had a division that designed and manufactured microprocessors. I had been at Tundra Semiconductor developing system controller chips that worked with the IBM microprocessors.
So I had the crazy idea of going out to raise the money and build the management team to buy that division of IBM. I had never raised $250,000,000 in one shot before. I had not run a business of that size before. I didn’t have the brand name to go down to Wall Street and raise the money.
I started with an idea. The first person I called was someone who had been general manager of a similar business. He had sold processors into Apple. He ran an automotive microprocessor business and counted Mercedes, General Motors, BMW, VW, and Toyota among his customers. His name is Brian Wilkie. The venture was my idea. But I hired Brian to be my boss.
I contacted the CEO of another chip manufacturing company. She had previously run that division inside IBM and reported directly to the executive who had responsibility for that business. She became one of my advisors. I brought another 5 people on board with similar pedigree.
Brian and I went down to NYC and met with Credit Suisse First Boston’s private equity group. We met with Citicorp Ventures who in that year had been very aggressive about investing in technology buyouts.
As a result of these relationships, our pitch to IBM matched almost exactly what IBM was looking for in a partner. IBM entered into exclusive negotiation with us. We spent 3 weeks at IBM headquarters, negotiating 19 agreements around the clock. IBM wanted to close the transaction before March 31, 2004. A week before closing, the IBM management team delivered some bad news from one of the customers. That spooked our banker who asked for additional time to complete their due diligence.
At that point, the senior executive in IBM said that he needed the asset sale in the quarter to compensate for a loss elsewhere in the division. He was a on notice from the CFO that he should not deliver a negative surprise to Wall Street. The asset sale was required to prevent that embarrassment.
At that point, IBM invited a California company called AMCC to bid on the business. Literally at the stroke of midnight, AMCC offered $100,000,000 more than us and scooped the business out from underneath us.
We were devastated.
I'm trying to narrow down to 1-2 focus markets for buy-and-hold SFR/small multi-family investments. I've come down to the following options and am curious about any feedback:
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Huntsville, AL
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Memphis, TN (high crime)
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Charlotte, NC
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Omaha, NE (steady but not super growth oriented)
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Columbus, OH
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Atlanta, GA (already overheated market)
I like all of these markets from a population / job growth perspective and affordability as a new investor.
I'm curious about any major positives / negatives about these markets I might be missing - high crime, new employers, high poverty levels, etc.
Kerry,
This is a great question. I’m a believer in the laws of supply and demand. But it’s more than just demand that matters. I’m talking about demand and ability to pay. The current job market turmoil puts a big question mark around ability to pay. For now, millions of people are collecting unemployment benefits. But it’s unclear how long those benefits will be in place. At some point, the weakness in the job market will cascade into the financial markets, which may precipitate a shortage of lending. The last time we saw this was 2008. The cause was different, but the effect is likely to be the same.
There are several considerations you want to examine.
1) The partnership and the team.
2) The city. Is it attracting jobs.
3) The micro-market. Real Estate is always hyper local. Some neighborhoods maintain value while others don’t.
4) The asset class
5) The deal structure. How much debt is on the property.
Personally, I like Huntsville because it has a strong jobs story with the auto sector having selected Huntsville for manufacturing. There is a history of technical expertise in both radio and military R&D centers. The drawback, is that the rent per square foot in the market is low, averaging at about $1.10. While there is a shortage of rental housing, there doesn’t seem to be much upward pressure on rental rates, which is keeping new supply from coming into the market.
I personally would stay away from Memphis. It’s a tough market and you need expert property management to make money in Memphis. I know several investors who own property in Memphis, and it’s got more risk than I’m comfortable with.
Charlotte NC is a growing city and has attracted a several financial institutions. It’s emerging as a banking center in the South. It’s not very high priced, but overall it has good fundamentals. It’s hard to say what the impact of the current economic downturn will be on Charlotte. I simply haven’t researched it. Charlotte is definitely worth a closer look.
I don’t have an opinion on Omaha. I simply haven’t researched that market.
Columbus Ohio is likely to suffer from its higher than average exposure to retail in the current economic conditions. Columbus is also a financial and insurance center in the middle of the country. Overall, Columbus has been one of the fastest growing cities in the country for a number of years now. It’s definitely worth a closer look.
Atlanta is also a growing city. But like any city it has a lot of areas. Some that I would not consider investing in, and others that are growing.
But before choosing a city, I would focus on finding a team to work with. Having the right people on your team, is more important than choosing the city.
I would also be patient about investing right now. There will be opportunities to buy properties at a deep discount to the market. This will take some time. We currently have a moratorium on foreclosures. That will eventually be lifted. Much like the period following the 2008 recession, the opportunities took years to materialize. The best years for finding deals were 2010 and 2011. It took a while for the deals to show up, and I believe that will be the case this time around too
On today's show we're talking about developing resort properties using RV's and mobile homes with Shane Melanson. You can reach Shane at shanemelanson.com.
Dr. Tom Burns is the co-founder and partner at Presario Ventures, specializing in new construction apartments. He is also the author of the upcoming book "Why Doctors Don't Get Rich."
You can connect with Tom and get a copy of his book at richdoctor.com.
On today’s show we’re talking about the merits and pitfalls of just accepting a contractor’s bid. When you’re experienced in construction, you get a feel for what items should cost for both materials and labor. But there are two distinct markets, the retail market and the developer or contractor market.
In the retail market, there are businesses out there charging what I consider to be outrageous prices for what amounts to basic commodity construction. Yes, quality matters. But I often find that in the retail market you get amateurs charging more than the most skilled trades people. These are the crooks. Frankly, they’re out there and you can run into them often.
I have a job under construction right now where the entire crew didn’t show up to work yesterday. Why? Because one of the members of the team has a family member with a health issue. Because one person couldn’t work today, an entire team of three people didn’t show up.
This crew was in fact the lowest bidder. To be honest, the number they quoted was lower than I expected. So I wasn’t surprised or upset when they discovered that they underbid the job. I fully expected to pay more. I feel badly that the subcontractor has a family member with a health issue. He’s absolutely doing the right thing by being with his family. Somehow, I’ll have to find a way to maintain the schedule with alternate labor. Otherwise the delays will cascade. I knew I was accepting a low ball bid and that there was risk of problems.
The first bid that I received was from someone who said they could do the work in a week and at a competitive price. But in the end, they quoted 4 times the price of the low bid, and fully three times what I considered to be a fair price. I made them aware that I was a developer and we discussed per square foot rates. Somehow between that conversation and the paper quote, something got lost in translation. Clearly they didn’t get the job.
I had another subcontractor quote me a price that was double what it should have been. I worked out the hourly rate and concluded that they would be charging me $125 per hour for what amounts to unskilled work. I reminded the subcontractor that I was a developer and that I had a volume of business in the pipeline. He offered that if I paid cash, I could save the sales tax. At that point, I knew I couldn’t hire his company. But I decided to see where the negotiation would go. I offered that if he gave a really good price on this project, I would give him early visibility of new projects in the pipeline. So he offered me a 4% discount. Needless to say, they didn’t get the job.
I had another contractor inflate the square footage in the scope of work on another part of this job. He argued that he needed to add 10% to the area because there could be wasted material. I completely agreed with the additional material allowance. There is always material wasted because the cuts result in odd remnants that can’t be used. But there should not be 10% wasted labor. The labour component of square footage is the actual square footage.
The funny thing is that these attempts at cheating the customer aren’t even sophisticated. They are plain as day.
Perhaps these subcontractors think that customers don’t know how to perform basic arithmetic.
I found one subcontractor selling materials from second subcontractor with an additional markup on the original supplier’s price.
Folks, the path to saving tens of thousands, or in some cases millions of dollars is found in being curious, asking lots of questions, and checking the math against known benchmarks.
On today’s show we’re talking about Student housing. I’ve been a student housing investor since 2012. Historically, I’ve loved student housing. I got my start by owning property in the shadow of Temple University in Philadelphia.
When you add together the revenue from each room in a student rental, it adds up to much more than the revenue from renting, say, a 3 bedroom apartment.
Yes, the turnover is high. Yes, students can be messy. They all tend to move in and move out on the same day. The cycle for student housing follows a very specific schedule. If you miss the window for rentals, you might be facing vacancy for the entire school year, not just a month.
But the big story in student housing is the massive change that is taking place in online classes.
Long before the mass move to online classes that happened mid-semester due to Covid-19, the trend toward online classes had been underway for more than a decade.
When I started investing in student housing, there was a shortage of housing next to Temple University. We were easily able to rent rooms for $600 a month and sometimes even $650 a month. By 2014, as more capacity entered the market, prices started to drop. When the university opened a new dormitory with 1,200 beds, the market flipped from under-supplied to over-supplied overnight.
So we started looking further afield. We held numerous meetings with architects, planners, and consultants in the city of Arlington Texas. Arlington is the home of the University of Texas campus. The largest UT campus is in Austin. But in order to get into Austin you needed a 90% average. You could get into UT Arlington with an 80% average and then transfer to Austin after two years. It was a way to get into the Austin campus with a lower grade point average. . We placed numerous offers on properties for development. Ultimately, we never did quite succeed in getting a large enough property to develop.
We decided last year in 2019 to take another run at delivering student housing to the UT market. We received the latest market study authored by the student housing office at the university.
What it showed was pretty telling. The campus had grown to 51,000 students. A large school by anyone’s measure. The combination of on-campus housing in one of 18 building, along with numerous projects within a short distance of the campus provided housing for 6,000 with approved projects in the pipeline that would ultimately bring 11,000 units of housing for a campus of 51,000 students. So far, it sounds like the addition of another 100 units would not create an oversupply situation.
But here’s where a small piece of data, changed our outlook completely. In 2019, 52% of the classes held on campus were also being simulcast online.
That meant that if a student lived in the Dallas Fort Worth area, they could spend an increasing amount of their academic year engaged with the university through their computer screen. If they needed to come to the campus once or twice a week, they would drive. The case for living on campus was starting to get weaker.
Well folks, now the Covid-19 pandemic has forced the acceleration of the trend that was already underway. Now I get it. There are some faculties that can’t be taught online. The school of dentistry won’t be taught online. The PhD program in psychology won’t be taught online.
In the past week, Queens University announced that the majority of its classes next fall will be conducted online. The University of Texas is holding the balance of its Spring term, and both summer sessions online. New York University is doing the same.
So if you’re the owner of student housing, you can expect negative cash flow this summer, and possibly into this coming fall semester.
You may need to take action now to develop creative marketing plans for getting your units leased before there is a glut on the market.
On today’s show we’re taking a short trip through the history books to see what history might teach us about today.
The year was 27 BC and Augustus was the emperor of Rome. Their money was the roman denarius, made of 98% pure silver. The pure coinage remained until 64AD when there was the Great Fire of Rome which destroyed close to 60,000 buildings, almost 90% of the dwellings in the city. Nero was the emperor at the time and it took a lot of money to rebuild the city. In order to afford the rebuilding, Nero made monetary reforms which reduced the silver content in the coins to 93%.
Emperor Vespasian reduced the silver content to 89%, Marcus Aurelius reduced the silver to 75% and Septimius Severus reduced the silver content to 50%.
By the time Gallienus was Emperor from 260AD to 268AD, the denarius had a meager 2.5% silver content. These coins were made of bronze and had a thin coating of silver which tended to wear away very quickly. It was during the time of Gallienus, despite a number of military victories, that important provinces started to splinter away from the Roman Empire. From 249AD to 262AD, the Plague of Cyprian which lasted 13 years caused widespread shortages across the empire and was one of the major contributing factors to the eventual demise of the Roman Empire. Rome was the epicenter of trade in Europe. As the coins had less and less silver, soldiers in the empire demanded higher pay. Prices for commodities increase. Eventually runaway took hold. By 265AD, there was less than 0.5% silver left in the coins and prices increased 1000%. Only mercenary solders were paid in gold.
The trifecta of rising administrative costs which caused soaring taxes, runaway inflation and worthless money caused much of Rome’s trade to collapse.
I totally understand why governments all over the world are printing money in response to the pandemic. In some ways, I think they have little choice.
Many think that we’re not in an inflationary period. That prices are not rising out of control. So the printing of money is appropriate. Remember, inflation is an average. We have seen prices for oil drop in the short term as the level of economic activity fell during March and April. What will happen when there are shortages of food? What will happen when there are shortages of building materials like steel or ceramic tiles? Will those prices go up? In places they already have gone up in price.
You see, if printing money were the path to prosperity, the Zimbabwe and Venezuela would be the richest nations on earth and they’re not.
So here we are in the year 2020 AD. We have global trade splintering into local trade. We have plagues. We have printing of money.
Every time this has been tried in human history, the path to prosperity has been interrupted by economic collapse. We’ve seen this movie before. We know the ending. The actors are different in this remake of the movie. But the plot is basically the same. I’m calling this movie “The return of Caesar’s coin stamping machine, part 29.”
When newly printed money is dropped from the sky, it’s not falling uniformly, or even fairly on the population. It’s going to some people first, and then to others not at all. When the unfairness of this wealth transfer has become visible in the past, the result has almost always brought armed conflict.
The headlines this morning tell the story of economic recovery that is now underway. The economy is the result of output of its people, not the printing of money.
When people are sitting at home, collecting a check from the government, they’re not producing. That check breeds dependence. It stifles creativity. I know that I would not be thinking hard about business strategy if I was getting paid to sit home and watch movies.
In truth, I don’t think I would want that check.
On today’s show we’re talking about how your business can survive the Covid-19 outbreak. Of course the degree to which you take action is a function of the nature of your business and the assets in your portfolio.
We remain in a period of unprecedented uncertainty. You don’t know if the businesses in your commercial space will survive. You don’t know if your tenants will lose their job and when their unemployment benefits will run out.
Every single property must be treated like a business. That means paying attention to both income statement and balance sheet.
Business survival is based on one simple concept, positive cash flow. The emphasis needs to be on cash flow.
If your cash flow has turned negative, you need to decide whether this is a temporary situation or a long term situation.
When cash flow is negative, then cash reserves become of paramount importance. How many months can your apartment building survive if it is losing $5,000 a month, or $10,000 a month?
Often times, I’m seeing investors trying to solve a cash flow problem with the balance sheet. That means borrowing more money. If your problem is short term, then that’s the appropriate solution. You take on a little more debt, but you save the property.
It’s easy to assume that people are not moving during this period of social isolation. While it is true that the level of activity has dropped, it’s not zero. For example, I moved in the middle of March.
Cities like Dallas continue to attract new business. According to a report in the Wall Street Journal two weeks ago, there were 1,500 corporate headquarters staff relocating from California to Texas in the middle of the pandemic.
I’m talking with landlords who are continuing to attract tenants. At the same time, I’m also reading market reports that show zero movement. Both are true at the same time.
These are challenging market conditions. It’s tempting during these times to take your foot off the gas and rationalize that it’s not worth the effort.
Marketing is the exercise in generating interest. Salesmanship is the process of converting interest into sales. Now is the time to practice and improve your skills at closing the sale.
Let’s say that you’re running a restaurant that has closed its dining room and you’re trying to make ends meet by offering take-out. It might not be your restaurant. Maybe the restaurant is a tenant in your building and you have a vested interest in having the restaurant survive.
The restaurant could offer clients the option of repeating the same order for the next 3 weeks for a 10% discount. Their Friday night dinner is taken care of for the next month, and the client is helping a local business. It might save them a trip to the grocery store.
I saw a video from a jewelry store owner in Brooklyn yesterday who was complaining that her store wasn’t allowed to open when Walmart and Costco were open. It seemed incredibly unfair to her. Her revenue was zero. My heart goes out to her.
She could do a window shopping campaign. I’m redefining window shopping to mean the following. The store should send an email to all their clients reminding them that a gift received during the pandemic is worth 10x what a gift is worth during normal times. It would be so unexpected, that the receiver will remember the gift for decades to come.
The client calls the jewelry store from outside the window. The shop keeper talking from the safety of being inside the store shows the client the merchandise. The order is placed by credit card and the product is delivered to the client by courier or by curb-side pickup. Mail order businesses and e-commerce businesses are not closed. A small re-thinking of the transaction opens up the possibilities that were not available before.
Maheen the Machine asks,
Hello Victor, I trust you are safe and healthy!
I have always had this belief that you collect gold for the day that the dollar loses most of it's value and then you "cash" it in??? Yet, I never hear the experts say to "sell" your gold. They always mention using gold as "insurance" but never go into detail or give examples.
You interviewed Russell Gray and he is amazing. When he was talking about Gold He mentioned using gold with debt. He recently said the same thing on his recent podcast "Golden Opportunity." He states you should "marry" gold with debt. This is unclear to me. I was wondering if you could shed your perspective. Sometimes the same information coming from a different source "penetrates." At least, for my sake let's hope so. HA!
Thank you for what you do. It truly is invaluable!
Thank you Maheen for the kind words and for a great question.
The philosophy that both Russell Gray and I share is that you should have the bulk of your assets in the form of hard assets with intrinsic value instead of paper assets that could carry counter party risk. In order for money to be money it has to perform two functions. It must be a store of value and a means of exchange. The US dollar is a very good means of exchange. A for a store of value, that’s not as clear.
We can debate how much inflation we think we have. But when you look in retrospect there is no question that we have experienced significant inflation over the years. In my lifetime, a cup of coffee has gone from 15 cents to more than two dollars. A gallon of gas has gone from 25 cents to about $2.50 cents, and at times over 3 dollars.
We like to invest in real estate. More importantly, we like to use other people’s money. That is in essence a form of leverage. When you use other people’s money and you retain a portion of the ownership, you get to multiply your rate of return.
But using other people’s money isn’t free. There’s a cost. You either give the lender a rate of return on their money, or you give them a percentage of equity in the project.
If you borrow money, the interest rate that you pay is a function of risk to the lender. If the lender has a lot of security, they’re probably going to be willing to offer you a lower rate. Funds borrowed with a high degree of security in today’s rates might be as low as 3% or 3.5%, depending on the lender.
Unsecured funds could be easily above 12-15%. The cheapest money will be the money that the lender has a guarantee of getting their principal back. Most of the time, borrowers secure their loan against a piece of real estate. The lender ends up having to qualify the borrower, the market and the specific asset. That’s a lot of due diligence.
Let’s look at a specific example. Let’s say that you want to invest in a townhouse that you’re going to hold as a rental. The purchase price is $200,000 and you’re going to borrow 75% from a bank. The remaining 25% is the equity contribution. So you need $50,000 in cash to buy the property. Where are you going to get $50,000?
You decide that you want to borrow the $50,000 that would normally be considered the equity contribution to the purchase. So you go to your friend, the rich lawyer who has tons of cash and you ask to borrow the $50,000. You offer to put, say, $70,000 worth of gold in your friends safety deposit box as collateral. So you pledge 40 ounces of gold.
When the loan gets repaid, you get your 40 ounces of gold back. But a few years have gone by, and your 40 ounces of gold are now worth $100,000. In the meantime, the lawyer charged you 3.5% a year for the loan of $50,000. The property has also gone up in price and instead of selling it for $200,000, you now sell it for $300,000. Your initial investment of $50,000 has now grown by $100,000, and your gold has increased in value by $30,000. You get to keep all of that profit.
Mark Victor Hansen is the best selling author of all time and is famous for the "Chicken Soup" series of books along with his partner Jack Canfield. Mark has a newly launched book called "Ask" which talks about the transformative power of simply asking. Mark and Nicky are also hosting a huge virtual summit this week with notable people including John Maxwell, Ken Starr, Candace Owens, Ashar Alam, Marc Von Musser, Jeff Hoffman, Crystal Hansen, Theresa Dugwell, Nicky Billou, and several more amazing speakers. There is no cost to attend this two day event on May 21-22. Simply register at yourfinesthoursummit.com. This talk with Mark was so much fun. We agreed to sail together in France as soon as conditions make sense for all to do so.
Damion Lupo specializes in self directed qualified retirement plans. Properly structured, these plans give the owner full check-book control and the possibility of taking advantage of some of the benefits of the CARES Act. Join me for a fascinating conversation with Damion Lupo.
Today’s question comes from Sue in Pennsylvania.
Sue asks, “I have a buyer who wants some debris removed from the property as a condition of closing. I’m worried that I won’t be able to get the debris removed from the property in time to close and that it might jeopardise the sale altogether. It doesn’t seem like a big deal that should hold up the closing and my attorney says the buyer is using it as an excuse to stall on the purchase. What do you suggest?”
Sue, that’s a great question.
You can’t really tell if the buyer is dragging their feet on the purchase with this. But there is a simple way to find out.
There is a concept in marketing called risk reversal. The idea here is to transfer the risk from the buyer to the seller, to eliminate the objection.
This is the same as what happens when a buyer finds a bunch of problems during the building inspection. They’ll complain that the bathroom window seal needs to be fixed and that the railing on the stairs needs to be tightened and that the old smoke alarms need to be updated because they no longer meet the building code.
When buyers come forward with these types of objections, they’re often looking to negotiate a discount on the property.
As the seller, you might be feeling a lot of pressure. You might be saying the discount is disproportionate to the cost of making the actual repairs. There might not be time to get all the repairs done by the closing date.
My suggestion is to not negotiate a lower price. Instead, offer the buyer what is called a hold-back. If the repairs would cost $2,000 to complete, and the seller is asking for a $5,000 discount, I would offer to put $10,000 in escrow with the title company. That money would remain in trust until the repairs have been completed. If the repairs are not completed by a specific deadline that you both agree upon, then the $10,000 would revert back to the buyer.
In essence you’re guaranteeing the performance of an item post-closing by pledging a bond that is many times the cost of the item in question. In truth, you’re not really going to risk $10,000 or $50,000 or whatever number you agree to pledge. You have zero intention of losing that money to the buyer and you make it clear to them that you are confident in completing the work by pledging a larger amount than is necessary to do the work.
You’re simply agreeing to get most of your money on the closing date, and you’re pledging to fix the listed defects post-closing. The key to not arguing over the holdback with the buyer is to make sure your lawyer does a great job of listing the terms under which the funds will be released to you with the presentation of the inspection report to the trustee who has received an irrevocable letter of direction on how the funds are to be disbursed.
The goal here is to eliminate the objection, and for you to maintain your negotiating leverage. When you can easily overcome any objection with a simple solution like this, you demonstrate to the other side that you have strength.
It discourages the buyer from chipping away at you with more objections. Some negotiators are bullies. When they smell weakness and they succeed in getting a concession from you, they often don’t stop at one concession. They keep coming back for more. If it worked once, maybe it will work again. You want to put a stop to behaviour where the buyer feels like they have the negotiating upper hand. You want to restore balance to the negotiation.
On today’s show I want to address something that has been on the mind of many investors I’ve spoken with in the past week.
We’re talking about the frustration be feeling stalled, of deals falling apart, of delays as a result of the current market conditions and the pandemic induced delays.
I’m hearing from a lot of driven type-A personalities that they feel like they’re failing. When you’re used to getting things done, to slaying a dragon each and every day, it’s unnerving to feel like the market has passed you by.
We have seen delays of all kinds. We have seen professionals like lawyers and accountants take longer than normal to respond. We have seen lenders take longer. We have seen contractors struggle with supply chain disruptions.
We’ve seen customer support calls facing incredible wait times. In the past, wait times that were 6 minutes, are now sometimes 30 minutes, or even 3 hours.
Materials that should have been delivered to a job site in one day have been waiting for over 5 days with no clear forecast on when they will be delivered. Parts for a vehicle repair have been waiting for nearly 4 months. Office supplies that should have been delivered in a single day, took nearly 3 weeks. When they were delivered, the quality was not up to par.
Last year, deals were too expensive. Today, the economy has changed and the deals are still to expensive. It’s going to be another bunch of months before prices fall to the point where the valuations make sense. More waiting.
Oh, it’s an election year in the US. That means some investors will want to see the outcome of the election so that they know what tax rule changes might come into play, depending on who gets elected into the White House.
All of these uncertainties mean only one thing – more delays.
As professionals, we pride ourselves in being able to set expectations. I pride myself in being able to control the outcome. These days, I’m finding myself incredibly frustrated by the seeming inability to deliver items whenever there is a single external dependency.
I don’t control what others do. All I can control is myself and my own response to others.
I find myself making excuses and resetting expectations. Things that used to take a few hours are now taking a week. It’s hard to adjust to the new pace. I’m not working any less. I’m not taking my foot off the gas.
It just feels like life is in slow motion. I hadn’t given myself permission to adjust to the new pace. Is this the new normal?
This week I was in a mastermind meeting with other developers. We compared notes on what was happening in the market. We talked about the struggles we were facing.
It was through the process of masterminds that I finally gave myself the permission to slow down. By talking with other entrepreneurs I was able to see that I wasn’t alone. Everyone was experiencing greater difficulty in getting tasks to completion, to having projects achieve their milestones. Everyone was experiencing changing terms from lenders, seemingly variable commitments from investors.
Everyone was experiencing slower progress and labor shortages in construction. Everyone was experiencing supply chain disruptions.
The stress I was experiencing was the result of the gap between my expectations and the reality on the ground. I only control my expectations and the expectations that I set with others. I can’t change reality. I may be able to influence the future through my actions. But reality is in the present, not in the future, and not in the past.
On today’s show we’re talking about a major change in the way realtors market properties. In particular, the National Association of Realtors are the defendants of a lawsuit brought by a consortium of agents called Top Agent Network in U.S. District Court for Northern California. Top Agent Network, a San Francisco-based, members-only platform for real-estate agents. The California Association of Realtors and the San Francisco Association of Realtors are also co-defendants in the lawsuit.
At issue is a new policy called Clear Cooperation. The suit seeks unspecified damages and to reverse NAR’s newly enacted “Clear Cooperation Policy,” which went into effect May 1. The new policy requires NAR members to share their listings through the local multiple listings service rather than shopping them privately to a few contacts, a practice increasingly preferred by wealthy and high-profile sellers. Members who violate the policy face punishment, including fines.
The problem with clear cooperation is that in many cases sellers want to maintain privacy. Contrary to the NAR policy which mandates that its always in the sellers best interests to make the property available to the widest number of buyers.
Privacy is sometimes a hallmark a concept called exclusivity. If a property is a sought-after property, like a waterfront property, the seller wants to attract a qualified buyer. The seller doesn’t want to be inundated with showings. They want a small number of fully qualified buyers to come and view the property.
What NAR is saying is that the seller doesn’t have the intelligence, in fact they don’t even have the right to choose how their property is marketed. Last month they had the choice, now NAR says that they don’t.
As I’m recording this episode, I have a gold coin on my desk. Part of what gives the gold coin its value is the scarcity of gold. If gold was as abundant as water, there’s no way it would maintain its value. It’s that exclusivity that gives it value.
When you take something that is rare and commoditize it, you actually lower its value in the eyes of the buyer.
It’s surprising to me that a sales organization like the National Association of Realtors would fail to understand such a basic concept.
The idea of value seems paradoxical. We know that if there are multiple bidders on a property, the value will be higher than if there is just a single offer. Casting the net wider using the public MLS makes it possible for more potential buyers to become aware of the property.
The fact is, realtors have multiple tools in their toolbox. It’s not a one size fits all. Clearly an exclusive listing for a commodity 1BR condo in a building that has hundreds of units might be inappropriate and not in the best interests of the seller. But to outlaw a tool, because it might be possible to abuse a tool seems highly unreasonable.
At the end of the day, the seller should have the choice of which method to market the property.
Incredibly we have seen the stock market rebound in the past week in response to the Federal Reserve monetary stimulus and the government’s fiscal stimulus.
But there are several characteristics about this market rally that are troubling.
1) The volume of shares being traded is way down. Not only that, the market index is being influenced by a smaller number of companies than perhaps at any time in history.
Let’s talk about what thin trading volume means in this context. It means that after the major selloff, there are not that many people looking to execute trades in the market. So a smaller number of buyers or sellers can significantly influence the price of a stock. The prices have gone up in the past week, but the buying sentiment is not broadly based, its very narrowly based. That means its quite fragile. A similar sized sell-off could easily crater prices.
2) Let’s talk about patterns of investing. I’m one of these folks who believes in investing on the basis of fundamentals. There is another school of investing called technical. That’s when you speculate on market timing and market psychology. Terms like bull market and bear market come from the world of technical analysis, where traders aim to time the market. Many analysts are calling this a bear market rally that is a precursor to the big drop.
3) Warren Buffet spoke about a week ago to the shareholders of Berkshire Hathaway. In his remarks, there were three items worth noting.
He is divesting if stocks including airline stocks. He is saying that it’s going to be a number of years before the airline industry recovers. After all, he is 89 years old and he likely won’t be alive to see the full recovery in the airline industry.
In the last downturn Warren Buffet was active in doing deals. For example, helped GE with a line of credit to ensure they had liquidity if they needed it. Today, he’s divesting of certain assets and is holding onto a record amount of cash. He isn’t making the same kind of bullish statements that we heard back in 2008 and 2009.
The Buffet indicator measures the total market cap (TMC) relative to the US GNP. If valuations are going up, and the economy isn’t growing, then the index goes up.
Let’s talk about why the stock market matters. Some people in the press are saying that the stock market is not the economy. That’s absolutely true. It’s as if to say that stock values can drop and it’s only a few wealthy investors who are going to have a smaller cash pile at the end of the day. Big deal. That’s not affecting main street.
Well folks, this is where the connected nature of our world is virtually impossible to escape. You see we have tens of millions of baby boomers who are nearing retirement, or have recently entered into retirement.
Guess where those retirement funds are highly concentrated? That’s right, the stock market. It’s in mutual funds. It’s in pension plans. While I don’t advocate the stock market as a place to invest right now. In fact I have been recommending against it for about 5 years.
When you’re dealing with people who are in their 30’s, they have plenty of time to recover from an investment setback such as we are experiencing right now. But if an investor is in their 60’s or 70’s, they simply don’t have the time to hope they can make it back. If they’re incurring losses, these losses are likely permanent.
The focus has been on job losses in the employment economy. Let’s not forget that the scope of the pain is going to extend far beyond the immediate. If retirees suddenly lose 30%, or 50% of their retirement savings because of a stock market crash, their spending power has been diminished for decades to come.
Brian from Ottawa Canada asks.
I'm wondering if there has been any discussion about the lack of government support for residential landlords? In this environment, it seems like we're one of the forgotten ones. Deferring mortgages seems to be a decent temporary measure but replacing rental income is far more important.
Brian, this is a great question.
Tenants and Residential landlords are both feeling the pinch from the current economic conditions. The economy is facing millions of claims for unemployment benefits. This is the time when you need to be in contact with your tenants on a regular basis to make sure they are clear on the terms of any reduction in rent payment.
Governments all over the world have implemented a moratorium on evictions for non-payment of rent. That is not the same as saying that the tenant doesn’t need to pay rent. All it has done is remove one of the remedies that landlords have to enforce the payment of rent.
If a tenants says that they can’t pay rent, then you need to ask them to produce documentation that supports why they need some rent relief. This includes, paperwork from the government on their new unemployment cheque. They need to demonstrate what their income was before they lost their job, and now what their income is now while they are collecting an unemployment cheque. In many cases, the current income numbers are very close to the previous numbers.
If their income has gone down, then you need to ask the tenant to show you their budget. They can’t just stop paying rent because they feel like it.
In a handful of cases, we have negotiated with our tenants a reduction of their rent for a period of time. The change has been written into a rent forgiveness letter, and the tenant must continue to pay the revised number.
You see, right now the government is stepping in and helping people who are out of work and replacing their income. If their income truly goes to zero and they don’t have the money to feed their family, then that’s a different story. A moratorium on evictions does not mean tenants no longer are required to pay rent.
If a property owner is experiencing a shortfall in revenue, there are a number of different types of discussions that can be had.
- In many markets, we are seeing that the city has offered a 6 month deferral of property taxes. This ultimately won’t help with a shortfall of money. The city eventually wants its money. But if you have a short term cash flow problem, a deferral of 6 months in property tax is better than going out and borrowing money.
- You want to have a conversation with your lender. If you are experiencing a cash flow problem, you may be able to negotiate a small loan modification that consists of a deferral of the principal portion of your loan. Under that scenario, you would still pay the interest. The loan would be considered current, meaning there would be no default on the loan. The principal would not reduce according to the amortization schedule, and the effect of the principal deferral is that you would essentially be adding, say, 3 months to the length of the loan. Just like there is a moratorium on evictions, there is a moratorium on foreclosures in a number of jurisdictions. That doesn’t mean that property owners don’t need to pay their mortgage all of a sudden. The same logic holds here as well.
While you are correct in saying that there are no programs specifically aimed at residential landlords, this actually makes sense.
You see, the money is needed by the people who lost their jobs at the outermost extremities of the economy. I’m talking about the people who produce through their labour, who have earned income.
Landlords are further up the food chain so to speak. As a landlord, I would not want to see a situation where the government pays the rent to me, but pays nothing to my tenants.
Steve Olson runs the Fourplex Investment Group (website fig.us). He has developed a strategy that is adding value to the market by building new product in areas where the land cost supports a rental rate to reliably recoup the investment, even in today's environment. I love this strategy.
In this final segment of a four part series, Russ and I talk about how to value assets and in particular real estate. Today's final mind blowing segment will bring home the ideas that underpin how to think about investment.
You can hear more from Russ on The Real Estate Guys Radio show at realestateguysradio.com.
On today’s show we’re looking at how investors are investing today.
There’s no question that we are living in uncertain times. The stock market is pushing valuations that can’t be supported by the current level of profitability in the economy. So what’s driving it?
I feel like we need to go back to basics and talk about how investments are made, or at least how they should be made in my view.
Money comes to you through one of three mechanisms
- Earned Income
- Residual income
- Capital Gains
If we’re talking about investing, then it comes through one of #2 or #3 either residual income or capital gains. Residual income, by definition means that a business is generating cash positive cash flow. Capital gains happens either because you bought something at a deep discount to its true value, or the value increased from the time you bought it.
In order to make a good investment, you need to be able to assess which of those is at play. Is there positive cash flow, payable to investors, and if so, how much? If there is a capital gains play, or a value play, are you buying the business at a discount or are they on a trajectory to create enough value from today’s purchase price that you are making a good buy?
If you can’t give an affirmative quantifiable answer to one of those questions, I’m starting to lose track of what you’re doing. That drifts out of the realm of investing into the sphere of speculating.
How on earth are you going to evaluate the value of a company that can’t provide any forward guidance on revenue or earnings? Many publicly traded companies in their most recent investor communications have declined to offer forward guidance. Don’t get me wrong, the executives are doing the right thing. They really have zero ability to provide meaningful guidance. If they gave a number, they’d be making it up out of thin air.
So why have people been piling back into the stock market in recent weeks? It makes no sense to me.
Quite simply, the investments are being made based on a belief that the Federal Reserve, and the Treasury will print as much money as it takes to save key sectors of the economy. If you believe that the airlines will be saved by the government, then Delta Airlines and British Airways must be a good investment, right? Or if you believe that the cruise lines will be saved, then Carnival Cruise line must be a good investment right?
The only thing that makes the investment a little better than another is the notion that the Fed is going to save the company, no matter what it takes. But folks, that’s not the same thing as investing in a company based on fundamentals. In a few short weeks, the stock market has gone from one where investors invested in companies, to one where investors are front running the Fed expecting that if the Fed is going to pump money into it, it’s a good investment at any price.
The Fed doesn’t have the power to grant money. They only have the power to lend money. The money actually will be coming from the government and the terms of those cash infusions haven’t been fully disclosed.
What I’m seeing in the market right now is that people are making investment decisions based on who is getting a government handout. The government handout that is being helicopter dropped from the sky, falling upon some and leaving others behind.
Don’t get me wrong, survival is a good thing. If you’ve decided that you want to hold onto a liquid investment, like shares of your favourite public company, then you definitely want to understand the story. But that’s not the same thing as making a new investment, expecting that you will get residual income, or perhaps you’re secure in the knowledge that you are buying a bargain at today’s price.
I’m parking funds on the sidelines in physical metal, or in real assets where I feel confident in the earnings from those businesses.
On yesterday’s show I spoke about using the energy of the market to aid you in your quest. Use the energy of the market to your advantage as you evolve your investment strategy.
On today’s show we’re going to look at a few asset types that we believe are eventually going to do well once through this period and once this pandemic recedes and we are into a recovery phase.
My analysis of various segments of the market show that some sectors are feeling tremendous pressure, and others are just ticking along like nothing has happened.
The ones that are doing poorly are will probably come as no surprise. But even in these segments, there are some bright lights.
The worst performing asset class right now is hospitality. Hotel occupancies across North America are averaging below 10%. According to a report from Colliers, most hotels have laid off much of their staff and are either closed completely, or are operating on a skeleton staff.
Short term rentals are a segment that overall have been hard hit. We’ve seen some announcements from AirBnB in recent days of large workforce reductions and cost cutting measures in response to the fall in bookings. But some short term rentals have done surprisingly well. In those locations, they’ve filled a particular need. Our own portfolio of short vacation rentals had very low occupancy in April, which in a normal year would also have very low occupancy. April is between seasons in the mountains. It’s after ski season has shut down and before the summer vacation season. As of last weekend, we’ve seen a flurry of bookings as lockdown orders have been relaxed.
Retail store front real estate is also struggling. The social distancing requirements have closed down most non-essential businesses. This includes clothing stores, restaurants, bars, many primary health care locations including dental clinics, massage therapists, and hair stylists. We’ve seen a 50% drop in our commercial rent collections.
Commercial office space is also struggling. This is particularly true in the co-working office model. These businesses operate on very thin margins because their operating costs are high, higher than regular office space because they carry more staff.
Many companies are re-examining their office space as they’ve continued to operate with large parts of their workforce remote.
Residential multi-family continues to do well. But the huge impact to the economy means that many having lost their primary source of income will eventually lose the means to pay rent. Unemployment benefits are closing the gap. But the moratorium on evictions could have the effect of encouraging non-payment of rent. Multi-family remains a good asset class, but the degree of leverage will determine how well these assets perform under these challenging market conditions.
There are three asset classes that are actually performing as if nothing has happened.
Warehouse and distribution centres that serve essential businesses continue to do well. These include grocers, online retailers that have been less impacted by the shutdown. Online retail sales are up 10% year over year in March as residents leverage deliveries to purchase essentials to set up home offices.
The operators I’ve spoken with in the Self Storage segment have seen no measurable drop in rent collection. That doesn’t mean this segment is fully insulated. If people are looking to cut costs, this might eventually become an area of cost cutting. But for the moment, it has not been the first to be cut.
Boat and RV Storage also continues to operate with no measurable change. This might change if and when people look to sell their boats or RVs in order to raise cash. But even if they sell, the boats and RV’s still exist and will simply change hands.
There are other asset classes that we have not analyzed yet. But for the moment, these are an initial analysis of the landscape.
When I was a young boy, I studied martial arts. But not any martial art. The fashionable ones at the time were Karate and Kung Fu. They were full of very flashy strikes and kicks.
No I studied Judo, the Japanese art form. One of the things we learned in Judo is that if someone is coming at you, you could expend a lot of energy trying to stop them.
Instead, in Judo, you use the energy of your opponent to their own detriment. In the simplest example, you might have someone coming at you at very high speed. If you stick out your foot and trip them, they are probably going to fall flat on their face. Or you could rotate them over your shoulders and flip them onto their back on the ground when you can easily pin them down.
They’re too big and heavy to pick up slowly, rotate in the air above your head and then place them down on the ground on their back. But if they’re coming at you, it doesn’t take that much energy at all.
Many people I speak with are trying to push against the system.
We’re starting to major defaults across many industries.
We’re seeing J Crew, JC Penny, Hertz Rental Car, Neiman Marcus, all filing for bankruptcy protection, or on the verge of filing for such protection.
There are a lot of people out there fighting against the tide. They’re resisting the tidal wave of energy that is coming at them.
My advice is don’t fight it. That doesn’t mean you shouldn’t fight to save your business. Absolutely you should. When I say don’t fight it, what I mean is don’t enter a state of denial. If the energy in the system is in the direction of an economic downturn, then lean into the downturn.
When I say don’t fight it, what I really mean is to align yourself to take advantage of the energy in the system, to use that otherwise destructive energy to your advantage. You literally want to perform a judo flip on your investments.
Ryan from Arlington Texas asks
Hi Victor,
You always seem to be ahead of the curve, and you do a wonderful job informing your listeners about the trends you see in real estate and current events.
Where do you like to get your news? What are some of your bookmarked websites (or other mediums) that you refer to most often?
Love the show. Thanks for all the great content.
Ryan,
This is a great question. I produce several different types of segments on the Real Estate Espresso Podcast.
- Evergreen content
- Trending Stories
- Journaling - These are stories from direct observation of my own projects
- Interviews
- Book of the month
- AMA episodes
Your question relates most strongly to those topics that are trending in the industry. These shows require the most research. They are those that somehow tie into something that is happening in the broader economy.
For that, I have numerous sources. I tend to stay away from the headline sources like the NY Times, and the Washington Post. I almost never look at USA Today or CNN or Fox News.
I find that when it comes to commercial real estate, the Wall Street Journal does a dreadful job. So I rarely look to the Wall Street Journal for real estate, but they are a source of good economic, and geopolitical information.
I have many go-to sources. They include the World Economic Forum, Business Insider, and the newsletters of various economists.
I go to the research departments of the major brokerage houses like Colliers, CBRE, JLL, and Marcus and Millichap. I use the economic research from the big 4 accounting firms.
There are a number of people I follow regularly, many of whom I know personally. I’m thinking of folks like Peter Schiff, Simon Black, Dr. Doug Duncan, John Mauldin, Ray Dalio, and Harry Dent.
While I may not quote them directly, the information I receive from them gives me a thread to follow. So for example, if the story is something on, say, demographics and the story references an updated data set in the census data. I’ll go find that census data, download it onto my computer, bring it into Excel and calculate a new slice of the data that would be relevant to our listeners.
In your question, you talked about my reporting being ahead of the curve. It’s true that I’ve made numerous predictions this year that have appeared in the podcast days or weeks before they’ve appeared in the news. Whenever that happens, it’s the result of some analysis. I rarely just report the news without adding any value. Thought leadership involves using my own intellect to add value. That’s an exercise in connecting the dots.
For example, on January 29, I predicted that we were going to experience a deep recession as a result of Covid-19. At the end of January, this was hardly headline news anywhere. Connecting the dots frankly was easy. If you go back to the impact of travel reductions in 2003 due to SARS, the GDP in the US fell 1.5%, solely from the impact to travel and hospitality. The scope of travel reductions and supply chain disruptions by the end of January were already looking to be larger in impact than 2003. Predicting a recession was as plain as day.
I’m going to go out on a limb and make one more prediction. I’m going to predict that once social distancing requirements are eased, people who have been stuck at home for nearly two months will be looking for a get-away. But it won’t be the charter flight to an all-inclusive resort. It’s going to be a while before people have the confidence to jump on crowded flights.
The vacation of choice will be a cabin on a lake, a chalet in the mountains, far from the crowd, or perhaps an RV vacation. If you own a short term rental within driving distance of a major center, you are well positioned to fulfill the demand that will return with a vengeance.
On today’s show we’re going to do an analysis that show how you can use numbers from the same data set to construct virtually any story that you want.
We are continually exposed to data in the news and the news source will provide an in-depth analysis with lots of supporting data.
Let’s say that you wanted to create a narrative on which country is experiencing the worst outbreak of Covid-19. For the purpose of today’s show, we’re going to rely on data that is available on worldometer.com. This website collects all kinds of global data like population data, global oil reserves, coal reserves, the number of bicycles manufactured each year, and yes, statistics related to the Covid-19 outbreak.
Of course the conclusions you draw from the data are only as good as the data collection that supports the numbers.
But on today’s show, we are going to also examine which measures provide meaningful insights, and those which are completely useless.
So back to our question, “Which country has experienced the worst outbreak of Covid-19?”
If we go to world-o-meter, you would see that as of today, May 4, 2020, the United State has more reported cases than any other country. The data shows that of the approximately 3.5M globally reported cases, approximately 1.2M are in the United States.
But we know that testing and reporting has not been uniform across the globe.
There is a clear correlation between testing and reported cases. If you’re not testing, then the reported numbers would be low. So let’s take a deeper look at the testing numbers and see if that can give us a clue.
The USA reports having performed more than 7.1M Covid-19 tests, more than any other country. Russia is a close second with 4.1M tests. So perhaps the numbers are accurate, the US has the worst outbreak in the world.
Let’s take a closer look and see how the testing compares against other countries. So far, the US has performed 21,400 tests per million of population. That would place the US in 42nd position out of all countries in the world for extensive testing.
So maybe that’s not the best metric. Perhaps we need to look at the number of serious cases and compare that with the ability of the health care system to handle the outbreak. Next down the list is Brazil with 8,300 serious cases. They have far fewer critical care beds and have experienced significant outbreaks in areas with very poor health care infrastructure. Perhaps Brazil is the hardest hit country?
What about deaths? Which country has experienced the most deaths? Maybe that’s a better measure. So perhaps let’s look at the number of deaths due to Covid-19.
Here too, the US leads the world with the largest number of reported deaths due to Covid-19 with 68,200 deaths. Clearly, the US is the hardest hit country.
But wait a minute, perhaps that’s not a meaningful measure. The US has a large population and a huge land mass. Perhaps the number of deaths per million population would be a better measure. If you look at deaths per million, then San Marino leads the world with the most cases per million population at 1,208 deaths per million. But of course San Marino has a tiny population so even their small cluster outbreak which killed 41 people could provide a skewed statistic. Let’s see who’s next. Next on the list is Belgium with 7,844 deaths and a whopping 677 deaths per million population. The US which has more deaths at 68,000 deaths has 207 deaths per million, less than a third of Belgium.
The next major countries after Belgium include Spain, Italy, the UK and France having the most deaths per million population.
So the top 5 hardest hit countries are Belgium, Spain, Italy, the UK and France.
Dana Samuelson is owner of American Gold Exchange, a national dealer of gold and other precious metals based in Austin Texas. On today's show we break down the way pricing is done in the physical metals market. His analysis brings a tremendous clarity to pricing that may be otherwise difficult to understand. You can connect with Dana directly at info@amergold.com or through his website at www.amergold.com.
Russell Gray is co-host of the Real Estate Guys Radio Show. He's a financial strategist and one of the smartest dudes I know.
On today's show we talk about the impact of counter party risk and where precious metals fit into the picture of real asset investing. It's an epic conversation as always.
Today’s show is the book of the month. On the first day of each month we review a new book. In order to be considered for book of the month, the book needs to meet a very simple criteria. It needs to be impactful enough that it can change your life, or your perspective on the world.
The book this month definitely meets the criteria for book of the month. It is called “The End of Food” by Paul Roberts. The book breaks down how our food system works. It chronicles the history and the evolution from the most basic agrarian economy to the thousands of new convenience products introduced each year that now line the supermarket shelves.
Paul Roberts’ work is extremely well researched and frankly is a riveting book to read. I simply could not put it down. Every page had some new insight. I don’t think I will ever see the contents of the supermarket shelf the same way again.
Our current system of food supply is not at all related to consumer demand. It’s being driven by the need for the major food suppliers to grow their revenues and their earnings. As margins have fallen in various parts of the supply chain, the response has been to introduce innovations that restore the margins. But in order to get a return on those incremental investments, a higher volume of sales is required to recoup the investment.
Imagine that a farmer is being squeezed on price for, say, wheat. The buyer tells them that if they go out and spend $400,000 on a new combine, they can reduce their cost per bushel. But in order to recover the $400,000 investment, they have to plant more wheat which brings more supply into the market. That increase in supply, selling into relatively unchanged demand has the effect of lowering the price at market. So the business case for fancy new piece of farm equipment is in fact somewhat flawed.
Back in the late 1940’s fishermen in the Hudson River North of New York found that the fish kept getting bigger and bigger. Fishermen are rarely ones to complain about that. It turns out that upriver there is a pharmaceutical factory owned by Lederle that manufactured tetracycline, an antibiotic. At first the company thought it was the Vitamin B12 that was a byproduct of the fermentation process. But in the end it turns out that these micro-doses of antibiotics were enabling the fish to expend less energy fighting bacteria in their gut and allowing more energy to go into growth of muscles and bones.
It wasn’t long after that the food industry discovered the same effect in chickens, pigs, and cattle. Mixing antibiotics into the feed meant that the growth rate of baby chickens was increased by 25%. It increased the growth in turkeys, pigs and calves by almost 50%. Of course, now we face a situation where antibiotic resistant bacteria are increasingly infecting entire herds of farm animals.
Fast forward to today. Major food companies like Nestle are struggling to achieve major growth in the mature markets in the US and Europe. The emerging markets in Asia and Africa represent an opportunity for growth. But they require customization of products to local tastes. Nestle’s new R&D center near Shanghai has divided the country into regions based on flavour preference.
The relentless focus on price has resulted in food that is of lesser quality and nutritional value; a food culture that is increasingly defined by value pricing and portion size; and a global production system so lean and just-in-time that it is simultaneously more likely to be disrupted and less able to absorb the impact of a disruption, as we have seen in recent weeks.
If you’ve been listening to this podcast for a while, you’ll know that I’m a junkie for Economics 101. What I mean by that is that so much of the market can be simply understood by watching the balance of supply and demand of any commodity. But markets are not always that efficient. They stumble from time to time and get temporarily out of balance.
Prices can be highly elastic when it comes to short term imbalances of supply and demand. We’ve seen it in all forms of products. We’ve seen it recently in oil. We’ve seen it in surgical masks, some medications and toilet paper.
One of the great illusions is that we operate in a truly free market economy. That’s true part of the time, except when it’s not.
We know that multiple bids for a product result in a higher price. Fewer bids transfer the negotiation leverage to buyer. This is exactly the same in real estate. We know that if a multi-family project has 20 offers, it will sell for more than if it has only one. It’s a true market when there are multiple buyers and sellers.
Increasingly, large buyers like Walmart create “perfect competition” where suppliers conduct a reverse auction bidding down the price to win a contract with Walmart or Costco, resulting in the perfect “free market” monopoly.
We have experienced decades of falling commodity prices as global supply chains, consolidation, and increasing specialization have enabled that reverse auction to bid the price down.
Our commodity economy continues to function as long as supply chains operate without disruption.
But now, we’re experiencing an unprecedented collapse in both supply and demand. But not for everything. The market is operating in a very inefficient way right now. Normal demand patterns are disrupted. You only need to go to the supermarket to see this effect.
People are staying at home and favouring canned food, packaged food over fresh fruits and vegetables. We are at the height of the strawberry season right now. Yet we are now experiencing a surplus of strawberries and a shortage of canned beans.
North Americans consume most of their potatoes in restaurants in the form of French fries. With restaurants closed down, potato stockpiles from last year are overflowing. Farmers are having trouble selling potatoes and they are reducing their planned 2020 crop size.
Naturally, potato prices have dropped.
Markets all over the world are going to be experiencing these kind of disruptions. It means that we may see local price increases for certain commodities.
Today I purchased some precious metals for my own portfolio. The premium for bullion coins charged by the dealers was 35% compared with the normal premium of about 10%. In fact, the licensed dealers in my home were 100% out of stock. I placed the order with the bullion desk at my local bank and the bullion will be delivered in less than two weeks. The dealers are quoting much longer delivery times and are charging a much higher premium. Again, this all relates to supply and demand.
Real estate is no different. I’m starting to see distressed sales on the market. The disruptions here too are creating market inefficiencies.
The big question is how long will the imbalance persist. Is this a short term condition, or a medium term condition? If the surplus is for retail space, it might indeed be a long term surplus.
Look at all these conditions through the lens of supply and demand.
On today’s show we’re talking about the difference between Main Street and The Fed.
The bailouts of the economy have been making headlines over the past month. The Federal Reserve has agreed to buy back hundreds of billions of in mortgage backed securities from the banks and from the mortgage insurers. They have allowed banks to temporarily drop their deposit reserves from the traditional 10% reserve to zero. Under normal times, that would mean the bank is insolvent, but not today. The Fed has their back.
The US Federal Government has pledged $2.7 trillion in bailout money since the end of March. The big question is who is getting the money, and more importantly, who is getting left behind?
Today in the Wall Street Journal, FHA director Mark Calabria was quoted as having said that he doesn’t plan to do much to help mortgage lenders outside the FHA umbrella where Fannie Mae, Freddie Mac, have a potentially large exposure.
Mr. Calabria, who heads the Federal Housing Finance Agency, is resisting pleas for help from lenders seeking relief as millions of Americans stop payments on their home loans, sending shock waves through the $11 trillion mortgage market.
He has said he is willing to stand aside even if some of the mortgage lenders fail, and he says there is plenty of capacity to move business out of failing firms and into healthy ones, if necessary.
His position offers a stark contrast to the rest of the federal government.
As part of the emergency stimulus package approved by Congress in late March, homeowners affected by the pandemic were allowed to suspend mortgage payments for up to a year without penalty.
As of last week, 3.4 million people had suspended payments, representing about $754 billion of unpaid principal, according to Black Knight, a mortgage-data and technology firm based in Jacksonville Florida. That represents about 6.4% of all residential mortgages out there.
If you look at the breakdown even further, we can see that Fannie and Freddie make up less than half (precisely 46%) of the loans where borrowers have stopped making payments. FHA and VA loans have the highest rate of non-payment at 8.9%. The remaining 22% of the loans in forbearance are made up of loans where the lender is a privately held or portfolio held.
I don’t have a problem with the notion that a bailout is coming. What I do have a problem with is the inconsistent application of the remedy. How can you protect 78% of the lenders, and then leave 22% of them out to dry? It’s not like the 22% private lenders did anything wrong. They took the same general risks as anybody else in the market. Arguably, they took less risk because they don’t have the leverage of being a bank where the banks loan out the same deposit another 9 times. Mortgage investment companies only loan out the money once. The same is true for issuers of bonds and insurance companies.
What Mark Calabria is saying is that he doesn’t care if individual main street investors lose money. The banks will happily purchase those distressed assets for pennies on the dollar.
The FHA position is alarming. If government isn’t going to help all lenders, just the ones they arbitrarily choose to help, this looks like a transfer of wealth.
I don’t want to see equity investors lose money in these market conditions and I don’t want to see private lenders lose money either.
Let’s say that a lender doesn’t get their interest payment for a month, or two, or three. Does that automatically mean that the lender is at risk of having a bad loan and losing their loan principal?
Not necessarily.
The question then becomes, how can private lenders work with their borrowers and stakeholder investors to provide the appropriate level of loan forbearance without risking the investor capital. This is clearly uncharted territory on a large scale.
One of the most powerful approaches to bring to any analysis is zero based thinking.
Quite simply, it helps eliminate the emotions that often cloud our judgement.
Zero based thinking means going back to the starting point of a decision, but armed with the knowledge and perspective of hindsight.
Knowing what you know now, would you rush out today and purchase those shares of General Electric, or Boeing? Those Boeing shares have fallen in value over 60% so far this year. If you wouldn’t rush out and buy them today, then I guess the question is, why are you holding those shares in your account today?
Oh I see, it’s because you already hold them in your account and you don’t want to crystallize a loss. By holding onto them you remain in the hope that the stock might bounce back. But that’s not investing. That’s speculating, that’s hoping, not investing. A speculator speculates, a gambler gambles, and an investor invests.
So if you wouldn’t rush out and buy those shares today, then why are you still holding onto them? It’s not because the brokerage commission of $5 is holding you back from trading out of the stock and perhaps buying them back at a later time when they actually meet your investment criteria.
The logic of the hold argument is often confounded by the emotion wrapped up in the consequences of the decision, not the decision itself.
Let’s say that you have an offer out on a property and you have passed through your due diligence period. Perhaps your earnest money deposit has gone from refundable to non-refundable. Your lender is no longer offering the same terms as before. The viability of the project is unknown at this point. This is a moment to apply zero based thinking. Applying what you know right now, if you were making the decision all over again to buy that property, would you rush in and buy it?
How do you handle the negotiation with the seller?
The seller doesn’t just want your deposit money. They ultimately wanted to sell the property. A 1% deposit isn’t going to really help them.
You have a few choices.
Would you try and close the deal as planned?
Would you walk away from the deal altogether and forgo your deposit?
Would you renegotiate the terms of the deal?
Delay the closing, but not just by a few weeks. We are talking scheduling a new deal several months out when it becomes clear that the economy will justify the project. The seller may legally be able to argue that the buyer failed to perform. But in truth, the failure to close has nothing to do with the buyer. It’s the result of the market conditions that have clearly changed dramatically in a matter of weeks.
We don’t know if the easing of social restrictions will cause a resurgence of the disease and another lockdown situation in just a few weeks from now. Other places around the world that have attempted to ease restrictions have re-imposed them shortly thereafter.
Here’s what few people are talking about. Government handouts are very easily accepted, and they breed dependence faster than you can say the word paycheck. Those who have laid off employees will be slow to re-hire them. Those who have taken government checks will be equally slow to give them up voluntarily.
If you knew that 25% of the tenants in this apartment building have been laid off and are receiving unemployment benefits, would you buy that building? If you knew that there was going to be a 150 day moratorium on evictions, and rent collections were running at 2/3 of normal, would you buy that building today at the same price?
If the answer is no, then difficult as it might seem, now is the time to renegotiate the deal.
On today’s show Anna from silicon Valley asks
Is now a time to be investing in multi-family real estate? Surely there are deals coming up on the market.
Anna, this is a great question.
Some people have adjusted their criteria in terms of what is a deal as the market has heated up over the past decade. I’m a believer that the criteria for investing should not vary dramatically with market conditions. That is to say, you should be conservative in your underwriting. But the truth is, virtually nobody under the sun who is syndicating multi-family apartment deals would have realistically designed a project to withstand the kind of economic shock we are currently experiencing. No rational risk manager would have assumed a continent wide 75% drop in restaurant revenue in a 5 week period, nobody would have assumed a jump in the unemployment rate to over 20% in less than a month. There are now more than 33 million unemployed, or a real unemployment rate of 20.6%—which would be the highest level since 1934.
The fact is, investors want certainty. Lenders want certainty. The process that both investors and lenders use is to point to history.
If you have a seller looking to sell, they’re assuming the value is based on a historical metric which clearly is no longer valid, despite the fact that the history is no more than two months old.
The buyer on the other hand is looking forward at what is, and what is likely to be the case in the coming weeks and months. Because of these two perspectives, there is currently a wide gulf in expectations between buyer and seller on how to value a property.
It’s going to take some time for sellers to readjust their expectations of what their properties are worth
The lender performs three forms of due diligence, the same as any investor should do. They need to qualify the borrower, the asset, and the submarket. All three of these require some history. But in today’s market, there is no Covid-19 market seasoning. We don’t have 12 months of history deep into this economic downturn from which to predict the future.
The problem is that there is simply no modern day precedent for what has happened.
A lender is really asking one simple question.
If I lend you money, how am I going to get it back. How will I get it back if things go well, and how will I get the money back if things don’t go well.
The key question is whether things will go back to normal when this pandemic is over? Or will there be a new normal that doesn’t resemble the way things were?
Knowing how to value a property in this new normal is the key question. We simply don’t have enough history accumulated to be able to say what the new normal is going to be.
In the world of multi-family apartments, the demand is the same now as it was two weeks ago. The population is largely the same. Very few people have moved during this period of social isolation. So the demand hasn’t changed.
What maybe has changed is tenants’ ability to pay. With 26 million job losses in a matter of weeks, combined with moratoriums on evictions, politicians calling for rent boycotts, the ability to pay is highly questionable.
But when you have a high economic vacancy, such as we have right now, establishing the net income becomes difficult. So then establishing the value becomes impossible.
It’s going to take time. Don’t be in a rush.
Loe Hornbuckle is founder and CEO of The Sage Oak Assisted Living with multiple locations in Texas and Louisiana. Loe shares his perspective on what the pandemic means from the perspective of an operator who truly has first hand contact with staff and residents.
You can learn more from Loe at loe@thesageoak.com and he has a free book "The Sage Oak guide to Residential Assisted Living" available for download at goodhorncapital.com.
Russell Gray is co-host of The Real Estate Guys Radio Show, now in its 24th year. He's a financial strategist and today's show is part two of a multi-part conversation on the economy and how to understand what is happening out there.
If you haven't heard part one, you may want to go back and listen to last Saturday's show first.
On today’s show we’re trying to get inside the mind of your tenants and figure out if they want to pay rent in a little more than a week on the first of May.
The messages from politicians have been confusing to say the least. Whatever your taste, you’re sure to find a politician who is saying something you resonate with.
There’s Senator Mike Gianaris, deputy leader of the Senate in NY state calling for tenants to undertake a rental payment boycott. Governments have created moratoriums on evictions on foreclosures. In that environment, tenants may be genuinely unable to pay their rent. Others may simply choose not to pay their rent.
There are federal programs designed to help families that have lost their employment.
For landlords, April 1 saw a drop in rent collections across the US. But still rent collections were fairly strong, having experienced a 12% drop compared with the previous month.
The real test will be the months of May and June.
Even when you have a long term lease, tenants are making a buying decision every month to pay their rent. If the property is being well maintained, cleaned, and most importantly they feel like the staff really care, they will feel an emotional connection to the property, and the landlord.
But if the mail room hasn’t been cleaned in days and there is trash on the laundry room floor, tenants will start to feel like the landlord doesn’t care.
If the landlord doesn’t care about the tenant, then why should the tenant care about the landlord.
Let’s be clear, there is no real causal connection between trash on the laundry room floor and tenants paying their rent. It’s not like the landlord put the trash on the laundry room floor.
But you have to remember that your tenants are people, they’re human. Humans live their life in stories.
I remember the CEO of a major airline telling their employees that if the tray table is dirty, then passengers assume that the engine maintenance isn’t being done. Here too, there is no connection between the tray table being clean and the aircraft engine maintenance.
So if you want your tenants to behave normally, then they need to believe that things are as normal as they can be. The property needs to be well kept. There needs to be extra care taken to sanitize the railings in the stairways twice a day, to make sure the door handles are sanitized, to unexpectedly deliver a handful of face masks for free to your tenants, to make sure they know you care about their well-being. It’s not enough to be cleaning. Even better would be to communicate the extra steps you’re taking to help keep their families safe. You want the tenants to say “Boy I’m glad I’m living here. I doubt other landlords are taking steps like this to protect their tenants.” These are things that people remember.
When tenants experience that the landlord cares, they will reciprocate to the extent that they can. Sure, some will have lost their income, some will have fallen through the cracks in the social safety net programs that are showering the population with cash. These folks may be genuinely unable to pay.
But the vast majority who can pay will still face a choice. The choice will be, should they hold on to cash to deal with the unknown? Will government assistance programs be extended if the timeframe of the pandemic gets extended? Would it be better to hoard cash just in case? The landlord can’t evict, so why not?
I’m not here to tell you how to run your business. I’m merely putting forward a hypothesis. The word hypothesis means a hypothetical argument, a conjecture. The thesis is that if your tenants will care about paying rent, they first need to feel that the landlord cares about them.
So many people are trying to read the market conditions and restore a sense of certainty in their own minds, despite the current reality. Frankly, it’s hard to make sense of it all.
In an effort to gain greater insight, I’ve been in discussion with family offices, and attending invitation only meetings to get a reading on what some insiders are thinking.
On Tuesday evening I attended an invitation only session with John Stackhouse, Senior Vice President, RBC and Craig Wright, Senior Vice President & Chief Economist, RBC
In their remarks, they shared their perspective on what is happening in the economy. As Canada’s largest bank, they have direct visibility on what is happening since much of the cash in the economy flows through their bank accounts.
Examining the value of transactions for both Visa and Debit cards, the bank has observed that after the initial surge of buying at grocery stores subsided, the current dollar volume of Visa credit card and debit card transactions is down by 60% compared with normal for this time of year.
That’s at the consumer end of the market.
When the economics team at RBC plugged this into their model for the economy, it looks like a 32% drop in economic activity in about a month.
The RBC economics team sees a slow and gradual return to work. They don’t see the flash restart of the major sectors of the economy. Music festivals, crowded restaurants and bars, places of intense social interaction will be among some of the last to open up.
In the month of March, there were a number of notable, albeit predictable patterns in consumer spending.
- Consumers spent 88% less on apparel, gifts, and jewelry in the week ended March 30.
- For the last week in March, department store sales were down 40% versus a year earlier.
- Spending on software and data was up 30% compared with a year earlier as people outfitted themselves to work from home.
- After a brief 5% surge in household goods, these sales were off 53% in the last week of March.
- Sales of books, subscription music and streaming content remained relatively flat compared with last year.
- Naturally, sales of movies and other entertainment was down 79.8%.
- Restaurant sales are down 75% as a handful of restaurants attempt to maintain some revenue with take-out meals.
- Grocery store sales spiked in the middle of March, and by the end of March were down 11%.
- In real estate home sales, prices were holding firm across Canada except in areas with high economic exposure to the oil and gas industry. Sales volumes were down 14.3% in March compared with February. A sneak peak at the first week of April results showed resales running at about half normal levels across Canada.
We expect both buyers and sellers to lay low while extraordinary containment measures are in place. This will maintain a certain balance in most markets and help home prices stay afloat. Inventories have grown in some markets, but not dramatically.
I don’t have the exact comparable data for the United States, but the shelter in place policies between Canada and the US are fairly similar and I would expect to see similar impacts in the US economy.
Markets are becoming increasingly hyper-local. That’s more true today than ever. Global transportation has been the great equalizer and has made so many things appear to be commodities.
That’s why real estate is hyper-local. You can’t just pick up an office building that has high vacancy and move it to a place where there is a shortage.
In the absence of a differentiated value, the discussion always degenerates to price. That’s why a pound of sugar tends to cost the same in Portland, Maine as in San Diego, California. A pound of sugar is a pound of sugar. There is no real dominant brand in sugar that distinguishes one supplier from another. It’s a true commodity.
But when we describe real estate we describe the property in terms of its characteristics, its amenities, and most importantly, its location.
Yesterday, the futures contracts for oil went into uncharted territory. Some prices went negative.
Let me take you through a sampling of prices.
Saudi Arabia light and heavy oil are both trading in the futures market at $19.07.
Oil in Mexico from the Mayan region varies in price depending on the destination. If the oil is destined for the US Gulf Coast, the price is negative $1.18. If that same oil is heading for Asia, then the price is $21.79. That difference in price is a reflection of differences in both transportation and storage costs. The US has so much oil at the Gulf coast right now, that they have no place to store it.
North Texas Sweet Crude is selling at a negative $41 per barrel. Arkansas Sweet Crude is selling for $11.50 per barrel.
Central Alberta Crude is at $10.93
These prices are all over the place. The only distinguishing factor is location and the local supply / demand balance in that market. The price difference is a reflection of the cost of storage and the cost of transportation to get the oil to where it is needed.
We’ve experienced an unprecedented collapse in global oil consumption in a matter of weeks.
When you take transportation systems out of the market, you create inefficiencies all over the place. Those who aren’t paying attention will be surprised. Those who understand the relationship between transportation and price will make sense of the inefficiencies in the market.
Now is the time to figure out where the supply chain disruptions are happening. They’re all over the place.
Expect a significant portion of the 6,000 independent oil companies to go bankrupt or be acquired in a distressed sale. The oil won’t disappear. The change will be in the ownership.
Don’t expect to see prices recover to the $50-$60 range for at least another 18 months.
Even the price of commodities vary by location when you take transportation out of the equation.
On today’s show we’re talking about the mental aspects of navigating these uncertain times. I find myself going through all kinds of emotional swings in these days. Those who know me would describe me as someone who is very tempered, pretty unflappable.
Over the past several months, I’ve been asking myself a lot of questions. I’m asking questions like:
- Will there be a shortfall in rental income, and if so, how much?
- When will we see revenue return to our short term rentals?
- Will our current construction projects be impacted by the mandated shutdowns?
- Will any of my friends or family get sick?
- Will we experience food shortages?
- Will we exhaust our financial reserves?
- What will the market look like when we emerge from this period of social isolation?
- What will happen to the capital markets?
- Will people stop investing out of fear?
What I discovered in these questions is that all of these questions have one thing in common. They are rooted in a basic human need to bring certainty to the most fundamental aspects of living.
We all crave certainty to some degree. If everything is certain in life, then there is no variety and life gets boring. So we need a little uncertainty, but we want that uncertainty to add a little spice to life. My wife loves to be surprised by a gift of beautiful freshly cut flowers. That should be uncertain.
But in areas that are core to living like: “Where is my next meal going to come from?” We want that to be certain.
In fact we need certainty so badly that some people will do just about anything to create certainty in their life. They will lie to themselves, they will create a narrative in their own minds that synthesizes a suitable level of certainty. If the certainty isn’t there, they will invent the story that brings an acceptable level of certainty.
I’ve observed the full spectrum of reactions. There are those who go to sleep at night in a hazmat suit at one end of the spectrum, and then there are others who are in complete denial and believe that this is all a hoax.
Both ends of this spectrum are trying to accomplish the same thing, to bring certainty to an uncertain situation.
I reality, nothing has changed. Life is uncertain and always has been. Even those who embrace the thrill of the hunt, the adrenaline junkies out there. They too at a deeper level require certainty at the very core.
My own response to the current Covid-19 pandemic has been to get as much information as possible. Armed with knowledge of what is really happening is my best path to certainty. I believe that I can’t change reality on a large scale. I can control my own expectations. The closer my own thoughts are aligned with reality, the less stress I will experience.
There is a natural human reaction to any bit of new information. The first step might be denial. At the other end of the process is acceptance, and finally action taking. In between there are a number of steps which include shock, anger, rationalization, confusion, rationalizing.
Some people get through that process to acceptance quicker than others.
I’ve discovered for myself, that the best path to certainty is to remain grounded in reality, to constantly question my own beliefs to make sure I’m not engaging in confirmation bias. It’s a difficult process. Sometimes I catch myself looking at wrong data, simply to make myself feel better.
Check in with yourself and how you are managing the uncertainty, that has been present in your life all along whether you recognized it or not.
On today’s show we’re talking about investing versus speculating, and we’re answering a listener question about where to invest in today’s environment. This question comes from David in Great Falls Montana.
David asks,
I want to thank you for all the hard work you put in on putting out great content that is filled with such helpful information. I had a question on the podcast you put out on April 14th about stagflation. I was wondering what are good assets to buy to hedge against stagflation in the economy.
David this is a great question.
One of the best short term hedges against inflation is precious metals. I definitely recommend parking cash in precious metals during a time like this. But I have to tell you that it’s extremely difficult to buy gold or silver at the retail level today. The supply has completely dried up and almost all the dealer’s I’ve researched have zero inventory.
I like the way you phrased the question. Instead of asking where to invest, you asked what asset you should buy.
In this context, I’m going to use Robert Kiyosaki’s definition of the word asset, where he defines an asset as something that produces positive net income. We are of course at a moment in time where problems are everywhere.
I’m continually shocked by the fundamental lack of understanding of what investing is really all about. Some people just focus on buy low, sell high.
The true investor mindset understands the value of an asset, but not just because it sold at a certain price.
My thought is to focus on tactical problem solving. We are going through a global problem with supply chains right now. These are not going to resolve quickly. The recovery which is months away will be incredibly messy and inefficient.
The path to earning is to solve problems that people are willing to pay money to have solved.
The most trivial example is the guy walking through the crowd at a summer music festival selling cold bottled water for $2 per bottle. They paid $0.30 per bottle and are making a healthy margin. But they’re solving a problem.
The problems abound right now. 90% of the doorknobs in the world are manufactured in China. There is a global disruption and everyone in construction is experiencing shortages of hardware for doors. That’s a problem that needs to be solved. Supply chains are going to be re-evaluated in the coming months with a greater emphasis on security of supply. It used to be that everything was being commoditized and lowest price always wins. That may change in the future.
There will be a shortage of spare parts, globally. Anyone with a machine shop who can manufacture spare parts from a CAD file will do very well. Any machine shop that can create the CAD file by copying an existing part that might be broken by digitizing the dimensions will do very well.
There are shortages in the food supply that have opened up and will become increasingly acute in the coming weeks and months. Someone with a few hundred thousand tomato plant seedlings would probably get a good price for them. It would only take a couple of acres to produce a few hundred thousand seedlings.
It likely that many men in North America are going to be reluctant to go to the barber shop to get their hair cut anytime soon. Sales of hair clippers have gone through the roof. Inventories are sold out and many orders are experiencing long lead times. Here’s another problem to be solved. They’re literally everywhere.
You get the idea. It’s about discovering the real problems and finding a way to add real value, not just being a middle-man in the transaction.
I want to thank you David for a great question. This is a question that we’re going to be looking at repeatedly over the coming days and weeks.
Reed Goossens moved from Australia only 8 years ago. In that short time he has assembled a portfolio of 2,000 apartments in San Antonio and Austin, Texas. On today's show we're talking about the current market conditions and how he sees the market unfolding, rent collection, and managing the lender relationships. Very valuable conversation for anyone who invests in multi-family apartments. You can reach Reed at reedgoossens.com
Russell Gray is a financial strategist and co-host of The Real Estate Guys Radio Show, now in its 24th year on the air. In this first part of a multi-part conversation, Russ and I discuss whether the pin is to blame for popping a bubble, or whether the construction of the bubble is in fact the problem.
You can hear more from Russ at realestateguysradio.com
Last week Colliers International had a private webinar for its clients focused on the state of the hotel industry.
The numbers of are absolutely devastating. There is no comparable period in history.
During SARS in 2003, the occupancy fell to 42%. We saw a 10.9% reduction in Revenue Per Available Room (REVPAR) during the financial crisis.
In the aftermath of the 2001 terrorist attacks REVPAR fell 2%
Most hotel groups started to prepare in the first week of March, a full 5 weeks after the China lockdown.
Many hotel groups had already started planning for a business slowdown when occupancies had started to fall in Q4. But all of the planning had focused on a reduction along the lines of what had been observed in previous economic downturns.
Many of the hotel groups had started to communicate with lenders in the past two weeks to keep them up to date on the state of their business.
Majority of institutions have been providing 3-6 months of interest only concessions. Many of the lenders are offering interest only relief and allowing principal payments to be deferred.
One perspective when it comes to hotel valuation is that many hotels will lose a year of net income. At current cap rates, a complete loss of a year of income could translate into a 5% reduction in valuation.
There is a lot of pent up demand for events. Weddings scheduled for the Spring are being rescheduled for the fall.
Hotel rates are not falling in today’s environment. The reason for that is that dropping rate won’t stimulate demand, so there’s no reason to drop rate.
The combination of the property tax deferrals, loan principal deferral, government wage subsidies, some amount of workforce reduction, capital project deferrals, the hotel owners who were on the panel seemed to feel that they can weather this storm for a period of time. However, they will need additional government help.
Hotels are reaching out to health care workers who need alternate accommodations to protect their families from possible infection.
Some hotels are also reaching out to hospitals to provide accommodations to patients as overflow for hospitals
Some scattered demand exists for airline crews and for repatriation quarantines.
The short term is focused on cost containment, preservation of capital and maintaining liquidity.
The hotel owners on the panel see a lot of pent up demand as witnessed by the number of events that were scheduled and are being rescheduled for the fall. That means the chance for a V-shaped recovery in travel is there. Most of the hotel owners had run several scenarios ranging from a fast recovery after a couple of months. Most of the worst case scenarios don’t see a recovery any later than the fall. All the major operators on the panel were ensuring they had the liquidity to survive until the fall.
The new financial model for 2020 assumes 50% occupancy for the year and a daily rate 15-20% lower than historical. That assumes a 0% occupancy for the next 60-90 days.
We haven’t had a lot of good news lately. Or, more precisely, we haven’t seen a lot of good news lately, though it does exist. We don’t see it because both regular media and social media usually focus on the bad. That’s not entirely wrong. The survival imperative makes humans watch for threats, and sometimes threats are real.
One of the powerful lessons of this past month has been that you really can’t count on anything to be certain in the world of business.
Only a few short months ago, if you had any rational risk manager argue that we could see a simultaneous large scale situation where retail revenues went to zero, where hotel revenues went to zero, where airline revenues went to zero you would have been sent for a psychiatric evaluation.
Well, here we are.
So where is this good news that I spoke about? Who will win in this economic environment? I take the perspective that a successful business is all about solving real business problems.
On yesterday’s show we talked about the massive supply chain disruptions that are poised to hit our global food supply. At lunch today, my wife went to our freezer and took out a package of frozen kale which she added to her home-made carrot soup. The package indicated that the frozen kale originated in Ecuador.
I don’t know how in a world of reduced transportation, as companies re-think their global supply chains, how we will kale get from a field in Ecuador into a freezer bag and ultimately to my dinner table in Ottawa Canada.
On today’s show we’re looking at a new report issued this week from industrial real estate firm CBRE predicts that demand for local domestic refrigerated warehouse space is going to increase in the short term and over the next 5 years.
CBRE also cited a Brick Meets Click/Shopper Survey, which saw 46% of respondents indicating they will continue to purchase goods online after the COVID-19 pandemic subsides.
What’s more, the report pointed to what CBRE called long-term impacts for the industrial cold storage sector, due to COVID-19, including:
- E-commerce groceries will become more widely adopted as consumer comfort grows with the practice. This will trigger heightened demand for cold storage capacity;
- Multi-tenant refrigerated warehouse companies will likely consolidate to gain more control of the cold storage footprint;
- Since e-commerce is typically fulfilled by local grocery stores, retail footprints will include more storage and fulfillment space, including a greater need for infill temperature-controlled facilities in proximity to consumers;
- Automation will increase, prompting higher-density, greater-height and smaller-footprint buildouts that will be required for around-the-clock operations
The cost of building new cold storage is a huge barrier given that construction costs are two-to-three times higher than that of regular warehouses.
It stands to reason that more and more people will shop using online grocery stores. They are going to use them first out of necessity during the Covid-19 outbreak. Once the initial objections are overcome, they will continue to use the online grocery for convenience. The result will be a significant and permanent shift in the retail landscape for food. We’re talking about the last 5 miles of the supply chain between the point of production and my dinner table.
Those online grocers will need a big fridge, the size of a warehouse. The entrepreneur who invests in these facilities in high density and high population markets stands to be ahead of the game and potentially a big winner out of this disruption.
Today’s show not about real estate. We’re talking about taking action to protect your family’s food supply.
I remember watching the news on television in the 1970’s as a teenager seeing the two hour long lines as people waited patiently to get a loaf of bread at the bakery in Moscow. The notion of food shortages in the US, Canada or Western Europe seemed unimaginable.
Well last week, I waited in line for 40 minutes to get into the grocery store. Once inside, some shelves were fully stocked, and others were 90%-100% empty.
We have been hearing about supply chain disruptions all over the world for components, for manufacturing, and now for finished products.
It stands to reason that the food supply would be similarly impacted. Whether the cause is labor shortage, transportation disruptions, or problems with logistics, supply chain disruptions are happening now in the path to your dinner table.
The United States relies upon 3 million migrant workers each year to work in agriculture. They come largely from Latin America. Western Europe relies upon migrant workers to work in their fields, largely from Eastern Europe. Border restrictions are already creating workforce shortages in a number of sectors of the agricultural industry.
We have millions of unemployed, but the question is are these people going to choose working in the fields versus sitting at home collecting an unemployment benefits check?
In a world of travel restrictions and closed borders, I’m not seeing those migrant workers materializing.
China exports millions of bees each year all over the world to help re-supply the declining bee population which are key to pollenating many crops. In the absence of bees, the only solution is for humans to hand pollenate the flowers with a cotton swab. I’m not seeing those millions of people, Q-tips in hand making their way out into the fields.
Vietnam is one of the top three producers of rice in the world. They put an export ban on rice.
Germany normally invites about 300,000 migrant workers into their fields. Last week, they brought 40,000 workers from Rumania to help with the Asparagus harvest. They plan to bring a total of 80,000 migrant workers. But between 80,000 and 300,000 there’s a gap. Germany hopes to close the gap with local labor that have been displaced from other jobs.
This week, amid reports of widespread outbreaks of Covid-19 at several of the largest meat processing plants in North America, we are starting to see disruptions in the supply of beef, chicken and pork to supermarket chains. The supply of animal protein in North America is highly concentrated in a small number of companies and a small number of massive processing plants.
My recommendation for listeners of this show is that you make a concerted effort to ensure security of your family’s food supply. I’m increasing my household supply of critical items from 60 days to 90 days. Even that is likely not going to be enough.
We are also planting a much more extensive garden this year than we have in the past. Every year we plant about 10 tomato plants, zucchini, cucumbers, peas, basil, oregano and so on. This year we will more than double the size of our garden. I don’t expect even that to be enough.
I realize that there has been a bucketload of jarring news over the past several weeks. I’m not here to spread negativity. Far from it. I believe that armed with good information you can make good decisions. Better to have a few extra cans of tomatoes and beans and not need them, rather than need them and be unable to get them.
On January 29 I reported to you that we were in economic recession, weeks before any economists uttered the words. I didn’t have any magic crystal ball to predict the future. It was just obvious that we had negative growth.
On today’s show we’re talking about the consequence of the government handouts. In the next 5 minutes I’m going to build the case to show you that we are now in a period of stagflation.
Stagflation is a combination of stagnant economic growth, high unemployment, and high inflation. It's an unnatural situation because inflation is not supposed to occur in a weak economy. In a normal market economy, slow growth prevents inflation. As a result, consumer demand drops enough to keep prices from rising. Stagflation can only occur if government policies disrupt normal market functioning.
Many people are treating these bailouts like they’re free. Nothing is ever free. But there has been zero discussion of who is actually going to pay for these handouts. If its coming from government, it ultimately means that we the population are going to pay. But nobody is saying how exactly.
A lot of people tend to measure the cost of government in terms of the cost of taxation in their personal situation. If they’re paying 50% of their income in taxes, then the cost of government is 50% of their income. If someone else is in a 10% tax bracket, then their perceived cost of government is 10%.
But that’s not the cost of government. The true cost of government is measured by government spending, not in the amount of tax collected. So for example if government brings in $100 in taxes, but actually spends $150 of those $100, the cost of government is actually $150, not $100.
You pay for government in two ways. You pay in taxation and in inflation. When government prints money, you pay for that spending in terms of reduced buying power, in terms of reduction in your savings.
So here we are, governments are spending cash in vast quantities to bail out various industries.
They’re spending cash they don’t have, so it’s being printed out of thin air.
If you’ve been listening to this podcast for a while, you’ll know my opinion on inflation. We have plenty of modern day examples of hyper-inflation. So we don’t have to dig too far in the history books to look and see what happens. We can look to modern day Venezuela, or Zimbabwe for current examples. You can look to Argentina in the mid-1980’s.
In a world of hyperinflation, there is so much currency being printed that the purchasing power of the currency gets eroded. It has the impact of eroding the purchasing power of those on fixed incomes, it devalues savings, and it devalues debt.
If you know that you’re entering an inflationary period, you would want to hold assets that will benefit from a devaluation of debt and a devaluation of savings.
Let’s say for example that you hold a piece of real estate that is generating income. That income property is producing positive cash flow, and its not over-leveraged.
Well guess what, we have the conditions for stagflation. We have governments the world over telling people that they should not go to work, that they should stay home, and that they should avoid social contact.
Don’t get me wrong, it’s all being done for a good reason, to save human lives. The social lockdowns are absolutely the right thing to do.
But we have to acknowledge that the vast printing of money will have an inflationary impact. Now some of you might be saying that the government has been printing money for decades and it hasn’t resulted in hyperinflation. Why is that?
I believe that we have exported our inflation through globalization. The extra printed money went to pay for goods that were manufactured in the East and imported into Western economies. We exported the extra cash, so long as they were willing to accept it.
Adam in Riverside California asks,
Hi Victor,
I hope you and your family are safe and well. I enjoy listening to your daily podcast. Thank you for educating your listeners!
The COVID-19 pandemic will certainly have a deep and lasting impact on our society. Covering nose and mouth in public is now the norm. Fewer cars on the road due to shelter in place orders has led to a reduction in carbon emissions. Having a reliable internet connection at home has become a necessity for mom and dad to work from home while the kids are attending classes. If we fast forward a year from now, what behaviors do you see changing?
Thanks,
Adam
Well Adam, this is a great question. As always it’s hard to forecast the future. But I see a few trends that seem obvious to me. This is a huge question and I won’t be able to cover too many aspects in just five minutes, so I’ll touch upon a couple of them.
The period of social isolation is going to be required for more than just a few weeks. Government leaders are going to try and re-open the economy as quickly as they can. China has attempted to re-open their economy and has almost as quickly tightened the restrictions when they saw cases of Covid-19 rising again. The process of re-opening the economy will take many months and will probably only happen fully in about 18 months from now.
When any behaviour happens with enough regularity and for long enough, new habits are formed. It’s been more than two months since I’ve been to the gym. Will I renew the gym membership when this is all over? I’m not entirely sure. I suspect that I will have formed new workout habits and once those new habits are firmly in place, the gym won’t seem as compelling, or maybe it will. It’s too soon to say.
A year from now, we will not be through this period of disruption. We will still be managing the disruption and some industries will be attempting to emerge from the shutdown.
The fact is, we will not see a return to what was. What emerges will be different. We will see a new normal.
I suspect that we will see changes that are driven by supply chain disruptions. For example, the way people shop for food is already changing. It used to be the case that the peak hour at the grocery store was traditionally 5PM, just before dinner time. Now that peak time is in the morning when the store opens. A year from now we will not be out of the woods with Covid-19. There will still be shortages of certain items and the competition for those scarce items between consumers will continue to be a point of social friction.
We will see a large percentage of the population still struggling financially from this disruption. That means austerity, spending less, and only spending on essential items. Businesses that rely upon luxuries will struggle as demand for those products will be among the last to materialize.
I predict that the cocooning of households that has been trending for the past 30 years will continue to become even more acute.
There are a number of people who are used to traveling extensively. I’ve traveled about twice a month for the past 15-20 years. Now that is zero of course. So much that has been done in person with travel will be increasingly done using technology. That’s both a problem and an opportunity. Those who choose to travel for business will have a distinct competitive edge compared with those who merely video conference.
How many people will eagerly jump on a plane in a year even when the airlines are saying that it should be safe to travel? How many people will book a cruise or go to a conference? I predict that these sectors will be slow to re-emerge after this is all over.
We will no doubt see an even greater reliance on internet communication than ever before.
Jason Pero owns and manages a portfolio of apartments in Erie Pennsylvania. He's a dominant player in the market and he favors secondary and tertiary markets. Today was a fascinating discussion on another perspective of multi-family investing. You can reach Jason at perorealestate.com.
Jeff Love is a real estate lawyer with Gibbs Giden in Southern California. This is one of the most difficult environments for real estate investors in recent years. Our conversation centered around how to form strong partnerships. You can reach Jeff at jlove@gibbsgiden.com
We are in an unprecedented situation economically. Because of that, we might conclude that there is no playbook for dealing with a crisis of this type.
The question is, can we learn anything from the handling of past economic downturns and is there anything that we can apply from that past experience?
I sat in on a conference call with the senior leadership from real estate firm Marcus and Millichap late last week that attempts to address this question. Of course we are all in uncharted territory, so it’s impossible for anyone to say they have all the answers. Clearly if any did make such a claim, they’d be delusional.
2008-2010 saw a contraction of the economy of 4% over an 18 month period. This time around we’re seeing a 29% contraction in the economy in a matter of a few weeks. This number could degrade further as the impact of the health crisis deepens.
Now we have a relatively healthy financial system compared with 2007. Companies are highly leveraged, but corporate balance sheets have been pretty strong compared with history.
If we compare this current situation to 2007, the banks only had $44B in reserves in 2007. Today the banks are sitting on $1.7 T in reserves. They were vastly undercapitalized in 2007.
Back in 2007, household debt was at 100% of GDP. Today, household debt is at 74% of GDP.
Back in 2007, the economic damage was caused by major cracks in the financial system, whereas today it’s being caused by a health crisis. The concern of course is primarily for the health and wellbeing of the population. The secondary concern is on the economic damage potentially spilling over, causing massive loss of jobs, large scale corporate bankruptcies, and that in turn could destabilize the global financial system.
The news media today are portraying the economic numbers with a combination of surprise, shock and horror. That’s partly their job to sensationalize the outcomes. But really there’s not a lot of surprise to me that the lockdown is damaging to the economy.
The folks at Marcus and Millichap created an economic model that uses a number of baseline expectations. They based their model on the folks at Moody’s Analytics.
Frankly, what the folks at Marcus and Millichap have presented seems to me to be a nearly best case scenario.
Yes, the US banks are much better capitalized. The US banks reserves have never been stronger.
Simon Black and Peter Schiff had a conversation about the state of our global debt situation. That discussion centered on the massive amount of debt that is being created, and the lack of equity to support that debt. On a global basis, we have about $250T of debt. The banks don’t own all of that debt, but the banks are an integral part of the system and if their customers feel the pain as a result of bond defaults, the banks are not immune.
The banks are only sitting on somewhere between 7.5T - 10T of Bank capital. That puts bank equity at about 3% of the global debt. If we saw a destruction of only 3% of bank’s debt, the banks would be technically 100% insolvent. The question is, would a 30% decline in GDP as the folks at Moody’s have surmised be enough to wipe out 3% of bank debt on a global basis?
We are about to enter a period of economic stagnation combined with one of the most inflationary periods in the past century. We’ve seen pockets of hyper-inflation throughout history in South America in the 1980’s, most recently in Zimbabwe and Venezuela, in Weimar Germany after the Great depression, and of course in the good ol US of A during the American Revolution. The result has been the same each and every time. Every time has seen an economic collapse and a large scale destruction of savings, and a corresponding destruction of debt.
We’re one week into the month of April. Landlords across the globe have been bracing themselves for a fall in rent collections in April.
After talking with a number of investors over the past several days, some preliminary numbers are coming in.
I spoke with a landlord in Texas who owns about 3,000 units. Their portfolio contains a mix of both B-class and C-class properties.
Overall, collections are running between 75%-78% of potential after the first week of April. The numbers are definitely down compared with a month ago. In a normal month, collections would be well into the 80’s and in many cases approaching 90% after the end of the first week of each month.
There is a small difference in collection between B-class and C-class. The numbers are slightly better in the B-class properties.
Management has spoken with every family. They’re seeing a large number of new leases being signed, even in this environment. Some markets like Houston and San Antonio have a high annual turnover rate. The landlords I spoke with are seeing higher than expected tenant retention. That means, tenants that had previously given 60 days notice to vacate have changed their mind and signed a new lease.
The National Multifamily Housing Council (NMHC) found a 12-percentage point decrease in the share of apartment households that paid rent through April 5, in the first review of the effect of the COVID-19 outbreak on rent payments. The Tracker found 69 percent of households had paid their rent by April 5; this compares to 81 percent that had paid by March 5, 2020, and 82 percent that had paid by the same time last year.
The NMHC data takes data from several property management sources including realpage, Yardi, Entrata, Resman and MRI.
There is a belief, propagated by many in the tenant advocacy groups that tenants are no longer required to pay their rent. They point to the moratorium on evictions that have been publicized. The fact is, there are several levels of government involved which results in a patchwork of regulations.
There can be rules imposed at the federal level, the state or provincial level, or at the local level. In some cases, there may be more than one regulation providing conflicting rules. Understanding which rule takes precedence will require that you get local legal advice in your home market.
For example in the US, the federal disaster relief CARES Act, included a 120-day moratorium on evictions, late fees and other penalties, starting on March 27, the date the legislation was signed.
This moratorium applies to all properties with a federally insured mortgage (Fannie Mae, Freddie Mac, FHA, HUD, VA) and properties participating in a covered housing program, such as the Section 8 voucher program, rural housing voucher program, the Low-Income Housing Tax Credit. Covered property owners also may evict or charge late fees to any resident. This moratorium applies to ANY resident who fails to pay their rent, not just those whose incomes have been disrupted by COVID-19. Unfortunately, the way it is written, that currently means the moratorium also applies to residents who simply choose not to pay their rent
On the commercial side, we’re seeing a very real problem with collections. It depends highly on whether the business has been forced to close its doors. We have some businesses that are unable to perform their business online. Their revenue has gone to zero. Our commercial rent collections are currently running at 50% of leased space. We expect that number might drop even lower in the coming months.
Overall, the impact to residential rents seems to be less than many had feared. It’s also reasonable to expect that the rent collections will be lower in May than in April.
As you think about that, keep your lines of communication open with your tenants.
On today’s show, we’re talking about what you can do if you have a short term rental?
Short term rentals, like hotels, and most of the hospitality industry are suffering deeply in this era of social isolation. You might be used to a high nightly rate, similar to what hotels are accustomed to getting. On average, this revenue stream is higher than the traditional monthly unfurnished lease.
Today, very few people are traveling to take vacations. Only essential travel is being permitted. That means that unless you have a medical reason for travel, or perhaps repatriation to your home country, there is no reason to travel.
Upon return from outside the country, all citizens must undergo a mandatory 14 day quarantine. A quarantine in the same home together with others who have not traveled defeats the purpose.
Here’s the problem. The hotels are closed. Many communities have instituted rules that restrict short term rentals to only happening in owner occupied properties. For example, you might have a spare bedroom, or maybe an inlaw suite.
Where would someone who must quarantine stay? Where would someone who has potentially been exposed to Covid-19 stay?
Locally, health care workers who are on the front line of the Covid-19 pandemic need a place to call home temporarily, without putting their families at risk.
To that end, the folks at AirBnB are looking to help provide accommodations for health care workers who need a temporary place to stay. They have agreed to waive their fees for the first 100,000 bookings that match health care workers with a place to stay. Hosts can put their homes into the program, either a full price, at a reduced price, and in many cases for free.
The thinking is that any revenue is better than the alternative. The people at AirBnb have put together a comprehensive cleaning checklist for your cleaning staff. They’ve also assembled a recommended list of amenities that might be difficult for guests to source during this time of social lockdown.
This includes all the basics that someone might need for daily living. There needs to be enough towels, linens, pillows, for each guest. The kitchen needs to be properly equipped with plates and glasses, cookware; everything you might need for cooking should be on hand.
Make sure there is ample supply of paper products.
When it comes to cleaning, make sure your guests know about your enhanced cleaning routine. Guests will want to know about all of the additional steps you’re taking to reduce the spread of infection. So it’s a good idea to mention your enhanced cleaning routine in your listing description.
Now is not the time to be trying to squeeze every last dollar out of every booking. It’s the time to get anyone to stay at your property, even at a reduced rent to try and cover your expenses.
Another use of vacation homes is to protect more vulnerable family members. Let’s say that you have a family member working at a grocery store. They’re interacting with the public on a daily basis. They’re definitely at higher risk of coming into contact with the disease by virtue of being exposed to more people during the pandemic. Let’s say you have someone else in the home who is elderly, or perhaps immune compromised, you want to make sure that the vulnerable family member and the at-risk family member don’t cross paths during this pandemic. Isolating vulnerable family members in a second location can be a very practical way of protecting them.
All of these uses for Short Term Rentals can fulfill very real needs during this time of social need.
Folks, I’m an optimist. Those who know me would classify me as a solid optimist. But in the past few days, there has been a deluge of news that, quite frankly is heavily biased toward the negative.
Let me be clear, I’m not here to propagate fear. But I think you ought to know what is possibly in our immediate future. Armed with that information, you can take steps to protect yourself and your family. So here we go.
Over the past several days, the folks at Moody’s Analytics who provide the bond ratings for much of the debt that is issued in the world have been performing a lot of modelling and analysis on the current market situation.
The latest projection from Moody’s is that if the shutdown of the economy persists another two months, the fall in gross domestic product is estimated at 75%. That would be the largest drop in economic output in global history. All of it having occurred in less than three months.
The impact of the shutdown is coming into focus with each passing day. So far, supply chains for food remain largely intact, but this is unlikely to last.
We know for example that Vietnam had banned the export of rice. That country is one of the top three producers of rice in the world. The US no longer maintains a grain reserve. You can expect that there will be rice shortages in the west later this year.
Much of our food harvesting in Canada and the US is performed by migrant labor, much of it coming from Latin America. Some estimates put the number of agricultural migrant workers in the US at about 3 million people. In an era of social isolation and international travel restrictions, what will happen to food production? This isn’t just an issue in one country. Covid-19 is a global pandemic.
On Sunday evening, the folks at Wells Fargo announced that the loan window had closed for its customers wanting to apply for the SBA Paycheck Protection Program, only a day after it opened. The bank said that it had exhausted the $10B it had capacity to lend for the SBA PPP. Now I have no doubt that the government will realize that it needs to do much more than it has so far. In fact the Federal Reserve announced on Monday that they were going to facilitate more lending to small businesses through the SBA program.
A massive decline in economic output on the scale of 30-75% will require the government to step in and replace that money in some fashion. If cash runs out in households across globe, and commerce becomes inefficient or impossible, we can only expect that a bartering system will eventually take over and a brand new underground economy will flourish. But even before that happens I expect that we will start to see social unrest as people become desperate.
Governments have been slow to react to this pandemic. Here too, they are way behind the curve. Two months of payroll help for small businesses is not going to be enough. It’s not even close.
This evening, my own city extended its official state of emergency until the end of June. That’s a full 3.5 months.
Those of you who know me, know that I’m someone who has a high degree of personal initiative. I don’t wait for permission to do the right thing. This year is going to be a test of emotional fortitude for billions of people around the world. I’m going to be taking additional steps to prepare for a deeper economic stress. I can say with all honesty that I don’t know exactly what that’s going to be. But it will be something.
I told my wife tonight that we were going to be alright. We both acknowledged that this period is stressful. We are going to be alright for three reasons.
- We’re in better financial shape than the bulk of the population.
- We’re generous and will help others during this time of difficulty.
- We have each other.
On today’s show we are talking about why our governments policies in the aftermath of 2008 is making this economic downturn so much more painful than it needs to be. This all falls into the category of a self inflicted wound.
I’m going to share some data with you from the federal reserve bank of St. Louis. But before I do let’s talk about the different types of expenses that a business or individuals can incur.
Broadly speaking, there are two types of expenses: fixed costs and variable costs.
If my business is a bakery, then an ingredient like flour is a variable cost.
A fixed cost would be something like rent or a loan payment. Irrespective of the number of loafs of bread, those costs don’t change.
The cost of labour is also a fixed expense in the short term. Yes, you can reduce the size of your workforce, but that comes at a price that goes beyond just the cost of paying severance. There is a human, social and emotional price to be paid for both employers and employees.
The problem with debt is that it keeps accumulating with the passage of time. Some debt that is government backed can be deferred through government intervention.
But most commercial debt is not government backed. Large commercial projects are funded by insurance companies, but commercial lenders who have issued commercial mortgage backed securities that are sold in the bond market.
A bank that is regulated by the federal government can implement temporary rules based on changes in legislation. But a bond that is held by private investors has no provision to implement a forbearance agreement. There is no mechanism to provide a 90 day payment holiday.
Debt involves bringing future money into the present. That only makes sense if you’re going to have more money in the future, measured in the same dollars so that inflation doesn’t skew the picture and accidentally make the picture look different than it really is. What you find is that our nominal gross domestic product before inflation adjustment has been growing at about 4.5% over the past number of years. The real GDP number, adjusted for inflation is about 2%. But the growth of debt across the United States has been growing at about 9% s year over the same time period. When the growth of those two numbers diverge, you can never catch up. This will eventually blow up. We had the opportunity for debt to implode in 2008. Governments elected not to allow that to happen by issuing even more debt. It seems that since debt is the problem, then more debt is going to be the solution.
Unless the financial system totally collapses this time around, we’re going to be issuing more debt. The only question is who is going to carry that debt on their balance sheet. Will it be individuals, businesses, or the government?
We have a global medical condition and the goal is not to harm the economy, but to put the economy into a medically induced coma. The question is, how do we come out of the economic coma? Does the economy bounce back? Does it take years to limp back to health? The path to economic recovery depends on how governments choose to respond to the economic damage.
You could give the money to the company that employs the people on the condition that they keep people employed. That way, the employees are never separated from the company they work for.
The other approach is to pay people unemployment benefits. But as soon as employees are separated from their employers, the path to economic recovery requires people to be re-hired. That’s a higher barrier than simply reopening the doors.
This is the time for you to get in touch with your elected officials and educate them on how to structure the bailout so as to enable the fastest restart of the economy.
We already have tens of millions of people out of work in the past two weeks. It may be too late already.
Chris Prefontaine is a repeat guest on the show. His no bank strategy is zero risk and very appropriate for a down market. You can learn more from SmartRealEstateCoach.com
Fascinating conversation. You won't want to miss this one.
Billy Keels is a US Real Estate Investor, living in Barcelona Spain. On today's show he gives a first hand, boots on the ground perspective of what's happening with the Covid-19 outbreak in one of Europe's hot spots of the outbreak.
Today is another AMA episode that is Ask Me Anything.
I’m not going to attribute this question to any one listener because I've had several people reach out to me and ask the same question. The question is, “Do I think the stock market has hit bottom, or is there more downside risk?”
As real estate investors we all have projects at various phases in the pipeline. Projects that are completed, those that are in construction, and those that are still under contract. The impact of the current global circumstance on each of these will be different. It’s clear that the scope of the economic impact is going to extend beyond a few months. Governments are only now starting to come to terms with this stark reality and setting more realistic expectations with the general public. For example, the City of Toronto told its residents to expect another 12 weeks of lockdown. At this stage we are focusing on only two things.
Protecting our investors and ensuring that our existing projects remain healthy Ensuring that our family remains safe and our household well supplied for the long haul.
For many of us, the focus has shifted to the basics of human living. That means making sure you are maintaining focus on keeping your family safe. Trips to the grocery store that in December were taken for granted, now are a process involving risk and immediate detox as soon as you leave the store. Nearly nothing is as it was. We have responsibilities to our investors, to our stakeholders, to our partners and to our families. You response to the current market conditions will very widely depending on your circumstance. If you are a landlord, you’re concerned with whether tenants will pay rent on the first of the month. Many jurisdictions have put a moratorium on evictions which creates the incentive in many people’s minds that they no longer need to pay rent. Even some tenants who are receiving unemployment benefits may choose to capitalize on the moratorium on evictions and not pay their rent. Our vacation rental business in the Rockie Mountains is currently 100% vacant. Our lender has offered a 3 month mortgage payment holiday. We have also brought additional capital into the business to further protect the business from possible collapse. At this stage we have about 7 months of cash reserves. That may not be enough and we may have to do even more to ultimately protect the business and our investors capital. So far today we had are down about $6,000 in retail rent collections compared with last month, but we don’t have a full report. We’re completely sympathetic to the plight of businesses that have been forced to close due to the pandemic. The fact is, very few retail clients will pay rent. This will become a huge issue for commercial landlords in the coming months. Eventually this will cascade and become a huge issue for commercial lenders. Banks are getting a bailout package, but many commercial buildings have non-bank lenders including private lenders, insurance companies, and commercial mortgage backed security lenders. Deal sponsors who have tried to close deals in the past two weeks have reported that lenders have pulled out in some cases. In other cases, they’ve changed the terms of the deal and asked for substantial additional cash reserves. One investor I spoke with yesterday had a deal fall apart when the lender required and additional $750,000 in capital at the closing table. These stories are becoming routine. If you have a closing coming up, now is the time to seek extensions from the other side. You can expect that there will be delays and that the delays will be extensive. These negotiations require a recognition by the parties that a third party that is not part of the transaction is the cause of the delay. Then there is the entire question of what valuations will look like when the market emerges from this pandemic. I expect that many more deals will get canceled or renegotiated. For the time being, in our business we’re focusing on execution of projects, protecting our projects and by extension our investors, and taking care of our families.
The Covid-19 outbreak has caused major upheaval in the lives of hundreds of millions of people.
Things that seemed important only a few weeks ago have faded into the background. That massive dislocation has caused many to re-evaluate both the content and the context of their lives.
Some people will re-evaluate their lives based on their own initiative. For many, that re-evaluation won’t happen until it’s forced upon them. Perhaps Covid-19 will be that forcing function, even if you don’t have the misfortune of contracting the disease, the disruption caused by it could be enough to cause a reset. The silver lining could be re-evaluating your life.
This month’s book is “Designing Your Life: How to Build a Well Lived Joyful Life” by Bill Burnett and Dave Evans.
Nothing could be more timely than re-evaluating and re-designing your life. Since life isn’t normal now, why would you want things to go back to normal. I actually don’t want things to go back to normal. I want my life to move forward so that what emerges from this dislocation in history is better than it was before.
I fancy myself a designer. I used to design microchips. Then I designed systems that would process millions of phone calls per hour. I designed hardware systems. These days I’m designing subdivisions, and buildings, and apartments. Of course this is a team effort involving architects and engineers of many disciplines.
Designers love problems. Every single item that you find in your house was the result of some designer somewhere encountering a problem and coming up with a solution. That’s why you have running water. That’s why you have a dishwasher and a toaster and a chair. These things would not exist if there were no problems. They were only created in response to a problem in each single case.
So if you’re going to design your life, you absolutely need problems. Lord knows, there seems to be no shortage of problems at the moment.
The book is based on a design methodology that has been taught at Stanford University for over 50 years.
Design thinking starts with curiosity. Often times people are working on solving the wrong problems. So perhaps a re-frame of the question of the problem can get you unstuck.
Connecting the dots to create a meaningful life involves getting connecting who you are, what you believe, and what you do. When these three are connected together, you will experience a more meaningful life.
But if you’re never asking yourself the questions, you won’t get clarity. More importantly, life isn’t a destination, but a journey. If you spend your entire life chasing an elusive destination, then you will have missed it.
You can’t solve a problem, you’re not willing to have. If you’re not willing to accept the problem, then it’s not really a problem and it’s merely a circumstance.
It’s what you choose in life that makes you happy. Designing this requires evaluating several alternate futures.
The obvious first choice is to take your current path that you’re on and simply making it better
If your current reality was uprooted and you needed to do a plan B, what would that be?
Finally, if you had no constraints and could design your wild-card plan, would that be?
Things that come up on the other plans were items that were part of the past ideas that got lost along the way. By creating three alternative life paths you will generate enough ideas to figure out where you want to go next.
Prototype your life. That is try it on for size so that you will know at an emotional level if the choice works for you.
Choose well. That doesn’t mean making the best, choice, but it means making the choice in a way that you’re going to let go of the other alternatives and not second guess yourself.
The book design your life might be the best thing you can immerse yourself in right now when your life has been disrupted.
The world is about to embark upon the largest economic experiment in history. They have no choice really. In a Formula 1 race, the yellow flag comes out when there is a problem on the track and the race is temporarily suspended. The cars continue to circle around the track. The speed is reduced to a safe speed and its impossible to make forward progress. Yes, you’re still burning fuel, but the race is temporarily suspended.
Never before have governments tried to put swaths of their economies in an induced coma and awaken them gradually. There is no yellow flag built into our economic system. One of the biggest impediments to the yellow flag is debt. Debt service appears as a fixed cost regardless of the level of business underway. But of course the debt was procured with an assumed underlying level of business. There was never an assumption that business would stop, or in fact that loan payments could stop on a large scale.
On today’s show we’re talking about whether you should take advantage of the loan payment holiday that some lenders may offer.
The fact is, we don’t know the scope of the Covid-19 problem. We don’t know if this period of social isolation is going to last weeks, months, or years. We already know that many countries have been shut down for
If a lender offers you a payment holiday, or perhaps an interest holiday, you will sign a document called a forbearance agreement.
A mortgage forbearance agreement is an agreement made between a mortgage lender and delinquent borrower in which the lender agrees not to exercise its legal right to foreclose on a mortgage and the borrower agrees to a plan that will bring the loan current.
The thing to remember is that we are only a few weeks into a pandemic of unknown scope and duration. If you approach your lender now, the banks only have the tools that have been made available to them by the government and the central bank. Much of the economic stimulus was based on the assumption of a short term situation. Let’s put this in perspective. The US is spending $2T in stimulus, which is a huge amount of money.
A report in the Wall Street Journal today suggests that we are expecting to see a contraction of about 30% in GDP in the second quarter. The stimulus would cut that reduction in half, or about a 17% reduction in GDP. It’s highly likely that additional stimulus programs will be forthcoming as the breadth of the damage becomes visible.
While I haven’t seen the language of the forbearance agreements directly, what I’m hearing from investors I’ve spoken with is that the terms of the forbearance agreements are pretty draconian.
As more stimulus becomes available in the coming weeks, I expect that the terms of the forbearance agreements will become more generous. If you have the financial strength to survive a few more weeks, you may get a more generous relief package and a more lenient forbearance agreement, either in terms of terms or duration. This is a fast moving situation.
There are other programs that may apply to your business that you might consider first. For example, there are forgivable loans that are available in the US through the Small Business Administration to assist with payroll.
In Canada, there are programs available through the Business Development Bank of Canada.
In the UK, Employers can claim for 80% of furloughed employees’ (employees on a leave of absence) usual monthly wage costs, up to £2,500 a month.
My recommendation is to look at some of those other programs first. A lender is likely to sign a single forbearance agreement, but not two or three forbearance agreements if this economic downturn gets extended beyond the initial number of weeks that governments around the world have been projecting.
On today’s show we’re talking about a French term that is often appearing in contracts, and insurance agreements. That term is "Force Majeure".
As of today’s show, the World Health Organization has declared the novel coronavirus (COVID-19) a pandemic; states of emergency have been declared in multiple states and provinces all over the world.
There is no doubt that COVID-19 has and will continue to have, an adverse impact on the global economy. With disruption to supply chains, international travel, and business operations, many individuals and businesses may be unable to fulfil their existing contractual obligations.
On today’s show we’re going to take a deeper look at Force Majeure and whether it could, or perhaps already has impacted you.
Force Majeure clauses are generally included in contracts to account for circumstances where a party cannot perform the contract due to circumstances beyond its control.
A Force Majeure clause typically operates to absolve the non-performing party of liability for its failure to meet contractual obligations as a result of an extenuating circumstance, but its precise effect will depend on the language of the provision in the contract.
Some contracts treat Force Majeure as an “Act of God”. These events would then trigger their operation of that contract’s clause. Common cases include hurricanes and earthquakes.
So the question is whether Covid-19 would meet the definition.
Some contracts spell out a laundry list of events that fall within the scope a circumstance beyond the control of the parties, such as acts of terrorism, war, labour disputes, strikes, or adverse weather conditions.
However, given the current state of affairs, it is likely that a court will find that COVID-19 is an unforeseeable event outside the control of either party. Whether COVID-19 makes it impossible for a party to fulfill their contractual obligations is a different matter. The obligations cannot simply be more difficult to fulfill; they must be impossible. The determination of these questions will be both fact- and contract-specific.
One of the most common contracts that developers and investors encounter is the AIA-101 contract. The AIA contracts are industry standard contracts that are widely accepted across the industry and are used by many general contractors.
The AIA-101 has a second document called the AIA-201. This document contains the general conditions that apply to the AIA-101 contract. The AIA-201 has section 8.3 which deals with the topic of delays.
This section deals with a lengthy list of the usual causes of delay like labor disputes, fire, adverse weather and so on. If none of those possible causes of delay have triggered an allowable delay, then there is a fifth item
“by other reasonable causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may determine.”
This is an example of a contract that has a force majeure clause.
The one place I expected to find a force majeure clause was the standard agreement of purchase and sale. A review of several states and provinces, could not able to find a force majeure clause in any of the standard agreements.
This has given rise to what many realtors are not calling a Covid clause. For new contracts being written in the current environment, many buyers are including a provision which would allow them not to close if the Covid-19 conditions make it impossible to close. The wording I’ve seen for one such clause was extremely broad. It basically said that if the buyer didn’t want to close, they could blame the virus and be off the hook.
If you have a contract that you’re negotiating, or perhaps a contract that you’ve already signed, I recommend that you go read the Force Majeure language in it.
Fabio Lopez comes to us live from Milan Italy, the epicenter of the Covid-19 outbreak in Europe. Italy's hospital system has been overwhelmed. Fabio's description of life under quarantine is much more restrictive than here in North America.
Alan Schnur went through a life changing event that most of us can't imagine. He was working on the 101'st floor of the World Trade Center on September 10, 2001. This is a powerful story of transformation and of intentional growth. Many lessons in today's conversation.
You can reach out to Alan at alanschnur.com.
On today’s show we’re talking about a topic that’s on every landlord’s mind. Which tenants will pay their rent on April 1?
Part of anticipating the answer to that question is understanding who is still at work, and who has been laid off.
There no question that this economic downturn will not affect everyone equally. If there’s a physical component to your work, chances are good that you’re going to be impacted. This means almost anyone in the consumer retail world, unless you’ve been deemed an essential service.
Well a new report issued today by the folks at apartmentlist.com attempts to model and quantify the demographics.
In this new “quarantine economy,” working from home is the most impactful thing workers can do to ensure job stability. But while remote work is becoming more popular over time, access is not universal. A much larger share of high-income earners have this luxury; many lower-wage employees do not.
- The quarantine economy creates four categories of workers, each facing varying levels of economic risk. The greatest risk is felt by those whose jobs a) are considered “non-essential” by local shelter-in-place laws and b) cannot be fulfilled at home. This includes many service sector employees, retail workers, and early educators. They tend to be lower-income, face higher housing cost burden, and have lower access to health insurance if they get sick.
- Regionally, high-risk workers comprise a larger share of the workforce in cities rooted in the tourism and service industries, particularly Las Vegas, Miami, and Orlando. Places with a high concentration of knowledge economy jobs and/or essential blue-collar industries will fare better, including metros like San Jose, Detroit, and Boston.
- Federal and state governments are rushing to pass legislation that will protect public health while reinvigorating the economy. In the meantime, job and housing insecurity will disproportionately affect millions of American workers in lower socioeconomic strata.
There are four categories.
- Secure jobs are the least threatened. They are not only essential to the economy but also flexible in their working arrangements. These workers are likely to retain their usual income while also practicing social distancing that will keep themselves and their families at low risk of coronavirus exposure. These are folks like financial analysts, accountants, and those who operate the community infrastructure like power plants and water treatment plants.
- Low-Risk jobs provide shelter from the coronavirus, but carry some risk of economic uncertainty. These workers can easily transition to a remote environment but their paychecks may be in jeopardy if demand for their skills weakens in an economic downturn. These are folks like software developers,
- Exposed jobs are those that are deemed essential, but must be done in person. These jobs generally offer economic stability during the crisis, but may increase individual exposure to health risks. These workers cannot shelter-in-place while working because the nature of their job requires leaving home and engaging in some level of personal contact. The list of essential services varies from one state or province to the next. Where I live, the list of essential services is about 70 items long.
- High-Risk jobs are the most economically at-risk in the quarantine economy. These workers are deemed “non-essential” by federal guidelines and furthermore do not have the option to work from home. Heavily concentrated in the service sector, the incomes of many high-risk workers are already in jeopardy today. This includes restaurant wait staff, hair stylists, tour guides, flight attendants and hotel staff.
History doesn’t exactly repeat itself. But it does rhyme. The year was 1775. The government in the British colony in North America was out of money to pay its soldiers. The American Revolution was well underway and they needed cash to to help fund the Revolutionary War. Continentals quickly lost value, partly because they were not backed by a physical asset like gold or silver, but also due to the fact that too many bills were printed.
Here we are in 2020. Ignorance of history and economic ignorance is spreading through the country faster than the Covid-19 virus. So much of what you’re hearing in the mainstream media is just plain wrong. The problem is that much of the economic ignorance sits in our houses of Parliament, and in our legislative bodies.
We have Senator Mike Gianaris, deputy leader of the Senate in NY State, advocating a 90 day suspension of residential and commercial rent for tenants and small businesses impacted by the coronavirus pandemic. How will the building owners survive for 90 days? How will this modern day Robin Hood shower cash upon the tenants, and ultimately protect the banking system from collapsing? Not to worry, the Evictions in the state have been frozen by a moratorium issued by the Unified Court System and Governor Cuomo has already ordered a 90-day mortgage moratorium. But wait a minute. Rents pay for much more than just the mortgage on a property. Where will the money to pay the property managers come from? Where will the funds for maintenance of the properties come from? I guess the Federal Government will helicopter more money into those businesses.
Tuesday the Dow went up nearly 11% in the largest single day gain since 1933. What was the driver for that? The news that the Federal Reserve would buy an unlimited number of US Treasuries. That’s right, there is no limit. Republicans and Democrats reached a deal on a 2 trillion dollar funding package. This fiscal stimulus will be used to help businesses and individuals affected by the outbreak. The mechanism for getting money into people’s hands is not clear yet. What will constitute a loan? What will be an outright grant?
It’s tempting to blame the bursting of a balloon on the pin. But if the balloon wasn’t over-inflated, the pin would have no effect. Now we’re trying to pump more air into the balloon after the balloon has burst. The last time the balloon burst was in 2008. But the Fed doubled down on printing money.
The pin in this case is Covid-19.
The worst thing that can happen to someone’s money isn’t the loss of a bit on their investments. The worst thing is hyper-inflation. We’ve seen it through-out history. One of the founding principles of the United States of America, enshrined in the constitution was the notion of
We saw it in the Weimar Republic in Germany from 1919 until 1933. Germany was licking its wounds after the defeat in the first world war. The country was focused on reconstruction and it lacked the resources to fund the reconstruction.
When the printing of money happens with complete abandon, the problems multiply. It caused the collapse of the Roman Empire.
The problem with printing money is that it is inflationary. The deficits are rationalized as temporary. They will be made up during the boom times. Little by little the government becomes addicted to the temptation to perform a politically expedient move and kick the can down the road. Each hit of cash feels great. It’s like a hit of cocaine to the cocaine addict.
The effect of inflation is to wipe out purchasing power for those on fixed income. It has the effect of wiping our savings, and it has the effect of wiping out debt. It’s a wholesale devaluation of the currency.
While it’s happening, the short term impact is positive. Asset prices increase. Remember, the best performing stock market in the past decade was Venezuela, that is, up until their economy collapsed.
Today’s show is the story of a conversation that happened in our household and probably mirrors conversations that are happening all over the world and maybe in your household.
The messages of social isolation have been clear for weeks. We are in the middle of an exponential growth in the number of cases of the disease, the number of critical cases, and the number of deaths. When you know the equation, it’s simple math to predict the future.
We made the decision to keep isolated within our household and to minimize trips outside the house. My wife has transitioned all her client appointments to video conference calls. I’ve cancelled all my travel and we have made minimal trips outside the house for critical supplies.
After dinner on Sunday night my son announced that he was going out for a walk. That seemed perfectly OK. But after about 45 minutes he wasn’t home and we saw that he had gone for a walk in his car.
A quick phone call discovered that he was out for a walk with a girl. He had all kinds of justifications. The girl had been in isolation for weeks, and he had been in isolation and they were walking outdoors in nature, and he was tired of being cooped up in the house and needed to get out.
At this stage we have examples of community transmission in our city. The public health lines are getting jammed with thousands of calls. The testing centres remained open until they ran out of tests. It’s clear that we don’t know, and probably will never know who does and doesn’t get the disease. The public health officials are saying at this stage not to call. If you have symptoms, stay home. If you are really sick and are having trouble breathing, then call your doctor to get an over the phone assessment. Most clinics have closed their doors and are only admitting patients after a phone screening.
The result was a difficult conversation with my son. The isolation practice in our house can’t be a leaky bucket. Either we’re in isolation or we’re not. Right now, and for the foreseeable future we’re choosing isolation.
My son shared that he takes the current situation seriously and that he’s being ridiculed by many of his peers as a result. I’m seeing many examples on social media of people who are not taking this seriously. A friend of mine in Las Vegas posted a large group photo. One last group shot before we go into isolation was the caption. I was dismayed to see the photo. They’re not bad people. They are just a little further behind in their adjustment to the current reality.
As with any change, there will be a spectrum of adjustment reactions. There will be those who accept the new reality almost instantly. They probably represent the usually early adopter percentage of the population. Then you have those who are easily convinced. After that you have the mass of the population who will follow when ordered by government to act a certain way. Finally there are those who will be dragged kicking and screaming every step of the way.
We now know of people in the community who we believe have contracted the disease. The numbers are still small compared with the global situation. In every case, they didn’t think they were taking a risk.
But here’s the problem, most of those who are carriers are not exhibiting any symptoms. They are completely asymptomatic and they are infectious, silently spreading the disease to everyone they come in contact with.
I believe that people are basically good with good intentions. They also believe that the risks are low when less than 0.1% of the population have been diagnosed. But many of these same people will go out and buy lottery tickets where the chances of winning are less than one in a million.
My son pledged to uphold the rules of our house. I truly believe that he meant no harm, but in spite of this he did put our home at risk.
This question is from Dan in Alberta Canada
I just put an apartment under contract and working through the DD.
It’s a 32 unit 4 storey for $50,000/door in a town with heavy reliance on the oil industry. At present the gross monthly revenues are 17k. The property was mismanaged and vacancy is 45%. The rest of the market has about 20% vacancy. Rents are now 20% less than the present market rents. In it’s peak days, gross rents were 60k.
I’m having mixed thoughts In these uncertain times... What are you suggesting?
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Wait and see
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Buy during these fearful times, as deals are best.
Dan this is a great question.
On the surface, when you look retrospectively, it looks like the property might be a deal. The purchase price is well below construction cost, and the market has delivered stronger performance at this property in the past. That’s all in the rear view mirror. We would both agree that driving a car using the rear view mirror alone for guidance is a recipe for disaster.
We are about to embark upon one of the largest economic slowdowns in our lifetime. The impact of this is unknown in many respects.
We don’t know what the credit markets will look like in 15 days or 30 days, let alone six months.
You mentioned that the local economy is driven by the oil industry. The oil industry is in the middle of a price war and the community that depends on oil production for its lifeblood will very quickly experience even greater reduction in workforce if prices remain anywhere near current levels. We’ve experienced a massive drop in global oil demand over the past two weeks which has caused prices to drop as stronger players aim to protect their income streams at the expense of weaker players. At a certain point with prices near levels we haven’t seen in over 20 years, these companies are losing money. The price of oil varies widely based on the cost of transportation. In places like Alberta where the transportation costs are high due to the lack of pipeline infrastructure, oil prices hit a low $7.23. Let’s let that number sink in for a moment. Even the OPEC price of $27.31 is at extremely low levels we haven’t seen in decades. So much of the global oil industry has been financed with debt. Many companies will end up defaulting on their debt and the stronger players hope that will result in a drop in supply.
If you don’t have an influx of population into the market, it’s hard to see how you’re going to implement a turnaround on this property in the current environment.
Making investment decisions requires a measure of certainty in the market conditions. There’s always a degree of risk in any market. But today we have so many risks that it’s virtually impossible to quantify the impact of each of the individually, and then in combination, it’s well above my analytic ability.
The key to answering this question. How long will this economic disruption last? The true answer is that nobody knows. There have been a few promising announcements that chloroquine, a 70 year old anti-malaria medication has been shown to be effective in treating patients with Covid-19. If that’s the case, and the clinical trials prove positive, we might be looking at a shorter period of economic disruption. That depends on whether this drug, or perhaps another, or a combination of drugs proves effective.
The chances are high that this situation will precipitate a credit crisis. Government backed loans only represent a small proportion of all lending activity. If there is a crisis in the private lending market, then we can expect a fall in asset prices just like we saw in 2008.
This particular building may be a deal, but I personally would advise you to be patient and continue to monitor the situation. You might find an even better deal in the weeks and months to come.
On today’s show we’re talking about preparation for the next several weeks. It’s stunning to me that I still talk to people on a daily basis who have made zero steps to prepare for a possible period of complete social isolation. Many who I spoke with in the past week had less than a week of supply in their pantry.
We’ve starting preparing for the possibility of a social lockdown over a month ago. As of now, we have about 8 weeks of supplies such that we can remain isolated for 60 days without going shopping if we need to. We are still going out to the grocery every few days and making sure we keep the pantry topped up.
We’re also mindful that as the disease spreads through the community, so too does the risk of going out even for a trip to the grocery store. Sooner is lower risk than later. Our latest visit to the grocery shows that the shops are empty of many essentials at this point. There is no flour, very little in the way of paper products like toilet paper, no rice, no coconut milk, no tofu.
We made sure to have a large supply of canned items and dried goods that have a long shelf life. Canned goods have the benefit of being easy to trade if there’s something you need that someone else has.
In our family, we have a Vegan diet which means no meat and no dairy. At some point if we face a lockdown situation we may have to rely upon what food we have in our house completely for an extended period of time. We will be relying on beans as a primary source of protein. So we have a lot of chick peas, lentils and beans that we can use in preparing meals.
We also purchased a fair bit of frozen vegetables. This is not something that we would normally consume, but if we are not going out, they will come in handy in meal preparation. We have a healthy supply of spices. When we speak about food tasting good, that has more to do with the seasoning of the food than the taste of the underlying ingredients. We recognize that part of our own emotional well-being will center around how we care for ourselves and how well we eat.
We have a few meals of prepared foods that are frozen and can be quickly heated and served. We don’t have a lot of these because they take up a disproportionate amount of space in the freezer.
We have dried foods like Rice, and Pasta. Some wonder how to calculate how many days of food are in their cupboard. For example, a one pound package of pasta will feed about 4 people, or about 100 grams per person if you do the math using the metric system.
There are some things we have not purchased. For example, we have not bought freeze dried foods, what some people call astronaut food. It’s partly because these portions are about 4 times the cost of regular food. They have a long shelf life, but it’s far from something we would normally eat. We felt that sticking as close to real food was the best choice for our family.
We have made certain assumptions about what will remain operational. For example, we expect that running water will continue to function, and that electricity will be reliable. So far we haven’t seen any cases of mass outages in the West. There is some risk. If you’re relying on your own well water for drinking water, then you should definitely stock up on drinking water. If you faced an equipment failure, it could be a long time before you got service to come and fix your pump.
We made sure we have about a two month supply of soap for the dishwasher and for the laundry. We do laundry on a regular basis, and this will be even more important if we go out for any errands. When we come back in the house from the grocery, the clothes go straight into the laundry and we go straight into the shower.
If you do the math on the social isolation required to protect our healthcare system, you quickly conclude that the period of social isolation we’re talking about is not measured in weeks. It’s measured in months.
Mr. George Ross, now 92 years old was Executive Vice President in the Trump Organization and Donald's right hand man for close to 47 years. On today's show George shares his perspective on the Covid-19 outbreak after having spoken with The President earlier in the week.
Dr. Chris Martenson has a PhD in Pathology from Duke University and is one of the founders of Peak Prosperity along with Adam Taggart. Chris was one of the first people in the West to flag Covid-19 as a major global health issue on Jan 23. Today's conversation with Chris covers the outbreak from a scientific perspective. To find out more, connect with Chris at peakprosperity.com and check out his YouTube videos on Covid-19.
There are so many aspects to cover these days. The entire world is truly in uncharted territory. It seems almost trivial to wonder whether tenants will pay rent on April 1, and May 1 and June 1? Landlords truly don’t know how many tenants will have been laid off, and how many will simply not pay rent in anticipation of the need to conserve cash. These things may happen.
We are in a moment of crisis, globally. It’s far more important to focus on staying healthy and keeping people who have existing health risks well isolated from any possible path of infection. The heartbreaking stories circulating the news services are incredible. There’s the story of a A Japanese man from Gamagori in central Japan with liver cancer and the new coronavirus wanted to enjoy a last night out before going to the hospital. He held hands with a hostess who so far hasn’t tested positive but he ended up infecting another employee at a karaoke bar and causing a national uproar. On Wednesday, he died, just two weeks after what turned out to be his last song.
There’s the story of an Italian nursing home with the small town of Cremona. I’ve visited that town many times. This nursing home has 460 beds. In the past week there had been 18 deaths at this facility of patients with respiratory difficulties - symptoms associated with the coronavirus on just a single day. None of these residents had been tested and therefore none of them fall into the official Covid-19 death-toll. So far in Italy, about 8% of healthcare workers have been infected. In the United States, the Center for Disease control has advised health care workers that if they exhibit symptoms of the virus, to put on a mask and gloves and get back to work.
It’s amazing to me that there are still people out there thinking this Covid-19 thing is totally overblown. I’m seeing people lose friendships over a difference of opinion about this outbreak. It’s amazing how this is challenging some closely held beliefs for some to the point of rupturing life long friendships. I think this is because the most basic of human survival is at stake.
On today’s show we’re talking about how you as landlords can open a dialog with tenants and how the government is making overtures that they plan to make direct cash payments to the population within the next month. You have an early warning that you need to take action to strengthen your balance sheet. If you have access to lines of credit, I recommend that you draw on those funds before the lines get pulled back.
The White House has proposed nearly a trillion dollars in emergency funding, and up to $250 billion of that trillion dollars going directly to citizens. This spending will require an act of Congress, and details are still being worked out.
The Canadian government has recalled Parliament and is expecting a bailout package for ordinary citizens that will be available in the next two to three weeks. While many programs discussed publicly have focused on employees, we have to remember that the economy has an increasing number of self employed workers. These include the entire spectrum from lawyers, doctors and dentists, to folks who drive for Uber and Lyft. None of them would qualify for traditional unemployment insurance benefits. Oh yes, that also includes real estate investors.
It reminds me of a simple example where if you, as a single landlord run out of cash, you might be forced to declare bankruptcy. In that situation, you have a problem. But when tens of millions of people run out of cash, then the banks have a problem, and the government has a problem.
There will be an increasing number of programs coming available. Banks will be asked to do their part to help their customers. The banks will only do so if they believe the government will backstop any financial commitments made.
Despite all the public warnings from governments and health experts all over the world, there are still people out there thinking that the SARS Cove-2, also known as Covid 19, the entire situation is being over-blown, that this is no more dangerous than the flu. The UK government was taking a very passive role up until a couple of days ago when they made a dramatic shift in strategy. The clearly saw some new information, some studies that scared the heck out of them and decided a change was appropriate.
Think about it, Italy had 4,200 new cases and 475 deaths yesterday, and has been averaging about 350 deaths a day for several days before that. These are huge numbers. If we scaled that up to the size of the United States, we’re talking deaths of over 2,000 people a day, and many times that in intensive care. These are huge numbers. Their health care system is crumbling under the weight of the new cases coming in requiring intensive care. Clearly some action is needed to slow down the progression of the disease to protect the health care system. Governments have been telling people that they need to eliminate social interaction for the next two to three weeks. The general population can handle a few weeks. They’ve been told that they don’t need to stock up for more than just a few days.
On today’s show we’re talking about the scope of the economic shutdown that we’re currently in the middle of. Many people are asking the question “How long?”.
I’m wondering, is this an economic blizzard, or an economic winter? In an economic blizzard, everything grinds to a halt, the community bands together, cleans up the situation and not long after, life is back to normal. An economic winter is an entire season. It could be a deep freeze, and hopefully not an ice age.
In a world of social distancing, businesses all over North America and Europe are either closed or operating with telecommuting. Some areas have allowed restaurants to remain open at 50% capacity.
The mortality rate is incredibly high compared with the flu. Since we don’t have a cure, nor a treatment, social isolation is key to prevent the spread of the disease. The big question is how long. If the goal of the isolation is to completely suppress the virus and eradicate it much like we have managed to do with Polio, then it will take an extensive period of social isolation, aggressive testing and aggressive contact tracing. Only when we have a vaccine that has been proven and manufactured in quantities will we be able to resume normal social interaction. But that’s at least nine months away, even if we had a vaccine today which we don’t. The process of introducing a vaccine requires a pre-clinical trial for 90 days, followed by a limited clinical trial, followed by volume manufacturing, and then the time it takes to immunize millions of people.
In mitigation, the virus is present in the population. As soon as you allow people to interact again, the rate of infection picks up where it left off and we will overwhelm the healthcare system in a matter of weeks.
So here too, the period of isolation ends up being extended for quite a while. While governments have not been sharing this perspective with the general population, the mathematical model to simulate the spread of the virus through the population is no great secret. The simulation is quite straightforward. If unchecked, the virus would envelope the population in 120 days, and governments aren’t trying to prevent it from happening. They are only trying to slow it down. So let’s say they’re trying to slow it down to no more than one percent of the population gets infected in a single week. That would take 100 weeks, or nearly two years. Italy’s health care system has been crushed in a very short time period. And penetration of the population is estimated to be no more than 1%.
The airlines are critical to virtually everyone in society, including real estate investors. So today we’re talking about the airline industry. I’ve traveled extensively over the years for business and pleasure. Despite the recommendations from government to reduce travel,
There are currently 90,000 passengers on cruise ships around the world whose fate is uncertain when their cruises end. Even once they’re back on land, the reality of flights home may be far different than when they boarded the ship.
Most airlines have already announced massive reductions in capacity in recent days. Many international routes have been cut by 85%, in some cases 100%. Domestic routes have been cut by anywhere from 10% to 50%.
Westjet flight attendants union announced that they expect layoffs of 50% of the airline’s staff in the coming weeks.
So far a consortium of airlines Industry trade group Airlines for America, or A4A, have asked the US Federal government for an aid package of $50 billion. This is a combination of loans, loan guarantees, and grants. The trade group argued that roughly half of the proposed assistance—$25 billion—should come in the form of direct grants to airlines. The proposal also outlines a $25 billion program in which the Federal Reserve would purchase financial instruments from, or provide interest-free loans or loan guarantees to, the carriers.
United Airlines alone estimating its revenue would be down $1.5 billion in March from a year ago. United Airlines cancelled their new pilot training program, but Air Canada is looking past the current business interruption and continuing to hire and train pilots.
A4A, also proposed $8 billion in grants and guarantees for cargo carriers. U.S. airports are separately seeking $10 billion in assistance to counter forecast full-year losses already approaching $9 billion. The airports collect their revenue through landing fees that are charged to each passenger as a supplement to their airfare. This pays for the operation of the airport and the debt due on any airport improvements.
In a matter of days, American Airlines managed to reach an agreement with its pilots union. These negotiations typically take months of dialog and the can gets kicked down the road many times.
When this downturn ends, the airlines will need to spin up to capacity very quickly. But in order to do that, pilots need to remain current. They need to complete at least 3 landings as pilot in command in the past 90 days. They also need to remain current on their medical and any flight tests. When a pilot is qualified to fly, they are certified on a single aircraft and only that single aircraft. You’re not going to have a Airbus A320 pilot all of a sudden switch to a Boeing 787. That’s a completely different equipment rating. You can do all of this work in the simulator.
The big question is how long is this disruption going to last? Like we said on yesterday’s show, is this an economic blizzard or an economic winter?
Some estimates I’ve seen have suggested that if the lockdowns we are seeing in the economy are successful in slowing the spread of Covid-19, the time that will be required to limit the spread through the population will be extended. That means possibly an extended period of reduced social contact, and therefore an extended period of economic slowdown.
Will the airlines undergo a substantial long term shrinkage in the industry as a result?
The White House has been clear that maintaining the airline industry is a priority as a matter of national security. Some lawmakers have opposed the bailout saying that protecting workers is a priority above protecting corporations. Perhaps those elected officials don’t realize that the path to paying workers is through the companies, without which there is no employment.
On today’s show we’re talking about the challenges that many property owners will be facing during this unprecedented time in modern history.
We don’t know if the Covid-19 crisis is merely a blizzard or an entire winter. Depending on the answer to that question, the extent of the economic damage can vary widely. Most people can survive an economic blizzard. Things slow down for a few days. Everyone gets their shovels out and digs out. A few days later life is back to normal. In an economic winter, a different approach is required.
Today’s discussion is a microcosm of the hundreds of similar situations that are happening in industries all over the world. If you’re in the restaurant business, if you’re a taxi driver, if you’re an airline pilot or flight attendant. Hundreds of millions of people are being directly affected economically by the current outbreak. The real estate example we’re focusing on today is short term rental properties.
I’m an owner of a portfolio of properties in the Rocky Mountains. A current search shows over 300 listings available for next week. Normally at this time of year, we’re running about 80%-90% occupancy.
This past weekend, AirBnB changed its extenuating circumstances cancellation policy. This policy over-rides the policy that each AirBnB host lists for their properties.
We have seen a flurry of cancellations over the past three days. In many of those cancellations, guests have been making false claims in order to qualify for a full refund. The AirBnB policy says:
“We may be able to give you a refund or waive the cancellation penalties if you have to cancel because of an unexpected circumstance that’s out of your control. Below is a list of circumstances covered by our Extenuating Circumstances Policy. Before you cancel, check that your circumstance is included in the list below and that you can provide the required documentation.”
- Unexpected serious illness or injury
- Government-mandated obligations
- Transportation disruptions
- Travel restrictions
- Epidemic disease or illness
In my case, my properties are not in a location that has identified any Covid-19 cases. As such, unless the guest is unable to get to the location due to, say, a flight cancellation, they would only be entitled to a 50% refund and not be entitled to a 100% refund.
As an AirBnB host, we want to be sympathetic to guests who are genuinely afraid of traveling in today’s environment. I cancelled two trips to Europe and paid a 50% cancellation fee to the AirBnB host in Rome.
There are three main questions that need to be answered.
1) Are we going to be unsympathetic to guests who want to cancel?
2) Has the guests false claim that the property is infected going to stigmatize the property and lead AirBnB to improperly flag the property as having a problem?
3) How will the property pay its bills in the coming weeks and months?
Some people may experience travel disruptions due to flight cancellations.
Clearly we are sympathetic. I would not choose to be traveling right now. At the same time, we have bills to pay, condo fees that are due and mortgage payments that are due.
In our case, we have a cash reserve that will carry us for a period of time. But that cash reserve never contemplated 0% occupancy for an extended period of time. We are probably not alone in that regard. We will have to tap additional resources in order to cover the negative cash flow.
A 2019 report by the JPMorgan Chase looked at 1.4 million small businesses with a business account at the bank and found 29% were unprofitable, and 47% had less than two weeks of cash liquidity. That means that nearly 76% of US small businesses could be insolvent in less than a month.
You should take immediate steps right now to reduce expenses and conserve cash.
The markets woke up this morning to a new era of zero interest rates in the US, and a coordinated effort with 5 other central banks to ensure liquidity in international markets.
The Federal Reserve slashed its benchmark interest rate to near zero on Sunday and said it would buy $700 billion in Treasury and mortgage-backed securities in an aggressive bid to prevent market disruptions from aggravating what is likely to be a severe slowdown from the coronavirus pandemic.
The Fed’s rate-setting committee said in a statement Sunday “The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses.”
As we’ve talked about before, it’s not entirely clear what these moves are intended to accomplish in the broader economy. The slowdown wasn’t caused by a lack of liquidity in the market. We have an unprecedented simultaneous drop in both demand and supply due to the corona virus outbreak.
It’s not like the drop in interest rates is going to stimulate me to hop on a cruise ship next week.
The Federal reserve is basically allowing the banks to buy treasury bills, up to $500 billion worth. In addition, they’re going to take $200 billion in mortgage backed securities onto the Federal Reserve’s balance sheet.
In his remarks, the Federal Reserve Chairman Jerome Powell said that he was seeing stresses in the market for Agency Mortgage backed securities, specifically Fannie Mae and Freddie Mac. He said this was necessary to enable refinance activity and enable buyers to continue to buy new homes.
So the Fed is clearly seeing a credit crisis emerging from the economy screeching to a halt in a matter of days.
The Fed also said firms could use their capital and liquidity buffers to lend, and reduced reserve requirement ratios to zero percent effective on March 26.
That’s an astounding statement. Think about it, the banks are no longer required to maintain a deposit reserve. The Fed is going to print an infinite amount of money, and it’s going to allow the banks to print an infinite amount of money, backed fully by the authority of the US Federal Government.
Fed said the financial institutions should feel comfortable tapping into the discount window as a tool for addressing “potential funding pressures.” In the past, banks have been hesitant to tap into the direct lines of funding because of the stigma associated with relying on the Fed for emergency funds. The Fed also reduced the interest rate for the discount window to 0.25% and these lines can be accessed for up to 90 days.
We’ve seen the Federal Reserve pump over $400B into the Repo market earlier this week.
Despite the aggressive move, the market’s initial response was negative. Dow futures on Sunday pointed to a decline of some 1,000 points at the Wall Street opening on Monday morning. The stock futures hit a limit which automatically stopped trading activity whenever there is a decline of 5% or more.
Treasury Secretary Steven Mnuchin said his agency would advance funds to businesses so they can meet paid sick-leave requirements under a new House bill to combat the Covid 19 outbreak. He said employers will be able to use cash deposited with the IRS to pay sick-leave wages. In essence, the funds on deposit with the IRS for payroll could be used as a line of credit for paying sick leave. For businesses that wouldn’t have sufficient taxes to draw from, the Treasury would make advances to cover the costs, he said. It’s important to remember that this sounds like a loan, and the terms for repaying the loan are not at all clear.
Now is the time when businesses need to be taking the necessary steps to conserve cash and reduce expenses.
On today's show we take a live look at my own website from a digital marketing perspective. Adam has some powerful insights on how content can be repurposed to create additional searchable content that can expand the digital reach. Adam can be reached at gowercrowd.com.
Cynthia Cummins is a residential realtor in San Francisco who specializes in luxury properties. Her wildly successful blog called "Real Estate Therapy" www.realestatetherapy.org has set her apart and allowed her to dominate her segment in the market.
On today’s show we’re talking about the fallout of the current covid-19 crisis on real estate investors.
The news media have filled the airwaves with news of the virus outbreak. The Federal Reserve and central banks the world over have responded by lowering interest rates. Under normal conditions, we would expect to see interest rates falling.
But in a strange twist, mortgage rates have actually increased in the past few days. That’s right you heard me correctly. In a falling interest rate environment, the quoted rates for mortgage loans have gone up in the past week.
So the question is why?
Last week, the rate for the 30 year government backed JUMBO loan in the US hit a low of 3.25% on March 2. Today, the quoted rates are averaging from 3.65%. I’ve seen several explanations for this.
The folks at Barrons magazine have speculated that there is a lag between the fall in treasury yields and the yields for mortgage backed securities. The Barrons article is saying the banks have been slow to lower rates to even match the fall in mortgage backed securities yields.
Let’s dig into this aspect a little deep so that we understand how the banking system works.
The bank takes in deposits from everyday people. Most people have their bi-weekly pay check deposited into their bank account.
The bank then turns around and lends that money out to people who are looking to buy houses, finance cars, refinance their homes, buy things using credit cards and so on. Not only do they lend out the money taken on deposit, they lend that same dollar on deposit up to 9 more times. The bank regulator only requires banks to hold reserves of 10% of the total deposits in cash.
But even with this system of multiplying the deposits into an order of magnitude more loans, the banks want even more leverage. So rather than keep the loans on their books, the banks then issue bonds called mortgage backed securities. The banks then earn a profit on the spread between the interest rate on the bond and the loan being charged to the customer.
If the banks can’t sell the bonds, then they run out of cash to lend out. The deposits in the banks aren’t enough to satisfy the demand for loans.
Elsewhere in the bond market, we’ve seen money flooding into the bond market from the stock market as investors flee stocks in search of safer yields. Overwhelmingly the cash has been going into US treasuries.
So let’s go back to the mortgage market and understand what’s happening there.
According to a report in the Wall Street Journal this morning, the banks are having trouble selling their mortgage backed securities. The normal buyers for these bonds haven’t materialized in the past week. If the banks can’t sell their bonds, then they can’t write as many loans. This is translating into the banks having to offer a higher interest rate on their bonds in order to sell them. This in turn translates into a higher rate for mortgages at the consumer end of the market.
This effect is yet another example of the counter party relationships that exist all throughout our financial system.
I predict that we’re going to see a shift in lending practices over the coming weeks. I’m predicting that there will be less liquidity in the market as real investors reduce their activity in the bond market. I also predict that the Fed is going to keep printing money like never before in order to make the market appear orderly and like nothing bad is happening. How this shakes out isn’t entirely clear. For the time being, you can expect the spread between the treasury rates and the mortgage rates to increase.
We are living through a moment in history where circumstances seem to be changing almost daily. With that less certainty, there’s less that you can count on.
When you’re negotiating a transaction between two parties, there are three sources of uncertainty. There’s the uncertainty that I bring to the transaction for items that are within my control. There’s the uncertainty that the other party brings to the transaction through items that are in their control, and then there are factors contributed by third parties to the transaction where it’s outside the control of both parties.
We’ve seen first hand, and second hand cases where investors have decided to pull back from commitments and sit on cash, choosing to do nothing for the time being. If you’re raising money in today’s environment, you have to assume that you’re going to get some investor attrition. It might not be large numbers, but you might plan on losing 25% of your investors just because of the uncertainty in the current market conditions.
In my conversations with other developers, I’m aware of cases where the drop in stock market values has directly made less capital available for investors to deploy into real estate transactions. This is real and I have to tell you that raising capital just got harder in the past few weeks.
For the moment, this hasn’t impacted the lending environment. But that too could change. Lenders come in all shapes and sizes. If you’re relying upon financing for a project, you may want to consider taking a more conservative approach in your negotiations.
In at least one case, we’ve added a financing condition to a transaction, even though we have no indication that there are any changes to the financing commitment.
We’re living in a highly interconnected world where counter party risk exists all over the place. You might have a private bridge lender who is fully on board with your project. You might have a term sheet, a good appraisal, and green lights everywhere. Then at the closing table the lender might not come through.
This happened to us with a reputable bank back in December. In that case, it was a situation where the bank was missing the paperwork for a partner bank that was co-funding the deal. It took a couple of weeks to resolve and everything was good. But we had no visibility of the fact that a second lending institution was involved in the loan. This is an example of the types of complexities that exist in the financial system. This stumble was nothing more than a benign administrative error.
Fast forward to today where we have a highly fluid situation that is changing from one day to the next.
I believe that you should not be signing any purchase agreements without a financing condition. You might have a lender failing to perform at the closing table at which point you need additional time to secure alternate financing without putting investors monies at risk in the form of non-refundable deposits.
I also believe that you should be much more conservative and unless you have the cash in hand to close, your earnest money deposit should be in trust with a lawyer, a title company a real estate brokerage, or other appropriate trustee for those funds.
On today’s show we’re talk about the Everything Bubble. Bubbles have formed throughout history and all it takes it a pin prick to burst a bubble.
On today’s show we’re talking about all kinds of bubbles and how they form. The year was 1554 and tulip bulbs were sent from the Ottoman Empire to Vienna. By 1593, a botanist in the Netherlands figured out how to create a varietal that would be hardy in colder climates. The tulip mania was on. By 1636, there was a derivatives market trading in Tulip bulb futures. Tulip mania reached its peak during the winter of 1636–37, when some bulbs were reportedly changing hands ten times in a day. No deliveries were ever made to fulfill any of these contracts, because in February 1637, tulip bulb contract prices collapsed abruptly and the trade of tulips ground to a halt. It sounds silly in retrospect. But at the time, those in the Tulip trade took it very seriously.
Back in 1997, 98 and 1999 we had the dot com bubble. Any business that had an internet component was worth gazillions. Some of those businesses had no revenue, only a promise of bringing internet technology to some aspect of commerce. Buying pet food online made no sense. We can see that in hindsight. But at the time, investors flocked to buy up those shares.
In 2004-2006 we had the housing bubble. In that scenario, it wasn’t really a housing bubble, but a debt bubble. Irresponsible lending practices in the subprime market caused stated income loans to be written against real estate using valuations that had been bid up beyond the level of affordability. The increase in asset prices was fueled by the lending practices. If you couldn’t get an appraisal at that higher value, then the bank shouldn’t lend you the money.
Over the past two years we’ve had numerous bubbles forming. We’ve had businesses that have not generated a penny of positive cash flow like Tesla, Netflix, Uber, Lyft, and WeWork getting valuations in the tens of billions of dollars. Companies that haven’t demonstrated their ability to have a profitable business model were worth gazillions.
We have another bubble in the shale oil business. Shale oil wells have a very steep decline in production volume after they start producing. After 12 months in production, they are typically producing about 15% of the oil that was gushing on the very first day of production. That well might continue to produce for another 20 or 25 years, but at very low volumes. The problem is that the break-even on the debt for that well is a function of the price of oil. At prices below $45 a barrel, these wells will never break even in their lifetime. The only way these oil companies stay afloat is to drill more wells at increasingly higher levels of debt. We’ve had oil prices fall nearly 40% in the past week. These companies will not be able to service the debt on those bonds for long if the price war between Russia and Saudi Arabia continues.
Well here we are in March of 2020. Central banks all over the world have been pumping liquidity into the system during supposed boom times. These are the actions to be taken during a crisis. But they were being taken during good times. We’ve known for a while that there would be a breaking point eventually. I thought the trigger event would be a sovereign debt crisis. I was wrong. It turns out that the trigger was the outbreak of a virus. The impact of that additional liquidity was to for cash to make its way into the debt markets which in turn was used by companies all over the world to buy back stocks through additional leverage and in turn increase the asset prices in the stock market. Even now, after the pin has burst the balloon, the central banks think they can re-inflate the balloon by pumping more cash into it.
This bubble was not a single asset bubble like before. This is the Everything Bubble.
What a difference a few weeks can make. A month ago we were in an economic boom. Unemployment was low. The stock market was at all-time highs. Sure there were a few cases of Covid-19 in China, but all was good in Europe and in North America.
In a few short weeks we’ve seen the travel industry’s world turned upside down. The first airline casualty was FlyBe, a regional airline in the UK that represented about 38% of domestic air capacity in the UK. They flew to smaller centers like Manchester, Birmingham and Liverpool, serving 139 routes. They declared bankruptcy and likely won’t be returning to the air.
Oil prices started to fall when it became clear that economic output was going to be disrupted from China. There’s a direct link between one unit of economic output and one unit of energy consumption. OPEC was trying last week to propose production cuts in order to prevent a glut on the market and to protect oil prices. Russia refused to comply and now we have an all out price war happening in the oil industry.
In response, we’ve had oil prices fall nearly 40% in one week and 25% in just one day. If there is a protracted drop in oil, we can expect bankruptcies in the oil industry.
Stocks have fallen 20% in value in a couple of weeks including a 2000 point drop in the Dow Jone Industrial Average, the largest single day drop in history. We know there are supply chain disruptions that are going to ripple through the economy over the coming months. So that’s all happening in the broader economy.
So let’s say you have a market report in front of you that’s two months old, or six months old. Is it any good? How do you plan?
Do you assume reductions in employment? How many of your tenants will be impacted?
Do you assume that there will be disruptions in the bond market which will ripple through the banking industry?
You see we’re used to thinking linearly. When there are massive dislocations and there is a delay between the warning signs and all the downstream consequences to the economy, it’s hard to connect the dots.
I was reading the Marcus and Millichap Office market report for 2020. It’s only a few weeks old. But as I was reading the report, it was clear that the report was written in a completely different environment. That was then, this is now. Would the report be written the same way if it was published today, only a few weeks later?
We think about cities like Dallas, Houston, Nashville, Toronto, that have been attracting tremendous growth in population. Will that growth be disrupted? If it is disrupted, will that disruption be temporary or longer lasting?
There are too many questions for which there are no answers. The only answer is to wait and see how all of this shakes out.
The web of interconnected dependencies in our global markets are incredibly complex and the relationship between them hasn’t even been modelled, let alone understood.
I was watching a TED talk that Bill Gates gave back in 2015. In that talk, Bill Gates predicted that we are globally unprepared for the outbreak of a virus. We have spent trillions on military preparedness in order to protect against a catastrophic global conflict, but our health care systems have not adopted the same wartime footing to prepare for a surprise attack.
The problem isn’t that our system for handling these outbreaks is breaking down. The problem is that we don’t have a system at all. Our system of testing in the US required medical samples that have a shelf life of less than 6-9 hours to be sent to a central lab in Atlanta. Even if you could get the sample to the airport by courier within minutes, the 5 hour flight to Atlanta, through the backlog in testing, the chances that the test sample is still viable diminishes rapidly.
Nobody can tell you the impact of what happens when you mass quarantine 60 million people, or 700 million people.
The Corona Virus is making headlines all over the world. Many people are out there thinking that it’s an over-reaction. On today’s show we’re going to take a departure from real estate and talk about the major factors that you need to consider during this unprecedented moment in history.
There’s no question that the disease and the threat of the disease are having a major economic impact. Events have been cancelled all over the world, quarantines and large scale lockdowns are underway in a number of areas, employers have asked people to work from home, and health care workers are sharing some harrowing tales.
On today’s show we’re going to break down the three major conflicting factors that individuals, governments and communities alike need to balance.
- The need to confine the spread of the disease
- Keep the economy and society running as smoothly as possible
- Protect the health care system from being overwhelmed
Let’s go into these three areas one by one. I’ve seen many statements on television, on the internet, including from doctors that this isn’t any different than the influenza. All these quarantines are an over-reaction.
Let’s look at the numbers for the corona virus and see if we agree. The influenza does kill a number of people each year. It’s usually in the range of about 0.1% of cases result in death, and these are heavily skewed towards older people with other health issues and compromised immune systems.
If we look at the data from the current outbreak in Italy, there are a total of 7375 people known to have been infected as of March 8, and increase of almost 1,500 compared with the day before. So far the disease has claimed the lives of 366 people. There are 622 who have recovered and 650 who are in serious or critical condition. So if you were to measure the case fatality rate you would divide the number of deaths by the number of cases where you know the outcome. They either got better, or they didn’t. You can’t include the number of new cases where people just tested positive because you don’t know the outcome. You only know the case fatality rate retrospectively.
The WHO is estimating the case fatality rate at 3.4%. I frankly don’t see how they get that number. If you accept the WHO number, then the case fatality rate is about 34 times higher than the annual influenza. But if you look at the actual numbers from China you get a different picture. Their case fatality rate is running at about 5%. If you look at the numbers from Italy, you get a very different picture. If you do the math you get a case fatality rate of 37%. That’s a huge number. It’s possible that the number will come down in the future, but we don’t know the outcome of the newly reported cases so its too soon to include those new infections in the statistics.
Let’s move on to number 2, the need to keep the economy moving. If the entire economy came to a standstill and you couldn’t get food to the grocery stores, you would start to see mass famine, social unrest, anarchy and the impact of that could be worse than the coronavirus. So you clearly need to keep the economy moving. That’s important.
Number 3, is protecting the health care system. If the hospitals become overwhelmed, then you end up with health care workers coming down with the disease. They get taken off the job and now you’re dealing with a major staff shortage, and you also lose beds that would be needed for the numerous other ailments.
This is the difficult balancing act that governments have to orchestrate. I predict that you will see an increasing amount of triage taking place. In a triage environment you are only handling the most severe cases up to your capacity. Everything else gets pushed to the back of the queue. Make sure you have a plan for your family that includes the possibility of lockdown for 30 days or more.
Matt Faircloth is the author of "Raising Private Capital: Build Your Real Estate Empire Using Other People's Capital". He can be reached at the DeRosa Group. www.derosagroup.com.
Eric Bowlin comes to us from sunny Puerto Rico where he is looking out over the water during our interview. On today's show we're talking about how Eric designed his life to manage his investments remotely and live in the location of his choice.
On today’s show we’re talking about the fallout from the gold rush in Cannabis. As more and more states and countries have decriminalized marijuana, investors have rushed into the market to plant acreage, build greenhouses, and create indoor manufacturing using vertical hydroponics. All of this was in anticipation of an increase in demand.
To be clear, in states like Colorado, Washington, and California, we have seen an increase in demand. I have to say, even though it’s been legal for a while, it is still a bit jarring to me to be walking down the streets in Manhattan and smell marijuana. I’m not a user, and this podcast isn’t intended to speak to the merits of cannabis use. I’m merely covering it from a real estate perspective.
California's legalization of cannabis for adult recreational use was expected to be massive. Back in 2016, industry investors claimed sales could top $6.5 billion by 2020.
And by the end of 2019, California is indeed home to the world's largest cannabis market, totaling close to $12 billion in estimated sales. But here's the problem: $8.7 billion of that is changing hands in the underground market, leaving only about $3B coming through licensed channels.
It seems that prices for growers have been falling significantly and many businesses are laying off staff.
CannaCraft recently laid off 20% of its 240-person workforce.
Smiths Falls Ontario based Canopy Growth is one of Canada’s largest indoor grow operation and occupies the site of the old Hershey Chocolate Factory. They are orchestrating a massive overhaul involving a layoff of 500 workers, and a writedown of $700 - $800 million dollars, the closure of two greenhouses and the cancellation of plans to operate a third. The two greenhouses based in British Columbia were opened in February 2018 and represent about 3 million square feet of greenhouse space.
The company, has struggled to create free cash flow as the cannabis market did not mature as fast as it anticipated and federal regulations permitting outdoor cultivation were introduced long after Canopy had begun investing in their greenhouses. Constellation Brands is a major share holder in Canopy having invested about $5B for a 38% share of the company.
Canopy now operates an outdoor production site that's made cultivation more cost-effective. It believes that site will play an important role in meeting demand for products necessitating cannabis extracts.
Over the past 4-5 years, farmland throughout several states and provinces was sold at top dollar in anticipation of the growth of the cannabis industry. Many of these investments are being written down as the money has failed to materialize.
The industry has struggled to grow because the opening of legal retail outlets is very tightly regulated. The number of retail licenses issued has not kept pace with the increase in supply at the production level. Getting the product to market doesn’t work if the retail channel hasn’t been developed. This too has been a major impediment to the industry growth.
Like many new markets that are still developing, it’s sometimes hard to anticipate where the inefficiency is going to appear in the market.
A quick survey of licensed farm land for sale, shows that prices for licensed land have been falling as oversupply has hit the market.
Let’s be clear, there is still big money making investments in Cannabis. AB Inbeve, the world’s largest beer company recently made a $50M investment in Tilray to research infused beverages.
Constellation Brands is also betting big on the infused beverage market. While beverages are still a growing segment of the market, the volumes are low. This segment is expected to represent about $5B in revenue annually by 2026.
On today’s show we’re talking about how to make sure the budget for a construction project has integrity. I regularly receive questions from new developers looking to grow from buy-hold investment into new construction. The first thing I ask for is to see their budget and the pro forma. On today’s show we’re going to highlight the most common mistakes that I see in a construction budget.
Understand that when you’ve made mistakes in the initial analysis, there’s very little that can save you apart from a miraculous increase in rents.
The number one mistake that I see is having an incomplete list of construction expenses. This is where you need to adopt the discipline of a pilot and use checklists for your budget.
If you’ve ever flown an aircraft you’ll know that everything that happens in the cockpit uses procedures and checklists. Whenever there are a lot of items that need to be taken into account, the human mind is bound to miss a bunch. That’s when mistakes happen. If you don’t have a system, you’re going to make mistakes. The key is to have a systematic way of ensuring nothing gets missed.
When budget mistakes happen, they can come from one of two possible sources. The first is that things were more expensive than originally estimated. This is where people expect to find cost over-runs. Maybe there’s a material shortage and all of a sudden prices are higher than you originally forecast. These types of mistakes can result in modest increases in your overall budget.
But the biggest issue is when you have an expense that was missed from the budget altogether. You’ve budgeted zero for that line item and in reality, the number is not zero. That’s a huge problem because the entire amount is offside, not just a small mis-estimation of say 10%.
The most important thing you can do is make sure your list of budget line items is complete.
In addition, on today’s show I’m going to highlight 7 of the most often missed budget line items.
The first three relate to costs associated with the construction loan.
7) Title Insurance. Most lenders will want a title insurance policy issued in their name for the construction loan. Depending on the value of the project, this can add up to a lot of money.
6) Loan Fees. Most investors remember to include the lender’s origination fee, but often forget to include the cost of preparing the loan documents. When you convert from your construction financing to permanent financing there will be additional fees associated with the permanent loan. These need to be part of the project budget.
5) I often see new developers underestimate the cost of the architectural work. Architect’s fees can vary widely depending on how the project is structured. They sometimes hire the engineers for mechanical, structural, civil, plumbing, and electrical as subcontractors and simply pass through those costs. Unless you’ve got a quote for the engineering work, you can be fooled.
4) Site related work. This encompasses everything from drainage to landscaping. The number of times I’ve see a project fail to include the cost of removing the material excavated from the foundation is astounding. I’ve seen so many projects include the budget for the building, but fail to include any money for landscaping.
3) Draw Inspections. When a lender loans money for construction. They advance the funds in draws. At the end of each phase of the construction, the bank sends an independent 3rd party inspector to verify that the scope of work included in the most recent draw request was in fact completed. These inspection fees can vary widely from a few hundred dollars each to a few thousand dollars.
2) Initial Operating Deficit. This is when property takes longer to lease than you planned for.
1) I’ve seen many budgets where the borrower fails to include an interest reserve in the budget to carry the cost of the construction loan.
Yesterday the Federal Reserve cut interest rates by 0.5%. As real estate investors who are about to refinance a project, we can raise a glass and make a toast to Jerome Powell.The Fed has been saying for some time that they intend to address a downturn with aggressive monetary policy. Today’s announcement was not at their regularly scheduled meeting that happens every 6 weeks. The last time the Fed took extraordinary action like this was during the financial crisis in 2008.
Today’s move will lower the cost of some borrowing, but not all. Long term rates are linked to the yield on the 10 year treasury which is determined by market forces, more than the actual short term lending rate set by the Fed. Still it’s a positive step for real estate investors. Some home owners and investors will choose to accelerate their planned refinance to take advantage of the lower interest rates. That lower rate will create more free cash flow in the economy that could eventually make its way back into the economy. Some will choose to maintain their payments constant and increase the principal portion of the payment to accelerate the amortization of the loan.
In terms of the broader economy, and the economic slowdown, like we talked about last week, this tool is completely useless as a counter-measure to the corona virus induced slowdown in the global economy.
I cancelled two trips in the past week because of concerns flying in a Covid-19 environment. I caught the H1N1 Swine flu when traveling in Japan back in 2009 and I know exactly what that’s like. I have no desire to be laid up in bed for a few weeks or worse. I also have no desire to be in a mandatory quarantine situation for two to three weeks. I have no desire to accelerate the spread of the disease.
It’s not like the lower interest rates would stimulate me to travel again. The interest rates have no influence on my decision to travel or not.
Economists don’t really have a vocabulary to describe this situation. They tend to think in terms of price elasticity of demand. The concept of price elasticity describes how sensitive demand is to changes in price. For example, if my flight to Italy last week was to increase in price to, say, $2,000, I probably would choose not to travel based on price and of course the risk of corona virus infection. But if the price were to drop to, say $300, I would definitely travel under normal circumstances. But we’re not in normal circumstances and I would still choose not travel because of the risk of corona virus infection. So while the demand might be elastic with price, it’s highly inelastic due to corona virus. The two are not connected in any way.
So that’s the demand side of the equation.
Let’s look at the supply side of the equation.
A recent report published in the Harvard Business review last week speaks directly to the question of supply chain disruptions. If you wanted to go buy a new Fiat automobile, they’ve shut down their factory in Serbia due to parts shortages. Perhaps you are looking for a new Hyundai or Kia SUV. Here too, manufacturing plants in Korea have been shut down due to parts shortages.
So perhaps lower interest rates might stimulate some to go buy a new car. For the time being, there’s ample supply. But in a few weeks, we can expect that some models will be more difficult to source. Some buyers may substitute for another product.
Then again, some may choose to wait until conditions normalize before making any major financial decisions.
Suffice to say, that the attempt to stimulate the economy where the supply chains have been disrupted won’t help if the manufacturers can’t get their product to market. A half point drop in the interest rate won’t create more surgical masks, manufacture more Tylenol or bring more container ships from China.
Just in case you thought being the owner of a retail storefront location wasn’t difficult enough, the City of San Francisco is going to punish those bad landlords who are responsible for the vacancies in retail. That’s right the government is here to help you with additional incentives to run a successful real estate business.
According to a report in the Wall Street Journal, the City of San Francisco is voting today on whether to impose a punitive tax on commercial storefronts that remain vacant for more than 6 months. They’re hoping this new measure will put an end to the blight of empty storefronts.
According to the wording in the proposal, the tax is intended to "reinvigorate commercial corridors and stabilize commercial rents, thereby allowing new small businesses to open and existing small businesses to thrive”.
We’re in an environment where there are major shifts happening in the world of retail. 2019 saw about 10,000 retail store closures across the US. A similar number of closures are expected for 2020. At the same time that 10,000 stores closed, the industry opened about 3,500 new stores across the nation.
Under the San Francisco initiative, building owners would have to pay $250 per foot of linear frontage, which could rise to $1,000 per linear foot in the future.
Think about it, a grocery store goes under with 100 feet of frontage and then all of a sudden the owner gets an extra bill for $100,000 through no fault of their own, because their tenant went out of business. It’s outrageous, and frankly I hope this gets challenged in the courts.
In my home city of Ottawa Canada, there has been an excessive amount of retail construction in my opinion. The West end of our city has been well served over the years by shopping malls of all types. I never would have considered that there was a shortage of retail in my area. We have had three new supermarkets open up.
Recently, a new outlet mall opened with 78 new stores about a 10 minute drive from my house. The impact on existing shopping centres has been clear. Another shopping district that is about 5 minutes from my house is suffering. Are vacancies the result of irresponsible landlords failing to keep their properties full?
New York City Mayor Bill DeBlasio has proposed a similar tax in the past month.
In his State of the City address that Mayor said, “If a landlord leaves that storefront vacant, hurts the community, makes the community less whole, deprives someone from having that storefront so they can be part of our community, then that landlord needs to pay more in taxes,”
In 2016, Arlington, Mass., passed a bylaw that requires owners of vacant storefronts to register the vacancy and pay an annual fee of $400.
Proponents of the approach would argue that the measure has worked. Vacancies in the central business district in Arlington fell from 6.4%—when the bylaw was passed—to 2% today.
Retail space is subject to the laws of supply and demand. There are a lot of forces that are affecting this aspect of the business. There’s new supply coming into the market making older properties comparatively less desirable. Our society has a tendency to discard older properties and allow them to fall into disrepair. This is particularly true when you have a major anchor tenant disappear from the market. We have seen many traditional anchors including Sears, JC Penny, Target, and Macys closing vast numbers of stores. We have seen supermarkets closing across the country. Walmart’s experiment into neighborhood markets has not been very successful and many of these stores have closed.
When a retail shop closes down, there is not a lineup of new small businesses waiting in the wings to take over that space. You can only have so many coffee shops in a given area.
On today’s show we’re talking about the fallout from last week’s stock market correction. Investors hate uncertainty. Whenever there is uncertainty investors go running for the hills. This is why investors finally woke up to the earnings warnings that have been resounding through the back alleys of Wall Street in the past 10 days.
Is the drop in corporate earnings going to represent a V shaped blip, or will it be more of a U shaped business impact? Will this viral outbreak last until the Spring and then disappear much like SARS did in 2003? Or can we expect this virus to circulate around the globe multiple times including mutations of the strain?
Will the supply chain disruption result in a weak Q1 and a roaring Q2?
Will the drop in travel result in airline and travel industry bankruptcies?
As real estate investors it’s easy to be complacent and say that real estate is unaffected.
Tenants still need a place to live. They’re still going to pay their rent and we haven’t seen any job losses being announced on a large scale.
At least not yet.
We keep hearing that investors have a lot of cash sitting on the sidelines. In the past week, we’ve had the markets fall by about 12%.
The losses total 6 trillion dollars in just five trading sessions. How many day traders were undisciplined and didn’t close out their positions at the end of the day? How many day traders will have their margin accounts called in?
How many investors left their cash in the market and were waiting on the right real estate transaction before cashing out of the market and using their gain to invest in a qualified opportunity zone investment?
Exactly who was impacted by the loss of wealth? The bottom 50% of the population in terms of net worth are likely not to be impacted at all by the stock market correction. They have very little in the way of holdings. Where they are at risk depends on the where the pension plans had funds invested.
If you’ve been listening to this show for a while, you’ll know that I’ve been advocating getting out of the stock market for some time. The valuations haven’t made any sense. But here’s where its going to start to hurt for real estate investors.
If your traditional sources of capital have been impacted by the stock market correction, they may be feeling conservative at the moment. They may be saying that it’s not a good time to make investments and would rather wait a few months to see what is going to happen in the market before making any commitments. Remember investors hate uncertainty.
They may be asking questions like “How will the coronavirus outbreak impact real estate markets?” It’s a difficult question to answer. How many people will wait for the quarantine orders to subside before making a decision to buy a larger home, or invest in a multi-family apartment complex?
You may find that investors who had committed funds to a syndication all of a sudden pull back and decide to wait it out. I know of at least three investors where this has happened.
The good news for real estate investors is that the yield on the 10 year treasury has dropped even further in the past week. Interest rates on permanent financing is index to the 10 year treasury yield which means it could be an excellent time to rate lock into permanent financing or refinance into a lower interest rate.
There’s no question that the rates of infection are going to multiply. I took an hour this weekend and created a mathematical model for the spread of the corona virus. If the current rates of infection remain unchanged and quarantines prove ineffective, we can expect that much of the global population will be impacted within the next 90 days.
If you’re raising capital in today’s uncertain environment, it would be a good idea to communicate with your investors and ensure they’re still on board.
Our book this month is Prosper!: How To Prepare for the Future and Create a World Worth Inheriting written by my good friends Chris Martenson and Adam Taggart. They run Peak Prosperity, and organization dedicated to helping people live a rich and sustainable life.
Their book Prosper! is a companion to The Crash Course. It shows the way that our society is living in a way that is destined to break down. Arguably crises like the one the world is facing right now with the Covid 19 outbreak is an excellent case study.
In the book Prosper, Chris and Adam outline many of the things that can happen in a moment of crisis. In fact, we’re seeing these scenes play out in many communities all over the world. We’re seeing lines to enter the grocery store in Korea, in Milan, and in Aukland New Zealand which just reported its first case of the Corona Virus.
In the book Prosper, Chris and Adam outline the steps you can take to build a resilient life. This isn’t just a single thing. We live in a world where black swan events do happen. They’re rare, but they happen. We’ve had two World Wars in the past century. We’ve had several major economic recessions including a decade long depression. We’ve had terrorist attacks and natural disasters. In the past twenty years we’ve had four outbreaks of highly infectious disease that have threatened our health care systems and killed tens of thousands.
Any one of these types of events can have a profound impact on our daily life if we’re not prepared. Now I’m not talking about building a concrete bunker 100 feet below your house and stocking a year worth of food and water. That’s for the doomsday prep community. We’re talking about investing in 8 forms of capital that will prepare you well in the event of a crisis. If the crisis never happens, it will give you a richer life.
- Financial Capital
- Living Capital
- Material Capital
- Knowledge Capital
- Emotional and Spiritual Capital
- Social Capital
- Cultural Capital
- Time Capital
I found the book prosper to be a real wake-up call and it has helped me bring focus to what’s important.
With this current global crisis, I’ve been following Chris and Adam’s recommendations and I have to tell you I feel very secure knowing that I have prepared a deep pantry with several months of food. If the supermarkets were to be emptied tomorrow, there are definitely some things we would miss like fresh vegetables. But we would survive without any worry whatsoever. There’s a comfort that comes from knowing that the grocery store could close for a month or more and I’d be fine. I could be quarantined for 30 or 60 days and be very comfortable.
If you haven’t been following Chris’s daily updates on YouTube, I really urge you to look them up. They reveal a perspective that is not being shared widely in the mainstream media. But I can tell you that everything he shares is well researched and has no agenda apart from keeping you informed.
Adam Carswell is with Concordia Realty, specializing in anchored shopping centers. His story is how someone with little experience came into the world of commercial investing by adding value to the business.
Adam can be reached at carswell.io.
David from Anchorage in Alaska asks
- AirBnB was founded in 2008 at the height of the Great Recession. In the past 12 years, the travel and leisure sectors of the economy have exploded. There have been various dips in the economy, but the modern short term rental market has not been tested against a major downturn.
Hotels and resorts have historically taken a large hit during economic decline, but do vacation rentals get lumped in with hotels or do they offer a cheaper alternative and continue steady?
- Markets set aside. The Vacation Rental season is almost upon us in Alaska. Unless you’ve just come back from off the grid, you likely have heard that a COVID-19 “pandemic” is also almost upon us.
As a STR owner myself, I am curious. There is no historical precedence for modern STR's and platforms like AirBnB during a "crisis" event. How will the escalation of COVID-19 affect the STR market? Will it affect an AirBnB IPO in 2020?
David,
That’s a great question.
The obvious answer is it depends.
There’s clearly a linkage between travel and hospitality. A portion of the short term rental market is made up of medium term stays. Some estimates put the proportion at about 20%. I received this number from an employee at AirBnB directly back in November. Of course this number varies by market.
You need to look at how people arrive at the destination. How many arrive by air, how many by car and so on. For example for your market, I don’t expect that many people are going to be driving to Alaska compared with those who fly. The Corona Virus is clearly having a massive impact on air travel.
We own several short term rental properties in the Rockie Mountains near some major ski resorts and a national park. A high percentage of the traffic to our properties comes from within driving distance. But if air travel is reduced and occupancy falls in hotels, we can expect prices to fall across the breadth of the market, including short term rentals. We won’t see as high a nightly rate as we might have seen in past seasons.
Short term rentals cater to a different market than hotels. While there is some overlap, the reduction in air traffic will have a significant impact. In our market we routinely see plane loads of tourists from China and Japan in the summer months. During the peak season we see essentially full occupancy and nightly rates that are over $600 a night. Air traffic from Asia is down by 90% at the moment. If that continues into the peak summer months, it will be a problem.
We’ve seen that vacancy in the short term rental market doesn’t hit the market uniformly. Properties with the best reviews and the highest ratings get a disproportionate number of nightly stays. Even during low season, many of our properties have seen very high occupancy, far above the market average. By offering a superior product, competitively priced you can get more than your share of occupancy. The vacancy will tend to go to the junk in the market.
Active daily management of pricing is essential to keeping units full.
We are at a moment when history is being made. We don’t know what the outcome will be. Be prepared for a bumpy ride in the short term rental market this holiday season.
Finally, to answer the last part of your question.
Whether AirBnB will delay its IPO remains to be seen. I have no inside information. A downturn in the hospitality industry could easily create unfavourable conditions for an IPO. When hotel stocks and airline stocks are falling, it will be hard for AirBnB to convince investors that they're different.
Today’s show is a personal story of why I canceled a trip to Italy today.
I was scheduled to fly to Italy today to attend a wedding in Rome. It’s a study of what can happen in times when there is a major civil disruption like the one caused by the current Covid-19 pandemic.
Italy is working hard to get the outbreak under control. Italy’s health care system is pretty strong by global standards. But it’s not perfect.
The number of cases continues to escalate with 51 new cases reported in the past 24 hours. Each one of these 51 new cases could have spread the virus to others. The average number of people infected by a carrier is estimated to be around 3. Each person infected, transmits the disease to three others. You can do the math. Unless the number of those subsequently infected can be brought below 1, the disease will continue to spread. In some cases, there are a few super-spreaders. There was the case of a woman in Korea who infected nearly 100 people at her church. That single carrier was largely responsible for the large scale outbreak in Korea. The lengthy asymptomatic incubation period is the greatest risk overall. People are spreading the disease who don’t know they have it. When you couple that with the cases where people are not being tested, and some number of tests that give erroneous results, we have the makings of a disease that will continue to multiply quickly.
I have many reasons to go to Italy this weekend. It was going to be a quick 3 day trip. It would be wonderful to see my cousins. I have an aunt who is 94 years old and experiencing some health issues. Any time you have the chance to spend quality time with someone in their 90’s, take it. When a member of the family get’s married, you can’t ask them to reschedule it. You can’t say, I’ll catch you on the next one. You either participate, or not.
So far, the region surrounding Rome has reported only 3 cases of Corona Virus. The vast majority of cases are in the North surrounding Milan. I also have family in Milan as well and I’m concerned for them. One of my family members is in her 90’s and not in great health. I have no doubt that they’ll be able to stay out of circulation for a period of time. But grocery store shelves have already been emptied. Getting food and basic supplies will be an issue in the near future.
This is a warning to those who are not prepared for how quickly a situation can change. Grocery stores can be well stocked one day, and then two days later be completely emptied.
It’s easy to rationalize that I’m going to be in a small group of people. It’s not a huge wedding, about 100 people. My risk is low. But still, people would be traveling from all over the world to attend. Who will be on the planes and trains of those 100 people attending the wedding? I have no idea who is catering the food. Several of the meals are scheduled for restaurants in central Rome. This area is frequented by tourists from all over the world on a daily basis.
I have no doubt that my direct flight to Rome would be pretty safe. There are no known cases of the disease in my community. What I can’t be certain of is the return flight.
We’ve seen travel bans being instituted from parts of Italy. It would be problematic for me to be stuck in Europe in a quarantine situation, or unable to return home because flights are cancelled all of a sudden.
Even back here at home, preparations are important. We have no known cases in our city yet. We’ve been stocking up on food. As of now we easily have a month of non-perishable food in our pantry.
My local Home Depot is now completely out of N95 surgical masks. I purchased 3 out of the last remaining box. Walmart is out of hand sanitizer in the city. My wife bought the last two bottles after checking the inventory across a city of 1.4 million people.
Check the inventory in your pantry and go shopping for at least a month of essentials.
A new report was presented at a conference of global central bankers last week in New York that has multiple authors including several of the top economists. The report advocates that central banks act early and aggressively when confronting a downturn. These crisis-era stimulus tools follow monetary policy. That is to say, the Fed, or any central bank tries to create stimulus in the economy by making money less expensive to borrow. We’re talking printing money, negative interest rates and forward guidance telling the markets that money will remain cheap. The idea is that if money is cheap, borrowers will use it to expand production, to hire people, and to make investments in growth of the business. On the consumer side, low interest rates make it attractive for consumers to buy now using credit instead of saving up the money to buy things when they can truly afford them. Today we are facing a crisis caused by the corona virus outbreak. If the impact is prolonged and travel becomes severely curtailed, we could start to see airline bankruptcies, hotel bankruptcies, and tour operators going out of business. We are seeing supply chain disruptions where the impact is not even fully understood. How this will ultimately impact businesses remains to be seen. We are already seeing companies unable to ship products because of component shortages. Making money cheaper to borrow won’t help. Federal Reserve Chairman Jerome Powell said recently that the Fed will fight the next recession aggressively with quantitative easing. That’s code for printing money. What will be needed in this instance is fiscal stimulus. But not just any form of fiscal stimulus. Typically when governments try to stimulate the economy they get busy building roads and bridges. That too would be completely useless as a remedy to today’s economic slowdown. Now is where government needs to step in and say to businesses affected by the corona virus outbreak, “here’s how government is going to help you directly”. So far none of the affected countries are making any meaningful statements about how they intend to protect their citizens from economic harm caused by the outbreak. Monetary stimulus will do nothing. It will require fiscal stimulus in the form of low interest loans or outright grants to affected businesses. Governments are way behind the curve in taking steps to contain the outbreak of the virus and they’re also way behind the curve in taking steps to protect the economy. So what’s the message in all this? Make sure you have taken the necessary steps to conserve cash in your business, take a defensive posture and be ready to rescue troubled assets when the time comes.
On today’s show we are talking about stock market valuations and how Wall Street justifies these high valuations.
A year ago the Dow Jones Industrial average was trading at an average of 18.17 x earnings. Value investors the world over were fretting about how such a high valuation could be justified. As of Friday, the Dow was trading at 22.56 x earnings.
First of all, let’s unpack what that means. The Price To Earnings Multiple is a measure of how expensive an investment is.
In absolute terms it means that you would have to hold a stock on the Dow for 22.5 years for a company to earn back the investment an investor has made in the company.
Let’s look at a low growth company like Consolidated Edison which provides regulated electricity, gas and steam to customers primarily in the NY area. Because they’re in a regulated industry, their ability to grow is limited by the utilities commission setting the rates that can be charged. Revenue grew by 0.1% last quarter. In the past year, Con Ed saw their net earnings shrink by 10.9%. Well Con Ed is trading today at 22 x earnings. This is a stock that should trade at a lower multiple. Historically, low growth stocks like this have traded at lower multiples like 10-12 times earnings. They’re stable year over year.
I predict that we’re going to see a return to fundamentals in the near future. This is going to start with the more aggressively priced companies and then will spill over to the broader market. Today we still have a situation where the majority of trades in the market are computer program trades and not actual legitimate investor activity.
We also have a large percentage of the investor market now investing in ETF’s, funds that track the market indexes.
Let’s look at a stock like Apple or Google. These have traditionally been considered high growth stocks.
We’ve been dealing with the Corona Virus outbreak for more than a month and the markets have shrugged it off and pushed valuations to all-time highs. Clearly investors have been disconnected from what is happening on the ground.
We now have Apple issuing guidance that their first quarter will be impacted by supply chain issues. As of Monday’s opening bell, the shares were down 8% for the week and down 6.6% over the weekend.
It doesn’t make sense that Apple trades at a premium to the market. The market multiples for Con Ed don’t make sense either.
I’ve talked about 2 companies at opposite ends of the business spectrum. I believe that my argument applies to all the companies that occupy the space between these two companies.
I believe that we will see a precipitous drop in the market averages as analysts come to grips with the true impact of the Corona Virus outbreak on the global economy.
So far in the past week, we’ve seen a 4% drop in the S&P 500.
Many have pointed to the stock market shrugging off the concerns about Corona Virus as a reason not to worry. Let me remind you of the irrational exuberance of the .com bubble in the late 1990’s. I lived through those days in the tech sector and was part of a company that had just gone public in the run-up to the .com crash.
Markets have a way of being very wise in hindsight, but not so forward looking.
Whether in good times or bad, but overwhelmingly when valuations are historically high I believe it is prudent to take a more defensive posture and invest in hard assets. Apple lost nearly 8% of its value in a few short days. Hard assets don’t typically exhibit that kind of volatility.
We are in the middle of a black swan event.
We have a serious global health risk. The scope and magnitude of the impact is yet to be understood. Unfortunately, we have seen bureaucrats with zero understanding of scientific information making decisions that have put entire countries at risk. For example, the US State Department over-ruled other government departments and put 11 infected passengers from the Diamond Princess in the same aircraft as other passengers who had tested negative for the virus.
The corona virus outbreak, also known as Covid-19 is what I would call a black swan event. The idea of a black swan was coined by Nissam Taleb. It’s a metaphor used to describe an event that is so rare it is thought not to exist.
We typically can only see a black swan in hindsight. The collapse of financial markets in 2008 was a black swan event.
A hurricane hitting a major populated area can be a black swan event.
The terrorist attack on the world trade centre on Sept 11, 2001 was a black swan event.
What will be the economic cascade of this situation? We tend to discuss counter-party risk as a financial issue between holders of assets and liabilities.
There is another form of counter party risk that we rarely talk about. That is in the global supply chain.
We don’t understand the complex web of linkages that make up the global supply chain. Economic activity can be disrupted by a drop in demand, or by a drop in supply. We have nearly 3/4 of a billion people in China on lockdown. This will clearly impact both demand and supply.
When Japan experienced the Fukushima nuclear power plant failure, there was a single factory that supplied a critical component for batteries used all over the world. That single factory’s inability to supply for a period of time meant global disruption in the cell phone market. That was a single factory.
Right now we have a situation where 50% of the containership traffic from China has been halted. Even if the products are on the pier ready to depart for North America or Europe, there is no way to get the products to market.
Understand, each one of these container ships are capable of carrying more than 20,000 containers. That’s right, 20,000 20 foot containers. That’s the equivalent of 10,000 trucks on the highway for each ship. There are over 96 of these ships plying the ocean waters right now and a large number of them are stuck in port.
We are going to experience supply chain disruptions on a scale we have not seen since the Great Depression. If companies can’t deliver their products, they can’t collect revenue. It doesn’t matter if there is demand. They simply can’t deliver because they can’t get the product to market. All it takes is a critical component to be missing in the manufacturing process. Some companies will be able to survive a number of weeks, or perhaps even a few months with their current inventory. In the world of Just-In-Time manufacturing, the most efficient companies focus on minimizing that inventory. Ironically, it’s the most efficient companies in the world that will experience the most acute pain in their supply chain. Finding an alternate sources of supply for a product is never quick, nor easy. Component substitutions and supplier substitutions take months or longer to implement.
We have a number of companies that have massive corporate debt, much of it in the way of bonds. A large number of companies will have a very hard time withstanding a precipitous drop in business lasting more than a few months. The debt obligations of those companies assumes that growth will continue without interruption.
I’m predicting a wave of corporate debt defaults over the next 90 days as a direct result of the supply chain disruptions. Those defaults will have a cascade effect due to counter-party risk on the paper.
Bob started his career in professional hockey where he played in the US and internationally. His brother played 15 years for the Montreal Canadians. Then after a start in real estate investing, he moved into the world of managing real estate projects with the help of virtual assistants. Today, he manages a team of virtual assistants based in the Philippines.
Real Estate Virtual Assistants is a company specially designed to supply virtual assistants to North American real estate clients, based in the Philippines. You can reach Bob at revaglobal.com
Bruce Firestone has been developing real estate for many years. He is best know for his role in creating a National Hockey League expansion franchise and creating the Ottawa Senators NHL team from an idea. Today's conversation in packed with powerful lessons on overcoming adversity.
On today’s show we’re looking at some of the recently announced or completed hotel conversion projects. These projects are happening all over the country. Hotel News Now maintains an online database of all the hotel conversions that are announced across the United States. You can download the entire excel spreadsheet and look at the details of each project.
In 2019, there were a total of 47 hotel conversion projects across the US.
So far in 2020, seven hotel conversion projects have been announced across the country.
On today’s show we’re going to showcase a few of those conversions to give a flavour for the types of projects that are getting funded in today’s environment.
Some of the hotel conversions are merely a refresh of an old and tired hotel, along with rebranding the property with a stronger brand. There are a few examples where a property switched from a Quality Inn to a Ramada. The Vegas Hard Rock Hotel is now going to be a Hilton Curio Collection property.
Some went from a private label like Turnberry in Miami to the JW Marriott brand.
In one case, an Intercontinental hotel in Milwaukee Wisconsin removed the brand affiliation and chose to go the independent route.
The improvements in a hotel conversion go beyond a fresh coat of paint, rectangular floor tiles and quartz counters in the bathroom.
Today’s traveler wants the best of both worlds. They appreciate the unique experience that comes from staying in a boutique hotel. It’s far more memorable for a visitor to stay in a hotel with art deco interior, Venetian chandeliers and brass handrails on the stairs, than telling friends and family that they stayed at a nondescript Holiday Inn.
But travellers also want the security of knowing that the property will adhere to international hotel standards for comfort and amenities.
This is where the major hotel companies have been launching so many new brands. In particular, they’ve been launching brands that allow for boutique hotels to maintain the brand strength of the parent brand whether it’s Hilton or Hyatt, while embracing the unique aspects of the property.
For example, Baywood Hotels purchased the downtown 14 story Oil and Gas office building with a plan to convert the property into a 175 key Canopy by Hilton hotel. This building was built in the 1950’s and was given heritage status in recent years. The hotel plans to open in 2021 after an extensive refit which was started this month.
It’s hard to start with an old bank, or a post office and make that hotel conversion meet the specifications of a Hampton Inn. In fact, it would be silly to try. It would create confusion in the marketplace. The Hampton Inn brand would add very little value to a unique boutique property.
When you are starting with an existing building and you would like to incorporate the history or the unique characteristics of the area into the building, it needs a distinguishing name that is in keeping with the character of the neighborhood. At the same time, travellers want to know that they can expect a fridge and coffee machine in the room, that there will be a safe for their valuables, a place to charge their electronic devices, the bed will be comfortable and that they will have high speed internet service for free with their hotel loyalty program membership.
All of these things come with being associated with a major brand in one of the new boutique collection hotels.
While these boutique hotels make up a small percentage of the overall portfolio of hotels in the market, they are a growing trend.
The boutique hotels don’t demand all of the same architectural specifications that a brand like Sheraton might require. So the construction cost can be lower in a lot of cases. Those savings make for a more profitable hotel while maintaining the brand strength.
On today’s show we’re talking about how more New York City hotel owners are defaulting on their mortgages, succumbing to a crush of new supply and rising expenses.
New York’s average daily room rate fell to $255.16 last year, according to hospitality research firm STR Global. That is down from $271.15 in 2014 and the lowest figure since at least 2013. A continued construction boom could push these numbers down further: 22,117 new hotel rooms were under construction or in planning as of January, according to STR.
Here are a few examples. A $98 million financing package for two Manhattan hotels has sunken into default. As it turns out, I’ve stayed at one of these hotels. The debt, which dates to late 2014, is secured by two midtown lodgings: the 148-key Hampton Inn on 43rd Street and the 135-key Holiday Inn Express Herald Square, on the West side on 36th Street.
When Cantor Commercial Real Estate originated the five-year, interest-only debt five years ago, income for the Hampton Inn covered debt-service requirements more than two times over, with a debt-service coverage ratio of 2.04. But by June that number had declined to 1.28.
Revenue at the pair of hotels has held more or less steady over the course of the loan, rising to $21.9 million this year from $21.7 million at origination. But expenses have grown more rapidly: They’re up 15 percent over the same period, rising to $14.5 million this summer from $12.6 at origination.
Otherwise, performance has been strong: As of 2019’s halfway point, the Hampton Inn’s 12-month occupancy rate stood at 92.3 percent, with the hotel earning an average daily rate of $224.65
Earlier in 2019, the owners of the NoMad Hotel, a luxury independent property located near Madison Square Park in New York, defaulted on about $140M of debt. The property was in jeopardy of going to foreclosure last June amid conflicts between the partners who own the property.
At the 11th hour, the partners came together to save the property.
Most recently, the old Milford Plaza Hotel in Times Square has run into trouble. This 1,331-room property was renamed Row Hotel. The property is in default on a loan package had a principal balance of $260.2 million.
According to a report in the Wall Street Journal, the loan could now sell for as little as $50 million, say people familiar with the matter.
The debt, which is secured by a long-term lease on the hotel rooms, has been in default since 2018 because income from the rooms isn’t enough to cover debt payments and rising expenses, according to the WSJ report.
Several other hotel owners have had similar trouble. In June, a lender filed to foreclose on a hotel in Williamsburg, Brooklyn, over a defaulted $68 million loan. In December, a group of international lenders filed to foreclose on a Times Square hotel and retail tower once valued at $2.4 billion. Last month, the owner of the Blakely hotel in Midtown Manhattan said he would shut it down, citing stiff competition.
And this month, a lender filed to foreclose on the former Hotel Americano, which in December was rebranded as Selina Chelsea.
On today’s show we’re talking about hotels and some of what’s happening in the hotel industry.
The first major trend is that the hotel landscape is changing dramatically. Major hotels chains are launching more and more brands as they try to gain market advantage.
Here’s what I believe. The value of a brand is called its brand equity. There is a ladder of brand equity that starts at the very basics
- Brand Awareness
- Brand Preference
- Brand Insistence
- Brand Advocacy
I’m a pretty astute world traveler. I’ve visited over 55 countries in the world. That’s not going to break any records. But it’s fair to say that I’ve traveled. I’ve stayed in roadside hotels on the freeway at under 40 Euros a night, and I’ve stayed in luxury 5 star properties from Shangri La in Asia.
I’ve stayed in Taj hotels in India, and Accor Group Hotels all over Europe. When it comes to hotels, I find that I struggle to keep pace with the proliferation of hotel brands. It’s like there is a hotel brand arms race underway.
All the major hotel groups including Hilton, Marriott, IHG, Best Western and Hyatt have multiplied their brands.
ntercontinental Hotels purchased Kimpton Hotels back in 2015.
The company breaks down their business into Mainstream hotels and luxury and lifestyle.
Their best known brands is Holiday Inn. Atwell, Avid are new brands that complement Holiday Inn and Holiday Inn Express as part of their mainstream portfolio. Some of the growth has taken place through acquisition, but much has happened as a result of launching new brands with positioning.
Luxury and lifestyles (Intercontinental has 65 hotels under development). There are new brands like Regent, 6 senses resorts, and Indigo.
Almost all of the 6,000 hotels in the IHG portfolio are owned by independent 3rd parties.
At Hilton, they’ve added new brands like Tempo, Motto, Signia, Canopy, Tru, Home2, Homewood Suites, the Curio Collection and the Tapestry Collection.
Marriott is now the largest hotel group in the world after having acquired the Starwood Group that owns Sheraton, and Westin.
Hyatt has expanded with new brands including Andaz, Alila, and Thompson Hotels.
The hotel groups are eyeing the growth of the middle class on a global basis as the main driver for demand.
There has been considerable focus in the industry on bringing additional value to guests through loyalty programs. Someone who earns their Hilton Honors points at the airport Hilton when traveling for business will use their points at a vacation destination using one of the other brands when traveling for leisure.
Today’s traveler is looking for specific amenities. When I travel, whether it’s for business or pleasure, the number one amenity that I look for is a refrigerator in the room. If it doesn’t have a fridge, I’m not staying there.
It’s common in the downtown core of a major city to see many competing hotel brands, when in fact many are
The seven largest hotel companies boast a mind numbing 134 brands. There has been so much consolidation in the hotel industry that even iconic family run hotel names like Waldorf Astoria, Fairmont and Ritz Carleton, are all part of a global conglomerate.
So why are the hotel companies proliferating the number of brands?
Strong brands like those under the Marriott and Hilton families attract the most visitors. They also attract the highest valuations from the REITs that aim to purchase performing hotels.
On January 31, a motion was put in front of Los Angeles City Council to expropriate an apartment building because the affordable rent covenant was due to expire after being in place on the property for 30 years.
The motion asks city staff to draft plans for using eminent domain to seize Hillside Villa Apartments, a 124-unit, privately-owned development in the city's Chinatown neighborhood to avoid rent increases at the property.
The property is currently under an affordability covenant that requires 59 units to be affordable for the first 30 years. The owner of the building sent notices to tenants over a year ago warning them of the increase, which will increase to market rates. That translates to an increase of up to $1,000 per unit.
The owner of the building is Tom Botz. He said, ”I think it's a brilliant idea but I need to know: Are we in Cuba or Venezuela?"
A condition of that loan was that the developer rent out units in the building at below-market rates for 30 years. Other government grants and loans that helped finance the building came with their own specific affordability requirements.
The affordability requirements from the redevelopment loan were due to expire in June 2019. In May 2018, tenants started to receive notices that their below-market rents would be increasing in a year. In March 2019, tenants were given the option of signing new leases at the new rate or face eviction.
In June 2019, several tenants, with the assistance of the Legal Aid Foundation of Los Angeles, sued Botz, claiming the tenants received did not receive proper notice.
That lawsuit was dropped in July after a compromise was reached in which Botz agreed to extend the affordability covenant for another 10 years in exchange for the city wiping away the debt owed on the redevelopment loan.
But after a period of time, Mr. Botz decided to not go through with that deal. He says that he had no hope that once the extended affordability requirement expired, activists and the city wouldn't just try to pressure him again into maintaining below-market rents at the building.
The past six months have seen bitter feuding between Botz, tenant organizers, and Cedillo's office. Activists even picketed his home.
Traditionally, eminent domain is used for projects that are considered in the public interest. These are situations where you need to build a freeway or an airport. The act of condemnation is not usually used for a city to simply buy a property. It’s not clear whether eminent domain would survive a court challenge. If the city succeeds in condemning the building, it will erode property rights, possibly on a national scale.
If this is a legitimate use of eminent domain, then it could be used again to seize other properties where affordability covenants are set to expire. The affordability covenants are usually set by HUD in Washington which is the primary source of funding and loan guarantees for these types of projects.
Cedillo's motion asks the city's Bureau of Engineering to consult with the city attorney and then prepare a report on seizing Hillside Villa within 30 days. Botz says he will fight any effort to seize his property in court.
It should come as no surprise that the increasing cost of housing follows the laws of supply and demand. Many within Los Angeles have opposed development and intensification. Intensification allows for more units within the city. Even though 70% of the land mass in Los Angeles is made up of roads, congestion is a major issue.
For example, in 2019, LA Council voted unanimously against SB 50, a state bill that would legalized four-unit homes on most residential land and mid-rise apartment buildings near major transit stops.
Should the city go down the path of seizing private developments to preserve units, it will discourage investment in developing new housing.
On today’s show we are talking about how to use other people’s money. As real estate investors we are trained to use other people’s money. We use the bank’s money. We might joint venture and leverage a partner’s money. We might syndicate a project and bring investors along for the journey.
Robert Kiyosaki is famous for his assertion that your home is not an asset. An asset is something that puts money in your pocket. A liability is something that takes money out of your pocket.
But what do you do in markets that are over priced?
Everyone needs a place to live. I hear that mantra over and over again. What if you want to live in an expensive city like NY, San Francisco, Toronto or Vancouver?
Let’s look at Vancouver where the median sales price for a 4BR detached home was $2.5M last month.
Even a 1,000 SF 2 BR condo in Vancouver averaged $985,000 last month. That represents a price decline compared with a year ago.
But you can often rent that same condo for $2,500 a month.
Unless you believe that the 2BR condo is going to further inflate to $1.2M in the market, why would you ever take the financial risk of buying something that generates zero income at that price.
Some people justify the purchase price of their personal home by saying that they deserve a nice place to live.
I get that.
So let’s look at the cost of owning that 1,000 SF condo in Vancouver.
If you finance 80% at a 3.6% interest rate over 25 years, you would be looking at a monthly loan payment of almost $4,000 a month. When you add property tax and insurance you’re now at $5,000 a month and you have to tie up about $200,000 in equity just for the privilege of paying that $5,000 a month in holding cost. But wait, there’s more.
The owner of the condo has $600 a month in condo fee. The monthly cost of ownership is a whopping $5,600 a month, for a 2 BR condo. That comes to $67,200 a year.
Now on the other hand, let’s imagine that you could rent that same condo for $2,500 a month. All other things being equal, you would save $3,100 a month by renting instead of owning.
That 2BR rental would cost you $30,000 a year. You would have zero maintenance responsibility. If the condo Corp isn’t properly capitalized and the owner faces a special assessment to replace windows or make repairs to the underground parking, you pay none of that.
Imagine now that you took the $200,000 you would have tied up in equity and invested it in real estate, at a modest 10% annual rate of return. You would have $20,000 a year in income and could use the after tax portion of that income to further offset your monthly living expenses. You could probably reduce your monthly housing expense by another 50%.
What I’m describing is heresy to many of my listeners.
“Live where you want to live and invest where the numbers make sense.”
I know that for some of you, what I’m saying is going to challenge some deeply held beliefs. Some of you will rationalize your belief by saying, you can’t rent a place that will be a nice as one that you would buy.
Today’s show is based on real world apples to apples comparisons. The truth is, there are foreign investors who are looking for places to park cash in real estate. They are buying brand new construction condos, off of the builder’s plans and then putting those brand new properties into the rental market. It is happening every day.
The concept of other people’s money doesn’t just apply to investing. It can also apply to your own home if you want to live in an expensive market where the numbers don’t make sense.
Rich Danby is the founder of Masters of Real Estate and is a frequent guest speaker at live events and on podcasts. He can be reached at rich@mastersofrealestate.com
Today's show is a live Q&A from a thought leadership conference in Toronto. Many of the questions center around the design and production of the podcast.
Enjoy...
On today’s show we’re talking about conferences. Who needs them? Are they worth all the effort, expense and time?
Nothing has impacted modern life more than mobile technology. In fact, if you’re listening to this podcast, 85% of you are listening on a mobile device, either iPhone or Android. The continued evolution of mobile technology is a global effort with companies from around the world involved in the invention, design, development, deployment, localization, monetization, and promotion of mobile platforms, devices and applications.
Yesterday, the GSMA, sponsor of the Mobile World Congress, the largest mobile conference in the world cancelled the conference, scheduled to be held in two weeks in Barcelona. This conference is massive in its scale and impact.
Its cancellation also raises questions about the utility of conferences in today’s environment. Let’s dig into the details.
It’s the first time in MWC Barcelona’s 33-year history that organizers have called off the event, which draws more than 100,000 participants from across the world to check out the latest innovations, pitch to investors and do deals. That’s right, 100,000 attendees. Hotels are booked months in advance. Short term rentals are booked months in advance. Poor unsuspecting tourists come into a city that is over-run by the event.
The direct economic impact of the conference in Barcelona is estimated at $490 million dollars. The show provides temporary employment for over 14,000 people.
This year, the list of big-name attendees started to crumble on Feb. 7, when Swedish wireless equipment maker Ericsson pulled out, saying it couldn’t ensure the safety of staff and customers. The first Asian company to pull out was Korea’s LG. As others pulled the plug from Sony to Nokia, Vodafone and Deutsche Telecom, it became harder for those remaining to justify their presence.
The booths from the world’s largest equipment manufacturers are extravagant multi-story structures. Many of them include built-in conference rooms in which exhibitors can hold client meetings. Some of the booths cost more than $2M to construct. Booths are limited to 6 meters in height or about 20 feet. These three story structures are extravagant and eye catching.
Why even hold a conference? Why is it needed? Do customers, many of whom work for government, or quasi government agencies really need to see all that extravagance?
From an exhibitor perspective, the question is always whether trade shows generate any additional business. Do people walking up to your booth become customers? Are the people in your booth existing customers who you would have retained anyway?
There are over 1,200 exhibitors and the attendees include experts from all aspects of the wireless industry.
When I was attending, I was representing my company that manufactured chips that are used in mobile devices. We were meeting with equipment manufacturers who would ultimately use our chips in their devices.
It’s an opportunity to compress timeframes. When I go to conferences, I hold multiple face to face meetings in a single day. Sometimes I’ll hold seven or eight meetings starting from early in the morning until late in the evening.
I’m able to accomplish in four days what would realistically take four months. When people are in conference mode, they put the office on hold and focus to maximize the efficiency of meeting people at the conference.
When I attend a conference, I don’t pick up the glossy literature. I don’t load up on free pens or sunglasses. I focus on meeting people, from dawn till late.
Later this month, none of that is going to happen. The big question is, who is going to absorb the cost of the cancellations?
David from West Virginia asks:
Nothing is selling here in the coal fields of WV. However, the rental market is really good. My question is, knowing I can buy cheap and rent with my long term goal being to eventually sell, Is this a reachable goal with our real estate market?
David, this is a great question. My heart goes out to the communities where the main industry is shrinking. The fact is, real estate follows any other free market and must adhere to the laws of supply and demand. Communities connected to coal mining are shrinking because the employment is shrinking.
For better or worse, coal has earned a reputation of being a dirty fuel and many jurisdictions have made the decision to eliminate coal burning for environmental reasons. Some of that reputation is well deserved, some not.
There are some clean coal technologies under development and undergoing trials with the department of energy. If those trials are successful, it’s possible that we may see a resurgence of coal as a viable fuel for power generation. I doubt we will see power plants convert back from natural gas to coal any time soon, but it may enable some domestic power plants to extend their operating life. In particular, there are numerous plants in other parts of the world that may want to license clean American coal technology, or perhaps source clean American for their power plants.
In my opinion, it would take something like a resurgence of coal in order for me to consider investing in an area where there is a dominant industry like coal mining.
In order for me to invest, there has to be population growth, and jobs growth. If the jobs are disappearing, you’re trying to sell a product to somebody with no money. If they have no money, it’s not exactly clear why you would go out of your way to do business with someone who has no money. There might be a social benefit to doing so, or perhaps a humanitarian benefit to doing so, Those are all great things. But if your goal is an investment, then you want to evaluate the investment on investment metrics.
The flow of money is straightforward. The tenants have the money. The way it works, is the tenants give you money at the start of each month. Over time, they help you pay for the property. In exchange, you take the financial risk of buying the property and borrowing the money from the future, along with personal guarantees and collateral to protect the lender’s position in the property. But if the tenants don’t have the money to start with, then the whole system breaks down.
The problem with buying with the intent of selling in the distant future is that you don’t know if there will be buyers. If there are no buyers, then prices fall. It’s exactly the same situation as Detroit, albeit on a smaller scale. If there are no buyers, then prices fall. If there are no buyers, then you don’t have an investment. All you have is a prison for your money.
Keep a close eye on whether clean coal gets adopted and whether it will drive a resurgence in coal mining.
On today’s show we are talking about how the arsenal at the Federal Reserve’s tool chest is getting empty.
The Fed is taking the approach of monitoring the situation closely. Fed officials at their meeting last week left their benchmark federal-funds rate steady in a range between 1.5% and 1.75% and signaled little reason to change course for now.
Fed officials had signaled before the coronavirus outbreak that they saw greater risks of surprises that could force them to lower rates than to lift them.
Americans are driving the US economy along with borrowed money. The question is how much longer can it last?
Consumer debt surged once again in December as Americans charged up their credit cards for the holidays. Total consumer credit grew by $22.1 billion in December, according to the latest data released by the Federal Reserve. That represents an annual growth rate of 6.3%. Total consumer debt now stands at a record $4.197 trillion.
Just 5 years ago in 2015, consumer debt was a record $3.4 trillion dollars. Back then, we were all saying “How much higher can it go?” This is unsustainable. Here we are 5 years later with an additional $800 billion in consumer debt.
The Fed consumer debt figures include credit card debt, student loans and auto loans, but do not factor in mortgage debt.
A big jump in credit card balances drove the big rise in consumer debt in December. Revolving credit was up 14%. Americans have run up nearly $1.1 trillion on their plastic. The big jump in credit card debt reversed a trend of slowing consumer borrowing, but this was not unexpected during the December holiday shopping season.
Non-revolving credit, including auto loans and student loans, grew by 3.7% in December. Total non-revolving debt outstanding stands at just under $3.1 trillion.
Through 2019, consumer debt grew by $187 billion, a 5% increase. Americans are driving the US economy along with borrowed money.
So if incomes have not grown by 5%, and inflation is low, some would say worryingly low, and consumer debt has grown by 5% and the economy grew by 2%, then there is only one possible conclusion.
America is spending money it doesn’t have.
The Traditional methods for stimulating the economy have relied upon the federal reserve lowering interest rates. The slow down in the economy is not the result of lack of investment by business. Lowering interest rates will have zero impact on economic growth.
It won’t have much of an impact on consumer spending either. Even if consumer interest rates fall, the ability of the consumer to sustain higher levels of debt is highly questionable.
The only economic stimulus weapon left is fiscal stimulus. That’s code for government spending more money and hoping that the increase in spending will circulate through the economy.
Well folks, don’t get ahead of me. This is an election year and you can bet that the White House wants to stretch out this economic expansion as long as it can.
Government spending is the only weapon left and you can expect them to use it.
The White House released their budget for the upcoming fiscal year. The $4.8 trillion budget for fiscal 2021, released Monday, assumes that economic growth will be stronger than most forecasters project.
The major elements of the budget plan are unlikely to become law, as Democrats control the House and spending bills in the Republican-led Senate need bipartisan support.
On today’s show we’re talking about how to reduce our energy footprint and one of the obstacles to doing so.
Energy consumption per capita in the US and Canada is among the highest in the world. While our homes have become much more energy efficient, we still have a long way to go. One ideal is the so-called zero energy footprint home. These homes not only lead the way in terms of energy efficiency, they also produce enough electricity to cover their consumption needs. All of this comes at a price. The cost of building such a home is definitely higher than vanilla stick built construction.
Since housing affordability is one of the most important issues in our communities, the idea of spending even more is outrageous to most people.
One of the leaders in green technology and clean technology is a gentleman named Vinod Khosla. Vinod was the founder of Sun Microsystems in Silicon Valley. His company created some of the greatest breakthroughs in computing technology dating back to the 1980’s. His company has since been acquired by Oracle and he runs a venture capital firm called Khosla Ventures.
He has a very pragmatic view of green technology. If the technology requires a government subsidy to be viable, it’s not interesting. If it requires massive investments in infrastructure, it’s not interesting. Your Toyota Prius, or your Tesla reduces greenhouse gas emissions by a tiny micro-fraction of a percentage. Until you come up with a technology that will convince the low income family in China or the single mother in New Delhi to stop cooking dinner on an open air fire using two bricks of coal, we will struggle to make headway on our global environmental challenge.
The obstacles that make pollution the path of least resistance need to be removed.
On today’s show we’re talking about one of those challenges. This is the story of Brad McLaughlin. He’s a home builder in New Brunswick who built a zero footprint home in 2017.
But the three-bedroom, two-bath home stubbornly refuses to sell. It has been on and off the real estate market since 2017.
Starting out, McLaughlin's asking price was $695,000.
By May, 2019 he lowered it to $570,000.
This week he put the two-storey house back on the market at $495,000.
The problem appears to be financing. Appraisers don’t know how to model a high efficiency home compared with a regular home. They see comparable sales and comparable construction costs in the area, and they don’t recognize the lower cost of ownership associated with a zero footprint home. Their financial model assumes that the energy consumption will be the same as a conventional home, and that the purchase and sale price should be identical to any other home in the area.
The technology for zero footprint is here. It’s a little expensive, but not out of line.
Here’s the problem. Home prices in my area have gone up 19% in less than a year. Appraisers and lenders are happy to recognize a 19% increase as perfectly normal in a market. Lenders are willing to lend against it. But a 15% increase in cost in order to create a zero footprint home is way off-side. There’s a certain silliness that allows price increases of 8%, 15%, 19% in a single year to be OK, but the construction of infrastructure that will make a home consume zero energy for the life of the home is not considered to be a legitimate part of the home value.
Today’s story is about Mr. Steven Long. He’s a construction worked who lives in Seattle, Washington.
Long had been homeless since March 2014, when he was evicted from his apartment after the rent got too high and he missed payments. He said he had previously lived out of a camper in the 1980s, traveling through five different states, so he thought he’d try sleeping in his truck.'
In fall 2016, when Long was doing cleanups for the Sounders, he had parked his truck in the 900 block of Poplar Place, near the Interstate 90 and Interstate 5 interchange. “It was out of the way,” according to Mr. Long’s testimony.
Steven Long returned from his job cleaning up CenturyLink Field after a Seattle Sounders’ game when he discovered that his truck was gone.
He had been living in his 2000 GMC pickup, parked on a side street, but the city of Seattle towed it because Long had violated a city rule that requires vehicles be moved every 72 hours.
Mr. Long claimed he told the officers he was living in the truck; Nonetheless, Mr. Long tore off the impound sticker, and left the truck in place.
The parking officer waited at least four days before having the vehicle towed, giving Long extra time to buy a part needed to get it running. When the enforcement officer returned Oct. 12, the truck was still there but Long was not, and the vehicle was towed.
At the impound hearing, Long said the truck was his residence. The city waived the $44 ticket and reduced the towing and impound fees from more than $900 to $557.
Long sued the city but lost in Seattle Municipal Court in May 2017. He filed an appeal, which Judge Shaffer heard in the Spring of 2019, and she ordered the city to refund Long the money he has so far paid.
King County Superior Court Judge Catherine Shaffer ruled that the city’s impoundment of Long’s truck violated the state’s homestead act — a frontier-era law that protects properties from forced sale — because he was using it as a home. Long’s vehicle was slated to be sold had he not entered into a monthly payment plan with the city.
The City has since appealed the case to the State level appeals court. ]
The appeals court judges have been asked to decide the case on two main questions: Does fining someone living in their vehicle violate the U.S. Constitution’s Eighth Amendment barring “excessive fines” and “cruel and unusual punishments;” and does attaching an impound fee to the vehicle, refusing to release the truck until Long entered into a payment plan to address the fees, violate Washington state’s Homestead Act, a frontier-era law that protects homes from being easily seized and forcibly sold?
Long’s lawyers argue that not only was Long forced by the seizure of his vehicle to sleep outside, but the fines amount to the city punishing him for being homeless.
They argued that it is punitive to take away a man’s home because of a parking violation.
Long still lives in a truck, now with a trailer attached, but outside Seattle now. He’s working a full-time carpentry job in construction.
A ruling from the State Appeals Court is expected within six months.
There’s no question that the despite being among the richest nations in the world, we in the west haven’t figured out how to care for the homeless in our midst and help them get a roof over their heads.
Marc Koran specializes in commercial strip malls. These assets are income properties with strong anchor tenants. Marc's take on this segment of retail space has a unique twist that aims to protect against the changing landscape of retail. He can be reached at marckoran.com.
Scott Choppin is based in Long Beach California where he specialized in new construction work-force housing. You will learn a ton from this conversation on development in a difficult market. Check it out.
Today we’re going to be sharing a collection of short stories that have one thing in common. They should never have happened.
We’re starting with the mundane custom furniture company that took an order for a custom made sofa. The lead time for the sofa is a full ten weeks and let me tell you, those ten weeks are going to pose a commercial problem for the business that is waiting for the furniture to arrive. The process of fabric selection took a week of back and forth negotiation between the sales team and the placement of the order. Now that we’re away from the country for two weeks, we get a message a week after placing the order that the fabric is not available, and what would we like to do with the order?
Number 2. This is the story of the government department of health that is really two departments in one. Submitting an application to said department of health, as it turns out does not mean that the building application will get routed to both places within the department. Of course, there is no publicly available documentation saying that you must submit the application twice to the same department in order to get it routed through both subsections of the department. After getting the approval from said department of health, the city’s building examiner noted that the food safety division of the department of health had not signed off on the application. This was despite the fact that the department had the application for nearly 6 weeks. The food safety division promised to give speedy review of the application. But his ultimately meant a month of delay. When that was complete, it went to the city’s food safety review who then required the addition of a 500 gallon grease trap for each 3 gallon kitchen sink. Clearly that made no logical sense.
Number 3. Then there’s the story of the internet service provider who would not provision fiber to a property because the property address wasn’t listed in the 911 database for the city’s public safety records. It turns out that the city is willing to collect taxes for that address. The road to the address is paved, and the mailman is delivering mail to that address. But the internet service provider could not recognize that the address existed. The location shows up in Google maps. The solution in this case was to bring the internet service to a friendly neighbor whose address did actually appear in the 911 database, and then we introduced a private extension of the internet service to go the last few yards to the subject property. The problem with this approach of course is that we experienced months of delay in the provisioning of the service, and we will won’t get the emergency services coming to the proper location if someone were to call 911 from a fixed device on that network.
Number 4. There is the story of the client who chose the paint color for an office. The painter ordered the paint and proceeded to get to work. Total elapsed time for the job was forecast to be three days, one primer coat and two finishing coats of paint. At first, the client was happy with the paint color. They chose it after all. By the time the time the second coat of paint was expertly rolled and dried on the walls, the client admitted that perhaps it wasn’t the best choice. They would go back and order new paint. But now the painters would not be available for another week. It took three days to choose another paint color and then another week to repaint the entire office.
So what do all these stories mean? They’re real life stories from our own business. Does it mean that we’re bad managers?
The fact is, it means none of these things. These are real life risks that happen in any business. You can’t plan for the unknown, apart from allocating a time buffer at the end of each project. That buffer isn’t for anything specific. It’s there to deal with the unknowns that will arise with alarming regularity in real life.
Real estate investors are famous for saying that you can buy a property based on both price and terms. I will let you set the price as long as I set the terms.
The trivial example is, I’ll pay you $10M for that old 1950’s single family home. But I’ll make daily instalments of $0.10 per day until the $10M is fully paid off. As long as you set the payment terms, you can agree to virtually any price.
I learned a powerful lesson in the past month. It’s a lesson that I already knew, or at least I thought I did. Sometimes, I find myself learning the same lesson more than once. So here’s the story. I’ve always known that a confused mind doesn’t make a decision.
The author and marketing expert Donald Miller is famous for his saying “When you confuse you lose, noise is the enemy, and a clear message is the best way to grow your business.”
I’ve known this for a long time. A confused mind will not make a decision.
My partners and I have a property under contract and we are looking to assemble several of the neighboring parcels in order to build a high rise project. This requires negotiating the purchase of these properties with each of the land owners. As with any negotiation, the seller wants to maximize the price, and as a buyer I don’t want to pay too much.
The value of the land to me is largely dependent on what the city will ultimately allow to be built on that site. The value will be influenced by the height restriction, and by the setbacks from the property line. It will be influenced by any restrictions imposed by the zoning code. Will the city allow 6 stories, 9 stories, maybe 14? The higher the density, the greater the value of the land. Can I build right to the property line, or will there be a required setback from the property line?
So here I was, thinking that I had come up with a clever solution to negotiating the purchase price for three properties. In each and every case, the idea didn’t really connect with the seller. Out of the three, only one of them truly got it. Even then, they didn’t really value it.
In almost every case, we were negotiating with one representative from each property. But there were multiple stake-holders behind the scenes that we didn’t have a chance to talk with directly.
So what was the lesson.
1) Keep it simple and easy to understand.
2) Don’t assume that all the stakeholders will connect with your clever idea if they’re not part of the conversation directly.
Some people believe what they see. But in truth, I think the opposite is true. Most people see what they believe.
Nowhere is that more true than in the political landscape. If you believe that the President of the United States should be removed from office, you’ll see evidence that supports your point of view. If you believe he’s innocent and was duly elected and is doing a good job, then that’s what you’ll see.
If you believe that eating beef is healthy for you, then you’ll see the evidence that supports that point of view. If you’re Vegan and you believe that beef is bad for you, then you’ll see the evidence to support that point of view.
I’m not telling you anything new. But there’s a link between this and economic survival.
Consumers increasingly want to work with businesses who deliver all the values of price and convenience, but also those contribute outside the transaction in a societal way.
Toms Shoes is a company that exemplifies this kind of impact. They invented the buy a pair, give a pair model. To date, they’ve given away almost 100 million pairs of shoes to people in need.
Last week at the World Economic Forum in Davos, the CEO of Walmart spoke very eloquently about how these social factors are influencing consumer choices.
Walmart is starting to look at Vegan products and are catering to consumers who match the values alignment with those products.
The big question is what kinds of businesses are going to be successful in the next decade. Those that are local and only compete on a local basis will continue to do well, provided of course that they deliver a quality product and good value for their customers. Increasingly, they need to cater to their values, not just deliver the product. Some people will order a cup of coffee because it tastes good. Others will only order from a coffee shop that advertises “Fair trade” coffee.
Commodity businesses are those that compete on a global basis where scale, convenience and lowest cost are the over-riding factors. This is the world of commodity. When the value is unclear, the discussion always degenerates to price. Price always wins in commodity.
You can’t get your hair cut online and your dentist had better be local. But if you have a high ticket item, you can bet that an online purchase will be the way to go. Carrying that inventory in a bricks and mortar store will always lose. I just purchased a dishwasher for a commercial property online. There’s no need for the bricks and mortar store.
But if loyalty to a store is going to exist, it requires three things:
- Repeat business. Transactions that occur infrequently such as once in a lifetime, or once a decade don’t generate loyalty. Wedding dress shops don’t have any customer loyalty. That’s why
- Competitive price and service.
- A connection between the buyer and seller. Increasingly these days, values alignment is being tested as a
Could it be that businesses that identify as Tea Party values will be attractive to that target audience. Perhaps businesses that identify as LGBT friendly will connect with a large segment of the population? Businesses that are explicitly immigrant friendly. If you or your parents are new to the country, then you are part of the immigrant experience. Businesses that speak to you and the immigrant mindset might be more attractive.
There’s no question that the landscape of business is changing. But the question is how is it changing? As a real estate investor, you need to know how business is changing because that’s the economic engine that ultimately pays for the rent in the buildings you own, whether you’re in the world of multi-family apartments, office, retail, or storage. All of these segments don’t survive without a vibrant local economy underpinning the community.
On today’s show we’re talking about a comprehensive look at short term rentals in a recent report from commercial brokerage house CBRE. This 52 page report outlines some major findings on the impact of short term rentals on the hospitality industry. The STR segment is also undergoing significant change as it matures.
- The supply penetration rate of short-term rental (STR) units to traditional hotel units reached 10.4% in 2019 and is expected to hit 12.2% this year with the addition of more than 100,000 net new units.
- STR supply grew by 26% in 2019, down from 39% in 2018 and after seven years of exponential growth (100% to 500%) since 2009. Growth rates are expected to slow further to 19% in 2020.
- Recent growth for STRs has been primarily in suburban and rural areas. Units in urban areas make up only 21% of total supply, down from more than 45% in 2014.
- Los Angeles remained the largest STR supply market in 2019 after overtaking New York in 2018. Los Angeles, New York and Orlando together accounted for about 12% of total STR supply in the U.S. last year.
- Guests consistently cite price and location as their top reasons for choosing alternative accommodations.
Branded apartment/hotel models such as Sonder, Stay Alfred, Lyric and Domio depend on the pricing arbitrage between monthly apartment rent and nightly STR rates.
Many companies have entered the market, primarily in U.S. urban areas.
If we examine where these units are located and their market penetration, we find that nearly 20% of the resort market is made of STR with 80% being made up of more traditional hotel product. 13% are urban, 10.5% are small metro and 6.5% are suburban or airport.
Consumption accounts for 60% of GDP.
Back in the 1970’s many of the western economies experienced the so-called stag-flation. The simultaneous occurrence of both economic stagnation and inflation. Traditional Keynesian economists postulated that monetary stimulus by governments would create economic growth.
Until the 1970s, many economists believed that there was a stable inverse relationship between inflation and unemployment. According to this theory, the growth in money supply would increase employment and promote economic growth. The 1970’s proved that this theory was not true.
Fast forward to today. We have central governments printing money like never before. However, it’s not having much of a stimulative effect on the economy. It’s inflating asset prices, but not creating a substantial jump in economic growth.
The other major factor that can’t be over-looked is demographics. If I observe my own behaviour, there was a time when I was willing to spend money on a large scale.
I remember ordering matching custom made leather sofas for our home. They were stunning. Today, my values have changed. I would never do that today. Perhaps it’s because I’m over 50. Maybe it’s the result of spending considerable time on board a boat and realizing that I don’t need all that stuff. There’s no question. I’m actively opposed to spending money these days. I want to invest, not consume. I’m putting increasing amount of money into assets and not into consumption. Am I also responsible for the economic slowdown?
I see other people my age spending less on consumption, even if they’re not investors. In our family, we took the decision to reduce our household from two cars to one. The number of times when both my wife and I need the car at the same time is hardly worth justifying the extra expense.
We have an economic system that requires never-ending growth in order to survive. Unless you have growth, there is no way to practically retire debt. Debt is borrowing from the future to spend money today. The only way that debt makes any sense is if you can have more money in the future.
If the growth isn’t there, then the only solution is the inflation of the money supply. In the world of inflation the currency get devalued. This has the effect of increasing prices. When prices rise, three things are affected.
- People on fixed income have their purchasing power eroded. They can’t spend as much on consumption. The only way to feed the consumption side of the economy in those cases is to make more consumer credit available.
- Savings get devalued.
- Debt gets devalued just the same way that savings do.
So the question is, are there new barriers to employment which are not influenced by monetary policy or fiscal policy?
If you live in California, the state government continues to make it less attractive to do business there.. New laws are making it less attractive to hire in the state of California. If the fed prints more money or lowers interest rates further, you’re not going to see a lot of new hiring happening in California. Access to credit isn’t what’s preventing more people from getting hired.
If you look at Japan, as soon as their population peaked in 2005 and started to shrink, you saw economic stagnation. In fact, today there are over 11M vacant, that’s right 11M empty homes in Japan. The birth rate and immigration are not sufficient to sustain the population. Japan’s population has continued to shrink and their fertility rate is currently 1.4, far below the 2.1 needed to maintain population constant.
The US population is growing through immigration, but only barely. If you want see our economic future look to Japan for a clue on how it might unfold. Increases in government spending and higher debt to GDP ratios have not help stimulate economic growth.
David Barnett is a business sale consultant. He can be reached at davidcbarnett.com. Such a great conversation.
Brian Tracy has developed a massive following over the years because he has figured out how to connect with his audience. He’s studied with the likes of Jim Rohn, Les Brown, Og Mandino, Zig Ziglar, and Wayne Dyer. He’s part of that upper echelon of self improvement gurus.
Brian Tracy’s book is “Get Smart: How to Think and Act Like The Most Successful People and Highest Paid People In Any Field”.
Core to this book is the notion that there is a correlation between successful people and their time horizon. Successful people plan further into the future and are highly future oriented. Everyone, and I mean everyone is on a quest to improve their situation. How they approach that improvement is where the differences lie. The alcoholic seeks to feel better in the moment and uses a drink to get an immediate change in emotional state. The further in the future, the greater the impact and the greater the compound effect of working toward a specific goal.
Brian Tracy’s premise is that your most powerful tool is the one you carry with you everywhere you go. The ability of the human mind to develop solutions simply by thinking is unparalleled in our universe.
Thinking is the hardest work we do as humans, which is why so many people avoid it at all costs. There are those who think. There are those who think that they think. Finally, there is the vast majority who would rather die than think.
It’s not enough to think. We’re thinking all the time, but most of that thinking is useless stream of consciousness. One random thought after another. Some people think quick, some think slow. Both have their place. Driving a car requires quick thinking. It’s almost instinctive natural reaction. But quick thinking is not the way to develop a strategy, to solve a difficult problem. This requires slow thinking, and slow thinking is best accessed in solitude in stillness.
The author contrasts informed thinking versus uninformed thinking. He compares goal oriented thinking versus reaction oriented thinking. He compares result oriented thinking versus activity oriented thinking.
These are just some of the ideas explored in the book Get Smart by Brian Tracy. In the book the author illuminates the path to the habits that when made part of you will enable you to access your best self, to harness your inner potential.
Brian Tracy simplifies his ideas and makes them almost universally accessible. If you’re going to embrace an idea and translate it into action, you need a very specific reaction.
You need to say to yourself, “I can do that”. If on the other hand you say to yourself, “I don’t know if I can do that. It seems pretty hard to me” chances are you won’t embrace it. But if you can visualize the idea and see how you can make it part of your daily practice, it becomes possible.
Brian Tracy is a master at communicating the same idea in multiple different ways. It doesn’t matter whether your preference is analytical, philosophical, story based, or methodical, he finds a way to connect with the broadest possible audience. He brings an idea into the open and shows it up to the light from several angles, without being repetitive or boring.
If you’re looking to diagnose why you might be stuck in some areas of your life, the book “Get Smart” may just open the door you’ve been looking for.
Ramon asks,
I recently purchased a small multifamily property at which I am doing a renovation project with a budget of approximately $300k. My contractor and I have a long relationship, spanning more than 10 years, and have successfully completed numerous projects together. At the beginning of the project we defined a clear scope of work, timeline and payment schedule. After getting off to a good start, we are now 8 weeks behind schedule and I’m noticing some work that is not up to his typical high-quality standard. I had a conversation with him about these issues and he said that he underbid the job and wasn't making any money, but despite that he plans to honor the deal (he pointed out that many contractors would just abandon the job in that situation). I believe that because of this underbid he is skimping on certain things and has a smaller crew than is required to speed up the process.
As I see it I have 3 choices: (a) I can let him finish which will likely result in the project falling another month behind schedule, (b) I can increase the agreed upon price if he agrees to hire more people (this may be a wash compared to the extra holding costs if I go with option (a)) or (c) fire him and hire a new contractor to finish which will likely result in more delays. How would you approach this situation?
Ramon, This is a great question.
It does happen that contractors underbid projects. When they do underbid, they start taking steps to protect their profit margin. They use lower cost labor. They start pulling quality out of your project and using cheaper materials. They slow down to preserve cash flow since they’re going to be losing money. They will do more of the work with in-house labor instead of using the proper subcontractor for the work.
They will cut corners at every turn. Put yourself in their shoes. You would do the same thing. Even good people make mistakes.
I don’t think you should just let him finish the contract, even on a slower schedule. I believe that the impacts will extend beyond just time. You will find quality and materials will be short of your expectations.
If you fire the contractor, there will be costs to break the contract. The contractor will claim that they are owed money for work completed. From there, you will bring a new contractor into the job. They will recognize that the job was underbid, and they will make sure that they don’t lose money. So you will definitely pay more. By the time you put the project out to bid, you will lose even more time and you will definitely pay a lot more. If you don’t agree on the amount owing to the previous contractor, you can expect a mechanics lien on the property, in which case your lender and a new contractor will have a problem with the presence of the mechanics lien. Think about it, would a new contractor take on a project knowing that he might not get paid?
I would recommend the following.
- Require complete transparency on the scope of work.
- Agree on a fixed profit margin for the GC. If their normal profit margin is say 10%, you’re going to agree on a haircut for that number, maybe 5%, or better still a fixed amount and it won’t be payable until the job is done.
- Review the scope of work and get agreement on the pricing for all the subs and in-house labor. In-house labor would be treated the same as a subcontractor for the purpose of the
- You can at that time value-engineer any of the finishes and make material tradeoffs yourself. I don’t know the details of your project. So I’ll just through out some ideas for you to explore. You might choose a less expensive flooring material, or eliminate the trench drain in the showers for a lower cost center drain. You might choose a lower cost granite for the kitchen counters, or lower cost windows.
You can recover some of those costs in a value engineering exercise.
On today’s show I’m going to make a bold economic prediction, and its not a popular one.
I don’t frequently make large predictions, but this one seems obvious to me. I haven’t seen anything in the media talking about this as of yet.
I believe that we will see a global recession in 2020. The trigger for this recession is the outbreak of corona virus that has the city of Wuhan in China as the epicentre.
British Airways suspended flights to China today, and it remains to be seen if governments or other air carriers will implement travel restrictions.
Air travel is one of the most effective methods for transmitting illness. You have a few hundred people in close proximity for several hours with a high percentage of recirculated air. The older the aircraft, the more air is recirculated.
Even if infection isn’t transmitted on the aircraft, you have the possibility of infected persons exporting the disease to other parts of the world making it that much more difficult to contain.
The Spanish Flu pandemic of 1918 infected an estimated 500 million people and killed an estimated 50 million people. Think about it, the world had just experienced WW1, and all of the horrors of that multi-national conflict. It was the war to end all wars and hot on the heels of that, along comes a strain of H1N1 that killed another 50 million people.
Back in 2003, the SARS outbreak killed an estimated 800 people worldwide and it too had a high mortality rate.
A few years later in 2009, the so-called swine flu pandemic was another H1N1 virus. Remember, the world was already in recession in 2009. We were in the middle of the largest economic downturn since the great depression. So the impact of a downturn in the global travel and leisure industry was hard to measure. It was just more bad news on top of a mud puddle of bad economic news. There are no official estimates. Some economists estimate the impact of somewhere between 0.5% of GDP and 1.5% of GDP.
But here’s what we do know. After 911 in 2001 travel on a global basis was hit hard. It triggered a downturn in hospitality. People still took vacations at that time, but they were increasingly driving vacations that didn’t involve air travel. In 2001, the global airline industry was weak and were already forecast to have somewhere between $1-2B in losses. In the wake of 9/11, the industry losses grew to $11B and a portion of this was offset by government bailouts of the airline industry. Midway airlines shut down. US Air went into bankruptcy and United Airlines was on the brink of bankruptcy. The only profitable airline in the US that year was Southwest. In total, 13 airlines applied for relief under the stabilization act.
With the SARS outbreak in 2002-2003, the same thing happened. Travel numbers were down dramatically for leisure. Even business travel was restricted and business people held more video conferences than ever before. At the time, video conference technology was not nearly as widely used as it is today.
So here we are at the beginning of 2020. Several countries are working hard to develop a vaccine for the corona virus. It will be at least 6 months before a vaccine is approved for use in humans and still longer before it is manufactured and available in meaningful quantities. A lot can happen in the spread of the disease in 6 months. We have already 6,000 reported cases in Wuhan, an increase of 50% in about a week.
The virus is now reported in 17 countries. Containment is vitally important to prevent a global pandemic. This will affect global travel patterns.
I’m going on record as saying that 2020 will experience a global slowdown in the travel industry that will be of sufficient magnitude to push most major economies into economic recession. This will have a ripple effect into other sectors of the economy.
Ray from Florida asks,
I am talking to an owner that will owner finance 100% of a small 20 unit mobile home park, that also has 3 commercial buildings.
The problem is that 16 Mobile Home sites are occupied and the homes are PARK-OWNED. From everything I’ve read it seems wise to see if I can get the tenants To own these homes through a rent to own program or gifting.
The sellers business would then be very different than mine and therefore value the different differently, right? This park has been on the market for over a year.
How would I go about valuing this property while also understand if he is going to finance the whole thing for me.
Thanks for your help!
Ray, this is a great question.
The problem that I see with the park is that it is too small. Even if you get the park to 100% occupancy, you're only looking at income from the ground rent in the mobile home park of about $4,000-$6,000 a month. That doesn't even pay for the staff to operate the park, let alone pay taxes, maintenance, and so on. Even if you got the park for free, I'm not sure it's worth the effort. If the seller is going to seller finance 100% of the park, then you are sort of getting it for free.
If they’re offering seller financing from the beginning, it means that other have tried to buy it already and passed on the opportunity.
If you aspire to become an investor, as opposed to simply buying yourself a job, then you need to look at assets that generate enough income to hire staff.
You only have four vacancies, and therefore your upside is pretty limited. You can only collect an additional $800-$1200 a month depending on how much you charge per home site.
If you’re serious about getting into the mobile home park business, I suggest that you build relationships with people who are experienced mobile home park operators who can help mentor you on what makes a successful park.
The fact is, you can have a vision for the community that you want to build. Some parks are the housing of last resort for the economically weakest members of our society. These are sometimes the worst slums in an area.
At the other end of the spectrum, there are amazingly beautiful parks that are well kept, retirement communities with great amenities, and some of the new high quality modular homes that are built by the nation’s best modular home builders.
All too often, I see newer investors going after smaller assets because they don’t have the cash to buy something larger. The skill that’s missing is the skill of raising capital.
The conventional way of thinking is to only use the money you currently have available at your fingertips.
I personally believe that the ideal mobile home park should have at least 150 spaces. If it’s distressed, then it should be at about 50-60% occupancy and operating at break-even. From there, we can take the park to full occupancy and add significant value with minimal downside risk. Those larger parks might cost more to purchase, and you probably need more cash than you have available.
A larger park brings enough income to justify the staff. If you want to be a real estate investors, then you need a project that can fund employees.
If you had the skill of raising capital, then the purchase price ceases to be an obstacle. If you had a team of specialists where one of you was an expert at operations, another was an expert at raising funds, and perhaps a third was an expert at construction management you could grow and scale your business without limits.
Don’t be scared of a larger project. The path to financial freedom is found in those larger projects, but only when combined with the skill of raising capital.
Today the Wall Street Journal reported that we could be facing a synchronized slowdown in home prices. On today’s show we’re talking about how to make sense of the conflicting data out there. But what’s reported in the news for individual home owners is very different from what investors will experience.
The Wall Street Journal reported that across 23 countries, an index of inflation-adjusted home prices compiled by the Federal Reserve Bank of Dallas grew 1.8% in the third quarter of 2019 from a year earlier.
The report said that home prices in many countries were falling, including prices in Canada have fallen 0.5% in the past year.
A key catalyst is the global slowdown over the past two years that kept a lid on housing demand and home-price gains. In large cities, affordability constraints are deterring many would-be buyers, and foreigners’ appetite for overseas properties has cooled.
Broad Statistics like this drive me crazy because they’re meaningless. At the same time that prices have fallen in some markets, we’ve seen prices rise dramatically in others.
It is true that foreign buyers in many major cities have fallen. We see this in Miami, Toronto, San Francisco and Seattle.
The claim of a slowdown in Canada is simply not accurate, even in inflation adjusted terms.
Here’s my take on what is happening.
Toronto is the fastest growing city in North America with over 125,000 population growth each year. There were only 27,410 housing completions in Toronto in 2019, down from 37,750 in 2018. The fact is, there is very little developable land left in Toronto. There is a huge reduction of single family homes and townhouses being built. Getting new projects approved in Toronto is a slow and expensive process. The vast majority of new construction is in the condo asset class and fully 60% of new product is high rise condo, 27% single family or townhouse, and 13% rental.
This shortage of supply is what is driving prices up.
The Bank regulator in Canada implemented additional credit tightening to try and cool what was seen as an overheated real estate market, specifically in Toronto and Vancouver.
By making it more difficult to borrow, that has put a cap on prices, but only in some segments of the market. We have seen prices falling at the top of the market. At the same time, we’re seeing prices rising at the bottom and the middle of the market. People will only pay for a home based on what the bank will allow them to borrow. This has reduced the rate of price increases, but prices are still increasing as long as people can borrow.
Home sales increased 14% in November and active listings are down 27% compared with last year. Prices have increased on average 7.1% in Totonto.
In my home city of Ottawa Canada, prices have increased 10.3% for single family homes and 11.5% for condos. Active listings are down 33% compared with last year. Sales volume is up 14%.
There is an increasingly loud chorus of people predicting that home prices will crash in several markets once the current generation of boomers exit home ownership. There’s no question that new supply will open up when that happens. The big question is demand, and how immigration will impact the balance of supply and demand.
If you’re making a financial decision for the next 25 years, I suggest you look out more than the next 90 days to predict where home prices are heading.
This question came up on Saturday where it was part of a lunch discussion with a group of investors over the weekend.
This particular sponsor was trying to figure out how to work with a private lender who would be lending funds that the project sponsor would ultimately use to fund the earnest money deposit and the equity for the project. The lender wants a 10% rate of return on their money. He’s also asking which property will be used to secure his loan. But the property has not been purchased yet. How can the sponsor convince the lender to keep money available until it’s needed so the 10% interest isn’t being spent on money that I can’t put to work yet.
This is a terrific question. The first thing to pay attention to is the fact that money is not all green. Money always has an agenda.
When I wrote the book Magnetic Capital, I found that raising money was straightforward when there is a perfect fit between the goals for the money and the goals for the project. In fact, there are 5 elements to raising money and if one or more of these elements are missing, then raising money becomes problematic.
The 5 principles are:
- Relationship
- Trust
- Results
- Compelling Opportunity
- Alignment
Where you’re having trouble is in the last element called alignment.
It’s very important to match goals for the money and the goals for the project. If you don’t have a perfect match between those objectives, don’t take the money because you’re trying to force a square peg into a round hole.
Alignment covers the structure and the terms of the transaction. These are things like the
Size of the investment
The length of time the money will be tied up
The rate of return
Are the funds secured on title?
What’s the tax consequence?
What’s the control structure?
What’s the risk?
The first thing to be aware of is that you are proposing a structure that might be governed by securities laws. Now let me say that it’s not my role to provide legal advice. I’m not a lawyer, and I’m definitely not a securities lawyer. I definitely recommend you get legal advice from a securities lawyer.
Any time you have a situation where there is an active party who brings effort, and a passive party who brings money, you could be walking in securities territory. You may qualify for one or more exemptions. A mortgage exemption is one of the securities exemptions that could apply. But if you’re going to be using the funds for the earnest money deposit, those funds are needed prior to closing the land purchase. Unless you’re prepared to cross-collateralize another property it’s not going to be possible to use the mortgage exemption.
It seems to me like you have a fundamental mismatch between the goals for this particular lender and the goals for the project.
There should never be anything in the process of raising capital that feels forced.
It seems to me like you are ideally looking for an equity partner. An equity investment is not a secured investment. It is an ownership investment, not a loan. You can get a loan for the rest of the project, but you will need some equity in the project.
If you bring an investor into a project to co-invest with you, then you might also consider a joint venture partnership. This could involve you investing a small amount of your own cash, and involving the investor directly in the decision making. That way, you are both contributing money to the project, and all the partners are active in venture. They become a full partner in the joint venture, and then you don’t have to worry about compliance with securities laws, because a joint venture where all the members are active is not a security.
JP Albano skipped over single family homes and small rentals and dove directly into the world of multi-family investing. His first investment was a 28 unit building.
You can connect with JP at jpalbano.com
Today's show is an extract from a talk that I gave at a thought leadership conference in Toronto on Jan 23. If you've ever want to know how the show is put together behind the scenes, this is the show for you.
Enjoy...
Dr. Kevin Hsu from NYC asks
I like your idea of buying on the line and moving the line. Does that concept ever apply to what the US government calls “opportunity zones” as well , those designated areas generally which are considered bad and in need of development , Rehabilitation.
Supposedly they have significant tax incentives if selling after ten years?What are your thoughts on investing in Opportunity zones?
Kevin, this is a great question.
Over the years we’ve developed this strategy called buy on the line, move the line. What is that line? It’s that line between the hot fashionable neighborhood with coffee shops and art galleries. You go two blocks too far in the other direction and you’re in the hood. Wherever you live, I can virtually guarantee that every city in North America has that situation. The idea is to buy a property just on the wrong side of that line for pennies on the dollar and redevelop that property. Once you’re done, the line is now on the other side of your property. When you go to get an appraisal, your only comparable property is in the hot area next door. There are no comps in the hood.
A Qualified Opportunity Zone is something that was introduced in the Trump Tax Code of 2017, the single largest revamp of the tax code since Ronald Reagan was President. The idea is to stimulate development in some of the poorest and economically disadvantaged areas in the country. Each state had the opportunity to designate up to 25% of the lowest income areas as opportunity zones which would qualify for preferred tax treatment by sheltering capital gains from taxation.
The short answer is yes, Qualified Opportunity Zone investments can often dove-tail nicely into the buy on the line strategy. In particular, we’ve seen several cases where the boundary of an opportunity zone is actually in a good area, or across the street from a good area. How these maps were arrived at is anybody’s guess.
It’s not my role to provide you with tax advice. I’m not an accountant. I’m not a tax lawyer. Everyone’s tax circumstance is different and what I’m saying may or may not pertain to you.
If you take the time to do the math, what you will discover is that the rate of return for something that is fully sheltered from Capital Gains Tax for the full 10 years, will give you an internal rate of return that is 2% points higher than one that is not.
So if your investment would naturally give you a 12% IRR, then the equivalent project in an opportunity zone would give you 14%. If your IRR was 14% in a vanilla project, now you could expect 16%.
As you know, you need to assess the risk on that 14% IRR. After all, the 14% IRR is only a forecast, constructed by a financial model that has a number of assumptions and risks.
Finding the right opportunity requires extensive work and due diligence. If it’s a new development project, then you want to know that the developer who is developing the project has strong experience and track record. In my experience, the greatest risk is in fact the developer and not the project.
You want to perform due diligence on the deal sponsor, the project, and the submarket. The deal might look good on paper, but unless the sponsor can execute on it, it doesn’t matter how good it is on paper.
On today’s show I’m talking about a property that I placed an offer on, and ultimately lost. The West end of Ottawa Canada has extremely low inventory. Some realtors estimate that there are 75 potential buyers for every one seller. Inventory is less than 10 days.
In fact, in my suburb of the city which represents a population of 90,000 people, there are only 16 homes listed for sale, 14 of them are South of a major freeway and in a less desirable area, and only two of them are North of the Freeway and one of those is already conditionally sold.
So to say that there is zero inventory in our market is not much of an exaggeration.
The home I placed the offer on was about 21 years old. The builder had acceptable build quality, and I know the builder first hand having purchased another home from them several years ago.
The owner of the home was the third owner in 21 years, and none of the owners had made any upgrades to the property to speak of. There was no backsplash in the kitchen, the appliances were new. The furnace was original. The windows needed replacing. There were many signs of deferred maintenance. The furnace was sitting in a puddle of water and there was a dehumidifier set up next to the furnace.
Needless to say, there was a lengthy list of items to investigate.
As is often the case in a sellers market like this, the agent for the seller set up the sale process as an auction. Offers would be accepted up until 3PM the day after the showing and I submitted my offer on time.
Our offer was a cash offer and had only a 10 day contingency for inspection. Given the scope of problems we saw in our short initial visit to the property, an inspection by a professional inspector was clearly warranted.
An hour later, the agent came back and said there were multiple offers. Did we want to amend our offer?
In response, I increased the offer price by $10,000 and reduced the inspection contingency period by 5 days.
The agent came back an hour later and asked if we could come up another $5,000 which we did.
Then by dinner time, the listing agent came back and informed me that we did not win the bidding war. The seller was not comfortable with the inspection condition.
They went with another offer at a lower price with no conditions.
So here’s the interesting situation. The buyer took the risk of a significant amount of deferred maintenance. I saw about $30,000 of work with the naked eye in less than 15 minutes on the property at night time. I probably would have seen more with a proper daytime inspection, and still more with a professional building inspection.
I think the buyer was silly to take the risk on that much deferred maintenance. I’m not scared of repairs and upgrades. In fact, I was glad that the seller didn’t try to do a poor quality renovation. A poor quality remodel would have made the home even more difficult to purchase.
One agent told me that in the current market, placing a condition of any kind on an offer means losing the auction.
I don’t regret losing the auction. I don’t like auctions, and I don’t like the artificial scarcity that an auction represents. Auction fever is real, and when it takes hold, paying too much is almost always the result.
I’m not an anxious buyer. I’m never an anxious buyer.
It’s far more important to me to purchase a property using the right process and not cut corners. Just because other people are willing to be desperate, doesn’t mean I need to be desperate.
Decisions made out of haste or desperation are rarely the best decisions in life.
On today’s show we’re talking about how to save money by unbundling.
There’s two ways to buy a service. You can pay an hourly rate, or you can pay a fixed price. It’s attractive for a buyer to pay a fixed price from a budgeting standpoint. If you are raising capital for a project, you need to know how much something is going to cost. You can’t simply write a blank check and hope that it will all work out the way you want.
Some contracts are a guaranteed maximum price contract. In those contracts, you go through tremendous pains to make sure the scope of work is fully understood and you conduct a detailed review of the specifications to make absolutely sure that nothing has been missed. In a fixed price contract, the price is fixed, and so too is the specification. If there’s an error in the specification, you can expect to pay more to have it fixed.
It’s often the case that when items are packaged together in a fixed price contract, you end up with some of the things you want and then other things you are not that keen on. You might feel stuck because you’re buying services and products that are not to your liking, in exchange for the certainty of a fixed price contract.
I’ve seen this happen many times when dealing with construction contracts.
There are some times when a construction contract is priced too high. That’s particularly true when the contractor doesn’t know how much time something will take. They tend to quote high to protect their margin. In those cases, it’s in your best interest to pay for the work on an hourly basis instead of paying a fixed price for a package. If you still want a guaranteed maximum price contract, then the solution might be to quote a time allowance for a particular line item in the contract. Any time over and above the allowance would be charged at an hourly rate.
A simple case in point was a drywall plastering job that had three extra line items that were priced above the original scope of work. Each of the line items when bid at a fixed price came to $2,600 in extra work on top of the base contract.
When I asked the person doing the work on site how much effort it represented, he estimated about 8 hours of work. There’s no way that I would spend $2,600 for only 8 hours of work. There’s no way I would spend that much if I paid for the extra work on an hourly basis.
In that case, I went back to the manager for contractor and asked him to quote me an hourly rate for the extra work and then I gave him a blanket authorization for the extra hours.
In the end, the extra work cost me $800 instead of $2,600.
This was all with the same contractor. I don’t feel like the contractor was trying to rip me off in any way. They were estimating the job the way I would expect contractors to estimate the job.
We are often conditioned to think that fixed price contracts are the best way to go. I’m here to tell you that it’s not always the case.
Before you can realistically negotiate this with your contractors, you need the expertise in house to estimate the work and figure out what it should really cost.
Sometimes the local knowledge of the site conditions can give you an advantage over the estimator who is trying to do their work quickly and efficiently. Their goal is not always to get you the lowest price. Their goal is to get the job done, to keep their people busy, and to minimize the time lost to mobilizing staff on and off the job site.
On today’s show, we’re talking about a global perspective of growth. The World Economic Forum opened this week in Davos Switzerland. The price of admission to that conference is high, but the networking is awesome. If you’re like me and have projects to get done, you’re probably limited to watching a handful of the video recordings.
The International Monetary Fund’s World Economic Outlook was part of the opening statement from the World Economic Forum this week. It highlighted their growth projections for the next two years.
In that forecast, the advanced economies like the US and Europe are expected to grow by 1.6% this year and next. The emerging and developing market economies are expected to grow by an average of 4.4% this year and 4.6% next year.
The big talk is about a slowdown in China. But frankly, it’s hard to see 6% growth, down from 6.1% growth in the Chinese economy as a slowdown. 6% growth of an economy that’s almost the size of the US economy is still massive growth. That’s 735 billion dollars of growth. Just the growth in China next year is larger than all of Spain’s GDP. It’s larger than all of Austria’s economy. It’s larger than Portugal, Hungary, Serbia, Bulgaria and Croatia and the Czech Republic combined. Here’s the kicker. China’s growth alone is larger than the entire Argentinian economy.
We’re conditioned to think historically of Russia and the US as the two global Superpowers. That was certainly the case for the second half of the last century.
That’s no longer the case. China dwarfs Russia and all of the former Soviet republics.
The US economy is the largest, followed by Europe, and then China. The other emerging market economies of Brazil, Argentina, India, and Russia are a rounding error by comparison.
Gita Gopinath is the director for the research department at the IMF who issued the forecast. In her update she said that the risks to the global economy have reduced in the past quarter. The two major risks were US China trade, and the risk of a no-deal Brexit.
The biggest downward revision of 0.1% in the global economic forecast comes from a slowdown principally in India.
Gita sees the US China phase 1 deal as offering a bright light. Risks remain to the downside according to the IMF.
I bring the World Economic Forum to your attention because it’s an event where some of the most influential people in the world come together for a week. There are the prepared statements which often are not that impactful. What I do find useful is to hear the questions.
Some of the panel discussions are taking questions from the Internet, not just from the attendees in the room.
By participating in the World Economic Forum even from an armchair vantage point, I feel more strongly connected to the major forces that are shaping our world.
I get to see the spectrum of political opinions directly, and not through the lens of the news media’s interpretation of what was said. I’m a huge believer in bypassing the intermediary and going directly to the source.
This question is from Carol in Toronto.
My husband and I have been living in the same rental for 18 years. For the past 6 weeks, our stove has stopped working and the landlord has not fixed it. He claims he doesn’t have the money. My landlord has been increasingly elusive. We have some evidence that he’s trying to push us out so that he can get a new tenant and raise the rent. The property has other problems with moisture and mold which could be affecting my health. In the past 18 years, he has only raised the rent twice. It would cost me far too much to move. I’m hearing that my landlord may claim that the landlord tenant act doesn’t apply because the home we live in is zoned commercial and not residential. There used to be a business located at our property before we lived here. I want to avoid confrontation, but the way the landlord is treating us isn’t right. I can’t afford to be forced out of my home.
Well Carol, this is a complex question. First of all, I’m not a lawyer and don’t want to be giving you legal advice. There are a number of aspects to your question.
- You are clearly paying below market rent. Rents in Toronto have gone up significantly in the past 18 years and you’ve been getting a good deal for all these years and continue to do so.
- In the province of Ontario, landlord tenant issues are governed by the residential tenancies act. If you have a dispute with your landlord for items regarding your lease, these are judged at the landlord tenant tribunal. As you’re probably aware, this is a slow process. But there is one major exception to the rules.
- The issue with the stove is not a landlord tenant issue but a property standards issue. The same is true for the mold in the property. That too is a property standards issue. The enforcement of property standards is not a provincial matter, but has been delegated to the city. A simple phone call to the bylaw enforcement office will have a bylaw enforcement officer come to visit your property. This is a simple phone call, and they will show up in short order.
- The province of Ontario instituted rent controls a few years ago. The landlord has the right to increase your rent. He can’t evict you simply because he failed to increase your rent all these years.
- The only circumstance that I know of where a landlord can evict a tenant for anything other than non-payment of rent is that they intend to owner occupy the property, something the owner of the property has the right to do. They don’t have the right to evict you because they don’t like the rent you’re paying and then turn around and rent it to someone else at a higher rate.
I appreciate your desire to avoid a confrontation with your landlord. But the fact that you’ve been without a stove for 6 weeks is unacceptable. In my opinion, you already have a confrontation in the sense that you’re having to spend extra money to buy prepared food instead of cooking at home. A stove is not that expensive and you’re paying your rent on time each month. Ultimately, you need to decide if you believe your landlord is trying to force you out of your property by making it too unpleasant to live there. That is, in my view against the law. The residential tenancies act is pretty clear about that.
Again, the purpose of this podcast isn’t to provide you with legal advice. I’m not a lawyer. But I can point you in the direction of some publicly available information that is easy to download from the city’s website. Getting bylaw enforcement involved is as simple as a call to a 3 digit number. If you dial 311 within the city of Toronto, you will be connected directly with the city.
On today's show, I'm talking about negotiation with George Ross. I love getting George's insight's.
Roy Smoothe hails all the way from the UK, where he specializes in helping business and entrepreneurs with their brand image. You can learn more about Roy at RoySmoothe.com or at his music website success2music.com. Join me for this fascinating conversation about how to get noticed in today's noisy world.
On today’s show we’re talking about an innovation in creating more affordable housing. The city of Los Angeles has amended their definition of an accessory dwelling unit. The history of an accessory dwelling unit has has be the traditional in-law suite, or the nanny suite. This is sometimes an attic apartment, or a basement apartment. It’s usually attached to the principal home and forms part of the home, but is a separate unit. In these secondary units, the utilities come from the main house and they’re really considered to be part of the main house.
Under the latest change, the city of Los Angeles is adding movable tiny houses to the definition of ADU. I’m going to read the definition directly from the text of the municipal ordinance.
MOVABLE TINY HOUSE.
An enclosed space intended for separate, independent living quarters of one Family as defined in Section 12.03 of this Code and that meets all of the following:
- Is licensed and registered with the California Department of Motor Vehicles;
- Meets the American National Standards Institute (ANSI) 119.5 requirements or the National Fire Protection Association (NFPA) 1192 standards, and is certified for ANSI or NFPA compliance;
- Cannot move under its own power; Is no larger than allowed by California State Law for movement on public highways; and
- Is no smaller than 150 and no larger than 430 square feet as measured within the exterior faces of the exterior walls.
So these are truly tiny houses.
There are a few restrictions. For example, No ADU is permitted on any lot that is located in a Very High Fire Hazard Severity Zone designated by the Los Angeles Fire Department.
One parking space is required for an ADU, except that no parking is required for an ADU that is: (i) Located within one-half mile walking distance of a public transit.
All exterior walls and roof of a moveable any tiny house used as an ADU have to be fixed with no bump outs, slide-outs, 7 tip-outs, nor other forms of mechanically moving room area extensions.
Even if your lot is large, you’re only allowed one of these on the property. If the tiny house has wheels, they have to be covered and hidden. The house has to sit on a paved surface. You can’t just put down some gravel and bring in a trailer.
The question is why would the city of Los Angeles want to bring movable tiny houses into the city? Who is it helping? Is it creating more affordable housing?
The fact is, it is creating a small amount of affordable housing for those who reside in the tiny homes. Equally important, it’s making home ownership more affordable for those who wish to purchase a single family home, but can’t quite afford it.
The city is also putting restriction on the types of homes. It’s pretty clear that you can’t just by an RV and hope that it will qualify as a tiny home. They have put rules in place to make it extremely difficult to use an RV for this purpose, without coming out and explicitly saying that they’re outlawing RV’s.
For example, the home must have square cornered windows. You’re not allowed to have radius corners on the windows.
Materials used on the exterior of a moveable tiny house shall exclude single piece composite, laminates, or interlocked metal sheathing.
The home can’t be more than two stories and you’re not allowed to place the tiny home between the main house and the street.
Those who live in tiny homes have given mixed reviews on the experience. On the plus side, you save money because your property is small. Equally important, you have so little space, that you tend to not buy stuff. There’s no point purchasing consumer items that you have no space to store.
On today’s show, we are talking about solar energy. Let me be clear, I want solar to work. I have solar electric panels on both of my sailboats. I love the idea of getting energy for free.
If solar energy is going to take hold on a large scale, it will be because it makes financial sense for all the stakeholders including consumers of electricity to make the investment. Governments in California don’t trust the population to do the right thing. So starting Jan. 1 of this year, all newly constructed homes and low-rise apartment buildings in California are required to have rooftop solar panels. The state is the first in the nation to carry such a mandate. Prior to the enactment of the law, about one in 5 new homes came equipped with some form of solar energy supplement. All new building permits in 2020 and beyond will require it.
The law also requires better insulation and air filtration for new homes. Some areas also are seeing mandates on the use of natural gas.
The rules for energy use are intended to help alleviate the state’s greenhouse gas emissions. The new laws apply only to newly constructed homes.
The California Energy Commission estimates that the solar mandate and additional building code changes could add between $8,500 - $9,500 per home in construction costs. However, they say the changes will save homeowners $19,000 in energy and maintenance costs over 30 years, or $55 a month. From my perspective, that’s an optimistic view. The solar contractors I contacted estimate the savings at closer to $35 per month per home. That means we’re talking about a 22 year payback on the solar installation. I don’t know about you, but these solar systems have not been tested to a 22 year life. If they don’t last beyond 22 years without maintenance or repairs then it’s likely that the solar installations never fully return their investment.
Many states have implemented financial incentives to sell power back to the electric utility at favourable rates. These rates are often higher than the cost of producing electricity using convention power generation, and certainly higher than the retail price of electricity.
Most utilities, including California have switched from buying power at peak rates to a method called net metering. So let’s say that your home generates more electricity than you use, will the utility write you a check?
The answer is no.
The problem is that the economics don’t yet support solar on its own merits. The cost of electricity from your utility is driven by two major costs. The first is the variable cost. That is, the cost associated with producing an incremental KWH of electricity. If you are burning natural gas to produce that electricity, then the cost of the fuel is the variable cost. The bigger problem is the cost of the infrastructure required to produce and distribute the power. The power system provided by the utility is designed to handle the peak power demand, not the average. Solar power systems produce electricity that lowers the average consumption, but doesn’t really lower the peak demand.
The problem is that the majority of the cost associated with delivering electricity to a residential home is fixed. That is, the infrastructure is so expensive, that the majority of the cost is the amortization of the fixed infrastructure over a number of years. The actual variable cost associate with the energy burned to deliver that electricity to the end customer is tiny by comparison. The problem is that the revenue model for the utility is based on consumption. Lowering consumption lowers the revenue for the utility, but doesn’t actually lower the cost by very much.
The problem is that politicians in this instance are pandering to an idealistic notion that is not born out in reality. If they could shut down a power generation plant, or retire the transmission infrastructure, they could save some real money.
On today’s show, we’re talking about math errors that some contractors make. These are simple errors to make, but ones that can cost you money.
There are many places where a contractor can hide expenses and it can be difficult for you to figure out where they are.
When you are dealing with high quality contractors, they will be transparent in how their bid was put together. They will clearly show what it costs for each division of work. There will be a line item for framing, for foundations, for site work. Electrical, plumbing, mechanical and so on. There will be somewhere between 15 to 30 separate line items. Then they will show you a line item for their fee, and a line item for what are called general conditions.
General conditions are the items that are needed on the job site that don’t pertain to any particular subcontractor. These are things like the perimeter security fence, rental of the portable toilets, rental of cranes, the waste material disposal and a portable site office. The general conditions are required to mobilize the construction team.
When there are problems in a quote, it’s usually because there is an error in one of the underlying calculations. I take the time and double check the math to make sure it’s correct. For example, I will divide the cost for flooring by the floor area and make sure that the correct rate is in use. Sometimes there is an error. Sometimes the error is in the materials, and sometimes it’s in the labour.
Let’s start with the material allowance. Let’s say you have a room that is 10 feet by 10 feet. We would agree that the room is 100 square feet.
Most people would also agree that you need to purchase more than 100 square feet of material to cover that floor. The cuts won’t match the room exactly and you will have left-over pieces that are too small to use. The usual material allowance is about 10% above the floor area or the wall area. But if you have irregular geometry, the material waste can be even higher.
So let’s say that the tile contractor purchases 110 square feet of tile. I’ve seen that same tile contractor charge for 110 square feet of tile installation. That’s mathematically incorrect. There’s only 100 square feet of floor area. They should charge you for 110 feet of tile material and 100 square feet of tile installation. If the tile comes in boxes of 15 square feet per box, then your will purchase will need to be 120 square feet of tile, because 105 square feet of tile probably won’t be enough. Will the contractor now charge you for 120 square feet? Again, they need to charge you for the exact floor area when it comes to installation, not more.
Then there’s the contractor who charges you for their insurance as a separate line item in the project. If its a large project, then its absolutely fair for the project to bear the burden of the builders risk insurance. But if you’re paying for the builders workman compensation insurance or the builders general liability, and then paying for it in general conditions, that’s double dipping.
Sometimes, the contractor will calculate the labour component based on the materials and not the actual area or length shown on the drawings. That extra is a little bit like the waiter in a restaurant who charges a service charge of 15% and then gets another 15% tip. It’s double dipping. I can tell you that the addition of 10%-15% in cost on a project can make the difference between a viable project and one that’s not.
On today’s show we’re talking about what to do when the numbers don’t work.
You look at a property, you think there’s a deal. But then you run the numbers and pretty quickly conclude that the margin is too thin to take the risk.
At the same time, you see multiple examples of larger projects in the same area. If your costs are similar, then those other projects should not be getting built. They too would be suffering the same risks, costs, and market conditions. So what do you do when it seems that the projects in the same area are getting done, and your virtually identical project doesn’t make sense on paper?
Profits on a project are the result of pretty simple math. So why are your projects not passing the math test? What do these other developers know that you don’t? What are they doing differently?
Profit is simply sale price minus expenses. Your expenses are pretty simple too. They’re the cost of land, labour, materials, design, management, and the financing cost for the property and the inventory of materials.
Are the other guys cutting corners? Are they negotiating deeper discounts? Are they getting access to lower cost financing? Are bringing more equity and borrowing less money? Are they negotiating better hourly rates for the labour component? The answer is yes to most of these, except for one.
The bigger developers don’t cut corners. They negotiate. They make sure that their numbers work without cutting any corners.
One of the biggest differences I’ve noticed is that major developers tend to land bank. We’ve done this in a few markets with excellent results. When you buy land at today’s price, the land often appears too expensive to justify developing it. In some cases, the developer buys the land and just sits on it for a number of years. They also buy the land with equity and not debt. That way their holding cost is kept to a minimum.
Fast forward another five or ten years and that land all of sudden looks like it was bought really cheap.
The most established developers get access to the lowest cost money. They have a strong enough track record that they can get funds that are guaranteed by a mortgage insurer.
I’ve seen major builders negotiate amazing pricing compared with the retail price for materials. You can count on discounts of 30-50% compared with the retail price for materials at the big box home improvement stores.
When it comes to materials, the pricing of materials varies widely with volume. If you buy a truckload directly from the manufacturer, you can save about 15% compared with buying from a distributor. If you’re buying in volume from a distributor, you can expect a huge price break from them too if you order enough material.
Job costing is an art form, and the larger builders have professional estimators whose job it is to source the right quantity of materials, scheduling delivery, and getting the lowest price. If you pay an estimator, say, $80,000 a year. Then you need to know that you’re going to get way more than $80,000 in savings in order to justify hiring that position. In order to get more than that amount in savings, you need a volume of business.
They buy quartz counter tops by the container load from the factory. They’re paying $35 per square foot for quartz instead of $75 - $100 per square foot at the big box home improvement store.
All these little discounts add up over the course of a project.
The big contractors are also the fastest. They show up at the job site with all the materials and tools to get their work done effectively. They expect the delivery truck to be late. So they bring the needed materials for the first few hours of work each day.
It could be that your project is too small. It could be that your contractor is too small as well.
On today’s show we’re talking about how to get construction quotes that make sense. It’s easy to be confused by multiple quotes. On today’s show we’re going to do a case study on a small commercial office build-out in an office.
The scope of the work was to partition about 550 Square feet into three offices and a lunch room. There is the addition of a small sink a fridge and a dishwasher. The existing space has almost all the lighting and electrical needed. We only needed to add electrical circuits for the dishwasher and the fridge.
So all in all, the scope of work seem pretty simple. In total, we’re talking about adding 55 linear feet of new wall partitions. They’re 8 feet high, and the work obviously needs to comply with the building code.
The fact is, this is a very simple project. There’s no doubt that mobilizing a team for a small project would cost a little more.
In order to comply with commercial codes, we need to use metal framing instead of wood framing. The doors should be solid commercial quality doors instead of the hollow doors that are common in residential. The electrical must be done with armoured cable, and the drywall must be 5/8” thick instead of 1/2”. All these things will cost more compared with residential construction. But there is nothing too outlandish so far.
The first quote we received was for 18,000. That seemed high to me. The second quote we received was for a better number, about $14,000, but it left many items open for further refinement. It did not include appliances, nor any electrical work. The scope wasn’t clearly understood.
The third quote was for $37,000 and did not include appliances.
In the end, I contacted a high volume contractor that only works on large commercial projects. What I discovered was that they were going to charge me the same price that they charge the high volume builders. I’m used to paying high volume prices for work on development projects. This fourth quote came in at a great price of under $5,000. The scope was narrow and it didn’t include the entire project. But I was willing to hire the electrician and the plumber. In the end, the project would get done for under $10,000.
When it comes to negotiating construction contracts, even a simple one like this, I tend to focus on getting a detailed breakdown of the work and the cost for each line item. That way I can see if there is a missing assumption or perhaps if the contractor is way off on their view of the scope of the project.
If all you have is a lump sum price, then you have no tools to assess the quote. You can’t tell if the contractor is greedy, or if they’re simply mistaken. Sometimes, the number is too good to be true. That’s as much of a risk as a number that’s too high. When the number is too good to be true, it could mean that they failed to include a portion of the scope in the project.
You can still get a bad quote from a great contractor. It’s tempting in those cases go looking for another contractor. That would be an unfortunate loss for both you and the contractor. Great relationships are hard to find and equally hard to maintain.
By focusing on understanding the scope of work for each line item, I managed to save about 50% compared with the reasonable quotes.
In fact, the contractor I chose didn’t even ask for any monies up front. They simply asked for a purchase order and they would bill me at the end of the month for the completed job.
Sometimes the biggest companies with the largest overhead are precisely the ones you want to do your work. Stay away from the two guys and a pickup truck. They’re the ones you can’t count on to get your project done on schedule or on budget.
On today's show, I'm talking with Matt Shields about how he made the transition from single family investing to multi-family apartment buildings. Matt is based in Cleveland Ohio and is investing in multiple markets including Atlanta.
On today's show I'm talking with Loe and Austin about the merits of purpose built townhouses for rent. This particular product offers some advantages and differentiation in the market when compared with large scale higher density multi-family complexes. Loe can be reached at loe@thesageoak.com and Austin can be reached at austin@angdevelopment.com
On today’s show we’re talking about the missing middle.
Modern cities tend to get most new housing in either very low-density (usually suburban), or very high-density buildings. In many North American cities, most new units are either detached, semi-detached and townhouse units, or else condo apartments in high-density high-rise towers. The mid-density stuff in between tends to be harder to produce. Larger developers don’t want the hassle of these smaller projects. So the lowest cost developers won’t build these. It leaves the field wide open for the smaller developers to try their hand at developing these types of buildings. Frankly, this is precisely where I started my development career.
Which part of that middle is missing, depends on the city.
In some cities, the missing middle refers to the kind of small walk-up apartment buildings and stacked dwellings that can be built on urban infill lots. This range of mid-density infills, of up to three full storeys and containing perhaps eight or twelve apartments, can serve a wide range of household types. They are more cost-effective to build, and so can be made more affordable to residents, than both lower- and higher-density forms.
A generation ago, there was plenty of affordable housing in the city. Most people chose to move to the suburbs, leaving a large supply of old, pre-war housing behind.
But a lot has changed. People are coming back to the city, and that growing demand for urban housing has put relentless pressure on supply.
People want walkable communities. People want lower maintenance. They don’t want to mow the lawn or shovel the driveway, and they want affordability.
It has become clear that affordability and rental supply isn't just about building more housing: it's about enabling more of the right kind of housing.
In order to keep costs down, you need to create density. Density, means going vertical in order to reduce the land cost per unit.
The limiting factor in virtually any type of housing is not actually the housing. The limiting factor is parking. You might have a parcel of land of, say, 6,000 SF. The city might let you build, for example 16 units on that parcel. The problem is that the parking for 16 cars would consume almost the entire lot. So either you limit the parking, or you find a way to incorporate structured parking. But structured parking is incredibly expensive.
If you want parking, then each parking spot costs as much as a brand new car. Many developers opt to build without parking if there is adequate public transit. But here too, the market still demands some amount of parking.
If you want to build ground level structured parking, and elevate the building, then the height restriction becomes the constraint. If the city won’t let you build higher, then you can’t get the parking. Once you introduce the parking underneath the building, then you need to factor in an elevator to get up to the 4th floor.
The key to lowering housing costs when land is expensive is to allow greater density. If you can get more apartments on the same land surface, then you can lower the cost of housing for everyone. If the rents aren’t high enough to pay for the building, then that building won’t get built. When new buildings don’t get built, then rents go up because there is less supply in the market.
On today’s show we’re talking about one vision for retirement that a number of people are actively doing.
For some people, the vision of retirement is that they will take time and travel the world. There’s no better way to do that than aboard a cruise ship.
From the early 1970’s my parents traveled extensively on cruise ships. In fact my father spent no less than 800 days aboard a cruise ship. He had taken the around the world cruise no less than 6 times. He did numerous ocean crossings, and dozens of Caribbean, European and Alaska cruises. Think about it, that’s more than two years of his life, spent aboard a cruise ship. When he was traveling that extensively on board, it was pretty unusual. In fact, from the time I was about 12 years old, my parents were gone for anywhere from 2 to 4 months out of each year. If that were to happen today, I’m guessing they would have been charged with abandonment. But that’s an entirely other matter. My sister and I lived at home, went to school, and did our homework. We cooked our own meals and looked after the house. That was pretty unusual too.
These days, the cruise industry has grown dramatically.
Last year, the cruise industry hosted 27 million passengers. Demand for cruising has grown 20% in the past 5 years and growth has been averaging about 4% a year. An additional 32,000 beds of capacity was added just in the past year alone.
So let’s look at the economics of living aboard a cruise ship. The average cruise passenger spends $213 a day. But that’s with drinks, photos, tours, and all the various sales in the gift shops. If you’re living aboard, the real cost can be much lower.
The average person spends $46,000 a year in retirement. That comes to a daily spend of $112 a day.
I can tell you with a high degree of confidence that you can definitely live aboard a cruise ship for $112 a day on average. Even if you increase the budget to $150 a day, there is a large percentage of the population that could easily afford $55,000 a year. Understand, that if you’re living aboard, that pretty much covers all your daily expenses. Your bed sheets get changed every day, all your meals are included. You might need to buy some clothing and spend a little money ashore, and pay for medical insurance. Apart from this, you have no other financial obligations.
Compared with the cost of senior living in an independent living complex, a cruise ship is still a bargain.
There are activities, shows, entertainment, and a high level of service. Your cabin stewards, waiters, deck hands are all available to help guests at any time.
The ships hospital is equipped to handle any emergency situations. But just beware, if you have a health issue, you can expect the cruise line to transfer you to a hospital at the next port.
An increasing number of people are making the cruising lifestyle part of their retirement plan. I know of some people who have been doing this full time for over 10 years.
Some people don’t like the cruise experience. They don’t like the crowds at the lunch buffet, and they don’t like the party crowd who can be a bit boisterous. But some cruise lines like Holland America and Royal Caribbean have built more of a reputation for being a bit more tame. They don’t attract quite as much of the Spring Break kind of crowd.
While we don’t expect cruise ship living to represent a first choice for many retirees, it is definitely a choice for some. Even those who would consider a sunbelt destination in the winter months are choosing the cruise ship alternative to a permanent second home for those colder winter months.
On today’s show we’re talking about government over-reach which has been partially stopped in one instance.
Municipal Governments all over North America are trying to implement rules to improve the quality of rental accommodations in their cities. One of the methods is called proactive enforcement. That’s code for inspections.
The theory is that if landlords know their property will be inspected, they will have a stronger incentive to make sur their property complies with the building code and property standards that make a property considered inhabitable. Not only do things need to be in working order, they have to be safe, and free from health hazards like molds or other toxins.
You would think that if the goal is to improve the quality of rental properties, then the tenants who have problems with the quality of their units would favour these inspections. Well, in the Commonwealth of Pennsylvania, that rule just got challenged in court.
In June 2015, The Borough of Pottstown Penn enacted a number of housing ordinance amendments. At issue here, the amendments included provisions requiring each owner of a rental property to permit inspections of all rental units every two years. If voluntary access for an inspection is denied, the ordinance allows the Borough to apply for an administrative warrant. The new rule does not disclose what criteria, if any, the Borough must satisfy in order to obtain such a warrant.
In the case before the court, the tenants, and the landlord refused voluntary access to their rental units by Borough inspectors.
The Commonwealth Court overturned a lower court’s ruling in favor of Pottstown in a lawsuit challenging the borough’s rental inspection ordinance. The lower court upheld the right of the borough to enter residents’ homes without cause and without the residents’ consent.
Tenants in the case asserted that the use of administrative warrants is unconstitutional because such warrants are issued without requiring and individual probable cause to believe any building code violation exists. Tenants also pointed out that each inspector is instructed to share with police any observation of an item in the rental unit that the inspector in their sole discretion considers an indicator of criminal activity. This effectively gives police the ability to obtain information about the contents of a dwelling without the need for a search warrant.
The tenants also argued that the privacy protections under the Pennsylvania constitution are more extensive than the protections under the United States Constitution concerning individual rights of privacy and freedom from unreasonable searches.
The actual article in the constitution says,
“The people shall be secure in their persons, houses, papers and possessions from unreasonable searches and seizures..."
This language is similar to that of the Fourth Amendment of the US Constitution, but provides broader protection than the 4th amendment.
In June of 2018, the Borough filed a motion for Judgement on the pleadings. They argued that the inspection provisions of the housing ordinance were not unconstitutional.
On Monday this week, the Judge who heard the cased rules in favour of the landlords and tenants who opposed the new rule. Judge Ceisler’s ruling said, “To require Tenants to endure the inspections before challenging the inspection requirement would render Tenants’ Article I, Section 8 privacy rights illusory,”.
Essentially what the judge was saying is that Pottstown’s rental inspections regime was a way to get around constitutional protections for privacy rights.
This ruling could ensure that every Pennsylvanian who resists a search of their home can only have the government enter with a warrant supported by probable cause that something is wrong inside.
For better or worse, we are addicted to growth. Our financial system that is heavily based on rising debt, virtually requires perpetual growth. When businesses shrink, bad things happen. Not only do people lose their jobs, businesses face problems meeting their debt obligations. If they shrink too much, then really bad things happen.
When governments create conditions that are intended to help workers, they sometimes have unintended consequences.
I’ve had the experience of managing employees and contractors in France which is one of the most difficult labour markets that I’m aware of. Every enterprise over 50 employees must have a union by law. On of the consequences of an overly regulated labour environment is that it’s very difficult for workers to find a job, because the liability associated with hiring someone often outweighs the benefits. Employers are very reluctant to hire in that environment. What was supposed to help workers, in fact has the unintended opposite effect.
The State of California took the unprecedented step of requiring companies that hire contract workers to convert them into employees if they work for more than a specified period of time. AB-5, which went into effect Jan. 1, requires companies to reclassify a wide category of California contract workers as employees.
A relatively new California company called Wonolo specializes in connecting workers and businesses. So far they have over 300,000 people working on their platform. Last month Wonolo secured an additional $35M investment from Bain Capital. At the same time, a couple of weeks ago, the company also announced that as of March 1, they would no longer allow businesses based in California to use their platform. This decision will affect tens of thousands of workers who currently use the Wonolo platform in California.
The gig economy has all kinds of contract workers spanning everything from Uber, to drivers for Fedex and UPS. Their customers include all kinds of businesses from Coca-Cola, to Six Flags to Papa-Johns Pizza.
Th company took the decision in order to protect businesses from any unnecessary risks associated with the new legislation. Wonolo doesn’t have the time or the resources to police compliance with the new AB-5 regulations.
So what does temporary contract work have to do with a healthy thriving economy?
So what does this have to do with real estate?
One thing that drives demand for real estate is jobs! Jobs, jobs, jobs. If employment is falling, if it’s too hard to do business in a particular area, then jobs are one of the first casualties. After that then comes real estate as the second casualty.
California legislators may finally get their wish, more affordable real estate. What that means is that prices will fall as more and more people exit the state. The problem is, the ones who are leaving California are precisely the ones that the state really needs to keep. The one’s who stay will be the least mobile lowest earning members of the population. Those who don’t pay taxes don’t really care that California’s taxes are high. It doesn’t affect them.
The folks at Zillow have a nationwide view of real estate. In their latest survey of real estate sentiment, they are predicting that the San Francisco Bay Area will be the worst performing of all real estate markets in the nation.
Of the survey’s markets most likely to underperform in 2020, six are in California and include Los Angeles, Sacramento, San Francisco, San Jose, San Diego and Riverside.
The lyrics in the song Hotel California by the Eagles say “You can check out any time you like, but you can’t ever leave”. I suspect that California legislators have been listening to that song for far too long, because it’s actually not true.
Dr. Kevin Hsu from NYC asks,
“ I’m curious your opinion on something I heard Jeremy Roll and various other experts say on podcasts in 2019 - that the market is very hot in Multifamily in the past several years, cap rates getting compressed, and the best thing would be to wait on the sidelines for the correction and then jump in.”
Kevin, that’s a great question. There are two schools of thought when it comes to investing. The first is to treat the marketplace as an auction. Properties sell to the highest bidder. In an auction environment, there is a mindset of scarcity. The idea is that there is limited supply of deals, and more money chasing deals. In that environment, the fear of missing out creates an emotional reaction in many buyers.
You’re proposing to not be an anxious buyer and that’s absolutely the right attitude. You never want to pay too much.
You’re absolutely right that prices for investment properties are being bid up in the market to valuations that don’t make sense. In our business we have not engaged the market in the that most investors are. We’re not willing to pay too much.
A simple example was of a property in South Dallas that we looked at last year. It was over 100 units, and decidedly a C-Class property. It’s not in a great area. In fact it is in the middle of an industrial area backing on a manufacturing facility, with a warehousing and trucking property on either side. This is never going to be a B class property, not in that location. The asking price put it at a 5% cap rate. Not only that, the seller was demanding 30 days due diligence, and $200,000 non-refundable deposit even to accept an offer. I have no idea if the seller got their price or their deposit. The argument for the high price and the incredible terms was that the market was supporting those conditions. But it made no sense to me. I would never pay that much for that property.
It’s true that the money is made in the buy, not in the sale. If you pay too much for the purchase, you’re really setting yourself up for failure.
You can go find deals, or you can create them. I personally prefer to create the deal. When you’re finding deals, there is a lineup of people bidding for the same deal. It’s truly an auction.
In that environment, it’s tempting to wait things out until there are better prices in the future. But nobody can predict the future. Will you wait 6 months, two years, five years? What if prices don’t fall enough in a downturn to make the numbers work?
I prefer to have a clear financial model for what makes a deal work. You can either
- Find those deals. They do exist, but there are not that many.
- Create them.
So how do you create deals? Well, you look at the supply and demand imbalance in the market and you figure out what a project needs to look like to make the numbers work. You figure out how much profit you need per unit, what your construction costs would be, and ultimately what you can afford to pay for the land in order to make that all work. I’m finding that I’m able to build new product for 25%-30% less than the equivalent product is selling for in the open market.
Yes, these projects take longer, and yes there is the additional risk associated with new construction. But when you can build brand new product that is in demand, in the right location, at the price you want, the risks can be managed. That’s proven to be a good tradeoff for me. That doesn’t mean it’s ideal for everyone.
There are a handful of opportunities that appear as the result of special situations. These are things like an older property owner aging out of the ownership process. Sometimes, these opportunities come off-market through relationships with brokers.
Sean Gray has a special message for those under 30, and in particular, those who are twenty-two without a clue. By getting in the right environment, by hanging out with Robert Kiyosaki and Ken MacElroy, he's managed to develop skills that are unusual for someone so young. Sean is on a mission to help those young folks who are trying to figure out their path in life, and how to ask themselves better questions. Check it out.
You can reach Sean at SeanDGray.com.
My good friend Robert Helms of The Real Estate Guys Radio Show has just completed the second full year of operation at Mahogany Bay Village, a Hilton Curio Collection Resort. This is an extraordinary property with features and experiences that are unique in the world. Like me, Robert also is passionate about goal setting. He hosts the Create Your Future Retreat in Lake Las Vegas on Jan 17-18. You can learn more at http://goalsettingretreat.com. My conversation with Robert is packed with value bombs. We are truly kindred spirits.
On today’s show we’re talking about one of the latest ideas in community design. It’s the 15 minute neighborhood. The idea behind the 15 minute neighborhood is that everything you need to live your daily life should be within 15 minutes walking distance of your home. That means a trip to the grocery store, a trip to the office, and a trip to the dry cleaner would all be within a 15 minute walk. Trips further afield could rely on a 15 minute walk to a public transit stop.
The idea of walkable communities is not new. If you spend any time in Europe, you’ll find communities that were centered around the town square. These places were built before the advent of the automobile and they’re some of the most livable communities, despite the lack of parking. But if you go to even small communities in Europe of, say, 40,000 people, you will find 6-10 story apartment buildings, dense main-streets with clothing stores and a local deli, a neighborhood restaurant serving simple food, and a fine dining restaurant.
You’ll find the local flower shop, the pharmacy and the health food store.
The design of North American cities have created a separation between the commercial center and the places where people live. The suburban lifestyle where row upon row of identical houses with manicured lawns is an artifact of the 1970’s and 1980’s. This trend created a band of abandoned real estate outside the core of each city. Drive a bit further and you get into the suburbs. But really it makes no sense. Communities all over North America have rediscovered that band of real estate and started redeveloping it.
My home town of Ottawa Canada has adopted the concept of the 15 minute neighborhood into its latest incarnation of the official plan. But if you research the concept, you’ll find other communities like Boulder Colorado and Portland Oregon adopting a similar concept. All across North America, we have bankrupted our cities and states by putting the everything ever farther apart, and then building huge networks of roads and public transit to connect it. Our cities have ballooned far faster in land mass than they've grown in population, and face ever-mounting maintenance costs for all that pavement, at the same time as residents clamor for yet more roads to deal with congestion caused by all the driving we’ve forced ourselves to do. If you’ve ever built a road, you know exactly how expensive they can be to build and maintain.
The best way to lower these costs is to fill in the spaces left vacant in the middle of our cities that have fallen out of fashion. That means no new roads, no new public transit, no new schools. It’s re-using the infrastructure that’s already there and being paid for.
One of the big tragedies of urban sprawl is the way we get children to school. I’ve lived in the suburbs for the past 30 years. My children have been walking distance from school. When I grew up, I used to walk to school, but my children never experienced that. They had to take a 30 minute drive on a school bus instead of a 20 minute walk to school. Frankly, that’s pretty messed up. I’d love to see the return fo the neighborhood school and get rid of all those school busses that are taking kids 30-60 minutes twice a day all over North America.
As you look at opportunities for development projects, study the 15 minute neighborhood and inspire your local communities to make old world sensibility part of the new world city.
A milestone date is just another day, or is it? As we enter 2020, the only thing that’s different is that we are a day older, either more tired, or better rested, depending on what you did in the past 24 hours.
It’s part of the social dialog to set New Year Resolutions. The fact is, less than 4% of the population actually set goals, and then the subset who do usually don’t meet their goals. So against those troubling statistics, it’s tempting to give up.
I’ve discovered that the secret is to setting habit goals and putting those at the forefront of your daily practice. Habits govern the thousands of micro-decisions that make up your day, your month and ultimately your life.
The result of doing is doing. The result of not doing is not doing. The result of trying is trying. The result of wanting is wanting. The only thing that counts is the decision to do or not do.
As you go into 2020, take the time today, before the phones start ringing, before the laundry needs to be done to map out 3 habits that you decide (not want) to make part of your daily practice.
You might be thinking, it’s already past the start of the year, and you’ve missed the opportunity to set goals. It’s too late. If that’s what you’re thinking, let me be the first to suggest that you let go of that story. That’s an arbitrary story that originated in your own mind. Today is a day, like any other. But you could choose to make today different. It could be the day you decide to establish some new habits.
You might be looking to establish a new work habit. Perhaps you will turn off your phone for two hours every day, early in the day to make sure you have time with no interruptions to get focus work done. You might decide to confine your meetings to the afternoons only and make sure you have productive time in the mornings.
You might be looking to establish a health goal. Maybe you want to get into a new sleep routine, or a new eating routine.
You might be looking to establish a health goal. Maybe you want to get into a new sleep routine, or a new eating routine.
You might have a family goal to spend more one on one time without interruptions each day. Being present with your family is a gift. I see so many people in restaurants having dinner together, but separately. They’re facing each other, but looking down onto a screen. The problem isn’t the electronics. It’s a decision to prioritize the stimulation of an electronic device and avoid the vulnerability of a face to face, eye to eye conversation. Everyone can carve out 30 minutes, or 60 minutes without an electronic device causing distractions. Ultimately it’s those personal connections that make the difference in the quality of your daily life.
If you’re experiencing stress on a daily basis, it means that you’re spending too much of your day doing things that are not in alignment with your core values. If you allow your day to get filled up with things that are not in alignment with your most closely held values, then you will be unhappy. It means that you’re living your day, your life for someone else’s values, but not yours. Maybe it’s fear of disappointment that’s driving you, maybe it’s fear of looking bad against some measure that’s only serving your ego. Whatever it is, bringing your values into alignment with your daily decisions is the secret. If you spend enough of your day feeding your true core values, you can’t possibly be unhappy.
Don’t wait for a milestone date to make the decision. Start living your life for you, authentically, purposefully, decisively.
I wish for your all the health, happiness, and success in 2020 and the coming decade. Today is just another day, maybe the day you decide to integrate new habits into your life. Go make some great things happen.
The Real Estate Espresso Podcast is your morning shot of what's new in the world of real estate investing.
Today’s book is in a completely different track from books we’ve reviewed in the past. Today’s book is called “The Body: A Guide For Occupants”. By Bill Bryson. Bill Bryson was born in Des Moines, Iowa. For twenty years he lived in England, where he worked for the Times and the Independent, and wrote for most major British and American publications.
Bill Bryson has written more than 20 books and his works have been published in multiple languages. His latest book has achieved New York Times BestSeller status. On this day, I made the decision to fall prey to the marketing and choose a book off the New York Times Best Seller list. Had the book not achieved best-seller status, I probably would not have chosen to read it.
The Body is truly a book about how to take care of this vessel that we use and abuse on a daily basis, expecting so much from it. It rarely breaks, requires surprisingly little in the way of maintenance or spare parts. You never have to change the oil or the spark plugs.
This mushy miracle we call our body is pretty much taken for granted on a daily basis. The makeup of the body is billions of cells, bacteria and elements. If you were to purchase the individual components it would cost under $20 to make a human out of raw elements. The books is written like a user’s guide, much like you might get when you purchase a new barbecue or a new car. It shows you all the different systems, how to interpret the different warning signals on the dash board, and how to check your tire pressure. Some drivers know how to use the windshield wipers, but they don’t know how to refill the washer fluid. This book goes into all the different parts of the body and give you a tour of the various systems.
The books is organized into 23 chapters with each section dealing with different part of the system. There is an entire chapter devoted to bacteria and microbes. There is an entire chapter devoted to sleep. There is a chapter devoted to nerves and pain. There is an entire chapter dedicated to the alimentary system. We swallow nearly 2,000 times a day, about once every thirty seconds, fully unaware of the 50 muscles involved in the intricate dance required to force food or drink from your throat down into the stomach.
Why do we choose to chew some foods for a long time, and yet allow others to slide down our throat with hardly any grinding contact with our teeth?
Why do some parts of our body itch, and others not? Why do you scratch your head, but not your spleen?
Even in the late 19th century, it was thought that the male or female decision was not the result of chemistry, but by external factors like diet or temperature, perhaps a woman’s mood during the first trimester of pregnancy. For a little over a century it was believed that the X and Y chromosome were responsible for choosing sex during the gestation process. In fact, it was not until 1990 that two teams in London identified the sex determining region of the Y chromosome. We had sent men to the moon and back, but still didn’t know where boys and girls came from.
How many of you know the difference between a tendon and a ligament? Do you know that the human body is made up of a roughly equal number of body cells and bacteria?
Apart from the dozens of trivia like facts about the body, perhaps useful for a party trick, I found myself appreciating the various systems hard at work, mindful of what they do because of what I do on a daily basis and despite what I do on a daily basis.
If you want to learn more about this thing we live in called a human body that we take for granted, check out The Body: “A Guide For Occupants”. By Bill Bryson.
Today is New Year’s Eve and it also marks the end of a decade. On today’s show, we’re taking a look at the decade in review.
A decade ago we were in a post-911 world where many western countries were embroiled in conflicts in Iraq and Afghanistan. There was the genocide in Syria and the collapse of the society in Venezuela and numerous other conflicts like the Ukraine have been a blemish on our humanity as a species. In this past decade we all gave up a lot of personal privacy in the name of security. There is more tracking and surveillance than at any time in human history.
This past decade was the decade of social media where it was once a peripheral distraction for early adopters and now has seen widespread adoption by almost the entire western society.
Ten years ago it was 2010, the Great Recession was in full force and real estate prices were falling in many areas of the country. Borrowing was extremely difficult and the only buyers were cash buyers. Loan defaults were making headlines on a daily basis. The next two years would see millions of foreclosures in the United States. Many of the defaults were the so-called maturity defaults where the borrower had made every single loan payment on time. But the loan came up for renewal at the end of a 5 or 7 year term and the bank then required an injection of cash in order to fix the loan to value ratio. Values had dropped so much during those two years that the banks didn’t have enough security. In many cases, properties were under water where the current value of the property was worth less than the loan. That seems like a distant memory. I remember attending real estate meetups in those days when you could buy properties for about 30% of the construction cost. I had people telling me not to invest in real estate because it was too risky.
We established the core of our “buy-on-the-line, move-the-line” strategy that proved extremely effective and scalable. By honing in on a repeatable process, I was able to build a sustainable development business.
I somehow managed to attract incredible people into my life over the past decade. I also attracted a few of the wrong people. Learning the difference and acting to eliminate those who were not a fit was the most important thing for me to do.
In this decade, I wrote two books, I learned how to communicate with the media and had hundred of media appearances and public speaking engagements. I took a leadership role in our local real estate investors organization and helped it grow to roughly double in size. Ten years ago I was listening to podcasts. These were mostly lectures and interviews with people from Silicon Valley. Little did I know that I would venture into this world only a short time later.
In the past decade, I had successful development projects, and I learned to manage success, as well as how to manage failure, delays, and setbacks. There were times when I felt stuck, like I wasn’t making progress fast enough. It was like pushing a rock uphill. I learned that persistence was the key to ultimately achieving success.
I watched my wife grow her family therapy practice from a single practitioner to having a staff of 9. I’m so proud of her.
Within my family, all of my children grew up and transitioned from being teenagers to young adults and living on their own. As a parent, I wish the best for my children. It gratifying to see them chase their dreams and at times it’s difficult to watch them make choices that I not would have made. But that’s what makes them unique. They have to live their life for themselves.
Above all, I’m committed to savouring the journey, to personal growth, and making each new day better than the one before.
As we start the new decade, let me be the first to say, hindsight may be 2020, but 2020 is in your future. Have an awesome New Year and New Decade celebration
On today’s show we are looking back on 2019. The year in retrospect. 2019 is notable as much for what happened as for what didn’t.
For me personally, it was a year of mixed results. We completed construction on two projects. We completed the refinance on two apartment buildings. We sold three assets for a good number.
We have a major assisted living project finally get into construction after months of value engineering. We were working really hard in order to achieve an acceptable construction budget.
We completed several acquisitions including securing a new development site for a high rise project.
But not everything went according to plan.
The podcast has been very successful this year on many levels. My goal from the beginning was to produce one piece of quality content each day. It didn’t matter where in the world I was located, I always found an internet connection to upload a show. If I happened to be at sea for a few days, I would upload a few shows in advance so that they would publish on schedule. I truly appreciate the feedback from you the loyal listeners. It makes me happy to know that the show is having an impact. You have downloaded more than 500,000 episodes and counting. That’s awesome and I recognize that your time is valuable.
My wife and I ran an experiment of what it would be like to live on board a boat for 3 months of the year. It was not a vacation, just a different living arrangement. There were mixed results. My work productivity definitely suffered during those months. I learned a lot about myself, and my own habits during those months in Europe. I lost about 15 pounds, managed to eat healthy, and exercised pretty much every day.
Once back at home, I struggled to establish my desired habits on a consistent basis. I wasn’t getting to the gym regularly. My daily meditation practice was not consistent throughout the year. Over the year I managed to successfully complete a number of projects. I put a few projects on the back burner, and brought laser focus to the ones that remained.
The purpose in conducting a retrospective is to extract the lessons from what happened in the past year and to express gratitude.
There are so many memories of the past year. It’s a little like mining for gold. The gold consists of those lessons that are hidden in all those memories. Like mining for gold, you need to sift through tons of rock and silt. Buried in the tailings from the mining operations are tons of things that serve no useful purpose. These are the emotional baggage that comes with emotions like regret, shame, fear. You can choose to hang onto the tailings, or you can choose to hang onto the gold.
As you think back on 2019, run your own retrospective on what work, what didn’t, and what did you learn.
Steffany Boldrini entered the world of real estate investing from a technology background in Silicon Valley. She is also the host of the Commercial Real Estate Investing From A to Z Podcast. She can be reached at www.montecarlorei.com.
On today's show I'm asking George how to set expectations with myself and stakeholders when projects are running late and I'm carrying some of my 2019 goals into 2020. Love his practical no-nonsense approach.
On today’s show we’re looking at the efforts to disrupt the traditional real estate markets.
British company Purple Bricks announced earlier this year that they are pulling out of the US market. The company is one of several fixed fee brokerage companies that have tried to penetrate and disrupt the traditional residential real estate brokerage industry. The heavy use of software, combined with minimal services was supposed to lower the cost base for consumers.
Purple Bricks charges homeowners a fixed fee for listing a property on the MLS, whether or not a property is sold.
Purple Bricks tried to differentiate by offering exclusive territories to its agents based on postal code.
Part of the argument in favour of fixed price listing services is that in a hot market when any property listed will sell, often over asking price. The listing agent isn’t doing much work to earn their commission. The buyer agent has to take their clients on multiple showings, and draft multiple offers, the majority of which are rejected. It’s the buy agent that does all the heavy lifting. In a buyer’s market, during a downturn, the roles are reversed and the listing agent does the heavy lifting.
In the traditional model, the seller pays the entire commission which is split between the buyer agent and the seller agent. The fixed fee model charges a fixed fee for listing a property. The fee paid to a buyer agent is in addition to the fee paid for the listing. The traditional brokerage commission in the US is 6% of the selling price. This is usually split between the buyer and seller agent.
In some hot Canadian markets like Toronto, listing agents have fought back against the flat fee offerings by discounting the listing service. The still pay the full 2.5% commission to the buyer agent, while discounting the sell side commission to 1.5%, or in some cases as low as 1%.
In 2018 Canada’s Comfree was purchased by UK based Purple Bricks for $51 million dollars. Under ownership of Yellow Pages, the company didn’t experience a lot of growth, as evidenced by the fact that they sold the business basically for what they paid for it two years later.
Purplebricks Group Plc‘s stock climbed after the online estate agent said it was pulling out of the U.S. The company shares had lost 75% of their value since it ventured across into the US market in September 2017. The investment in the US expansion was bleeding the company of its resources and profitability was too far off in the future for investors and the board to accept.
The stock has regained some value since the decision to focus on its more-established U.K. and Canada businesses.
Purplebricks CEO said a “significant opportunity to disrupt the U.S. market,” remains, but it would take “substantially more management time and resources than the company is able to commit at this time.” The Solihull, England-based company reported a full-year operating loss in the country of 34.1 million pounds ($42.9 million), wider than the 16.8-million pound loss a year earlier.
According to the national association of realtors, flat fee transactions accounted for about 2% of home sales in the United States in 2018.
Another California startup called Reali set up shop in San Francisco. They’re offering a flat fee listing service at just under $5,000 for the service. Paying the buyer agent’s commission, if there is a buyer agent would be on top of the flat fee.
The problem with discount brokerages is that they assume a high volume of transactions in order to pay for the overhead associated with the business. In a market downturn when sales volumes drop, the cost of carrying the fixed overhead doesn’t change. We’ve seen many large discount brokerages fail in market downturns which is why they don’t survive in my opinion.
Whitney from Phoenix asks.
How many apartment units do you think I would need to retire comfortably if I’m just relying on the monthly cash flow. I’m finding it hard to project the cash flow into the future and properly model for inflation. Any thoughts on how I can analyze and plan would be helpful.
Thanks.
Well Whitney, this is a great question. I’m not sure how many years you have until retirement. But let’s talk about the process of investing through the entire lifecycle of a property portfolio. When you’re starting out, chances are good that you’re going to be relying on other people’s money to help you buy the property. That’s true if you’re going to be using bank money and even more true if you’re going to be bringing equity investors along for the ride.
Let’s start with a simple example just to make the numbers really clear. Let’s say that your goal is to generate $10,000 a month in cash flow from real estate. If you are borrowing funds from the bank at something approaching 80% loan to value, you’re going to be producing only a small amount of cash flow each month. This might be no more than $100-$200 per month. If you’re like most people, the loan is going to be amortized over 25 years. So you’re going to be facing very low cash flow per unit for the next 25 years. That’s a long time to wait for the property to be paid off.
Let’s say the property is generating $100 a month in cash flow. You would need at least 100 units to generate that cash flow. In the real world, with reserves for long term maintenance, your actual cash flow can end up being even lower. You could need even 200 units to generate that amount of cash flow. If you have equity investors and you are sharing the ownership with partners, you then only own a fraction of the portfolio. If you own 50% of the portfolio then you would need 400 units to achieve that $100,000 a year in income. If you own 25%, that’s 800 units. I know what you’re thinking, that’s a lot of units and it’s going to take me a long time to amass that many units.
You could wait the 25 years, at the end of which you own the 200 units free and clear.
The fact is, properties that carry no debt generate a tremendous amount of cash flow. If you owned those 200 units free and clear, you could easily expect about $800 a month in positive cash flow per unit. That’s 160,000 a month in cash flow. But you’ve got to wait 25 years to get that cash flow. In the meantime, you’re barely squeezing by. Not only that, you’ve got to build a huge portfolio and manage it for 25 years in order to achieve an incredible monthly cash flow.
What if you don’t want to wait 25 years. What if you’re in your early 50’s and you only have 15 years until retirement. You’re worried that you’re running out of time. Well, there is a shortcut that can help you dramatically.
If you’re facing a 25 year amortization, you will pay off 30% of that loan balance in the first 10 year.
Let’s say that you buy one property of 50 units each year for 4 years. At the end of 4 years you own those 200 units. Let’s say that you hold them for 10 years and at the end of 10 years you decide to sell 75% of the portfolio. You’re now left with 50 units. You may have some capital gains, and you decide you will pay the capital gains tax on the properties you sold. So you may have some additional equity apart from the principal pay down on your loan. Remember, the principal pay down over those 10 years was paid out of after-tax income, so the equity you accumulated in principal pay down is already in after-tax dollars.
So after 10 years you decide to take the cash proceeds from the sale of the 150 units and fully pay off the remaining loan on the 50 units that you are still holding. Now you have 50 units that you hold free and clear.
Those 50 units will generate 40,000 a month in positive cash flow. That’s more than enough to meet your retirement objectives.
Thank you to all the loyal listeners. Producing a show each day has turned into a labor of love for me. I truly appreciate the letters and emails that I receive from you. I’d like to read a message I received earlier this week from Dr. Kevin Hsu in NYC. He writes,
Dear Victor.
My main reason to contact you was just to say thanks for sharing your insights. I just found your podcast in the past couple weeks.
I appreciate your message about the 5 principles and there is a correlation with my field. My Patients’ compliance is affected by how much trust, and relationship there is. The idea of never “selling” my patients any procedure is dear to my heart. Treat them how I treat my mom. If I educate them properly they will come to me when they decide they need the procedure.
After reading Rich Dad Poor Dad maybe 15 yrs ago during residency. I admit I didn’t really put it into practice. I only recently started listening again after a friend approached me about a syndication. Since I didn’t know much about it I wanted to educate myself. First place I went was Kiyosaki’s podcast/YouTube. First one I heard was your interview on Assisted living. Then went to your Real Estate Espresso podcast and heard your interview with Josh McCallen on work family balance. I thought it was so relevant and positive. Thankfully I have a wife who is practical and keeps me grounded. :)
Then I listened to your interview with Dr. Jeff Anzelone, and another light bulb went off in my head. I thought Wow! Jeff is describing what I’be been through. Med school loans. Pay them off and now what? So I contacted him and we had a great phone chat last week.
In summary as I embark on a rejuvenation to learning principles of cash flow, just wanted to say I can’t thank you enough for your teaching, and being an example of a businessman who is a family man. I’m also glad I didn’t just google “real estate” or something and end up on some random scammer site but rather got plugged into podcasts of trustworthy investors like yourself. Thank you so much and Merry Christmas to you and your family!
Thank you Kevin for the kind words and it makes me happy to know that the show is having an impact. Congratulations on continuing your own personal and professional growth. I know so many professionals who worked really hard in University, and then once they got into the workforce, they stopped learning.
I truly believe that personal growth is one of those fundamental daily needs like food, water, love, and oxygen.
As business people, as entrepreneurs, there are only a few genuine places where these conversations are happening. I’m glad that the podcast is starting a conversation. As much as the podcast exists online, the real world is offline.
Finding like minded people is truly where the journey starts for me.
I like that you didn’t consume the podcast passively. You took action and reached out to one of my guests. Very few people do that. It’s easy to think of a book as an inanimate object, or a youtube video as a piece of content. A podcast is just a show.
I don’t think of it that way. In fact, as I look at the bookshelf in my office, it turns out that 3/4 of the books on the shelf, I know the author personally. That’s pretty unusual. Many of the books are signed by the author. Even though I have read the books, I can’t seem to part with them. The signature on the inside jacket represents a personal connection with the author.
There is an endless supply of learning. I spent this morning reading and incorporating the learning into myself. It’s amazing how these little steps, one by one, little by little, add up over an extended period of time to move you. Darren Hardy talks about this in his book the Compound Effect.
On today’s show we’re talking about value engineering your finished product. It’s hard to believe that a little bit of software makes it possible to save a bunch of money in the communications infrastructure for your projects.
Today’s property has so many connections. There is water, sewer, electricity, telephone, Cable TV, internet, natural gas.
When you are supplying services to a multi-family apartment or assisted living project, every single one of these services costs money. In fact, it’s common to have two water mains, one for the household use, and a second higher capacity water supply for the sprinkler system.
These days, a modern building will be pre-wired with cable for telephone, internet, and Cable TV. It might even be pre-wired for the security system and for surveillance security cameras.
We just recently went through an exercise where our general contractor missed a critical item in the scope of work. They agreed to absorb the cost of the error. But nevertheless it became clear that the designers had specified a lot of wiring in the buildings.
We decided to undertake a significant cost reduction in the wiring of the project in order to save money. But the real question is whether we would experience any loss of capability or quality. We’re not willing to compromise on the quality of service. At the end of the day, the residents want their service and they want it to work reliably with great performance. The want to be able to make phone calls, watch TV, and access any internet based service. How that’s accomplished is immaterial.
Traditionally all three of those services had their own separate infrastructure. Today, the technology makes it possible to put all three services on top of the basic internet service.
It was an easy decision to eliminate the legacy telephone wiring. These days, even in the event of a power outage, the need for a hard wired telephone is virtually non-existent. So many people have wireless cellular phones that a hardwired phone is no longer needed.
The second cost saving comes from eliminating the Cable TV wiring. There is no need for Cable TV. Virtually every market has a TV service provider offering a digital set top box that can be connected via Ethernet or WiFi.
Now I know what you’re thinking. A wired connection is going to be a better connection than a wireless connection. WiFi connections are prone to interference.
Wireless technology has changed dramatically over the past decade. The older legacy WiFi technology used the 2.4 GHz spectrum. That region of the airwaves is unlicensed and you can literally have all kinds of interference showing up in that radio band. You can have garage door openers, microwave ovens, cordless telephones, and yes, lots of other WiFi access points. If you’re in a sense urban environment like NYC, it’s common to see the radio signal of 40-50 other wireless networks. All that interference can make for a very unreliable connection.
The newer wireless technology uses the 5 GHz spectrum. As you go up in frequency, the shorter the distance the signal will carry. That’s both good and bad. It’s good because it means that you will experience less interference. It also means that your own radio signal won’t go as far. You may be required to install multiple wireless access points in order to get decent wireless coverage within your desired coverage area. As an example, we’ve designed a system that will use five access points in order to provide coverage for a 9,000 square foot home. The reason for having five access points is to have each one operate in a difference frequency band within the 5GHz spectrum. This means that each region of the home will be very close to the base station.
We've replaced the legacy wiring with bundles of 24 optical fibers per building. This ensures expansion capacity for decades to come.
On today’s show we are talking about a proposed change to the accredited investor definition by the SEC. The effect of the change would be to make more private investment options available to individual investors who have a level of financial education and sophistication.
The purpose of today’s show is to open the topic for you to investigate further. I’m not a lawyer, and I’m definitely not a securities lawyer and my role is not to provide legal advice of any kind.
The proposal would expand the number of people allowed to invest in private securities offerings.
Currently, people who may invest in those markets, known as accredited investors, must have the financial resources to withstand big losses: either $1 million in net assets, not counting their home, or at least $200,000 in annual income.
The SEC proposal, which was approved by a vote of 3-2, would allow investors with certain qualifications, such as an entry-level stockbroker’s license, to sidestep the income and wealth thresholds
The SEC’s rules which were enacted in 1933 were born out of a Depression-era mandate to protect Main Street investors from the vagaries of financial markets. If you go back to the 1920’s, the irrational exuberance of the markets was littered with fraudulent public offerings. Companies with no underlying business issued public offerings and cheated investors out of their life savings.
The SEC estimates that $2.9 trillion was raised through private channels in 2018, versus $1.4 trillion in registered offerings.
The fact is, the vast majority of private offerings today that are filed with the SEC are under Regulation D, part 506. Under a 506 offering, there is 506B which allows up to 35 non-accredited investors and an unlimited number of accredited investors. However, under 506B, solicitation is not permitted. Under 506c, offerings are only open to accredited investors who must demonstrate that they meet the accredited investor criteria. Offerings under 506c are permitted to be advertised and do not require the pre-existing relationship that is part of the 506b rules.
The proposal is outlined in a 153 page document that you can download and read from the SEC website.
There is also a mechanism and a 60 day period for collecting comments from the public, and this too can be done on the SEC website. The methods for submitting comments are outlined on the second page of the SEC proposal.
Just in case you’re thinking that 153 pages is a lot to wade through, I suppose it is. But on each page, there are substantial footnotes. Some pages consist of about 25% actual text and 75% footnotes. Unless you intend to go through all the footnotes and references, it’s actually not too bad a document to read through.
The proposal includes Adding “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Advisers Act;
The proposal also includes Add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors;
If and when these changes might be implemented is anybody’s guess. They could be amended between now and then. Even once enacted in law, they could be further refined by policies governing the implementation of the new rules.
In the coming years, we can look forward to the possibility of an expanded definition for accredited investor that could make a larger number of investors eligible for the accredited investor definition. That, in turn could make the 506c offering an even more effective tool for syndicators and project sponsors to raise capital for real estate projects and other business ventures.
Owen Barrett from San Diego is a specialist in energy management. On today's show we're talking about the economics of solar power for multi-family apartment and commercial real estate projects. He can be reached at valueaddsolar.com.
I take several days each year to get clear on my goals and to set quarterly goals. This is such a vital exercise. On today's show I'm talking with my friend Rich Danby about goal setting in front of a live studio audience.
This question comes from Kyle.
I am considering a new construction MF project. My business partner is a home builder and general contractor. Through my research on MF syndication it sounds like the majority of these deals follow the same cycle:
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Value Add Building
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Refinance once units are rehabbed to market value
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Payback investors with refi money
When it comes to new construction how does your deal cycle compare?
Thank you Kyle for a great question.
In many ways you are correct in drawing a parallel between development and a value add deal. Conceptually, they are exactly the same. But where they differ is in the details, and its in the numerous details that the traps can lie.
When it comes to development, there are just a lot of moving parts and any one of them can trip you up.
Like a value add, the goal is the same, to add value, in fact to create enough value that you can refinance the project and recover your initial investment for a long term hold with little to no cash tied up in the project.
In your classic value add project, you perform light remodeling, you add washers and dryers to the apartments, you improve the amenities, and you increase the rent accordingly.
When you move into the world of development, there are just so many moving parts. You may have to hire the engineers to design your site and prove to the city that you are not adding more runoff to the stormwater management system. You may be required to perform a traffic study to prove the existing road infrastructure can handle the increase in traffic. You may have to perform a shadow study to prove that your building won’t cast a shadow on the neighbours property. You will need to make sure the water, sewer, and utility infrastructure has the capacity to handle your project.
Will you be limited by storm water management? Will you be limited by soil stability and the strength of the soil to support the weight of the building? Will the city allow you to get a curb cut to access the property in your desired location?
Will the proximity to other properties limit your choice of building materials? Will you be required to use fire rated doors and windows?
Unless you know the answers to these questions and more, you can be facing substantial cost increases that will completely catch you by surprise.
Apart from quite a few details that can trip you up, it’s exactly the same as a value add project.
Having people on your team who know how to navigate these complexities is key to having a successful development project.
The second area of risk is in construction. Hiring an established general contractor who does large projects is essential. If you’re hiring the smaller GC’s, the ones that I call “2 guys and pickup truck”, your risk of having corners cut and failing inspections goes way up. You might pay a tiny bit more for a more established contractor, but your risk of cost over-runs goes way down. It’s also important to hire a GC who has experience in multi-family. The subcontractors who work on multi-family are completely different. The project management of the subcontractors is completely different from other forms of construction. We don’t have time to go into all those details on today’s show, but you must hire a GC who specializes in multi-family construction.
Finally, you want to hire an attorney to negotiate your construction contract, but not just any attorney. You want someone who has experience negotiating and litigating these types of contracts. These contracts can be filled with landmines and you need a specialist who can spot and correct the risks.
I’m coming to you live on location from Key Biscayne Florida.
One of the most beautiful places to visit in the US are the Florida Keys. The waterfront homes in the keys are a dream to me. Many of them are built up on stilts to protect them from the storm surge of the occasional hurricane.
This strip of islands stretches all the way from Miami to Key West. From the very first Key, called Virginia key, down the Rickenbacker causeway towards Key Biscayne. Further south, Key Largo. The entire drive through the keys stretches for 118 miles or about 190 km.
The state has a rule that the island chain has to be able to get everyone out 24 hours before a hurricane hits. And there’s just one road out. So there’s a limit to how many people are allowed to live in the Keys.
Hurricane Irma in 2017 did considerable damage to properties on the keys. Overall in Monroe County, 27,649 homes experienced some degree of damage, including 1,179 homes being destroyed, 2,977 homes receiving major damage, and 5,361 suffering minor damage.
Starting in 2023, no new building permits will be issued in the Florida Keys, a stipulation of a 1970s state mandate aimed at controlling development in the environmentally sensitive archipelago and ensuring timely evacuation of tourists and residents in the path of hurricanes.
Because the Keys were designated an area of critical state concern, development there is regulated by a law called the Rate of Growth Ordinance, known as ROGO, which requires property owners to go through a myriad of steps that can take decades before they can build.
Many of the thousands of people who have not built on their land haven’t done so because they are mired in the ROGO process.
The question is, will the renovation of an existing property be allowed? As long as the density is not being increased, will the county allow an existing property to be redeveloped, to be improved?
This has not been made clear.
As a real estate investor, this kind of situation is precisely what I look for. I love to see situations where there is a supply demand imbalance. In this case, there is a constraint being applied on the supply side. When these types of conditions exist, the downside risk to property value is reduced. The demand for homes in the keys appears robust.
The Keys have already survived a devastating category 4 storm. That has not deterred people from wanting to live there, from owning their own piece of paradise.
On today’s show we’re talking about what’s happening in France.
I spend several months a year in France and I used to manage a team of 110 people in France for several years. I understand a little about French culture, and it’s very different than we’re accustomed to in North America. Unlike in the US and Canada, the business environment in France is highly dominated by labour unions. In fact, any enterprise having more than 50 employees must have a works council. That is a union. Unions in France are incredibly militant. When I was managing a team of microprocessor designers, professional electrical engineers, I was surprised to see them on strike one day, picketing in front of the building and being interviewed by the evening news TV show.
The retirement age in France is 62. That compares with 65 in North America, and 67 in some other European countries.
The math is pretty simple. Demographics says that entitlement programs in most countries are under-funded when you fast forward only a few years into the future.
Mr. Macron wants to consolidate the country’s 42 different pension plans—each with varying retirement ages and benefits—into one universal system. Many civil servants, including teachers and rail workers, worry they could lose some of the advantages they enjoy under the current system.
The contentious proposal includes a system of bonuses and penalties to incentivize people to work until age 64, two years beyond the legal age of retirement of 62 years. Unions reacted by calling on workers to hit the streets. Workers are taking to the streets in droves virtually paralyzing the country. The latest estimate from the French Interior Ministry is that over 800,000 people participated directly in the protests. Even towns like Toulouse that have a strong manufacturing base with companies like Airbus manufacturing aircraft are seeing tens of thousands of protesters clogging the streets, bridges, and central squares. The largest protest in Paris was estimated at 65,000 people and turned violent at times.
The French are incredibly militant when it comes to protecting their social programs, regardless whether the math adds up or not. There is a feeling that somebody will take care of it. If I have a pension that’s been promised to me, then it’s not my problem. Somebody owes me my money. There is a sense of entitlement that is so deeply ingrained in the culture that anything that threatens any aspect of the an entitlement program is enough to bring people out into the streets in force.
But you need to understand why this is the case. The work environment in France does not favour entrepreneurship. If you’re an employee in France, if you work for a company for one year plus one day, you are entitled to two years of severance if they fire you.
In an environment where it’s very difficult to fire people, its also very difficult for people to get hired. So it has the effect of reducing mobility. When someone has a job, has an income stream, they become incredibly protective of it because their choices are perceived to be extremely limited. The loss of job, the loss of benefits, the loss of even one day of vacation per year is enough to trigger protests.
But just in case you think this is a France only issue, don’t be fooled. We have seen organized labour movements have a larger voice in the US than at any time since the 1980’s. We’ve seen more strikes by teachers, auto workers, and hotel workers than in decades. Public sentiment is much more favourable toward unions where they have a 64% favourable view in eye of the public according to a poll by the Gallup organization. That’s the highest it’s been in half a century.
I’ve long maintained that if you want to see your future, have a look at what is happening in Europe.
On today’s show we’re talking about the war on short term rentals. Communities around North America have been establishing new regulations designed to reduce the number and scope of short term rentals in their communities. Many communities are facing a shortage of affordable housing and the perception exists that homes are being removed from the rental market and put into the more lucrative short term rental market, putting an even greater strain on housing affordability.
By making these investment properties illegal, the hope is that many of these rental properties would be returned to the long term rental market, or sold outright into the owner occupied market.
A widely accepted definition of a short term rental is one where you rent to the same person for less than 30 days.
Many cities have put restrictions on short term rentals and limited them to owner occupied properties. So if you have a spare bedroom in your principal residence, you can rent it out.
Some cities have introduced licensing as a way of regulating the industry and keeping tabs on which properties are in the short term rental market. On today’s show we’re looking at some of the activity across several cities in North America.
The City of Vancouver says its efforts to regulate short-term rental units and bring more long-term rental options back into the pricey housing market are working. Active short-term listings are down to around 5,000, compared to more than 6,600 before the regulations took full effect last September, the city said. More than 2,000 unauthorized units that were taken offline have not been re-listed.
In Austin, whether renting out an entire home, an apartment or a bedroom for a single day or all 365 days of the year, local law requires the owner to register and license the property as a short-term rental with the city. The city counts 2,500 licensed units throughout the city; however, a third-party firm working with the city has reported over 10,000 properties advertising as a short-term rentals.
The City of Nashville is undergoing tremendous growth with about 120 people a day moving into the city. This is putting a strain on housing supply and on housing affordability. They implement new regulations at the city level, which were then subsequently blocked at the state level.
One year after state lawmakers blocked the city’s plan to phase out non-owner-occupied short-term rentals by 2021, Metro Nashville officials are revisiting not only where rentals can operate through their zoning ordinance, but they also increased the annual permit fee by more than 600%.
In San Francisco, new rules governing short term rentals were implemented a couple of years ago.
Any home rented out in San Francisco for less than 30 days must be registered with the city, and someone must live there at least 275 nights per year. An NBC News report suggests that about 45 percent of short-term rental applications are now being denied for what appear to be false residency claims, in which the applicants falsely state they are the “primary resident” of the home, which is a requirement for all short-term rentals.
If you’re noticing a trend here, that’s no accident. Cities around North America are actively trying to remove short term rentals from residential zones, and they’re making sure that they don’t lose hotel tax in the process. If you’re contemplating making an investment in short term rentals, you definitely want to know that the city has completed their regulatory process. If not, you’re taking a huge risk of the rules changing after you’ve made a significant investment.
On today’s show we’re talking about opinions. The nice part about opinions is that there is no shortage of them. The world is unlikely to run out of them any time soon. Last week we reported on the podcast that Fannie Mae had published their housing confidence metrics showing a very high consumer confidence index as it relates to housing.
A new report published by CCN paints a far more pessimistic view of the market. The report referenced new guidance from Home Depot which has lowered its guidance on both revenue and earnings for 2020. They cite several factors for the lower guidance. There is an acute shortage of homes at the entry level of the market. Homes in this category are those priced below $200,000. The housing market is also experiencing a shortage of mid-tier homes, that is, those priced between $200,000 and $750,000.
The author draws the conclusions that the shortage of supply combined with a possible future increase in interest rates could cause the housing market bubble to burst in 2020.
The author went on to say, “In all, the U.S. housing market is suffering from a lack of supply. This could prove to be its undoing next year as buyers are likely to be priced out of the market if mortgage rates continue to tick up. Americans are already under duress, as evident from four straight months of declining consumer confidence.”
When I read things like this, I sometimes find it hard to make sense of the logic. So I read the article 4 times. Each time, I tried to follow the chain of logic that would lead to the outcome the author is claiming.
Yes, the consumer confidence has fallen for four straight months. It fell from a high of 135 to 125.5. In the past month the index fell from 126.1 to 125.5. A measure of 100 is considered neutral. While it is true that consumer confidence has fallen slightly, it is still considered well into positive territory and is consistent with what the folks at Fannie Mae reported last week.
The author says “Consumer confidence is also low” which is an outright misrepresentation of the data. I’m sorry, consumer confidence is not low, it has dipped slightly, but remains incredibly high, well above historic averages. For contrast, consumer confidence hit a low mark of 60 back in 2013 and didn’t reach 100 until mid-way through 2016. The author of the report seems stuck on pushing a particular narrative and is quoting numbers that actually contradict his conclusions. It’s almost like they’re asking the reader not be confused by the facts.
When there is a shortage of supply and an excess of demand, it has the effect of pushing prices up. That’s exactly what we’ve seen. The shortage is driven by population growth and by the millennial generation finally getting into home ownership. The number of new homes constructed is not keeping pace with population growth.
Where we are starting to see bargains is in the upper segment of the market. These larger homes are selling at a relative discount to the market on a per square foot basis. We call this price compression.
Unless the demand evaporates, we can expect continued upward pressure on housing prices at the bottom of the market. We are seeing prices fall in areas where people are moving out.
So did Home Depot lower its guidance? What does it really mean, and what is driving it? Could it be that a smaller number of homes on the market would in fact reduce the revenue at Home Depot as the author suggests? I read the entire transcript of their investor conference. The author has it wrong.
In my view the author of the article has an agenda. They’re trying to paint a picture that the real estate markets have some downside risk. I get that. I have no problem with having that point of view. If the author wanted to hi light the downside risks, there’s ample data they can find to make that argument. There’s no need to make stuff up.
On today's show, I'm talking with George about how to maintain liquidity in your business. Having cash on hand is vital for dealing with the unexpected. I love George's practical wisdom and common sense approach.
Josh McCallen is the CEO of Renault Winery and specializes in redevelopment of distressed resort properties. On today's show we talk about what it means to be a parent and integral to the family when the business life of an entrepreneur can pull you in many other directions. Join me for a very intimate and vulnerable conversation.
Today is another AMA episode,
Hayden from Atlanta asks:
I received an appraisal which in my opinion does not reflect an accurate picture of the property value. The comparable properties listed in the report include agricultural land with zero entitlements, versus my property which already is zoned for development, is fully paved and has 46,000 SF of buildings on it. The appraiser ultimately ignored the comparable properties and used an income multiple approach. But the cap rate he chose was a national average which does not reflect the local market conditions in South Florida. I understand that the appraisal process must be independent so that the bank can have an objective view of valuation. But this one is out to lunch. What do you recommend?
Hayden,
This is a great question. Unfortunately, this type of situation is far more common than you might think. Fortunately, it sounds like the errors are pretty grave. The most difficult situation to correct is the appraisal that’s only a few percentage points off. This one sounds like it’s way off.
You are completely correct in saying that the appraisal must be independent and you can’t be seen as directing or otherwise tainting the appraisal.
You want to keep the communication to the appraiser through the lender and under no circumstances should you communicate directly with the appraiser.
If you can get a hold of a market study for your submarket, you may be able to ask the lender to direct the appraiser to narrow their radius and use local data and not national averages which are not meaningful. A third party market study should align with the appraisal quite closely. By showing the lender that the market study and the appraisal are far apart, you can likely convince the lender that there is a problem with the appraisal. The lender can have a dialog with the appraiser, but you can’t.
I had a recent situation earlier this year where just like in your situation, the appraiser used five properties in their comparison. Three of the properties were not good comps at all and like you, compared land that was zoned agricultural with land that was zoned for development. When we replaced the bad comps with relevant comps, the picture changed considerably.
Finally, you can research who are the best commercial appraisers in the submarket and provide a list of three to the bank, asking them to choose a new appraiser. This will requires paying for a new appraisal, and it could delay the closing date.
If you need to delay the closing, you can often negotiate an extension with the seller by offering them an increase in the earnest money deposit, along with a daily interest charge for every day that the closing is delayed past the original closing date. The purpose of the daily interest is to cover the holding cost for the seller so that they don’t incur any losses as a result of the delay in closing. It shows the seller that you’re serious about closing and you should let them know that the cause of the delay was out of your hands.
These types of situations are incredibly common and have to be handled very delicately. Sometimes a bad appraisal can taint a loan approval. I’ve had situations in the past when a bad appraisal meant abandoning a lender and starting fresh to get a new loan approval from a brand new lender and a completely new appraisal.
On today’s show we’re talking about home buyer sentiment. The folks at Fannie Mae have some of the best research in the country and last week they published their The Home Purchase Sentiment Index® (HPSI). It is a composite index designed to track consumers’ housing-related attitudes, intentions, and perceptions, using the net results of six questions from the National Housing Survey® (NHS).
The index increased 2.7 points in November to 91.5, reversing the decline from last month and re-approaching the survey high set in August. Three of the six HPSI components increased month over month, including large increases in the percentage of Americans who believe it’s a good time to buy and that home prices will go up over the next 12 months.
The data guessed correctly that the Federal reserve would not change rates and that’s exactly what they did. The Fed also signalled that rates would remain steady for some time to come.
The analysis of the data mirrors what I’m seeing first hand in several markets. We are seeing price increases at the entry level in the market. The lower interest rates are creating conditions that enable first time buyers to bid up the price at the entry level. There is an acute shortage of housing at the entry level and many first time buyers fear being frozen out of the market.
This is creating frothy conditions at the affordable end of the market, even if prices at the top of the market are flat and in some cases slightly down.
So what does this mean for real estate investors?
It means that we can expect some movement out of rentals into starter homes for first time buyers. Those leaving rental accommodations will be primarily millennials who are getting married, having children, or otherwise looking to buy a first home.
We are seeing high variability in labor costs from market to market depending on the supply demand balance of construction labor. This translates directly into construction cost. Even a few percentage points difference in construction cost can affect the price of starter homes and the financial viability of new development projects.
The result is that more and more developers are building smaller homes in order to maintain affordability, and they are focusing more on density. This means more townhouses, more stacked townhouses, and more condos.
In higher priced markets, a starter home is not a detached home, but a condo.
The populations of both the US and Canada are growing. We expect about 0.9% population growth in the US this coming year and about 1.6% in Canada. That translates into demand from an additional 2.9M people in the US and about 438,000 in Canada.
New construction in the US is expected to maintain an annual rate of about 1.32M units. That’s barely enough to keep pace with the population growth. When developers In areas that have excess demand, we can clearly expect prices to rise.
Areas that are losing population, like the traditional rust belt addresses can expect prices to remain flat or increase modestly.
Sunbelt addresses where population growth, combined with migration inside the country are seeing very strong demand, in excess of supply. These are the market conditions that I find interesting as a real estate investor.
The same short list of markets keep coming up. This includes Nashville, Atlanta, Dallas, Houston, Charlotte, Raleigh Durham, Austin, Orlando, to name just a few.
If you can find opportunities to acquire development land in the path of progress in any of these markets, you can often create a tremendous amount of value.
Remember, it’s population growth that drives demand, and jobs that drive the ability to pay.
Today’s episode comes to you thanks to Wayne in Austin Texas. His keen eye noticed that there might be some changes coming to the building code in Portland Oregon. In reference to the new initiative in Portland, Wayne asks, “Victor, will this kill commercial and residential investment in Portland?”
Portland is not immune to a growing homelessness problem. Like San Francisco, Los Angles, Miami, New York, and Seattle, Portland is overrun with people sleeping in public spaces and on private property, many of whom suffer from drug addiction and mental illness.
It’s a large and growing social problem that many of these people who desperately need help are not getting the help that they need.
The state’s one mental hospital, Dammasch, which opened in the 1960’s was overcrowded and closed its doors in 1995, and released its patients with no follow up care, turning hundreds out on to the streets, ill-equipped to handle living on their own.
Portland has the dubious honour of having the worst homelessness problem in the nation.
The city estimates its homeless population in excess of 14,000.
Now the City’s Planning and Sustainability Commission has accepted language into its recommendation to City council that would have new construction be required to incorporate mandatory “rest spaces” where the homeless can get safe shelter.
Every city has the right to have their design guidelines. These define the character of the city. The preamble for the design guideline says that proposals that meet all the applicable guidelines will be approved, and those that don’t will be denied. The fact is, the design guidelines contain terms that are in fact at odds. Design is always a tradeoff of conflicting requirements. An absolute statement that says all guidelines must be met is a mathematical impossibility. In practice, it means that the approval will be at the discretion of the review board.
The commission which writes and enforces the city’s building codes, approved a change to building guidelines last month that would require new construction to feature “opportunities to rest and be welcoming” for those who do not number among that building’s residents or customers. This does not apply to all new construction. It applies only to projects of a certain size. It applies for buildings taller than 55 feet, or more than 40,000 SF in buildable area.
A review of the minutes of the meeting shows the motion from Commissioner Magnera where he says that wants to propose a change to the language to say that spaces should “Provide opportunities to rest and be welcome, pause, sit, and interact”.
During the exchange in the meeting, Chair Schultz said: “I’m supportive but am a little concerned about what it means to “rest”... does this relate to sitting or sleeping or both?“
Commission members were asked for clarification on what the new recommendation meant. All of them refused to clarify the language.
After the meeting, the chair of the commission, did offer a written statement. He said, “how private development can provide places for people to feel welcome and safe, as well as allow space for people to rest, especially in light of our current housing shortage.”
Design guidelines like these are not the worst we’ve seen. California has become much more onerous by requiring solar power generation for all new construction, they’ve outlawed gas stoves for new construction, and they are requiring a long list of additional items to comply with the new regulations. The short answer is yes, this increase in requirements will deter some new construction. Will it eliminate it? No, but it’s becoming death by 1,000 paper cuts. It’s no surprise that Texas is leading the nation’s growth and is not burdened by many of these initiatives.
On today’s show we’re talking about the office real estate market. And no, we’re not talking about WeWork. I had the opportunity to take over a co-working space that had been operated by an accountant. they had the master lease for about a 7,000 square foot office space that had been divided up into small offices ranging in size from 100 square feet up to about 800 square feet. There were a total of 25 separate spaces, of which all but three were leased. The accountant who owned the accounting firm died, and the wife of the accountant didn’t want to manage the real estate. In fact she was also in the process of trying to sell the accounting firm. The owner of the building was a major national landlord with billions in assets. The offices were renting for $500 to $800 per month for the smaller ones capable of housing one to two professionals. The accounting firm had fallen behind on its rent payments to the building owner was in default under the terms of the lease. The owner had since engaged with another company in the co-working space who ran the floor for a year and they too had fallen behind on their lease payments. The building owner had finally taken over operation of the floor, but in reality didn’t want to be dealing with 25 individual tenants. I already was running another small shared office rental business and the building approached me to take over the running of this 7,000 SF space. I reviewed the financials and the master lease agreement. The tenants were paying below market rents. The expenses were pretty simple to analyze. There was the rent for the entire floor, a few miscellaneous expenses for the photocopier and printer, insurance, and the salary for the receptionist for the floor. The two major expenses were rent at $14 per SF NNN, about $28/SF gross, and the receptionist. The rent wasn’t a bargain, but it was certainly quite fair for a modern B-Class office building. As the business was currently operating, it would break even at 95% occupancy and would generate about $40,000 a year at 100% occupancy. I might be able to raise the rents over time, but it wasn’t clear how many tenants would seek alternatives if I increased the rent. The business would generate a profit if I eliminated the receptionist, but then there would be nobody apart from myself actually working inside the business. That was not something I was prepared to do. It was an inexpensive way to expand in the co-working business. I would inherit all the furniture, all the equipment. It was an instant revenue stream. As is, the business represented too much risk. There was no way I would sign a 5 year lease complete with personal guarantees when I had no guarantee that the tenants would stay with me at a higher monthly rate. So I decided to decline the opportunity. In the latest co-working news, WeWork competitor RocketSpace is pulling the plug on its operations. RocketSpace is a San Francisco-based coworking startup founded in 2011. If RocketSpace files for bankruptcy, it will join another San Francisco coworking company called Sandbox Suites, which filed for Chapter 11 bankruptcy reorganization in April. The prices at Sandbox are pretty attractive if you’re a tenant. An office with two desks costs $1,000 per month. That includes 10 hours of free use of a meeting room each month. I’m talking about an office in San Francisco or in Silicon Valley. That’s incredibly cheap. The problem with these co-working businesses is that the labor costs are high for the number of tenants. A co-working space doesn’t really function properly with zero staff, and the front office staff doesn’t offer enough perceived value for the tenants that the customers would be willing to pay a premium for it. None of these companies have a profitable business model. I couldn’t even make the numbers work with zero capital investment, taking over an existing business.
On today’s show we are talking about elementary school arithmetic. It seems to me that elected officials should be able to perform third or fourth grade arithmetic. Multiplication and division would be a bonus, but we will settle for addition and subtraction.
Amazon announced last week that it had leased about 335,000 SF of office space in the Hudson Yards project on Manhattan’s west side. Hudson Yards is the project that was built on the old rail yards that bordered the shipping piers along the Hudson River. That was back in the day when shipping came directly into Manhattan. Today, most shipping commerce comes into much larger container ship terminals in Newark NJ. The Hudson Yards project was the brainchild of the Trump Organization and was more than 20 years in the making. The space will house some 1,500 employees. This despite the earlier Amazon announcement to pull out of locating the so called HQ2, satellite headquarters in Long Island City.
The original plan would have brought 25,000 direct jobs and nearly double that number in pull-through employment.
In response to the Amazon announcement, senator Mike Gianaris issued a press release on Friday declaring victory over Amazon. He said,
“Amazon is coming to New York, just as they always planned. Fortunately, we dodged a $3 billion bullet by not agreeing to their subsidy shakedown earlier this year. Now, we must enact reforms to our economic development programs to ensure no company can seek to take advantage of the public again.”
Since Amazon’s decision to leave New York in February, Senator Gianaris introduced legislation to ban secrecy clauses in economic development agreements, de-link state opportunity zone tax breaks from the federal tax code.
I don’t have a political axe to grind in any of this. I do have a strong opinion that arithmetic has no political affiliation. One plus one equals two. 25,000 jobs is a lot larger than 1,500.
A tax reduction is not the same as a government grant. In order for Amazon to benefit from the reduction, they would have to pay taxes, more taxes than NYC and NY state are collecting today.
The addition of 1,500 jobs is positive. But it’s really a loss of 23,500 jobs, instead of a loss of 25,000 jobs. The loss of 25,000 jobs was entirely the work of a few politicians actively doing the unfathomable.
New York has lost considerable population and considerable tax revenue in the past few years. One million people have fled New York City and the tri-state area—which encompasses New Jersey, Connecticut and Long Island—in the last nine years. According to Bloomberg, almost 300 people are moving out of the area per day.
When politicians make patently false statements in order to aid their narrative, they erode the political system as a whole.
Perhaps senator Gianaris would not mind a system whereby his income would be reduced every time he utters falsehoods. He probably would declare that consequence to be a victory too. He could use the same math that argued Amazon was fleecing the taxpayers of NY.
Reduction of revenue for the state of NY and NYC is hard for the city to tolerate. NYC has gone through considerable resurgence since the 1970’s and 1980’s when the city was on the verge of bankruptcy. They could not repair the crumbling infrastructure. The had 1.3M people on welfare at that time. After Mayor Giuliani took office, that number was reduced to 500,000. Nearly 800,000 people went back to work under Mayor Giuliani.
The fact is that business leaders know how to do math. The issue is not just with Amazon. NY has sent a signal to the business community that it is no longer open for business. When the most basic arithmetic is distorted to reflect a particular narrative, every business leader can see it for what it is.
Kathy Fettke is the host of the Real Wealth Podcast, and co-CEO of The Real Wealth Network. On today's show we're talking about market dynamics and how to position the portfolio for the current and next economic cycle.
Dr. Jeff Anzalone specializes in helping doctors and dentists navigate the complex world of main street investments. In this episode we discuss some of the challenges unique to these investors making good investment decisions.
On today’s show we’re talking about the complexity of agreements with contradictory language.
One of the realities of the real estate investment business is the need to pay close attention to all of your contracts. There are construction contracts, lending contracts, purchase contracts, letters of intent, employment contracts, insurance contracts. Contracts, contracts, contracts.
It’s often the case that contracts are put together using a template that has standard terms, and then the contract is modified by terms in attachments, or in some cases subject to the terms of other agreements that are referenced in separate documents.
A simple example of this is the standard AIA construction contract. This standard form is used extensively in the construction industry and is widely accepted as fair to both owners and general contractors.
But even a straightforward item like a construction contract is far from straightforward. There are the general terms referenced in the AIA 101 template. These terms are then modified by the AIA 201 contract. These documents then refer to the architectural drawings. The architectural drawings then refer to the architectural specifications. The AIA documents also refer to the general contractor’s schedule, and the General Contractor’s Basis of Estimate document.
It’s common to require five documents open at once to get a complete picture of what the document is actually saying.
It’s pretty common for the base contract to say that it is subject to the terms of the schedules and attachments. That means that if the base contract says the building is going to be painted blue and the architectural drawings say it is to be painted brown, then the drawings will take precedence. Where it really gets complex is if one of the other attachments says the building is to be painted yellow. Which of the contradictory attachments will apply? It’s not immediately clear in all cases. You might read the contract one way, and the builder might read the contract another way.
I’ve heard many investors say that contracts are not their strong suit and they rely upon the advice of their legal counsel to keep them out of trouble.
That’s all fine up to a point. The lawyer will probably do a good job of keeping you protected against the risks and pitfalls of legal challenges to your contract.
What they can’t possibly know is whether you want the building painted blue, brown or yellow. Only you know that. You can read the architectural drawings and see that there is an Ethernet connection in every room on the drawing. But there may be a line item in the basis of estimate that limits the number of Ethernet connections in the building. These need to be taken together. The complexity of not seeing the entire picture in a single place adds considerable risk of misunderstanding.
Legal documents are not drafted with hyperlinks to enable quick and easy reference to items that may affect the meaning.
So how do you make sense of this?
Unfortunately, there’s no shortcut, no easy button. It requires all parties of the contract to read and understand what the contract says.
Reading and understanding the contracts is incredibly detailed and painstaking work. We have a recently completed building design where the specification document alone that clarifies the architectural drawings is 650 pages.
Attention to detail may not be your thing. It might not be your strong suit. But there had better be someone in your team whose job it is to pay attention to the details and make sure they reflect what you want the contract to say, not just the legal risks. Your lawyer often won’t look much past the legal aspects.
Put on a big pot of coffee, get a comfy chair and prepare to dig into the details.
On today’s show we are talking about a specific case study of a property that has been on the market for nearly 5 years.
This story is a cautionary tale of what can happen if you choose a property in the wrong location.
This property is a gorgeous 7,000 square foot home, that’s about 650 square meters for those of you who measure in metric.
This home is located just outside Portsmouth NH in a beautiful residential neighborhood where all the homes are on large estate lots of about 2 acres. All of the homes in the area range in price from about $800,000 to about $3.5M with numerous homes in the $2.5M range. It is located less than a mile from the ocean.
The interior of the home features an extraordinary kitchen with a granite island that is large enough to play ping pong on it. This exceptional property is architecturally driven at every turn.
Walls of French doors lead to the deck from the dining room, living room and entry hall. Magnificent center hall invites you to the rest of the house. Master suite includes bath with Rare Egyptian Alabaster counter tops, custom designed mahogany vanity, Onyx tile floor, oversized walk in shower, 18X13 walk in closet and access via rear stairwell.
The solarium is a beautiful space with a spectacular view of the garden. The entire back of the home is a wall of windows.
The area is a bedroom community for the wealthy who may have built businesses in the Boston area.
This is a truly gorgeous home.
It was built in 1997. It was purchased in 2003 by a friend of mine who owned several luxury properties in the northeast. He was an investor in several of our projects over the years and sadly he was diagnosed with cancer and died a couple of years ago. His lovely wife still lives in the home, and quite frankly they’ve been trying to sell it since 2014 to enable them to focus their energies on their homes in Martha’s Vineyard.
They bought the property in 2003 for $1.65M. They listed the home for the first time at $2.3M back in 2014. It was not selling and in fact was only occasionally getting showings once every couple of months.
They lowered the price to $2M back in 2015. Then they lowered the price another 5% in 2016, and then another 10.5% later that year.
The home is currently for sale at $1.6M, $50,000 less than the purchase price in 2003. The property has been on the market for 144 days and it’s still not selling.
Let me put this in perspective, if you bought this home today at $1.6M, this 7,000 SF home would be selling at $233 per SF. You could not build the home in today’s market at that price. With the level of custom finishes in the home you would spend easily $250 per SF in hard construction. If the add the cost of the land, the design, the permits, you would be well over $350 per SF to build a comparable home today. On the surface, at $233 per square foot this looks like the very definition of a bargain.
So why has the home sat for 144 days on the market and not sold?
It turns out that the property taxes in this community are a bit high. In fact the current property taxes back in 2017 were a little above $31,000 a year.
Even if you buy the house in cash with zero debt, your monthly home ownership cost is over $2,500 a month just in property taxes.
I believe that the high tax environment is what is keeping buyers from jumping onto this bargain. You know that if the value goes up, which is something that almost every home owner wishes for, the property taxes will go up too.
There is nothing physically wrong with this property. It’s a gorgeous home in a beautiful location. It’s been impeccably maintained, and the buyer could buy it below replacement cost.
Unfortunately the cost of ownership is off the charts because of the property tax structure. I don’t know of any people who would willingly move to take on that high a property tax burden.
We just spent 3 intensive days on the beach in Mexico working on goal setting for 2020.
It was not exactly on the beach. We set up our conference table inside a straw hut called a palapa that was situated at the end of a pier out over the water.
The pier was surrounded by schools of fish, needle fish, barracuda. It was a pretty magical and inspiring place to do this kind of deep work where there was a panoramic view of the beach to one side and the ocean stretching to the horizon
You can’t improve something you are not measuring. The business world is filled with performance metrics. Revenue, profitability, efficiency, return on investment, gross profit margin, inventory turns, cash flow, vacancy, delinquency rate, accounts receivable aging. The list goes on and on. We establish these measures to improve business performance.
It’s said that anything which is actively measured has a general tendency to improve. The simple act of measuring brings focus and attention to that metric. Sometimes businesses get off track by focusing on the wrong measures. You only need to look at companies like Sears, Macy’s and General Electric to see examples of companies that did a great job of optimizing the wrong metrics.
Today’s show is about setting expectations, not so much with others, but with yourself.
How often we as humans latch on to measures that we use to define our own sense of self worth. For some people their sense of worth is attached to their career, perhaps their title.
A lawyer who needs to make partner before the age of 40. For some it’s the house they live in, the car they drive. How much money they have in their bank account.
There are so many metrics that we unconsciously track on a daily and weekly basis.
Some people measure their weight, the number of hours they sleep, the number of steps taken each day, the number of likes on a social media post, the miles per gallon they get in their car, the percentage increase in their stock portfolio in the past year, the value of their home.
How many people wished you happy birthday on Facebook?
How much did your spouse spend on your birthday gift?
How big a discount did you get when you went shopping for holiday gifts?
Think about it. In each one of these measures, there is an entire story wrapped up in what a good number means.
More importantly, there’s an opportunity to feel bad about yourself if the number isn’t what you hope it to be.
What does a number actually mean? And who decided what a good number or a bad number means?
Do any of these measures have any real meaning that reflects truly upon your worth as a human being?
How many people measure the quality of the time spent with their children, the hours spent hugging a loved one, the time spent laughing per day?
So often people lose their way by focusing on measures that are not truly in alignment with the core values that will bring fulfillment. In the same way that companies can go bankrupt by optimizing the wrong measures, individuals can become emotionally bankrupt by focusing on the wrong measures.
Sometimes things get measured simply because they’re easy to measure, not because that measurement is truly important to improving my life. The fuel efficiency of my car is not going to fundamentally change the quality of my life for better or for worse. But it is easy to measure.
So many people find themselves climbing the ladder of success only to find when they get to the top that they leaned the ladder against the wrong wall.
I’m going to be taking three days in the next week to complete the work on my goals for 2020 and beyond. But before I can start working on my goals, I need to get clear on my values, what’s important to me. Once I have that clarity, setting the goals becomes obvious.
Kevin from California asks,
I currently live in California and would like to know which other states are good for investments within the next 5-10 years and why?
Kevin,
This is a great question. The first thing to remember is that real estate is hyper local. We will come back to discussing the hyper local aspect of investing in a minute.
The direct answer to your question. Generally speaking I’m looking for areas where there is influx of jobs, and influx of population. That increase in demand in the presence of modest supply means that we should experience increasing prices with all other things been equal. I like to pay attention to demographic trends. I like low tax states where both residents and corporations pay a minimum of tax. I also like states where there is a demonstrated flow of both jobs and population. This means places like Texas, North Carolina, Florida, Nevada, Arizona, and Alabama. You want to choose places where there is an already an established flow of migration.
But in each of these states there are locations that are not suitable. So if you choose a state like, say, Florida, there are local areas that are great investments, and others that aren’t. I might be much more interest in Fort Myers than, say, Ocala. There is a clear migration flow to certain locations in Florida from cities in the North East like New York and Boston to communities like Boca Raton, Jupiter, West Palm Beach. There is a clear migration flow from California to Texas, Nevada, and Arizona.
In fact, Some 660 companies moved 765 facilities out of California in the past two years, and Dallas-Fort Worth has been the beneficiary of many of the relocations, according to a recently published report. Discount brokerage Schwab is among the latest announcements. The company has already moved several hundred roles from its San Francisco location to Dallas. The latest announcement will move about 400 jobs to Dallas to be housed in a new campus being built in Westlake Texas.
Even Uber is moving it headquarters to Dallas from the SF Bay area. One of the culprits that is often cited is the increasing regulation that is making it difficult to do business in California. One of the latest is a law in California that was passed in September that requires companies to hire workers as employees, not independent contractors, with some exceptions. The law is intended to give basic labor rights and benefits to hundreds of thousands of California workers now classified as independent contractors. This is a major shift that fundamentally alters how businesses conduct themselves.
So you want to pay close attention to the specific moves that are taking place. You want to look at the migration of several hundred jobs to a specific office location and then draw a circle of a few miles around that office and see what the dynamics are within that radius. You want to see where the shortage is. There might be a surplus of 3-4 bedroom residential properties and a shortage of one and two bedroom properties.
You also want to look at asset class. Maybe the shortage is in single family residential, perhaps apartments, or maybe self storage.
There are other dynamics affect the value of property. Specifically the distance from a major airport affects property values significantly. The further you get from a major airport, the more prices drop generally. If you look along the Gulf coast, you would find that properties in towns like Englewood are very inexpensive, including waterfront properties. These towns also lack major industry. As you get closer to an airport heading North to Sarasota, prices increase.
Higher prices are not something to shy away from. They’re a reflection of higher demand. Even in those higher priced markets, there are opportunities to acquire bargains and create tremendous value. Again, these moves are subject to the local supply and demand balance.
On today’s show we’re looking at why prices for real estate in Australia fell by 8.4% in the past two years and we’re answering the question as to whether what happened in Australia could happen elsewhere in the near future.
Australia’s median house price dropped 8.4% between July 2017 and May 2019. With only a handful of larger price dips during the late 1800s, the slump surpassed the recession of the 1990s and 2008 financial crisis, making it the worst ever recorded in recent decades.
markets in Sydney and Melbourne were hit the hardest during the downturn, which lasted from mid 2017 until earlier this year, with an average price drop of 22.5% in Sydney and 32.1% in Melbourne.
Following a boom that peaked in mid-2017, prices began to fall due to tighter lending conditions, low buyer confidence and changes to Chinese investor loan limits.
The government launched a Banking Royal Commission inquiry into lending practices, which commenced in late 2017 and concluded earlier this year, resulting in a crackdown on lending practices by big banks in Australia.
This government-led inquiry, triggered by reports of misconduct by certain Australian banks, was a major reason house prices began to fall.
Much like the 2008 crisis, the downturn in Australia was the result of significantly reduced availability of credit in the market.
At the same time, demand from Chinese buyers, Australia’s largest offshore property investors, also slowed in 2017 and 2018. We’ve seen the same dynamic in the US and Canada. China’s government has imposed tighter capital controls, making it harder for residents to move money out of their own economy. There is still money coming into the market from China, but the numbers are down significantly. Chinese buyers have a cap of A$50,000 (US$33,903) they can take outside the country.
Much like the 2008 downturn in the US, the availability of credit is more important than the interest rate. When financing is hard to come by, the balance between buyers and sellers changes dramatically. If the only buyers are cash buyers, sellers will drop their price in order to sell.
Proof that the problem is a credit problem rather than a real estate problem is the fact that since May, lending has opened up and prices in Sydney and Melbourne have risen almost 6% in both those markets since May.
It’s fair to say that the issues in Australia were unique to that country. But it goes to show that something as simple as an investigation into banking practices can, at least temporarily crater the real estate values in an entire nation.
So the question is, could we see a credit crunch again in the US, in Europe, or in Canada? If so, what could be the cause?
We often think about the levels of sovereign debt that so many countries around the world have signed up to. This includes every major economy in the world. We’re talking about the US, China, Japan, the UK, Canada, Italy, and yes, even Switzerland.
So far the problem in Australia was limited to a regulatory issue. There was no domino effect. There was limited counter party risk. You might be wondering, what is counter party risk again? Well, I’m glad you asked.
Counter Party risk happens when an asset on my balance sheet appears as a liability on your balance sheet. If you fail to pay me, then I’m at risk of defaulting on my obligations to the liabilities on my balance sheet and the dominos start to fall.
Clearly the political will does not exist for any one country to trigger the next financial crisis.
The point is that this time the problem was localized to Australia. No dominos fell, except in Australia. Once the dominos start to fall, there is almost no stopping it from happening.
Welcome to December. This is the last month in the current decade. Hard to believe that the 2010’s are almost over.
Today is the book of the month episode. On the first day of each month we review the book of the month. In order to be considered for a book of the month the book has to meet a very simple criteria. It has to be impactful enough that it will change your life or your perspective on the world. Whether it does or not is entirely up to you. You might read the book and comment on what a great book it was. But if you don’t internalize the book and make a part of you, you’re missing the point.
The author of this month’s book is none other than Malcolm Gladwell. He has written several other ground breaking books including Outliers, Blink, David and Goliath, The Tipping Point, and What the Dog Saw. Each of these books would have easily met the book of the month criteria. Malcolm Gladwell is also host of the Revisionist History Podcast in which he goes back through history and looks at something that happened and examines underneath the covers.
At heart, Malcolm Gladwell is a journalist. He’s a Canadian from Toronto and currently lives in NYC where he writes for the New Yorker Magazine.
Our book this month is called Talking with Strangers. Like his previous books, Gladwell takes real life stories and tries to dig beneath the covers to find insights, to find common threads of new learnings and to illuminate the blind spots that are hidden in plain sight.
The premise of the book is that communication happens easily with people whom we are familiar with, whom we understand
The authors examples are diverse. The book is framed around the story of a woman from Chicago who moved to a small town in West Texas to restart her life in a new setting. She had secured a new job, and on her first day in town was stopped by a police officer for a questionable traffic stop. The sequence of events that unfolded found this innocent woman being dragged from her car, handcuffed and brought into custody, and eventually dead three days later in a jail cell, never having committed a crime of any sort.
The author looks at how we process communication. A case study of the TV sitcom “Friends” showed that viewers of the show were able to follow the story line of the show with the audio completely turned off simply by watching the body language and facial expressions of the actors on the show. The accuracy of the interpretation was incredibly high. It shows that many of us rely upon these cue far more than we know.
But this is a TV show and the actors are paid to do a great job of acting. In the real world, a smile isn’t always a signal of happiness. There are those people who make up a small percentage of the population who have learned to disconnect their emotions from their body language.
Some go on to become criminal masterminds like Bernie Madoff. Others go on to become championship poker players.
It is full of case studies that individually can lead you astray. Taken together they reframe the way you will look at interactions. Malcolm Gladwell isn’t shy about confronting difficult topics. He chronicles the case study of the negotiations between Prime Minister Neville Chamberlain of the UK and Adolf Hitler in 1938. Chamberlain’s negotiations with Hitler are widely regarded as one of the great follies of the second world war. Chamberlain fell under Hitler’s spell. He was outmaneuvered at the bargaining table. He misread Hitler’s intentions.
In the book Gladwell argues that something is very wrong with the tools and strategies we use to make sense of people we don't know. The idea of the book of the month is to change your life or change the way you see the world. Talking with Strangers by Malcolm Gladwell will definitely deliver on both those promises.
Logan Freeman is based in Kansas City where he helps out of town investors with their portfolios large and small.
Today's show is part 2 of a question from yesterday's show.
Anthony and Julia from Brooklyn ask.
Hi Victor.
I’ve been listening to your podcast for about a year now and appreciate what you’re doing! I have my wife, who is an architect, listening in now too! We want to invest in other real estate but with two young boys we don’t have a lot of disposable income to work with.
We own and live in a double duplex in Brooklyn. We bought in 2013 and after significant work and neighborhood development its has more than doubled in value. On our block alone there is a lot of studio and one bedroom apartment development going on. We’d like to access some of the equity we have built up in our property. We’ve been renting the lower unit short term for about 4 years, but that business is getting less attractive. We are considering condominium conversion and selling half to capture money to buy other property or renting out both units and taking out a HELOC or do a Cash Out Refi. Ideally we’d like to hold because the neighborhood has a lot of growing yet to do. Our interest rate seems kind of high at 4.875%.
What are your opinions of Helocs vs Home Equity Loans for less experienced eager to grow investors?
Thanks for taking the time and we look forward to learning more from your show!
Anthony and Julia
On yesterday’s show we talked about the differences between the types of debt offerings that could be used to invest in more income properties. On today’s show, we’re going to focus on what to do with the money when you have it.
You’re probably thinking the same way that most DIY investors do, save up some money for a downpayment, put down 20% in equity, borrow 80% and add one more property to the portfolio. That’s definitely one way to do it, and in one sense there’s nothing wrong with it, depending on what your goals are.
In this context I”m going to speak directly to your wife Julia. Julia, you’re an architect. My mom was the second woman in history to graduate in architecture from Cornell University back in 1945. She has her stamp on several landmark buildings in NYC. You entered university to get your degree in architecture, knowing that it would be a huge commitment of both time and money in order to get that degree enabling you to practice as an architect. You didn’t say to yourself, I want to be an architect, but it’s hard so I’ll take a small step and get a degree in drafting. Just like someone wanting to be a doctor doesn’t say, that’s hard so I’ll go to nursing school instead.
So I want you both to look at your investment goals with a longer view. If you truly only want to own a handful of apartments in the NY market and you are willing to get there slowly over the next 20 years, then the approach you’re taking is perfectly fine.
The number one mistake I see rookie investors make is to run their project with too little capital. You want to make sure that in addition to raising the money to purchase the property, you maintain a healthy reserve fund to handle any surprise that the market might throw at you. You might have a water heater fail, or an air-conditioner fail and all of a sudden you’re digging deep into your pocket for a capital repair that wasn’t in the budget. Spend time with other experienced investors in your area and learn from their mistakes, rather than going and making the rookie mistakes yourself. It’s much cheaper that way. Like I said, investing in small properties is a perfectly viable strategy, if that’s in line with your ultimate goal.
But if you want to create a stream of residual income that can provide multi-generational wealth for you and your family, then you may want to think bigger.
If you’re thinking bigger, then you may want to jump to the next level and skip the time wasted on small stuff.
This question is from Anthony and Julia in Brooklyn.
Hi Victor.
I’ve been listening to your podcast for about a year now and appreciate what you’re doing! I have my wife, who is an architect, listening in now too! We want to invest in other real estate but with two young boys we don’t have a lot of disposable income to work with.
We own and live in a double duplex in Brooklyn. We bought in 2013 and after significant work and neighborhood development its has more than doubled in value. On our block alone there is a lot of studio and one bedroom apartment development going on. We’d like to access some of the equity we have built up in our property. We’ve been renting the lower unit short term for about 4 years, but that business is getting less attractive. We are considering condominium conversion and selling half to capture money to buy other property or renting out both units and taking out a HELOC or do a Cash Out Refi. Ideally we’d like to hold because the neighborhood has a lot of growing yet to do. Our interest rate seems kind of high at 4.875%.
What are your opinions of Helocs vs Home Equity Loans for less experienced eager to grow investors?
Sorry for the sprawling question but I hope you can speak to some of these issues.
Thanks for taking the time and we look forward to learning more from your show!
Anthony and Julia
Let’s look at the condo conversion option. While it’s certainly possible to do a condo conversion, it’s not very practical for such a small condo project. The overhead of managing a condo corporation for the rest of time quite frankly is hardly worth it for two units. The shared common elements between the two units can become a source of friction between unit holders. For a small property you’re better off keeping it all together and not subdividing it in my opinion.
A sale of the lower unit that you don’t occupy would free up some equity, but it might also be considered a taxable event. A refinance on the other hand isn’t a taxable event. It offers you a lot more flexibility in terms of what to buy, and when to buy it.
Let’s start by describing the difference between a home equity loan and a home equity line of credit. A home equity loan would basically be a refinance of your existing two unit property. It would be for a fixed amount of money and rates these days a pretty good. You have a couple of choices in this. If you work with your existing lender, they may be willing to put a second loan on the property while maintaining the original loan. That way, there’s no pre-payment penalty for refinancing the old loan.
The second choice is to replace your existing financing with a new loan up to the new loan amount. Remember, at this stage, the lender assumes that the path to repaying the loan is primarily from your employment income for both of you. They will generally give you credit for the rental income in the second unit, but they will typically want to see a 12 month lease. Short term rentals usually don’t fit with most bank’s lending model.
The third choice is the home equity line of credit. The difference between the line of credit and the home equity loan is the way the funds are advanced, the way the interest is calculated and the way the loan is repaid.
The loan is an amortized loan which means that the monthly payments include both principal and interest.
A line of credit simply requires that the interest be paid monthly. If you’re using the equity in your home to buy another property you probably want to use the equity on an ongoing basis without being forced to repay it on a monthly basis. For that reason, the home equity line of credit might be a better fit. The home equity line of credit also has the advantage that you’re not paying interest on monies you don’t use.
On today’s show we’re talking about one of the latest disruptions to come into the retail industry. This is from the guy who brought us Uber, Travis Kalanick. His latest venture is called Cloudkitchens. The company is currently live in 3 markets, Los Angeles, San Francisco and Chicago.
The idea behind cloud kitchens is to break apart the traditional food and beverage model associated with a bricks and mortar restaurant. The trend toward delivery meals is growing and is being serviced primarily from the traditional bricks and mortar restaurants.
The vast majority of food delivery currently takes place in traditional brick and mortar restaurants, but these locations are not optimized for delivery. Today, online delivery is a high priced luxury product with a very poor experience.
Everything about the restaurant experience is designed for walk-ins and reservations. And while delivery is an increasing percentage of the business, many operators are forced to trade-off the dine-in experience with a booming delivery business.
Cloudkitchens has designed a commercial kitchen along a formula that allows for the basics and at the same time allows for customization of work flow. It’s a turnkey solution to opening new locations for those who want to be in the food and beverage business, with a focus towards building a delivery oriented brand.
The delivery channels like ubereats, grubhub, doordash, each have their own platform. There’s a problem of integrating the data from each of these disparate channels into a single accounting system. Cloudkitchens has completed the integration so that audited financials are a breeze.
The workflow in a restaurant is optimized towards the front of house dining experience. The workflow for a delivery model is completely different. When you are operating a restaurant kitchen with two competing workflows, you end up compromising both.
Kitchens in a restaurant are built to support table capacity. You now have a full set of tables and now additional demands on the workflow for which the kitchen was never designed. This forces food operators to compromise on both the dine-in and delivery experience. When workflows operate above 80% of their capacity, queueing theory says that the delays grow exponentially. A simple example of that is rush hour traffic. When the number of cars exceed 80% of the designed capacity of a road, the delays multiply. The same thing happens in a kitchen.
So what does this have to do with real estate? The traditional bricks and mortar restaurants are located in the most expensive commercial retail real estate. A commercial kitchen can be located in the least expensive industrial space, lowering the operating cost of being in the food business dramatically.
So how is Cloudkitchens capitalized? Well, they recently secured a $400 million dollar round of financing from the Saudi Royal family. You might be wondering why on earth would Cloudkitchens need that much money as a startup? The technology component of their offer wouldn’t cost more than a couple of million dollars to develop from a software perspective. Even the marketing might stretch into a few tens of millions, but not much beyond that.
Well, it turns out that CloudKitchens is a real estate company that provides smart kitchens for delivery-only restaurants. They provide infrastructure and software that enables food operators to open delivery-only locations with minimal capital expenditure and time. They enable food operators to get into business within weeks instead of months or longer in the traditional restaurant model.
I know of several investors in the retail space who have argued that retail investments are safe as long as you are focused on businesses that cannot be satisfied by Amazon or other cloud based businesses. You can’t get your hair cut online. I see that the CloudKitchens model has the potential to upend prepared food.
Today’s show is a continuation on the topic of demographics. Yesterday, we talked about the reduction in mobility that has taken place over the past decade. The least mobile group of people are those above 65 years of age. The move less frequently than any other group. But eventually they move, usually because they have to. Either due to health or because they die, one way or another, they will eventually move.
A number of communities have been built around the country specializing in retirees as the target client. When Sun City, a suburb of Phoenix Arizona opened on January 1, 1960, it was billed as the original retirement community. It was the first of its kind in America.
On the weekend Sun City opened, cars were backed up for 2 miles as some 100,000 visitors waited to gawk at a village built specifically for adults over the age of 50.
But the same demographics that propelled Sun City’s rise now pose an existential risk to this suburb as baby boomers age. More than a third of Sun City’s homes are expected to turn over by 2027 as seniors die, move in with their children or migrate to assisted living facilities.
The big question looming in this neighborhood—and dozens of others like it around the country—is what happens to everything from home prices and to the local economy when so many homes post ‘For Sale’ signs around the same time?
The very same tidal wave of people expected to enter senior housing, whether it’s independent living, assisted living, or skilled nursing means that same wave of folks are exiting their homes.
This second but related tidal wave of homes will be hitting the market on the scale of the housing bubble in the mid-2000s. This time it won’t be driven by overbuilding, easy credit or irrational exuberance, but by an inevitable fact of life: the passing of the baby boomer generation.
It’s estimated that one in eight owner-occupied homes in the U.S., or roughly nine million residences, are set to hit the market over the next 10 years as the baby boomers start to die in larger numbers. That is up from roughly 7 million homes in the prior decade.
By 2037, one quarter of the U.S. for-sale housing stock, or roughly 21 million homes will be vacated by seniors. That is more than twice the number of new properties built during a 10-year period that spanned the last housing bubble.
Most of these excess homes will be concentrated in traditional retirement communities in Arizona and Florida or parts of the Rust Belt that have been losing population for decades. A more modest infusion of new housing is expected in pricey coastal regions of New York or San Francisco where younger Americans are still flocking in large numbers.
The Gen Xers, as a generation are a smaller in numbers than the boomer generation and more financially precarious. They have different preferences, posing a new kind of test for the housing market. They don’t necessarily want to live in the same types of homes that their parents did.
One problem is that the bulk of the supply won’t necessarily be in places where these new buyers want to live. Gen Xers and the younger millennials have shown thus far they would rather be in cities or suburbs in major metropolitan areas that offer strong Wi-Fi and plenty of shops and restaurants within walking distance
In case you think I’m being overly alarmist, you just need to look to Japan to see the impact of demographics on the housing market. With the aging population, Japan now has 11 million vacant apartments across the nation. This was in a place where real estate was once in such demand that people were signing multi-generational loans in order to afford the property.
As you make investments, you definitely want to look at demographics in your local market and fast forward a few years to make sure you’re going be in a good spot when the elderly exit the market.
On today’s show we’re talking about where your future tenants are going to come from. Last week the US Census Bureau published new data on migration across the US.
It shows some new trends that are quite frankly a reversal of some long term historic trends.
If you think back to the time of your grandparents or great grandparents, they probably grew up in the family homestead community and they married and started their own family in the same community, probably the same neighborhood.
My father’s family lived in the same community on an island for nearly 400 years. They were displaced by the Second World War. Were it not for that, my father probably would have ended up taking over his father’s Pharmacy and continued the family business.
As modern transportation increased and mobility became easier, so too did migration of people. Migration, that is the percentage of people who move their primary residence has been increasing generally with each passing decade. That is, until now.
In the latest census report, we’re seeing a reversal of migration trends in the past decade since the start of the Great Recession. But I don’t think you can blame this on the Recession itself. Because even as the economic recovery has taken hold, migration has continued to decline steadily across the US.
If you have a brand new vacant apartment ready for someone to rent, or a recently renovated property for sale, people have to be willing to move in order for you to rent your apartment, or buy your house. If the mobility in the population is declining, it stands to reason that there will be fewer people looking to move into your property.
So let’s look at the data.
The Census Bureau looked at a data set of 263M people over 15 years of age. Of those, 238M didn’t move in the past year and about 25M people did move.
That’s about 10.5% of the population. That sounds like a lot. But it’s a significant decline compared with the previous decade when
In 1985, nearly 20 percent of Americans had changed their residence within the preceding 12 months, but by 2018, fewer than ten percent had. That’s the lowest level since 1948, when the Census Bureau first started tracking mobility.
The largest group of movers by age are in the range of 15 to 24 years of age where 17% of people in that age range moved in the past year. This makes sense. College choice is a big driver of that need to move.
The older you get, the less people move. Only 4% of those over 65 years of age moved in the past year.
11% of those between 25 and 64 years of age moved.
Your inclination to move also depends on where you live. The lowest mobility part of the US is the NE where less than 8% moved in the past year. 10.73% moved in the midwest and 11.2% moved in the South and the West.
Income also seems to be a factor.
Those with no income had one of the highest inclinations to move with 11.55% of those people moving. The lowest percentage of movers were those having incomes above $100,000 with only 8.5% of those people moving.
Only 3.7% of the people who moved in 2018 came from outside the country.
Of those coming from abroad, men were more likely to move than women, with men making up 3.9% of those who moved compared with 3.4% who were women.
81% of people who moved stayed within the same state and 15.5% of those who moved went to another state.
So if you’re looking for new tenants and you can target your product offer or your marketing message, it pays to take a closer look at the demographic information in the census data.
Debbie Bloyd is based in Dallas Texas where she specializes in reverse mortgages for those seeking to utilize the equity in their homes to fund their retirement. She demystifies the process of reverse mortgages and how they can be a useful tool for those later in life.
Gary Boomershine is CEO of RealEstateInvestor.com. He is also host of the Real Estate Investor Huddle podcast.
He lives in Danville California.
The question of the legal treatment of short term rentals has been contested in multiple communities around North America. Earlier this week, a legal challenge that had been underway for the past two years has finally come to a conclusion.
The City of Toronto enacted new rules in December of 2017. Almost immediately, these rules faced a legal challenge from a consortium of hosts and short term rental platforms.
The government's Local Planning Appeal Tribunal (LPAT) announced this week that it had ruled in favour of the City of Toronto, effectively allowing the city to crack down on short term rental landlords for the first time since approving new bylaws in December of 2017.
It's a major blow to people who have invested in properties for the sole purpose of putting them in the short term rental market.
It is estimated that as many as 5,000 units could return to the long-term rental housing market thanks to the city's new rules. Whether that happens remains to be seen. The definition of a short term rental is any rental of 28 consecutive days or less.
The new short term rental regulations, which include capping the number of days anyone can rent out a single property for, were originally supposed to have come into effect over the summer of 2018.
A person needs to live in an Airbnb property, either as owner or tenant, under Toronto's new regulations, and is also now required to register with the city for an annual fee of $50.
The rules also restrict the number of days any resident could rent out their space on a short term basis to 180 nights per year.
So what is going to happen? There are 4 possible outcomes for any given property.
1) Property prices in Toronto have risen dramatically in recent years. Some owners will simply choose to sell their properties on the open market, and take advantage of a capital gain, rather than experience the negative cash flow from renting at lower prices in the long term rental market. For those properties, it will return some inventory to the long term housing supply.
2) Some will convert their properties from short term rental to long term rentals. They will experience lower income and the city will achieve it’s objective of returning more housing to the long term housing supply.
3) Some may choose to continue to operate, but outside the rules and hope that they don’t get caught. We’ve seen this kind of activity taking place in New York and other cities where short term rentals have been regulated. It’s hard to say how much of that will go on.
4) I think there is a market nuance that many have completely overlooked. There are a number of clients of the so-called short term rental platforms that actually rent on the medium term basis. We’re talking stays of 1 month, 3 months, 6 months. There are all kinds of reasons for these rentals. Sometimes it’s dealing with a repair situation where some people need to vacate their home because of an emergency like fire or water damage. Some people have purchase a new home and their builder is running late and they need a place for a few months. Many are corporate contracts. In fact, the net income for a medium term rental is not that much different compared with a short term rental in my opinion. While the nightly rate is lower, the management costs and maintenance costs for a medium term rental is also much lower. For these clients, a 12 month unfurnished lease is of no use.
If I was an owner of a short term rental, I’d certainly be looking hard at the corporate medium term rental market as a viable alternative to the short term rental market.
I spoke with a representative from AirBnB last week and she told me that approximately 20% of their traffic are for stays of more than 28 days. That’s already a substantial proportion of their existing business, a proportion that I predict will grow substantially.
Vishal from Ottawa asks,
“I listened to your interview with Aaron Chapman on the weekend. You were both talking about how inflation can benefit investors, and I didn’t quite follow how that works. Can you explain it in a little more detail, maybe with an example?”
First of all, let’s start with a definition of inflation. Inflation means the growth of something. Often we think of inflation of prices as being the issue. In fact, increasing prices are not the actual inflation. They’re a symptom of inflation. The true underlying inflation is the inflation of the money supply.
Prices rise for one of two reasons. Sometimes they rise against our will, but more often than not, they rise because people are willing to pay more. The only reason they’re willing to pay more is because they have more disposable cash available.
I’ll give you a simple example. A cup of Starbucks coffee costs about 25 cents if you buy the big bag of Starbucks coffee at Costco. That same cup of coffee costs $2.45 if you buy it read made at Starbucks. People are willing to pay almost 10 times the price of a cup of coffee, not because Starbucks is forcing them to pay more, but because they’re willing to pay more. It’s the availability of that extra cash that enables Starbucks to charge 10x the price of a cup of coffee.
So let’s extend that concept to real estate. I think we would all agree that most people have not saved up enough money to buy a house. That’s why they go to the bank and borrow heavily, some as high as 97% of the purchase price. It’s the availability of that extra cash at low interest rates that enables people to offer higher and higher purchase prices in the market.
It’s not that prices are being driven by the sellers asking too much. When sellers ask too much, houses don’t sell. If they sell quickly or homes sell over asking price in multiple offers it’s because the buyers have access to more cash.
So where did all that extra money come from? It was loaned into existence. We think of central banks calling down to the printing presses in the basement and asking them to start printing some more sheets of $100 bills. That’s not really how governments print money these days. It’s simply the addition of a line item on a general ledger on the central bank’s balance sheet.
So now let us look at how an investor can use inflation to their advantage. In our example, you’re going to buy the home with conventional financing. You’re going to put $200,000 in equity and borrow $800,000.
In our example, let’s say that inflation is 10% per year. At the end of year 1, your property that you purchased for $1M is now priced at $1.1M. The principal owing on the bank loan is still very close to $800,000. For the sake of simplicity we’ll say you still owe about $800,000. But now you have a property worth $1.1M and your equity in the property has increased by $100,000. It’s not truly $100,000 because the increase in price is only an illusion. What’s happened is the value of the currency has fallen by 10%. So that $300,000 gain is really 10% less because the currency is worth 10% less. You gain is really $270,000 in last years dollars.
If you then fast forward one more year your property would be worth $1.21M at the end of year 2 and your equity would have increased from $200,000 to $410,000. Again that $410,000 measured in dollars from 2 years ago is more like $332,000.
At the end of 10 years of 10% inflation each year, your property would be priced at about $2.6M in the market. If you didn’t make a single principal pay down on your loan in 10 years, you would still owe $800,000. But your equity would have grown from $200,000 to nearly $1.8M in just 10 years.
If you had never borrowed the money, and without inflation, you could never have made that rate of return.
On today’s show we’re running what seems like an almost annual episode. The pain in retail real estate continues with little signs of slowing down.
According to a new report in Business Insider this week,
Retailers closed a record 102 million square feet of store space in 2017, then smashed that record in 2018 by closing another 155 million square feet, according to estimates from the folks at CoStar.
We can expect similar numbers in 2019, with more than 9,000 stores expected to close this year. Some of these announcements are from earlier this year, but several are as recent as this past week.
Back in February, Payless shoes abruptly announced it was closing all 2,500 of its stores in what may be the largest inventory liquidation in retail history.
Gymboree filed for bankruptcy protection for the second time. The first time was back in 2017 when they closed about 400 stores. This time, they’re closing all 805 outlets, never to return. The company’s remaining 140 stores under the Janie and Jack brand.
Dress Barn is closing 650 stores after 50 years of operation.
Discount Chain Freds announced that it was also closing 520 stores.
Dollar Tree plans to convert 200 Family Dollar stores into Dollar Tree stores and close another 390 Family Dollar stores.
The Gap announced the closure of 230 stores and announced intention to sell its Old Navy stores.
Womens clothing retailer Avenue is closing all 222 of its stores.
Walgreens continues to rationalize after its acquisition of Rite Aid. Following the acquisition, they announced the closure of about 600 pharmacies. This year they announced the closure of 200 Walgreens locations.
Forever 21 is closing 350 stores globally and about 178 locations are in the US.
Sears department stores have been the walking dead for years now. They announced the closure of another 175 stores in a series of announcements that have trickled out over the past three months.
Lifeway is closing 170 stores.
Kmart is closing 160 stores.
Performance Bicycle filed for bankruptcy protection this month and is closing all 102 stores. Bike shops around North America have been struggling. Cyclists would go to a local performance bike shop, try out a bike, get a feel for exactly what they want and then find the same product, or the brand name components to assemble a performance bike online for less and order it online. This story is playing out over and over and over again.
Olympia Sports was purchased earlier this year by Jack Rabbit. Following the acquisition, they announced the closure of 76 stores.
CVS Health is closing 68 stores.
Bed Bath and Beyond is closing 60 stores.
Pier 1 Imports is closing 57 stores.
Party City is closing 55 stores.
Agaci is closing all of its 54 stores.
Victoria’s Secret is closing 53 stores.
JC Penney is closing 27 Stores.
Womens retailer Christopher & Banks is closing 40 stores over the next two years.
Lowes is closing 20 stores and even retail giant Walmart is closing 17 stores.
Macy’s is closing 9 stores.
There are more retail closures that I could tell you about. I don’t know about you, but after listening to that partial list, I’m pretty numb already.
I firmly believe that the strategy for dying shopping malls is the redevelopment of mixed use planned communities that have a combination of residential, parks, amenities, and a modest amount of neighborhood retail including groceries, and food and beverage.
These distressed assets will increasingly appear on the market in the coming year and years to come.
Brendan from Pennsylvania asks:
I bought my first commercial rental a few months back using seller finance and it was a breeze since the property was off market and I could talk to the seller directly. The seller and I haggled it all out based on their retirement needs and since it was still a good deal the interest didn’t matter much to me since it was an excellent cash on cash return.
I am currently searching for my next deal and have found one that interests me on the MLS but the price doesn't make sense as-is. The realtor is telling me the seller will entertain owner finance offers. Without being able to directly contact the Seller without realtor involvement I’m stuck as to how to build my offer.
Brendan,
This is a great question. Congratulations on your first successful deal. There’s no question that seller financing can be a great financial tool. The thing to remember is that seller financing is still financing and you are still the owner of the property after the transaction closes.
The property should still be a property you want to own, not just because of the financing structure. That means that the property is in the right area from a management point of view. You want to know that you are invested in an area where you will see an ongoing stream of investment. You want to make sure that the investment meets your criteria in terms of supply and demand.
For example, you may choose to invest within a radius of a major hospital and target health care workers as your ideal tenant. Or you may choose to be within a radius of a major university and target students as your ideal client.
You want to be in an area where there is inflow of population, and inflow of jobs. I will never invest in properties in a shrinking market. At the end of the day, properties are simply part of the inventory of your business.
You really want to find out from the broker why the seller is selling the property. You are correct in saying that the negotiation will need to be direct with the seller. Some realtors are uncomfortable with a direct discussion with the seller. Offer for the realtor to be present in that discussion.
Your strategy of offering a lower purchase price and a larger overall deal value makes sense. But in reality you could actually be offering more than the asking price, but then choosing the payment terms. Let me give you a simple example.
Let’s say that the seller is asking $100,000 for the property. You want to purchase the property for $50,000 up front and then $10,000 per year for the next 8 years. You could tell the seller that you’re offering them $50,000 up front which they may find alarming. Another way you can write the offer is to set the purchase price at $120,000 payable as $50,000 on closing, followed by annual payments of $10,000 for the next 8 years. Such an offer will certainly get the seller’s attention. Note that a realtor is legally obligated to send any offer to the seller. The realtor can’t hold onto the offer, even if they don’t like it.
Once you are in the dialog with the seller, you can have the discussion about what is more advantageous from a structural point of view. The seller may desire to have the payments secured on title using a collateral mortgage until the property is paid in full.
On today’s show we’re talking about environmentally sustainable buildings. These are part of a growing trend of buildings globally and in North America as well.
A new report published by CBRE details what’s happening in the multi-family asset class. The buildings that have traditionally been energy hogs have been in the office and industrial asset classes. Most of the work in environmental sustainability started in that asset class.
In fact, much of this work dates back to the 1940’s and 1950’s. My mother was an architect in NYC and she used to design mechanical systems in those buildings that would use the air conditioning to manufacture ice during the night-time hours when the outside air was cooler. During the day, the air conditioning systems would melt the ice and heat the water in huge tanks. These systems used much less energy than the traditional air conditioners that we know and love today. Some of these systems are coming back into fashion.
I recently visited the JC Penny headquarters building in Plano Texas. This 500,000 SF building is LEED certified and uses the same technology that my mom was working with in the 1950’s. The only difference is that they think it’s new technology.
Historically, energy efficiency hasn’t been a big factor in multi-family construction. Increasingly though, while the number of green apartments remains small as a percentage of the total inventory, it is a growing proportion of new construction.
To help the commercial real estate market measure and understand the adoption and prevalence of green buildings across markets, CBRE and a consortium of Maastricht University and the University of Guelph developed the Green Building Adoption Index (GBAI) in 2014. The index tracks the adoption of green building certifications across the largest U.S. office markets since 2005 and this year has been extended to the 30 largest U.S. multifamily markets (measured by number of units) in collaboration with Yardi and supported by the National Multifamily Housing Council.
Three of the main certification programs for multifamily buildings in the U.S. are the EPA’s ENERGY STAR rating, the National Green Building Standard and the U.S. Green Building Council’s LEED certification.
The 2019 Multifamily Green Building Adoption Index shows that green building certification is on the rise in the multifamily market. A total of 251,763 units, representing 3.3% of the 7.7 million multifamily units across 39,071 investment-grade properties (i.e., those with 50 units or more) within the top 30 markets, have already been certified as “green.”
The top 5 markets for green certification are Denver, where 7% of multifamily units are green certified, followed by Washington DC / Suburban Maryland (6.9%) and Seattle (6.5%), Northern Virginia with 6.5% and Chicago at 5.9%. Green building adoption rates vary widely among the 30 largest markets, which could be related to the differing green building mandates and incentives for each of these markets. For example, some cities now require green building certification for all new construction.
Just in case you’re thinking these efforts are in the traditional tree hugger communities, even cities like Austin and Dallas that have a reputation for high energy consumption made the top 10 list for new Green buildings.
All the way from Mesa Arizona, Aaron Chapman specializes in helping investors finance properties. He won't finance a residential condo for an owner occupant. On today's show there are some powerful nuggets that could really impact the way you look at business.
Mark Owens has been a fixture in real estate investing in the Baltimore area. He knows the local market and has figured out a niche that is solid and repeatable. He's not after home run deals, but lots of consistent growth using simple proven strategies.
The City of San Francisco continues to be one of the most sought after places to live in the nation, and also boasts some of the least affordable places to live.
San Francisco is a notoriously difficult place to have any project approved. The process allows for community input on virtually any application.
San Francisco’s general plan makes new development difficult. Approximately 74% of the land is zoned for no more than three-unit homes, with the majority dedicated to one- or two-unit homes. Most of the city has a maximum 40-foot height limit for all new development.
Unfortunately, even the city’s general plan downplays the difficulty of building in the city. The ever-proliferating bureaucratic documents underpinning this plan muddy whatever potential clarities developers could glean from the plan itself. A typical example is the Planning Department’s area East and South of Market Street. This has been a rough area for years. The city drafted a neighborhood plan back in 2008. The plan lays out 42 separate “objectives” the city wants to achieve through development in the area, with no ability to rank them in case they conflict, as many clearly do. Now somehow there has been some redevelopment, but it hasn’t been easy.
Developers Prado Group and SKS Partners first submitted their proposal close to five years ago.
The developers originally aimed for 558 homes and an office component that was since axed to make room for the senior housing,
After years of planning — and battling neighborhood opposition — a proposal to build 744 homes on California St. in San Francisco is finally moving forward.
Earlier this week, the city’s Board of Supervisors voted unanimously Tuesday evening to approve the project, which represents the largest new home development in the city’s northwest quadrant in decades. There are so many competing interests, that every project has to have features that will satisfy every special interest group that wants to have a voice at the table, even though they have no cash invested in the project. It’s amazing that people with no ownership get to dictate what happens on a property.
The project includes 186 homes for low-income seniors, a childcare center, five acres of public open space and 35,000 square feet of retail.
Even after the approval, the ground breaking is still more than a year away in 2021 and complete the first phases of homes two years later. Overall, the project will cost more than $600 million.
During a three-and-a-half hour hearing on Tuesday, opponents said the project’s environmental impact report was flawed.
Many speakers opposed a plan to cut down existing trees on the site and destroy what they called a swath of natural open space.
The trees became a point of contention.
One special interest group claimed that the city doesn’t have enough senior housing. So now the project includes a senior housing component.
If you are contemplating undertaking a project that requires community input, make sure you understand the process that you might be subjected to. The process on paper might only be a few months. But the process in reality can stretch into years if the community opposes your project.
On today’s show we’re talking about one of the most important questions when evaluating a potential project.
You’ve received the executive summary. The glossy pictures are great. The pro forma looks enticing.
If the project is so amazing, then why would the seller be selling? If it’s so great, why would you ever let go of such an amazing asset? Or maybe its not an amazing story and the seller clearly has a problem that they need help solving. Whatever the reason, the answer to this question affects two things.
- Your potential interest in the project at all.
- You approach in negotiation
So why are they selling?
Are they selling because the owner is in their 80’s and the kids don’t want to own it, and the owner is tired of being an active business owner?
Are they selling because the property is distressed and the owner doesn’t have the financial resources or resourcefulness to solve the problem on their own?
Are they simply trying to take some profit off the table to reposition their portfolio for the next downturn?
How motivated are they as a seller? Do they need to sell, or do they merely want to sell if the market delivers their price?
Now of course the seller might not be 100% truthful in the reason they give for selling. But it gives a clue as to how you might negotiate the purchase.
For example, if the seller is aging out of the market, but they still want the income from the property, there might be a case to be made for seller financing a portion of the asset. Seller financing, if properly structured can result in some tax deferral for the seller, and a continuing source of passive income for the seller without the hassle and responsibility of ownership. The seller may simply be tired of the active side of managing a business and want to spend some time on the beach with their grandchildren without having to check in on the property on a periodic basis.
If the seller is in a distressed situation, you can be helping the seller solve a problem. Often times, the property can be a good asset, but the seller is dealing with a problem elsewhere in their business. The sale of a performing asset can bring much needed cash to strengthen the balance sheet of a seller and solve a problem they may be facing elsewhere.
The seller may be on a fishing expedition and looking to see if they can get someone to offer them too much money. Maybe they’ve heard that properties are selling for high prices and want to use the opportunity to take some profit off the table on an opportunistic basis. If that’s the case, I can tell you that I won’t be the buyer, unless I see something in the property that the seller doesn’t. That would mean changing the property substantially to add significant value to it. Maybe it means demolishing what’s there and building something new. Perhaps it’s a land assembly with a property next door. There are so many different ways to add value to a property.
I make sure to ask the broker for the seller why the seller is selling. I then ask the same question directly of the seller. It’s amazing that sometimes that fundamental question gets answered two different ways, by the broker and by the seller.
There are so many answers to that simple question. Knowing the answer guides your interest in the property, and certainly guides the approach you’re going to take in the negotiation.
On today’s show we’re talking about another aspect of short term rentals.
I’m in the short term rental business. My partners and I operate our units legally and at a very high level. The consistent 5-star reviews are not an accident. They’re the result of hard work by our team and our staff on a daily basis.
Now, I don’t know about you, but my social media feed is filled with advertisements for training classes that advocate getting into the short term rental business.
The headline reads “Everything you need to become a property investor without owning any properties”
The ad goes on to say
This Exclusive Webinar will Show you how to RENT Properties, Not Buy them, and List them on Airbnb™and other short terms Rental Platforms, Just Working Part-Time.
Step by Step Blueprint, Easy to Follow Instructions on How to set up this Incredible Business with One Rental Property at a Time.
So I clicked on the ad.
The webpage invites you to an exclusive webinar. It’s amazing, the webinar starts in just 7 minutes from now. It’s my lucky day.
The web page invites me to
Join hundreds of people worldwide making money using other homes as short-term rentals. Many property owners earn up to five times the profit of traditional rental properties. Sign up to this exclusive FREE training webinar today!
The company claims to have cracked the code on how to rent properties and make money with them by listing them on Airbnb and other short rental websites.
In less than six months, Jimmy was earning 15,000 pounds per month (around $20,000 US Dollars) with just five rental properties and he was able to quit his job for now, Jimmy teaches other people how to do the exact same thing.
The web page has a live chat window. So I clicked on the live chat window.
Sarah in the chat windows asked me if I had any questions.
I asked Sarah how their system works around one small issue. You see in many jurisdictions, not all, but many, there are laws that prohibit subletting a property for more than you rent it for. So I asked Sarah how they get around the law that prohibits subletting a property for more than it is rented for.
The chat window confirmed that my question was delivered to Sarah. At that point, I’m guessing there must have been a technical issue, because I still have the chat window open and have not received any further correspondence with Sarah. I wonder what the problem might be.
Now I know that subletting an apartment on a short term rental platform has been a common practice a few years ago. In fact, there was a rash of these units appearing on the market in New York City. There was one unit in particular, located near Union Station and close to NYU in lower Manhattan. That property is owned by someone who is from out of town. The tenant never occupied the property. They set themselves up as an AirBnB host and despite the monthly rent of $3,500 per month, they were able to get a monthly profit by using someone else’s asset.
This particular host had done this with nearly a dozen properties in NYC. When NY instituted the new rules prohibiting short term rentals for an entire apartment, the host continued to operate.
When the city went to enforce the new bylaw that prohibits rentals of entire homes, the unsuspecting owner of the property received very hefty fines for the violation.
The key is for operators who want to get into the commercial end of the short term rental business to be aware of the marketplace they operate in. You need to understand the supply and demand dynamics of the market. What is the barrier to entry? And what are the regulations? Nobody ever built a sustainable business that operates outside the law. You might not like the law, and you might want to influence changes in the law. But the law still is the law.
On today’s show we have an update on a story that we’ve been following for some time. The topic is short term rentals. The staff at the City of Ottawa completed their public consultations on the short term rentals and have issued their recommendations to a committee of City Council which I will be speaking at this coming week.
At the end of 2018 there were an estimated 6,278 listings. Listings include individual rooms and complete dwelling units.
It’s estimated that the number of investor owned commercial short term rentals in the market is approximately 1,236 units.
These properties have been put in the short term market and serve purely a commercial and no other purpose. This is an issue to which there are two sides and quite frankly I see both sides of the argument.
As an investor, I fully support the notion of investors making an honest dollar by providing a product for which there is real demand.
I live in a lovely home backing on park land and a lake. If my neighbour decided to move to the Caribbean and put their home into the short term rental market, I’d be pretty upset. The transient nature of the traffic next door would negatively affect the value of my property. So I fully understand the issue from the perspective of residents who bought residential property in a residential area, never expecting a hotel product to open up next door.
I own several short term vacation rentals in an another community that is heavily tourism centric. The properties that I own are zoned for tourism and for short term rentals. There’s no conflict between the intended use and the actual use.
In response to this shortage, the city is hoping that by regulating short term rentals, they will eliminate some of what they see as problems with short term rentals, and that these second homes will appear in the long term rental market to help address the shortage of properties in that segment, or sold outright in the open market to help address some of the shortage there.
The new rules provide for residents to benefit from the sharing economy while attempting to establish appropriate regulations that minimize the negative consequences of short-term rental activities that impact the availability and affordability of housing, generate community nuisances, and disrupt community cohesion.
Where the problem lies is with those investors who purchase properties for the sole purpose of entering the short term rental market and are now facing a dramatic drop in income as their properties will no longer be allowed to operate as a commercial short term rental.
The city has been incredibly slow to act on this, compared with other communities around the world. Platforms like AirBnB have been around for more than a decade. The city has the right through their zoning policy to dictate what types of businesses are allowed in a given area. But the city hasn’t used the zoning code to guide the current proposed bylaw. My comments to the city will be to amend the zoning definitions to specifically include short term rentals within the zoning. That’s the mechanism that currently governs the use of properties in the city. If all of a sudden chicken farming became really popular, we don’t need a new set of special chicken farming regulations. The use is governed by zoning, and this is no different.
I have no issue with the city charging hotel tax. That’s a level playing field.
I’m going deep on this situation because it’s a dialog that is happening in cities around the world. If you’re an investor in your local market you definitely want to understand what is happening within your city’s government and their bureaucracy so that you can influence the
On today show we are talking about conversations with potential funding partners. If you are in the marketplace for capital, you will invariably meet new people and develop relationships that a long way down the road could become a source of capital for your future projects.
The initial positioning of the person you meet might be unclear. Are they an individual investor who has capital to deploy? Are they a fund manager who places capital into projects using their funds? Are they a mortgage broker who simply wants to get another loan done? Are they an amateur who fancies themselves a connector of people? Are they a project sponsor who is out there in the market trying to raise capital just like you are and will never be a source of capital for your projects unless you join forces to work on a project together?
In my conversations I’ve encountered all of these.
It’s sometimes difficult to tell them apart.
The problem is that people like to make a good first impression. They will talk about their recent projects with the same level of ownership as if they were the principal in the project. Sometimes they were a broker on the deal. Sometimes they were a partner. Sometimes they were a principal. And then there are those who merely have friends who are principals in the project, but were not directly involved themselves.
I’ve even had situations where I’ve been talking to someone who is clearly not the money, but they tell you they are connected to the money. So after several lunch meetings and phone conversations an introduction is made, only to discover that the new player in the conversation is not the money either. They have some amazing relationships and can talk at length about the projects they have been involved with and how they placed $30 million in a project, or how they have continual deal flow. They’re a real player. So a few conference calls later it becomes clear that these folks don’t have the money either. If the deal meets their criteria, they might be willing to go out into the market and help you raise the money.
If you are listening to this, perhaps you have encountered the same situation yourself. These types of daisy chains are incredibly common.
I find that nothing happens in terms of a funding commitment until I’m speaking directly to the decision maker who has the funds and the authority to make the decision. Anyone else is just a connector. If they are not the decision maker or part of the core team that makes the decision, they are a connector.
So the question is, if you are dealing with a connector and not the money directly are you wasting time?
Sterling White is based in Indianapolis, Indiana. He grew up in a tough part of town without the advantages of connections or capital. Sterling's story is highly inspirational.
You can reach out to Sterling at sterlingwhiteofficial.com.
On today's show I'm talking with Billy Keels from Barcelona about the specifics of the Buy on The Line, Move The Line Strategy.
On today’s show we’re talking about the predicted extinction of realtors and mortgage brokers.
It used to be the case that in the old days, knowledge was power. In many ways it was perceived that in order to complete a real estate transaction, or a real estate financing, you needed access to someone with inside knowledge of the process in order to navigate the complexities of a transaction.
It used to be the case that information about a specific property was hidden in a database that only the brokers had access to.
Today, almost any information can be searched online. Some of it requires paying a small fee in some areas, but most is freely accessible.
So if the real estate broker or the mortgage broker isn’t required for your to get information, why do you need them?
Information falls into two categories.
- Information about a property that is either timeless or has happened in the past
- Information about what people intend to do in the future.
Info in the first category doesn’t require a realtor. You can find the legal description, the assessed value, a property’s dimensions, any liens on title all using online resources.
If there’s lots of choice out there, investors can often do the research themselves using online tools. But if you’re looking for something specific, the proverbial need in a haystack, that information is unlikely to be contained in searchable form online.
The goal of a broker is compress timeframes, to lubricate the relationship building process between buyers and sellers, between landlords and tenants.
Many people approach these types of business transactions with a healthy degree of skepticism and mistrust. But if the seller has a relationship of trust with their broker, and the buyer has a relationship of trust with their broker, the amount of time spent in due diligence can be reduced significantly.
Some people think that what is being brokered is the property. But in many ways, what is being brokered is trust, and the relationships.
The same is true on the lending side. Lenders can easily waste lots of time with borrowers who won’t qualify. By requiring the broker to qualify the borrower before bringing the file to the lender, the lender can save lots of time. The borrower too saves a lot of time by increasing their chances of having a successful financing. Lenders often decline a loan that for reasons that have nothing to do with the borrower. They may be facing other constraints in their business that cause a loan to be declined.
Simply having a business card that lists a license to operate in an area isn’t enough. The true value of a broker is the relationships that they have developed over time. This takes the broker a long time to develop and doesn’t happen overnight. That’s why the more established brokers get the lion’s share of the business. They have the strongest relationships, and they’ve established the longest track record in the marketplace. After all, that’s what is really being brokered, not the property.
So when you go out into the marketplace and look for a broker, whether you’re looking to transact real estate or complete a financing, the track record and reputation of the broker in the community and the quality of the relationships are the first two things I believe you should be evaluating.
On today’s show we are talking about the meaning of investing versus speculating. In 2017 the global value of all bitcoin in existence soared from $20B to about $320. Bitcoin was making headlines all over the world and it seemed like crypto currency had transitioned from the technology world into the mainstream.
One of the benefits of cryptocurrency is that the transaction history is fully contained in each transaction. Theoretically someone could analyze the transaction history and perform an audit of all transactions. Practically speaking, nobody’s ever done it because it is a huge amount of work.
That is, until recently.
But before we dig into that, a little more background is needed.
There’s another cryptocurrency called Tether. Tether’s main feature is that it is tied to the US dollar. For every Tether coin in existence, there is supposed to be a US dollar in a bank account backing that coin. Since most cryptocurrency at that time were quite volatile, cryptocurrency investors overwhelmingly would purchase Tether with US dollars and then buy another cryptocurrency with Tether, whether it was bitcoin or Etherium or another currency.
The makers of Tether insist that new tether are created by demand with the backing of purchases in US dollars from end users.
Researchers at the University of Texas conducted deep research on the influence of Tether on the price of bitcoin. They loaded all of the bitcoin transactions and all of the Tether transactions into a single database and started looking for patterns in the data. They developed a thesis that Tethers had a regular pattern of coming into the market whenever the price of bitcoin dropped. They also noted that the pattern of buying was much more orderly and consistent than other market activity. They also found that after this surge in Tether buying, the price of bitcoin went up. All of these market moving transactions went through a single exchange called Bitfinex. It turns out that Bitfinex is owned by the same three people who own Tether.
Bitfinex is an exchange that offers its users complete anonymity. You don’t need to provide any identification to open a Bitfinex account.
The researchers found that almost half of the $300 billion of price increase in bitcoin was linked to these suspicious transactions involving Tether , Bitfinex and bitcoin. That’s a $150 billion dollars of profits that have a cloud of suspicion over them.
The NY attorney general has started investigating these transactions as well. The folks at Tether have been asked to prove that there is in fact a paper trail showing 1 US dollar backing every token that was minted.
Now I want to be clear. Whenever money is involved, you will find fraud lurking in the shadows. The financial world has seen fraud in banking, price fixing in Libor, fraud in construction, the list goes on and on. Cryptocurrency is not the problem per se. But it takes a deep investigation to uncover fraud in cryptocurrency especially when it is an inside job.
There is no way that a single individual could manipulate the price and value of hard assets like gold or real estate. There is no single marketplace for trading in those assets. Moreover, the intrinsic value of hard assets is based on broad market fundamentals and not minute to minute or second to second price arbitrage.
The underlying problem of course is that bitcoin has no intrinsic value. There are no market fundamentals that make bitcoin or any cryptocurrency more valuable a minute from now, or a week from now compared with today. So the arbitrary assignment of value is pure speculation which in my mind is very distinct from investing. In order to be considered money it has to perform two things
- It has to be a store of value
- It has to be a means of exchange
Today bitcoin is neither a store of value nor a means of exchange.
Conclusions based on flawed assumptions are ultimately flawed conclusions. That makes sense. But when governments are involved, they don’t seem to adhere to that basic law of nature.
Real estate developers will soon have to create or fund social and affordable housing if they want to build in Montreal.
Projet Montreal passed a new housing bylaw in June of this year, following through on a campaign promise to give Montrealers more affordable housing.
The new bylaw aims to regulate the real estate market and improve upon its current vacancy rate of 1.9 per cent, the lowest in years.
Developers would have to enter into an agreement with the city to build affordable and social housing units, and family housing units, or give land to the city or make a financial contribution in lieu of building the finished units.
The Mayor is hoping to get land for free out of the new rules. On a big project for example in downtown Montreal, The Mayor hopes it's going to be more interesting financially for developers to give the city land so the city can develop social and affordable housing.
The number of units required to be social, affordable or family will depend on how many are being built overall and the location in the city.
For example, for a building with 50 or more units downtown, a developer would have to build:
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social housing equal to 20 per cent of the project
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affordable housing equal to 10-15 per cent of the project
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family housing equal to 5 per cent of the project
The city expects condo prices to rise by 2 to 4 per cent because of the bylaw.
I have to tell you that as a developer, it’s increasingly difficult to make the numbers work in today’s environment. This is simply based on the rising cost of construction, increased taxes and levies from government. For example, the development charges from the city have been steadily increasing and growing much faster than the rate of inflation. Only a few years ago, the federal government significantly reduced the value added tax rebate on new construction. This means that a developer needs to charge a 13% sales tax on the sale price of a new property. There is a small rebate, but most of the tax gets passed onto the end-buyer. Since the resale market has not gone up by 13% to compensate for this, it has had the impact of reducing or outright eliminating the profit margin for developers who build new housing. The industry still has not fully absorbed the additional tax. Many builders have exited the business entirely because the numbers no longer make sense. The smaller number of builders has created increased competition for fewer resources in the construction industry, which in turn has increased labor costs for construction.
If we now have to build a significant proportion of the project that will introduce a loss and negative cash flow, the number of viable projects will decline.
What government officials fail to recognize is that investment money has no geographic restriction. People who live in a geographic area don’t want to move. They are often anchored in their community. Money has no such restriction. The greater Montreal area is made up of several municipalities. If prices in the downtown are going to go up by 5% to accommodate this new bylaw, some will simply choose to live in one of the neighbouring communities.
The truth is that if you take 1/4 of a project and make it unprofitable, you need to compensate for that in other parts of the project. My financial models show that the real impact to maintain parity would require a price increase of 10% on the remaining units in order to make a project viable with the loss of profit from the affordable units.
This is yet another example of government using flawed math to justify their position. Conclusions based on flawed assumptions are ultimately flawed conclusions.
On today’s show we’re going to be doing some math. That’s right. The real purpose of today’s show is talk about the importance of financial education. Some people, notably lawyers, mathematicians, accountants, engineers and statisticians will find this math fairly simple.
But for the general population, the inability to perform basic financial math is one of the reasons that wall street and the major insurance companies are able to exploit their customers and quite frankly give them a bad deal on their money.
On today’s show we’re going to look at what some life insurance companies are quoting for income annuities. These financial instruments are often used by people later in life to guarantee an income stream in their later years.
Some of you might be wondering what an income annuity is?
Quite simply an annuity involves paying a fixed lump some of money into an insurance company. The insurance company in turn guarantees you a regular monthly income for the term of the annuity.
There are a couple of different types of annuities. Some are somewhat like a life insurance policy in the sense that the insurance company takes the risk on how long you’re going to live. You might purchase an annuity that has a 10 year minimum on it. But if you live, say, 20 years, the insurance company will take the risk and pay the monthly amount for life.
The second type of annuity is simply a guaranteed income annuity for a fixed number of years without taking life expectancy into account.
So if you call up your friendly insurance company and ask them for a quote, how do you know if you’re getting a good deal?
This is where the ability to perform basic financial math is vitally important. What we’re talking about is the ability to move seamlessly between the present value of a lump sum of money and the future value of an income stream. The most important variable in this instance is what is called the discount rate. That’s essentially equivalent to the interest rate that is being charged for that money into the future.
Now let’s be clear, the calculations to perform this math are extensive if you’re doing it in long hand on a piece of paper.
Fortunately, programs like Excel have a function embedded in them that makes this math quick and easy. But before you can use the function, you need to understand the concept. What I’ve discovered is that a lot of people don’t even understand the concept.
For an investment of 100,000, the insurance company will guarantee you $893 a month for 10 years.
If you multiply $893 a month times 120 months, the total comes to 107,160. So in 10 years, they’re giving only an extra 7,160 for the benefit of holding your money for that length of time.
If you kept the money in your bank account and earned zero interest, simply withdrawing the same $893 a month, the money would run out after 9.3 years instead of 10.
If plug these numbers into Excel, you will find that the insurance company is essentially offering you 1.4% growth of your money on an annual basis. Is 1.4% a good number? I guess it depends. Is it good compared to what?
Compared to the 10 year US treasury yield of 1.549%, it’s a little better, but not by much. The same money invested in 10 year treasuries would give you $900 a month instead of $893 a month from the insurance company. Generally speaking, US Treasuries are considered the safest form of investment.
If you were to invest the money at 6% instead of handing it over to an insurance company, you’d earn a monthly income of $1,110. This is clearly a lot better.
But here’s the sad thing, there are lots of people out there handing their money over to an insurance company to guarantee them an income for life. They don’t have much money to begin with, and the lack of education on how to perform the math is ultimately going to cost them even more money.
Alexandra asks: “I’m considering investing in the Toronto market that has an extremely low rental vacancy rate. Since the demand is so high and Toronto is a growing city, do you think this is a good idea?”
Alexandra, this is a great question.
It is true that vacancy in Toronto is extremely low. The city continues to add about 125,000 population each year, and there are about 35,000 units of new construction added to the market each year. Clearly there is a gap between demand and supply for housing overall. If you break down the vacancy by type of property, you can see even more granularity. For example, Bachelor apartments have the highest vacancy at 1.6%. This data comes from the Canada Mortgage Housing Corporation. This is Canada’s quasi government back mortgage insurer.
One bedroom apartments have a 1.3% vacancy rate, two bedrooms have a 1.1% vacancy rate, and 3 bedrooms are 0.9% vacancy rate.
Rental rates increased an average of 4.9% from 2017 to 2018.
The shortage of housing in Toronto isn’t new. That’s been happening for years. So the real question is “Why is the vacancy rate so low?” If the opportunity is so amazing, why do we not have more people flocking into the market to invest in rental properties? It doesn’t make sense that the vacancy rate remain so low for such a long time.
In my opinion, there are four factors that contribute to making rentals in the Toronto market a mediocre investment.
- Properties are very expensive to purchase. We’ve seen sale price increases over the past several years in the double digits. When the purchase price increases much faster than the rent, it’s hard to make the numbers work. You won’t see the market support an 18% increase in rents, whereas in 2016, market prices increased an average of 18 across the entire Toronto market. That’s a huge shift. You end up tying up too much equity in a property for the rent that you can collect.
- Toronto has instituted rent controls which limit the amount of annual rent increase that a landlord can demand from tenants.
- Constructing new dwellings in Toronto attracts very high development fees to the city to pay for the increased load on infrastructure, whether we’re talking about water, sewer, electric, roads, public transit and so on. When you have to write a cheque to the city for $84,000 to build a new single family home, and you have a choice to sell that home in the open market where you have no cap on the sale price, versus putting it into the rental market where your rent increases are capped, it’s an easy choice.
- The landlord tenant laws in Ontario are heavily skewed in favour of the tenant.
Toronto is a wonderful city. It’s clean, safe by World or American standards, multi-cultural, and there is an abundance of commercial and employment opportunities. But it’s increasingly one of the most traffic congested cities in North America. They haven’t been able to build enough road infrastructure to keep up with the population growth.
Some investors have bought into the market, accepted the fact that there is very small cash flow, and in many cases negative cash flow. They’ve justified the investment by saying that they make it up in appreciation. For investors, it has worked out. But you don’t control what the market will do in the future. For that reason, it’s a risky strategy and one that I don’t recommend.
I personally favour markets where the rent to purchase ratio is much better.
George Ross is my guest again today and we're talking about the opportunity that may exist in the aftermath of the disaster at WeWork.
Adam Taggart is one of the founders and principals at Peak Prosperity, an organization dedicated to helping people build a sustainable life. The headwinds and dislocations facing us as a society are numerous. On today's show, Adam gives a first hand account of what it was like to evacuate from the fires in Sonoma County in Northern California earlier this week.
To learn more, reach to Adam at www.peakprosperity.com
They also have an actionable plan which can be found at
www.peakprosperity.com/wsid (What Should I Do?)
The book this month is Getting Things Done: The Art of Stress Free Productivity by David Allen.
This is not a new book. It was first published in 2001, with numerous revisions. The most recent edition is 2015. Since technology and tools are moving so quickly, the most recent edition removes a lot of the tech tools that have a short shelf life and what remains is a timeless edition the focuses on the techniques needed to
This book is about how to manage the overwhelm that represents the reality of modern life.
The author David Allen has been called one of the world’s most influential thinkers on productivity.
As I was reading the introduction of the book, it’s like the author was inside my head. He was articulating many of the struggles that I faced on a weekly, if not hourly basis.
I experienced the stress of having too many things to remember, too many things to do, and too many priorities to ever feel like I’m keeping ahead.
While the title of the book seems to imply that it’s all about accomplishing more, it’s really a book about how to engage appropriately with your world.
In some cases, it’s about doing less, about focusing, and about eliminating the overwhelm and distraction that is associated with what you are not doing.
When I’m sitting at my desk working on a focused task, I’m often distracted by the nagging knowledge of something that is overdue, that someone is expecting me to do and isn’t complete. The mental juggling of tasks is overwhelming and causes distraction and loss of focus.
Even writing down the tasks into a to-do list doesn’t solve the problem. Some people simply write down their focused task list of the 8-10 items they plan for that day. But the problem with this approach is that it neglects the dozens of other items that are not on the list. Those items are still stuck in your head and occupying mental storage. Writing them all down seems overwhelming and not the way to go either. Unless you have a method for decision making, you will quickly get overwhelmed.
The method presented by David Allen is based on three decades of experimentation and refinement. It’s based on three fundamental practices:
1) Capturing all the things that might need to get done or have usefulness to you in the future
2) Directing yourself to make front end decisions so that you a workable inventory of “next actions”
3) Curating and coordinating all of that content utilizing the recognition of the multiple levels of commitment with yourself and others at play.
A paradox has emerged in our lives. We are bombarded with choices that far exceed our capacity. We have an enhanced quality of life, and at the same time we have been adding to our stress levels by taking on more than we have the resources to handle.
The fact is the edges of work have blurred. In the old days, you could tell when the work was done. The field was plowed, the room was painted. These days, there is no real boundary. Writing another blog article, ten more social media posts, updating the images on the website, reviewing the google Adwords campaign, checking that the lawyer has completed the title work, reading the financial statements and ensuring that expenses were properly categorized as part of the construction inventory and not operating expenses. The list goes on and on.
David Allen’s book was all the rage in Silicon Valley for a number of years after it was published and several of my colleagues used its method religiously. I’ve been adopting it into my work flow. While the system required a large commitment in time to implement, the benefits are self evident.
On today’s show we’re talking about interest rates again. Yesterday, the Federal Reserve announced another 0.25% drop in the benchmark lending rate. A number of listeners are wondering what the Fed rate has to do with every day lending rates. Some consumer credit card rates have increased in recent months at a time when the Fed rate was falling. So on today’s show we’re going to read directly from the Federal Reserve’s prepared statement, and then give our interpretation of what it means.
In his prepared remarks, Federal Reserve Chairman Jerome Powell refers to the committee that governs the Federal Reserve.
The Federal Open Market Committee (FOMC) consists of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. So these 12 people have more influence on the financial world than perhaps any other non-elected officials on the planet.
So what does this all mean?
In my view, we can expect interest rates to remain low for some time to come. While there has been stimulus in the economy since the summer, it’s not uniform. We are seeing increased demand in real estate, which is very sensitive to interest rates. Real estate refinance activity in July and August was up 75% compared with June.
Manufacturing numbers are down. Some are blaming it on the trade negotiations. But in truth, I believe the inventory numbers are the real reason.
We’re seeing troubles in the automotive sector. When I drive past car dealerships, whether it’s in rural upstate New York, or in the core of a major city, dealership lots are literally bursting at the seams with inventory. I haven’t seen dealer lots this jammed with inventory in a long time. I’m seeing manufacturers offering very aggressive deals in order to move inventory off the lots.
So back to real estate. As a real estate investor, your borrowing cost is usually tied to one of two indexes. Most short term loans, like home equity lines of credit and other revolving credit lines in real estate are tied to Libor. That is the London Interbank Overnight Rate. This is the lending rate that banks use to pay for money that is stuck between accounts on an overnight basis.
Long terms lending rates for permanent financing tend to be indexed to the 10 year treasury bill rate. So if you’re looking for long term permanent financing, whether it’s conventional, or an insured non-recourse loan
When the Fed sets rates, they’re really setting the rate at which the US government borrows money. Ultimately that trickles through to the T-Bill rate, both short and long term US government bonds.
As a real estate investor, you’re in a great position to lock into some great terms on long term financing, and even some strong terms on short term financing.
On today’s show we are answering a question that I receive frequently. The question is how I spend my time. What is an average day?
So today I’m going to do a deep dive on what I did yesterday.
My day started at 6:15. First thing, my wife and I spend about 20 minutes together. We have a meditation practice that we do. We have a couple of different ones that we use. We sometimes use an app called Calm. Today we used another App called Oak. It’s a very simple app to use and the guided meditation is very simple and easy to connect with. We start our day with the meditation practice lying in bed and holding hands.
We both had a quick shower and got dressed for work. In our family we made the decision this year to go from two cars in our family down to one. Some days my wife takes the car to the office and other days I will drive her. In fact many days she will walk because the office is walking distance from our home. But today she had a little too much to carry for that distance. It gave us a few extra minutes together during the drive. On the way to her office we stopped at the fresh vegetable market to buy something for her lunch.
I was back home in time to start organizing my day. I usually reserve my morning with a minimum of meetings. That is when I get my focus work done.
On Monday morning I have two short meetings. At 9:30 I have a call with my partner John in Dallas for a quick update on status. Then at 10 I have a quick daily call with Patrick in my team where we reviewed the negotiations on a project. From there I started drafting the podcast for the next day. Some episodes are recorded well in advance and others are only one or two days ahead.
Every Monday morning at 11:00 I have a brief phone call with a lender to update the status on one of our projects.
My son reported that he had tooth pain and might have cracked a tooth. He would need to get to the dentist and find out what was going on.
Recording the next podcast episode completed my morning. My afternoon was focused on another condo development project in my local market. We had a meeting scheduled at the law offices of the land owner to review a number of details on the file including a number of complex structural problems with the investment. On the drive to the meeting I made a quick stop to grab a salad from the salad bar at the local market. I made good use of the drive time to have a call with an investor.
The owners of the property are a lovely family who are very close knit. We spent nearly two hours at the lawyer’s office discussing various aspects of the project, solutions to the existing problems and estimating the costs associated with the next phase of the project.
After that our team found a Starbucks and we strategized how we would structure the deal. By this time it was deep into rush hour and it was going to take me an hour to get back to the west end of the city.
During the drive, I figured out how to register as a delegate for an upcoming city council committee meeting. I also called a friend who had been struggling in the past year to see how they were doing.
I arrived at my wife’s office just in time to pick her up.
We only had about 20 minutes to have dinner, so we grabbed a sandwich on the go and went together to a community meeting organized by our local city council representative to discuss the proposed development of a golf course that is not far from our home. Several other developers were in attendance and the Mayor came to speak as well at the meeting. There were about 500 people in attendance and the meeting ran late into the evening.
I finally wrapped up my day by reading part of a sailing magazine that I had picked up about 3 weeks ago and had yet to crack the cover open.
James from British Columbia asks:
I have been scouring a lot of Canadian town and cities and have not come across any properties that rent at 1% of houses value let alone 2%. What do you recommend for Canadian’s and am I focusing my search in the wrong areas? I live on the west coast, so I have been primarily looking in the interior of British Columbia and Vancouver Island.
James, that’s a great question. There is sometimes a paradox when it comes to making the numbers work for rental properties. The one percent rule, or the 2% rule are a proxy for not paying too much for your income stream. It’s not exact math by any means. Properties that tend to adhere to the 1% rule fall into one of two categories.
1) Working class, C Class housing in areas where there is steady employment and houses are quite inexpensive to purchase. This happens usually in mature markets. I’m thinking of pretty industrial towns like Sudbury Ontario where there are large Nickel Mines and Smelting operations. But Sudbury isn’t growing like a major Metro like Toronto or Vancouver or Nashville. You need growth to drive up the price. Areas that are more rural like Vancouver Island and the Interior of British Columbia have very high infrastructure costs. The cost of building roads and bringing electricity is high. A good US example where you can often meet the 1% rule is in Indianapolis, Indiana. Boise Idaho would be another.
2) The second area where we often meet the 1% rule is by building new apartments in markets where there is strong demand. This is what my company does. We don’t set out to adhere to a 1% rule. We use more sophisticated measures, but when we look in the rear view mirror, we often discover that we indeed did meet the 1% rule. When we purchase vacant land in the core of the city, next to a great area, we often purchase the land at a deep discount to the market. This is our buy on the line strategy that if you’ve been listening to the show for a while you would have heard me talk about. We consistently build new apartments in Philadelphia that meet the 1% rule, even though we’re not actively setting out to meet that metric.
It’s absolutely true that properties in many markets in British Columbia are expensive. There has been a tremendous amount of immigration and homes that were once very affordable are now out of reach for many average people with real working class incomes such as you would have in those communities. The growth in the cities has had a spill over effect and now even outside the major cities, prices have increased considerably. Sale prices have increased much faster than rents.
I find that the opportunities in many expensive Canadian markets is to focus on very specific under-serviced needs. For example, there may be a shortage of student housing next to a growing community college. There might be a need for luxury rental apartments for senior citizens who are downsizing and don’t want to tie up a lot of equity in their home.
On today’s show we are talking about cyber security. October is the annual cyber security awareness month.
As more and more of our lives seem to have an online connection, there is a tug of war between convenience and security. Our mobile devices are always listening. My phone using location information tells my thermostat when nobody’s home so that we save energy on heating or air conditioning. We may think that our phone is only listening when we issue a voice command. But that is not the case. My latest car has a smart phone app that allows me to read the current status of the vehicle. It tells me if the windows are open. It tells me if the doors are locked. It tells me where the car is located. It even tells me what my mileage was on my last trip. But if my phone were to become stolen and compromised, someone with my phone can unlock the doors, and even start the engine from the app.
Practicing online safety takes on so many new angles that didn’t exist even a few years ago.
These days it means so much more than making sure your password isn’t something simple. If your password use simple words that are in the dictionary you’re vulnerable to a computer program guessing your password by brute force techniques. The intruder simply makes enough guesses over a long enough period of time that it eventually will guess the password. The shorter the password the quicker the computer will guess your password. Let’s imagine that your password is the word “sand”. At only 4 characters, it will take no more than a few minutes to guess the password. If you extend the password to an entire sentence, something like “Sandisonthebeach” the password has a lot more characters. It’s going to take a lot longer for a program to crack that password. Now if you start including special characters. Let’s say that you replace the S in the word sand with a $, and you replace the letter B with the number 8 which looks a little like a capital B, you’re making it much harder for a computer program to guess the password.
When we talk about cybersecurity, people tend to think first and foremost about password security. That is certainly important. Another technique called two factor authentication brings an added layer. For example, if in addition to having the correct password, you also had to type in a time sensitive code that is only valid for a short period of time, you make the chances of a password breech incredibly small. But there’s another few areas that can create vulnerability.
The first is to never click on a link that’s been sent to you via email. If the link isn’t going to the place you think it is, the act of clicking on a link can initiate the download and installation of software on your computer that might exploit a security vulnerability in your computer’s operating system. Once the hackers have installed software on your computer or your phone, that software can monitor your keystrokes and memorize your passwords. At that point, no amount of passwords security will help because they’re literally eavesdropping on all of your keystrokes.
If you’re in business, your website is a point of vulnerability. It’s not often talked about, but commercial websites are under assault virtually all of the time. For example, every day of the week, I receive notifications from my website and from the website for my wife’s business every time it receives a barrage of attempts to attack the websites security.
I can tell you that I’m seeing hundreds of attempts to crack website security each and every day. We also make edits to the website on a staging site that is not publicly visible. So if the production website was ever to be compromised, we can replace the production website with the staging website with the push of a button and in about 3 minutes, the entire production website has been replaced with a fresh website that could not have been compromised.
Tamera comes all the way from Stockton California where she has mastered the art of remote lifestyle investing.
Anne Amagrande hails all the way from Pasadena California. She can be reached on LinkedIn or on her website at Amagrande.com.
On today’s show we are talking about how to speak to bureaucrats. This past week I attended a public consultation meeting with city officials. They are trying to gather community input on the question of housing quality, availability and affordability.
Tenant advocacy groups showed up at the meeting in force. They had lots of stories of problems with their property that quite frankly should not have happened. I have a tremendous amount of empathy for the folks in the room who have endured hardships.
It’s true that not all landlords are educated on how to run a quality rental business. People had stories of molds being hidden behind a coat of paint. They had stories of recurring pest infestations. They had stories of broken elements that had not been repaired despite numerous requests.
The city has a mechanism for enforcing property standards. It involves a simple phone call to a 3 digit hotline and any resident can report a problem to city bylaw enforcement officials. The most common complaint at the meeting was that residents either didn’t know about the hotline or were too shy and intimidated to call. The proposed solution would be to institute a landlord licensing scheme that somehow would improve the quality of the rental properties. The cost of implementing such a system would inevitably be passed onto tenants, making housing even less affordable.
One of the proposals is to levy an administrative charge against landlords that face repeated complaints requiring repeated visits to the property by bylaw enforcement officers. The funds collected from the administrative fees would funds proactive enforcement.
Let’s unpack what this really means.
I stood up at the meeting and made the case for properly addressing rental affordability. The root cause of affordability is that the underlying cost of properties in the city is high. When a basic commodity 3 bedroom townhouse costs $450,000 to purchase, the cost of owning that property is going to be somewhere in the region of $2,500 a month. It doesn’t matter who owns the property. If the property is owned by the landlord who rents it for zero profit, it’s still going to cost $2,500 a month. That’s out of reach for many in the community.
We discussed many ideas for creating affordable housing. But at the end of that discussion city officials said they weren’t really trying to create affordable housing. They were simply trying to make sure that in the process of implementing any new rules, they didn’t make the situation any worse. So the study was really about what if any new rules would be implemented to govern rental housing.
The city does maintain statistics on where they get complaints. Of the 133,000 units in the market, only a small number are the subject of property standards complaints to the bylaw enforcement hotline. In fact 233 units are responsible for 23% of the complaints in the city. We’re talking about some 233 units that represent 0.17% of the total inventory in the city. That’s less than 2 properties in 1,000.
In my view, the city knows exactly where to focus its attention. It’s on those 233 properties.
The second major question was on the topic of proactive enforcement. City staff mentioned the concept of proactive enforcement on several occasions. That’s a word that is code for going on a fishing expedition to find problems. You can't get the police to respond to reports of drug activity at a property, real criminal activity.
City staff seemed to accept my argument that the bigger picture priorities needed to be examined.
The point of today’s episode is that you absolutely can influence recommendations made by city staff to city council. You can absolutely influence decisions that are made by politicians. But you have to get out from behind your desk, you have get off your sofa on a Tuesday night and go down to city hall and engage in the dialog directly, face to face.
Entrepreneurship is a hot topic these days. The story of the startup founder turning a great idea into a thriving business is the raw material of modern urban legend.
Then there’s the dark side. There’s the stories of greed, of jealousy, and of insecurity. These are all human traits that make up part of the human condition.
Movies like the Big Short have documented the headwaters and the aftermath of these human characteristics.
In the latest news, Business Insider is making a WeWork documentary with a hit Netflix producer about the unraveling of the world's most valuable startup.
Since its inception in 2010, WeWork has amassed more than $12 billion in investment from some of the world's smartest business leaders and venture capitalists, including JPMorgan's Jamie Dimon and SoftBank's Masayoshi Son. At its peak, the coworking company commanded a $47 billion valuation and set its sights on a public offering of up to $100 billion.
Today, Business Insider and Campfire announced they are making a documentary about the rise and fall of WeWork. The tagline for the documentary is that It's the story of what happens when Silicon Valley greed goes haywire and the idea of building a big business becomes more important than the fundamentals.
I actually take exception to the Silicon Valley reference. WeWork tried to associate itself with Silicon Valley as if to imply that it could play by a different set of rules. The company was a real estate company and it clearly didn’t play by the rules of any sane real estate investment.
It's really the story of a charismatic leader who both hoodwinked investors and was enabled by them as they tried to drive returns on their investments. Thousands of employees are now paying the price.
The latest news from WeWork is that they intend to lay off thousands of employees in order to reduce their cash burn. But they had to delay the layoff notices because the company didn’t have enough cash on hand to pay the severance.
The company’s board of directors had set a deadline of October 22 to review two proposals for taking the company forward. The first proposal is from Softbank who would take over the company with the injection of another $5B in cash over the next several years and ultimately steer the company to profitability. The company would be valued at $8B after the transaction and would leave Softbank deep underwater on its investment, but at least offer the possibility of a profitable outcome at some point in the distant future.
The second offer from JP Morgan is a $5B debt deal that would further leverage the company. That deal would offer up to $5 billion in secured and unsecured bonds that, unlike SoftBank’s proposal, wouldn’t dilute or devalue the stakes of WeWork’s existing investors. It all would have the effect of pushing WeWork’s equity investors further down the capital stack, standing in line behind bondholders whose high-interest debt positions would take priority.
I don’t want to see a Netflix documentary on WeWork. We’ve already seen that movie before. It’s been playing out in the newspapers over the past month. In fact Business Insider has written over 255 pieces on WeWork in recent months. It’s been regular front page news in the Wall Street Journal for much of this year.
What I want to see is Adam Neumann appear as a contestant on Shark Tank. That’s right. I want to see him sell his idea to Barbara Corcoran, the maven of NY Real estate where Wework has 53 locations.
I want to see him sell Mark Cuban on a billion dollar investment in exchange for 3% of the company.
I want to hear Kevin O’Leary’s eloquent signature sound bites. I want to hear Mr. Wonderful say “The purpose of being in business is to make money.” I can’t stand to watch people murder money. I want to hear the closing statement “and for that reason, I’m out”.
On today’s show we’re going to run a small experiment. Let’s imagine that you went into the casino in Vegas wearing a baseball cap that says Federal Reserve. You sit down at one of the card tables and start playing.
But one player, the one with the baseball cap has some special powers. They can print cards at will. Moreover, they don’t exactly deal out the newly minted cards uniformly at the table. What do you suppose would happen?
They’d be hauled out into a back alley behind the casino and some thugs would probably break their knees.
But that’s just a hypothetical situation. Let’s get back to the real world. The year was 2008, there was a real banking crisis underway. Some of the largest financial institutions in the US and in fact around the globe were at risk of collapsing.
President George W. Bush signed the $700 billion bank bailout bill on October 3, 2008. ... $700 billion was a shockingly large number. It made headlines around the world for weeks. It was the subject of books and movies.
The situation was truly a crisis and it called for desperate measures. By implementing these emergency measures, Treasury Secretary Henry Paulson wanted to take these debts off the books of the banks, hedge funds, and pension funds that held them. His goal was to renew confidence in the functioning of the global banking system and end the financial crisis.
The economy was in uncharted territory. Government was in uncharted territory. It needed a new vocabulary. The term quantitative easing was brought into the financial lexicon. This fancy term was much more palatable than the crass synonym of printing money.
Thankfully, today the economy is healthy. Unemployment is near 50 year lows. Inflation is low, worryingly low according to some government officials. We have a US federal election coming in a little over a year.
So then why would the Federal Reserve be printing, um, I mean quantitative, no that’s not it, Why would the Federal Reserve be buying US Treasuries?
The Federal Reserve began buying short-term Treasury debt Tuesday at an initial pace of $60 billion a month, but officials say these purchases are nothing like the bond-buying stimulus campaigns unleashed by the central bank between 2008 and 2014 to support the economy.
When private investors buy bonds, they use cash, borrow funds or sell assets to raise money to fund those purchases. The Fed is different. It doesn’t have to do any of that because it can electronically credit money to the bank accounts of bond dealers that sell mortgage and Treasury securities. The Fed gets the bonds, and the sellers’ bank account increases by the same amount as the bonds’ value. Banks keep deposits at the Fed, known as reserves, and when the Fed buys bonds from banks, their reserves rise by an equal amount.
They’re like that special player at the card table.
The Fed bought bonds to stimulate the economy between 2008 and 2014. Isn’t this the same thing?
Not according to the Fed. The central bank has taken pains to emphasize that these purchases don’t represent a return to what is known as quantitative easing. We’re not allowed to call these purchases QE, but they look exactly like the QE bond purchases of 2008. Now at $60 billion a month, that comes to $720 billion a year. But wait a minute, the Fed printed $700 billion in the middle of the biggest crisis in decades. Now 10 years later, with no crisis, they’re going to print $720 billion a year.
Yesterday was the Federal Election in Canada. The incumbent Liberal Party under Justin Trudeau had a majority prior to the election with 177 out of the total 338 seats in Parliament. At total of 170 seats are required to form a majority.
There were 6 parties vying for position in the election.
The two major parties are the Conservative party which is a little right of center, and the Liberal party which sits left of center.
The third party is the New Democratic Party is decidedly left wing in their policies. There are a few wild cards. The Bloque Quebecois, is a party based in the province of Quebec and they are exclusively focused on furthering the interests of Quebec, Canada’s only French speaking province. Historically, the Bloque was furthering the agenda of Quebec independence. These days they don’t talk about separatism and are focused on protecting Quebec’s interests at the Federal level. The Bloque Quebecois could hold the balance of power in a coalition government with either the Liberals or the Conservatives. The Green Party, the People’s Party, the independents, and a few other fringe parties make up the balance.
When you look at what each party is proposing on their election platform, there are supposedly about a dozen election issues, at least according to the media.
Then there’s the big issue that really decides the votes. Do voters like the candidate who is was elected as leader of the party who would ultimately be named Prime Minister. Do they conslder the politician to communicate in an authentic way, or do they find them manipulative? Justin Trudeau who has held the role of Prime Minister for the past mandate narrowly won enough votes to form a minority government. That means that any major legislation will require a coalition with at least one other party and possibly more.
The popular vote separating the Liberal and conservative parties was less than 2% different. Neither party managed to secure more than 33% of the popular vote. So it’s really surprising that any party was able to form a government with such a low percentage of the popular vote.
The US has a decidedly 2 party system. You either get a democratic congress, a democratic senate and a democratic white house, or a republican congress, a republican senate or a republican white house.
But in Canada, there are multiple parties. There are two major parties that seem to capture the majority of the votes, but there’s nothing enshrined in the system that limits the number of parties.
Minority governments are traditionally unstable. They also tend to gridlock and don’t get much done.
Countries that have an electoral system based on proportional representation have a very hard time forming a majority governments. You only need to look at Italy and Israel for examples of the pitfalls of a proportional representation electoral system.
After several weeks since the last general election in Israel, Prime Minister Benjamin Netanyahu came forward today to concede that despite having the most votes, he has not been able to put together the democratic coalition needed to from the government.
Minority governments have a history of not lasting very long in Canada. They often fall within 18-24 months and the country goes back to the polls.
This particular election was one of the most divisive in recent memory. There were numerous personal attacks and issues where the candidates themselves became the issue.
Much like in the US, the political division is regional. Canada tends to see a stronger base of support in the Western provinces for the Conservative party, and a strong based of support for the Liberal party in Ontario and Quebec.
I found there was little to vote for, only things to vote against.
Today’s show is a case study of a specific project which my wife and I visited this weekend. It seemingly has all of the right elements. The location is one of the best in the city. It’s directly across from the Rideau Canal one of the most historic and picturesque waterways in North America. During the winter months, the canal is the site of the world’s longest 7 mile skating rink.
The property is walking distance to restaurants, shops, two universities. It’s in the heart of the community and still has lots of green space right outside your doorstep. The location counts some embassies in the same area overlooking the canal.
The project is being developed by an experienced development team who have completed several other successful projects. The architect is one of the premier architects in town. The general contractor is one of the largest and most established contractors in building concrete structures in North America having built numerous high rise buildings, government office towers. They have over 14,000 employees and have been in business over 100 years.
The showroom and sales center is situated in an old church that resides on the site of the future condo tower.
The developer took the project through the entitlement process and the project is approved. The six story building has a few technical challenges. It’s across the street from the Canal which means that the water table is going to be extremely high. The underground parking will have to be protected from water intrusion that will ultimately be present. This will increase the cost of construction.
The site is not that large. The original plan was for 32 units on 6 floors. The floorplans are large and spacious. The terraces and balconies are luxurious and spectacular.
Once you have a project that is entitled, that process defines the envelope of the building. It defines the setbacks from the property line, from the street, and the height. In some cases, if buildings are going to be higher than other properties in the area, the city will require the upper floors of the building to be set back and have a smaller footprint so you don’t have a huge rectangular block. This creates tremendous opportunities for roof-top terraces on the upper floors.
But there’s one small problem. The units are not selling. Why? Because in my opinion they’re too expensive. In fact the developer has pulled all the pricing from their marketing materials and have stated that they’re in the process of redesigning the interior. They plan to increase the number of units from 32 to 40 without changing the exterior envelope of the building.
There simply isn’t that large a market for apartments at the 2.5M price point. Underground parking spaces are going to be priced at $45,000 each. At the end of the day, the target clients are going to be people who are empty nesters who want a property in a premier walkable location combined with the security of a lock and leave condo. They want to know that the maintenance of the building is handled and that they can spend a few months away in the winter without having to worry about taking care of their property.
The problem is that the price point is too high. As developers we tend to think in terms of price per square foot. But retail buyers don’t think in those terms. Retail buyers think in terms of price point, of affordability. Tenants don’t think in terms of rent per square foot. They have a monthly budget of so many dollars per month.
They might want a large two bedroom for that price, but if they can’t get it, they’ll accept something smaller that fits within their budget.
If you’re choosing to develop a premium product, pay very close attention to your market demand and be prepared that it could take a lot longer for your project to sell than you imagine.
Hayden Crabtree is based in Atlanta Georgia and he owns and operates storage facilities in multiple states. On today's show we do a deep dive on a specific case study that I think you'll find fascinating.
Our guest today is the host of the Thought Leader Revolution Podcast. Nicky specializes in working with business leaders, olympic athletes, and authorities who are looking to establish themselves as thought leaders.
You can reach Nicky at http://ecircleacademy.com.
He is also offering to ship you a free book written by Matt Church called the Thought Leader's Practice.
https://www.thethoughtleaderrevolution.com/free-book/
On today’s show we’re going to do a deep dive into a city consultation process as they grapple with the question of how to manage what is perceived as a problem with affordable housing in our city. To that end, they’re holding a number of public consultations including a public survey.
Over the course of this past year, the City has met with and received input from multiple community and business organizations to discuss rental housing regulations.
The purpose of going into this much detail is for you the listener to become involved in your own municipal consultations and for you to recognize that you have a voice.
Tenants have shared a range of experiences related to housing quality, from very poor to excellent. While there is significant support within the community for a licensing/registration system for rental housing, the majority of tenants do not support these measures. In approximately 9 out of 10 cases, landlords make repairs when required and there is concern about the increased rental costs that would result from licensing and inspection fees.
However, when problems do occur, both tenants and neighbours want to see a more robust response from the City. There is strong support for proactive enforcement as well as enforcement targeted towards properties with a history of violations.
From landlords and the real estate industry, the city has heard that over-regulation will deter new construction and could also result in current units being taken off the market. This will likely result in higher rents and more residents living in unaffordable housing. However, it is important to note that the majority of landlords and tenants both agree that enforcement should target specific problems when they occur rather than taking a broad “one size fits all” regulatory approach.
In the good old days you went to the big box store and purchased a software application in a large cardboard box. The software as contained on a CD and you installed the software on your computer. These days, software is rarely a product any more. It’s increasingly cloud based and sold on a monthly basis as a subscription. That is what we now know as software as a service. The latest is something called banking as a service that aims to disrupt the world of banking much life the sharing economy has disrupted taxi services, hotels, and even the dining experience.
On today’s show we’re going to do a deep dive on some of the innovations in banking that fall into the open banking and banking as a service initiatives that abound in the industry.
These days a lot of the literature focuses on the mechanics of gaining access to bank data through defined software interfaces. These Application programming Interfaces (API’s) define how a third party software company can access customer data, or bank functionality or both.
It’s important to make a distinction between these two because the security of your money is at stake.
Unless you are in the business of banking, a lot of this can sound like technical jargon. On today’s show, we’re going to break it down so that you can understand what it means to you as a user of banking services.
First of all, we need to spend a little time on definitions.
Platforms break down into four main areas:
- Identity Verification
- Move Money
- Account Origination
- Design and Manage branded customer debit cards
There are a large number of startup companies developing products in the financial technology space. They’re called fintech companies. So what do fintech companies do? They offer services that previously were not possible in the market.
An example is a solution for taxis and public transportation:
In this service, the bank's customers can send for a taxi from the bank's own app and identify all of the charges; and the bank gets payment fees and offers the service itself.
Intuit, the maker of Quicken, Quickbooks, and Turbotax has a new product called Mint. Mint makes it possible to get a consolidated view of all your accounts, credit cards, loans and so on across multiple financial institutions on a single dashboard. You can see your entire financial life in one place. As you can imagine, that requires that each of those institutions provide secure access to your accounts so that you have the benefits and convenience of a single dashboard without the security risks of opening up your financial records to any unauthorized access.
The mint offering includes a bill payment tracker, a budget goal tracker, an investment tracker, and an integrated credit score tool. You also have access to services and products including insurance quotes, loans, and 401K to IRA roll-overs.
Another one of the recognized leaders in the open platform space is BBVA from Madrid in Spain.
The opening of these platforms would enable banks to play more directly in services like peer to peer payment which up until now have been in the exlusive domain of companies like Paypal.
The European Union has set clear rules in place for interchange of bank information and for open banking standards. These rules have put European banks well ahead of banks elsewhere in the world in terms of adopting open standards and more advanced service offerings.
One of the major frontiers in fintech is the interchange between traditional bank accounts and various blockchain technologies and crypto-currencies.If and when that happens, it may revolutionize electronic commerce on a global basis and change the relationship between you, your smart-phone, your bank, and virtually every aspect of your financial life.
On today’s show we’re talking about the race to the bottom. You have to admit, it’s hard to compete with “free”.
There are numerous examples of products and services that used to cost money, that all of a sudden are “free”. If you were in business relying upon service revenue and one of your competitors up-ends the market by offering your service for free, what are you to do? Are you out of business?
Earlier this year, Luxembourg decided to make its public transit 100% free. Luxembourg City, the capital of the small country, suffers from some of the worst traffic congestion in the world. It is home to about 110,000 people, but a further 400,000 commute into the city to work. A study suggested that drivers in the capital spent an average of 33 hours in traffic jams in 2016. While the country as a whole has 600,000 inhabitants, nearly 200,000 people living in France, Belgium and Germany cross the border every day to work in Luxembourg.
Annual revenue from fares – 41M Euros – covers less than 10% of the network’s 491M-Euro operating costs. When you consider how much labour and expense is spent collecting money, counting, sorting, enforcing payment, it actually made sense to eliminate the fares. But think about the impact to the other forms of transportation. If you’re a taxi driver in Luxembourg, you’re probably unhappy about the new free alternative. Will taxis go out of business? Probably not, but free doesn’t help bring more business.
If you’re in the online dating business like match.com, e-harmony, tinder or bumble, you were probably unhappy to hear that Facebook was going to enter the market with a free offering. The service has been live in 20 countries for a while and is now live in the US over the past few weeks. The service aims to put a dent in the $2.5B dating market that is aimed at the 200 million Facebook users in North America who identify as single.
In other news, Charles Schwab began offering commission-free online trading for U.S. stocks, exchange-traded funds and options on October 7. Previously, each trade cost investors $4.95.
Commission fees are charged by a brokerage when you buy or sell a stock, ETF or other type of investment product.
So far, one area that has been defended strongly from “free” services is real estate commissions. The standard model of 6% commissions being split half way between the buyer and the seller side hasn’t budged in a few decades, even though much of what a realtor does has changed significantly.
Finally, specialty news services, Cable TV, and subscription radio are struggling to survive in the era of YouTube, online news sources like Business Insider, and of course the entire podcast movement.
I’ve had several people who want to start a podcast ask me how to monetize a podcast. The simple answer is that you don’t monetize a podcast, at least not directly.
So the question is, why would anyone provide something for free?
Why would a broker provide free brokering?
Why would Facebook provide a free platform?
So why would someone host a podcast for free?
In the case of the podcast, it’s a fair exchange. I provide you with something valuable each day for free. My message will connect with some of you and some of you will want to reach out to me and propose doing business together. That doesn’t mean that every one will be a match, but a subset could be and that’s enough for me.
Some people view free as a race to the bottom. Some free offerings are just click bait. I view free as an opportunity to engage in a conversation and develop a relationship that may turn into something more in the future.
Pam in New Orleans asks:
Harry Dent recently published a view that says
“The Biggest Stock Market Bubble In History Set To Crash.” What are your thoughts on what Harry has to say?
Pam, this is a great question. Harry Dent is an economist who specializes in using demographics to predict economic behaviour. He is also known for having some controversial views. All controversy aside, I agree mostly with Harry Dent’s perspective that the market is going to face some significant headwinds.
If you think about what drives up prices in the stock market, it’s more buyers than sellers. Buyers of stock are people who are in the workforce who put some money aside and invest some of those savings in the stock market, the bond market or in real estate.
People who are of retirement age take their life savings out of the stock market and put them into more fixed income securities and use the income to fund their retirement.
When you look at the number of people in the workforce compared with the number of people in retirement, we see an inversion. When the baby boomers were all in the workforce, they were saving for retirement and investing in the stock market. With about half of the baby boomers now retired, and the remainder to retire over the next decade, that large generation will be pulling money out of retirement accounts and out of the stock market for the next 30 years. The generation of people who came behind the baby boomers, the so-called Generation X is a much smaller population who are still in the workforce. All other things being equal, we’ve gone from a period where there were more investors in the stock market to a period where there are now more people withdrawing form the stock market. All other things being equal, this redemption of funds form the stock market is putting downward pressure on the stock market. It’s hard to see that right now because we’ve just gone through a few years of asset price inflation in the stock market. The valuations we are seeing in the market don’t make sense on a fundamentals basis.
We’ve seen insane valuations being attached to companies that are losing money. The examples are rampant from WeWork to Uber, Lyft, Tesla and Netflix. The valuation multiples being attached to these companies are decidedly in bubble territory. So at some point, when the markets wake up and sanity prevails, we can expect to see a dramatic drop in stock prices. I think we’re starting to see the tip of that iceberg with the failed IPO of WeWork.
So when will this happen? I’m not sure about the timing. The difficult thing to predict is how much longer governments can inflate the bubble by printing more money. These hits of heroin (cash) being injected into the economy do have a stimulative effect (less and less), and they definitely inflate asset prices. The patient is now resistant to the drug. That’s why negative interest rates in Europe for over a decade have done nothing to stimulate the economy there.
You want to get your money into assets that are an effective hedge and you want to do it before the precipitous fall in prices. Harry also predicted a precipitous fall in real estate prices. When he says that, I believe he is talking about residential real estate. There is no question that demand for 5 bedroom houses in the suburbs is falling. Demographics says that the demand isn’t there at those price points. So we will definitely see homes at the top end of the market fall in price, even as homes at the bottom end of the market increase in price.
He did say that cash flow positive real estate is a good hedge (I agree). He said long bonds are a good hedge, but I don’t agree. Paper assets get devalued too much over the long haul. Savings get wiped out. Debt gets wiped out, and people on fixed income get wiped out.
A destruction of wealth in the stock market will make less equity available for investment.
On today’s show we’re coming to you live from Annapolis Maryland.
Annapolis is the capital of the state of Maryland. It’s also the home of the US Naval Academy. This is where the US Navy trains its officers. It’s also home to the world’s largest in the water boat show. It’s an important town because it is a state capital. But it is a small town. Total population is only 39,000. It’s small because it is geographically constrained.
On today’s show we’re going to do a small walking tour of Annapolis from a real estate perspective.
This town is decidedly anti development. It’s a vey quaint seaside town with historic homes set on narrow streets with cobblestone sidewalks. Many of the narrow century old townhouses have a flag pole jutting out from the side of the house. You won’t have to go very far to be reminded which country you are in. Most of the streets are one way streets and many of them are dead end streets. They’re dead end streets because in Annapolis it’s common to run out of land and come across the Chesapeake Bay.
The many inlets, rivers and coves make for a very intimate and extensive coastline. Many of the waterfront homes have a boat docked in front. The idyllic setting is one of the most picturesque coastal towns in all of North America. Real Estate is expensive here. Waterfront homes are priced usually between $2-3M.
Development in Annapolis is difficult because any development that falls within what is called a critical area must be sent to the State of Maryland Critical Area Commission for the Chesapeake and Atlantic Coastal Bays prior to receiving local zoning approval, or a building permit.
Generally speaking any property within 1000 feet of a waterway falls into the critical area overlay. In this zone, a whole bunch of extra rules come into play. Most of these rules are designed to protect the sensitive waterways of the Chesapeake and coastal regions.
For example, there are vegetation requirements. There are restrictions on waste transfer. You are unlikely to get a septic system approved on a property in the critical area overlay.
This is not an easy town to be a real estate investor. We saw an old townhouse in very poor condition. It had a public notice posted in the front window. The owner of the home was seeking to make improvements including new siding, new windows, and a small addition in the rear yard. The entire process had been opened up to public review. That home, is directly across the street from the courthouse and has been in distressed condition waiting for the application process to complete.
A review of commercial listings in Annapolis shows only a single 5 unit building for sale. The next closest listing is a commercial property for sale in neighbouring Parole which is one exit away on the freeway.
Annapolis is a difficult place to get anything approved. Residents are decidedly anti-development. This is why you see very few new structures in the town at all.
Older structures are governed by the Annapolis Historic Preservation Commission which has final say on any changes to properties within the historic district. For example, the Annapolis Waterfront hotel recently wanted to update the Awnings, fence and landscaping. This too had go in front of the Historic Preservation Commission for comments and approval. We’re not even talking about any permanent structures. We’re talking about awnings, fence and landscaping.
As you think about undertaking projects, pay close attention to the rules in your municipality.
Joe Quirk is President of the SeaSteading Institute. On today's show we're getting an update on the advancement of the technology of life on the high seas. Listen to this fascinating conversation.
Peter Conti is the author of "Commercial Real Estate For Dummies" and lives with his family in Annapolis Maryland. Six years ago, he survived a devastating motorcycle injury. As part of his rehabilitation, he walked the entire Appalachian trail from Georgia to Maine. Listen to this fascinating conversation with Peter Conti.
On today’s show we’re talking about another of the many distortions that exist in our world.
I’ve been to Greece many times. I love the food. I love the weather. I love the islands, and the rich ancient history. My father was born on the island of Rhodes and he was born in a home inside the old walled city in Rhodes. The fortifications date back to the time of the Knights Hospitaler and were built in the 1300’s. My fathers house was built in the 1400’s. Prior to 1910 the island was under Turkish occupation. Then from 1910 until the end of the second world war it was under Italian occupation, before finally being returned to Greece after the war. I love going to Greece.
But Greece is a chaotic place. The culture in Greece is one of rebellion. It’s common for traffic violations to happen directly in front of police officers with zero consequence. Greece also struggles to have strong enforcement of tax collection. The underground economy is alive and well. Not surprisingly, Greece is also mired in debt. One sovereign debt crisis after another has befallen the country. The country has struggled to pay its bills. The solution?
Each and every time, its creditors have loaned it more money even though it was obvious that they didn’t have the political will to implement the austerity required to improve their balance sheet. But since a default was too distasteful for the creditors, it was easier to loan them more money and kick the can down the road. By the time the next crisis hits, hopefully the decision makers at the bank will be retired and it’s no longer their problem.
This week, Greece entered the Negative Club. What is the negative club you ask?
Greece sold debt offering less than 0% for the first time on Wednesday in the latest sign of how far investors will go in a hunt for returns amid a global slump in yields.
The Greek government issued €487.5 million ($535.31 million) of three-month debt at a yield of minus-0.02%. At a previous auction for bills with similar maturity on Aug. 7, the rate was 0.095%.
The move reflects a broader shift in European bond markets in recent years, with investors paying governments from Germany and Switzerland to Italy to hold their money as the European Central Bank cuts borrowing costs to bolster economic growth in the region. That also means investors are being forced to take on more risk to generate returns, with Greece long considered the final frontier.
The nation, which emerged in August 2018 from an eight-year international bailout program following a prolonged debt crisis, has been welcomed back into the bond market with strong demand for its debt.
While the Greek government so far has issued only very short-term debt at a negative yield, other European governments are borrowing through longer-dated debt that pays no interest. Germany, for example, sold 30-year debt at a negative yield for the first time in August.
The yield on the government debt has tracked improvements in the Greek economy, suggesting that debt holders are “not as worried" they’re going to lose money as they were in the past. So the question is would you be willing to lend money to the Greek Government for 90 days and make the bet that they won’t default in the next 90 days?
But more importantly, would you be willing to lend money to the Greek Government at negative interest rates, even if it's for only 90 days?
Perhaps purchasing a 90 day bond from the Bank of Canada at 1.75% would be a better bet. I know, I know, you would face costs associated with the foreign exchange that would negate any earnings. Europe is a family. Within every family, not all members are an equal credit risk.
The very idea of lending money to my cousin who has a spending problem because I don’t know what else to do with my money seems a little crazy.
The idea behind today's episode came to me from one of our listeners. Hayden in Atlanta share some details on the topic of today's show. So thank you to Hayden for keeping your eyes open to what's happening in the marketplace.
The latest of these is a new company called Why Hotel. Apartment developers often have a number of vacant units upon completion of the building. The developer ultimately wants to sell these as soon as possible. But these vacant units are costing them money each and every day. The developers are not in the nightly property management business. They don't want to put tenants into vacant units they intend to sell. They certainly don't want to be in the hotel business. It is far too labor-intensive.
The folks at Why Hotel will partner with a developer to take a percentage of their vacant units and make them available in the short term rental market. Why hotel manages the furnishing of the units. They handle the nightly rentals, and they handle the day to day cleaning and management of the customer experience.
The value proposition to the end customer is it that they get to stay in a brand-new luxury building with modern amenities. By establishing a brand and setting a high standard for quality of finishes, they address the very common customer objection over the wide variation of accommodation quality that you find on platforms like AirBnB and VRBO.
Why Hotel solves a problem for the developer, by giving them a stream of income during a period where they have vacancy and holding costs. They solve a problem for the end customer by delivering a high quality finished product.
So far the company has locations in Seattle Washington and Arlington Virginia. They have a third location schedule to open shortly in Virginia as well.
So far why hotel is a small player. But it is a unique and innovative business model. The folks at Why Hotel are obviously making a capital investment in the furniture and fittings. The developer is contributing to vacant units on their side of the deal. The profits get split between the developer and why Hotel according to a formula that is negotiated between the two parties.
The first property opened in the Inner Harbor area of Baltimore, the result of a partnership with Monument Realty for 158 of the building’s units. The 347-unit property offers a custom mural, apartments with private balconies, an outdoor rooftop pool, a rooftop lounge, game room, theater room, 5,000-sq.-ft. fitness center, and business center. Today, that property is no longer part of the hotel portfolio and has been fully leased.
One of the criticisms of short term rentals is the increased traffic of hotel guests mixing in with permanent residents. Residents often raise concerns about security. Why hotel has full-time staff on site, just like a regular hotel. But these pop-up hotels also offer an additional benefit to residents. Permanent tenants of the building can have access to the hotel cleaning staff services at very reduced and competitive rates.
If you have a building that is going to be leasing 20 or 30 units a month, the developer can be secure in reserving a portion of that inventory for a pop-up hotel.
While each pop-up is expected to typically last between eight and 16 months, the company expects to remain active in a single market over a sustained period of time in multiple properties.
On the podcast, we keep our eyes and ears open to innovative ideas. Again this one came to us from Hayden in Atlanta. Thank you Hayden. Perhaps this gives you ideas on other ways you can create a master lease agreement with an under-utilized asset to solve a business problem.
Governments all over the world have resorted to FIAT currencies that are no longer tied to the value of a hard asset. The word FIAT comes from Latin and simply means “by decree”. The fact is, both gold and silver have been money for centuries. It’s only in the last 50 years that the US stopped using Gold and Silver as the basis for money. For a while, it was illegal for US citizens to hold gold. There was a shortage of gold to fund the war effort around the second world war and the US government didn’t want to be competing with private citizens for access to gold reserves.
Fortunately that ban was lifted and we can all buy gold coins or bullion.
So what is gold worth today?
It’s a little like asking how fast you’re going? It all depends on your point of reference. You might be standing perfectly still right now. But the earth is spinning on its axis and if you were standing on the equator, you would be traveling at a speed of roughly 1,000 miles per hour.
But wait, the planet itself is rotating around the sun once a year. Maybe you’re really traveling at a much faster rate of 30 km per second or about 67,000 miles per hour.
You get the idea.
So what is the value of gold? It depends on your point of reference. Is the measure of value in US dollars, in Euros, in Chinese Remnimbi?
Maybe when the price of gold is going up, it’s really the value of the currency that is going down. Perhaps you should be measuring your net worth not in dollars, but in ounces of gold?
Why is it that both China and Russia are amassing gold at furious rate? In fact, China is growing its gold reserves at a rate that is equivalent to the annual global mining volume. Whatever gold is being pulled out of the ground today, China is buying virtually all of it.
I know of a few contractors who have been working in the oil field in Saudi Arabia. They get their pay check in gold bars.
So today the price of gold, as measured in US dollars has gone up by nearly 20% in just the past couple of months. Is that a reflection of the weakening of the global economies and an anticipation that governments will start printing more money again as the economies show signs of weakness?
So why does the price of gold as measured in US dollars fluctuate so wildly? Should the price of gold not be more stable?
In the end, gold is a hard asset with intrinsic value. It’s value should be very stable over time. It’s one of those references. So are other hard assets. That 11 unit apartment building we built last year will not change in value from week to week based on whether the President sent a controversial message on twitter or not.
It’s still the same 11 unit building where a two bedroom apartment rents for $1,650 per month. It will be worth about the same in a year, plus a little bit of appraised value growth as our currency devalues. The rents will increase a bit, so will the expenses. In 10 years, it will still be the same 11 unit building, generating strong income and cash flow each and every month.
We tend to think of our net worth in dollars. But what if we thought of our net worth in apartments, or in ounces of gold? What if we measured our net worth in acres of agricultural land, or number of beds of dementia care in assisted living? Each one of these offers a hard intrinsic value based on the underlying physical assets and value to the marketplace.
The benefit of holding a hard asset is that devaluation of the currency has three effects. It wipes out purchasing power for those on fixed income. It wipes out savings, and it wipes out debt.
You don’t typically borrow money at low interest rates to buy gold, although I suppose you could. It wouldn’t be terribly responsible because gold doesn’t generate positive cash flow. But real estate can carry the debt service plus a bit and provides a highly effecting hedge on inflation.
On today’s show we’re talking about how to measure the financial merit of an investment. How do you compare two investments that pay the investor according to differing formulas? Some investments pay greater cash flow. Others have more aggressive loan principal pay down schedules. Others still are creating equity through forced appreciation. We’re not going to even touch the topic of risk, since that’s an entirely other subject. So how do you compare these dissimilar investments?
Yesterday we talked about the equity multiple as a metric for evaluating the merits of an investment. It’s a simple metric to calculate and involves adding up all the cash flow from an investment and dividing by the initial investment. It has the major drawback that it neglects time. Getting a 3x equity multiple in one year is clearly a better investment than one that takes 50 years to achieve a 3x multiple. Perhaps a rate of return calculation would be more meaningful. But here too, there are multiple calculations that you can perform. The most comprehensive is the internal rate of return.
The simplest investment to understand is a fixed income security. Think of a certificate of deposit with your bank. You put in $100. A year later the bank allows you to redeem the certificate and you get $103 back. The annualized rate of return is a simple 3%. The math to calculate the rate of return for that simple cash flow is about as simple as it gets.
But if you have a real estate investment that is appreciating 2% per year, with 4:1 bank leverage, paying out a 5% preferred return, and has a one-time forced appreciation of 30% in value in year 2 of the investment which you predict to hold for 5 years. What’s the rate of return now? If your head is spinning, you’re probably not alone.
Enter the Internal Rate of return metric.
Calculating the internal rate of return involves quite a bit of complex math. It’s a time value of money calculation for a stream of cash flows over the life of the investment. Payments happening now are considered to be worth more than payments in the future.
For the pure mathematicians in the audience, I’m not going to go into all the math that the internal rate of return calculation entails, nor the related net present value calculation. I can assure I’ve done all those calculations many times as part of my engineering degree.
Fortunately, most spreadsheet programs including Google Sheets, Microsoft Excel, and Apple Numbers have a built in function that calculates the internal rate of return without requiring you to do a ton of math.
The IRR function assumes that you have a stream of cash flows that occur on a regular schedule. So for example if you expect regular monthly payments from a project, the IRR function can handle that with no problem. The payment amount can vary each month, and as long as the time element remains regular. If you have a month with zero cash flow, that’s no problem. If you have a month of negative cash flow, that’s no problem. If you have a large lump sum payment upon the sale of an asset or a cash distribution in the middle as the result of a refinance, that’s no problem. The IRR function is one of the most powerful tools for measuring financial rates of return.
In order to assist in that process, I’ve created a simple Excel tutorial which you can get for free. Simply send me an email to victor@victorjm.com with the word IRR, just three letters in the subject line. I’ll send you a copy of the Excel file and a short two minute youtube video that walks you through the Excel file.
I often have both investors and consulting clients ask me about various metrics contained in the executive summaries we prepare.
In order to maximize the benefits, investors need to know how to effectively compare opportunities. That’s often easier said than done, because the entire concept of valuation is often highly subjective. So while it’s certainly possible to gauge the potential returns, security and performance of any given property, investors need to know how to use the right tools to do so.
A lot of investors use the cap rate as a measure of the attractiveness of an opportunity. But the cap rate really only talks about the profit potential for a project, independent of how you might finance a project. Clearly the operating performance of an apartment complex at a 7% cap rate is not going to depend on the financing. But the rate of return to the investor will depend heavily on the financing structure. If we’re paying a 9% interest rate for debt versus a 4% interest rate, it makes a big difference. In order to capture that, we use two metrics. The Internal Rate of Return is the most often used metric. On today’s show we’re focusing on the equity multiple.
In fact, along with Internal Rate of Return, we believe equity multiple is one of the most effective ways to compare the attractiveness of specific real estate investments. Here is what you need to know in order to effectively use this metric.
Equity multiple is a metric that calculates the expected or achieved total return on an initial investment. It’s calculated by dividing the total dollars received by the total dollars invested.
Equity multiple is an easy comparison tool because it provides a quick glimpse into the total profit investors can expect to earn on a particular investment, if successful. However, while equity multiple is important when analyzing deals, it is by no means a one-size-fits-all solution because it ignores one critical factor — time.
To thoroughly evaluate a potential investment, investors should pair equity multiple with other industry metrics — particularly the Internal Rate of Return (IRR).
Jens Nielsen came to the US from Denmark. He now resides in Durango Colorado and invests in New Mexico. Like many, he made the transition from corporate life to full-time real estate investing.
On today's show I'm in front of a live audience in Dallas talking about the principles of raising capital.
Leon from Ottawa asks, ”I listened to 7 of your podcast episodes in the past week. One thing that stood out to me was when you made the point about how the mainstream media sell sensational media. My question is Which news, info media resource outlets do you trust and read to get real info of what’s going on? I’d love to hear your thoughts on the podcast.”
Well, Leon, that’s a great question. I don’t profess to have all the answers on this one. It’s a huge topic. What I can say is that I do rely on multiple sources. I also try not to dive into topics where I have no expertise.
It’s easy to be opinionated on things. In fact, everyone has an opinion. That doesn’t make them an expert, nor are they qualified to offer an opinion.
So you won’t see me offering legal advice on the podcast. I’m not a lawyer. I might interview a lawyer and have them offer some ideas and education that could enable you the listener to have a dialog with your attorney on your specific situation. But that’s about as close as I would want to get on that topic in a public forum like this.
In terms of the news media, I’m also no expert on what’s real and what’s not. But I do have some first hand exposure to the news media and have witnessed the process first hand. I can offer a perspective from my vantage point.
I know several TV producers and have observed how they make decisions on what to air on TV. They have a specific time slot to fill on a daily show. The segments are anywhere from very short stories that form part of the news broadcast. This might be as short as 30 seconds. The second could be a special feature or interview that is between 4-5 minutes in length. The producer uses what is called a hook in the industry jargon. Unless people are watching, their sponsors won’t want to pay the dollars to advertise on the news show. Sponsorship is what funds the production of the show, so the producer can’t veer too far from topics that will keep viewers watching. Otherwise they’ll be out of business, and the producer will be out of a job. In a world of shrinking TV viewership and falling newspaper subscriptions, TV News programs are being cancelled and newspapers are shutting down all over North America. This is the stark reality.
So what is a hook? A hook is designed to draw in the viewer. Let’s imagine for a moment that you Leon were about to be interviewed on the morning show on real estate. The show host might say something like
Coming up after the break, Leon is going to be here to talk about how to make money in real estate. If I heard a hook like that, I’d probably change the channel. That sounds as boring as you know what.
On the other hand, if the show host said, And coming up after the break real estate expert Leon is going to be here to tell us that if you can’t afford to buy a house, you should in fact buy two.
Now that sounds intriguing. I’ll definitely want to watch through the commercial and wait for the next segment. When the host has a strong hook, viewers will watch the advertisement, and that is what the sponsors want.
So Leon you’ll go on the show and tell the audience that they should buy a duplex and use the rental income from the second unit to subsidize their home ownership cost. They may not be able to afford a single family home, but if there is an income property attached, the numbers could work in their favor.
So back to your question, which news media are trustworthy? The answer is it depends. I find that many stories in the Wall Street Journal are well researched and well written. But even they are not without bias. I find that the Wall Street Journal’s coverage of real estate is very weak. I prefer sources like the research team from Fannie Mae.
If there is a news story, I’ll often check several sources including the BBC, NBC, CNN and Fox. The coverage of the same story tends to vary widely.
Manhattan is one of the most dense markets in the world. Over the past 7 years there have been more than 16,200 units completed in New York in 682 new buildings. But today, roughly one in four of these remains unsold. This is astounding when you consider that the traditional model for condo development is to have a high percentage of units pre-sold prior to breaking ground on the project. Some lenders require 80% of the units must be pre-sold. Clearly that hasn’t happened.
Prices in some of the newest towers are being reduced.
At the same time we hear continually that there is a lack of affordable housing in the New York area. It’s true, housing in NY is hard to come by. Many people who have a six figure income will rent, others will have a room-mate in order to make ends meet.
Much of the vacancy is in the luxury and ultra-luxury segment. Manhattan, like some other gateway city markets, notably Miami and San Francisco have seen a boom of investment from outside the US. Much of this has come from mainland China and Hong Kong. Today, there is a significant slowdown in money coming from abroad. While the US remains one of the most desirable places for global investors to park cash, various headwinds have made the flow of money slow to a trickle.
According to a report in the New York Times this week, there is also a shadow inventory of units for sale. This inventory is held by the developer and doesn’t appear on the market. If you include these units, local experts estimate that there are as many as 9,000 unsold units.
Across New York City, the rental vacancy rate was most recently recorded at 3.63 percent, which translates to about 79,000 units. That is much lower than the national vacancy rate, which was last recorded at an average of 6.9 percent.
The vacancy rate is the highest in Manhattan at 4.73 percent and the lowest in the Bronx at 2.71 percent.
The NYC vacancy rate varies greatly by price with higher vacancy rates among more expensive apartments and lower vacancy rates among less expensive apartments. The vacancy rate for apartments over $2,500, for example, is 8.74 percent.
New York continues to add a lot of high quality jobs. Despite Amazon’s announcement to pull out of its planned expansion into the Long Island City location, several other tech businesses are expanding their presence in NYC including Google, Facebook, Twitter and salesforce.com.
So what does this have to do with supply and demand? We are seeing the top end of the market as being over-supplied and the middle of the market and below as dramatically under-supplied. There’s no really good reason for New York to be that much more expensive than the rest of the country. Building materials cost the same pretty much regardless where you put them. But the underlying land is incredibly expensive and the cost of labour doing construction in New York is much higher than the rest of the country.
I’m definitely in favour of development. Probably 90% of our business consists of new construction. But I’m not in favour of building in areas where the delay between concept and completion is so large. There’s simply too much risk that the economic conditions, specifically the balance of supply and demand can change dramatically over that time period. Make sure you segment your market to understand the balance of supply and demand within a market segment. The averages don't really exist.
Robert from Detroit says, ”Victor, I love how you talk about real estate from a business perspective. It’s fresh, clear and its devoid of the industry jargon.
The question was if you’re in an area where there is a lot of new investment going into an area, such as downtown Detroit. This large scale development seems to be attracting new residents. It seems like the new development is creating new demand. Is this an area that would be a candidate for your buy on the line, move the line strategy?”
Robert, thank you for the kind words. This is an outstanding question. There are a number of forces at play here and we need to take all of them into account. You are correct in noticing that real estate is hyper-local. The revitalization of the downtown in Detroit is an ambitious project and I truly hope it is successful.
As you’ve hear me say many times, successful business always follows the laws of supply and demand. The revitalization project is creating new supply. What I want to see before I would invest in an area is the demand that will absorb all that new supply, plus a bunch more excess demand left over that didn’t get satisfied.
What I’m worried about in Detroit is that it’s a shrinking city. There is not the inflow of jobs that is creating additional demand. So this new supply will compete with existing supply in the market. It will steal market share from other properties and you will likely see other areas become run down as residents leave those areas. It becomes a game of substitution for one product over another.
Some people think that lots of brand new supply can stimulate demand. Here’s how I think about it. Imagine if you were a city planner and you were tasked with creating a public transit system. It might be light rail, or busses. Imagine for a moment that you decide to start small and you are going to put one bus per hour on each bus route throughout the city. Even though you added supply, I don’t believe it would get used very much. People would still use other forms of transportation. The new busses would be too inconvenient. If you realized that insufficient frequency of service was the problem and you decided to invest very heavily and now you have a bus or train coming every three minutes like they do in Tokyo. You would get a lot of riders using public transportation. It would be way more convenient, it would cost less than driving and parking your own car, and it would be faster because you would avoid all the rush hour traffic. More people would use public transit than ever before.
But notice, nowhere in this example did the demand for transportation increase. What happened was a substitution of public transit over other modes of transportation. Investment in a new product and bringing a lot of new supply of that new superior product can cause substitution. But it’s not creating additional demand that didn’t exist in the first place. So if your city has a shrinking population, the need for housing is actually going down. In a shrinking market, prices will eventually fall. They have no choice but to fall. That’s why you can buy houses in Detroit for under $20,000. Yes, eventually over time these houses become distressed, the city forecloses on them for unpaid property taxes and the homes become condemned and eventually disappear from the market. Now you’re left with vacant land in the core of the city. It’s a modest improvement, but not much.
You can get some local market effects happening when there is development in an area. I would definitely look for those types of conditions to see if there truly is demand. Otherwise it’s just a bunch of developers who have too much money on their hands and they don’t know what to do with it. The landscape is littered with major projects that have resulted in over-building.
The problem is a failure to properly assess the demand.
On today’s show we’re focused on the book called PRE-Suasion by Robert Cialdini. Now it’s not persuasion, it’s a made up word pre-suasion.
The main idea behind the book is that we as humans are often easily swayed by momentary framing of attention. That framing seems to have a disproportionate importance in how we make decisions in the moment.
The author spent many years understanding the process of influence, attending training classes on sales technique, shadowing sales professionals on their sales calls and observing what made some sales people disproportionately more successful than their peers.
His research uncovered a massive blind spot that most of us humans possess. What happens In the moment before we are asked to make a decision has a disproportionate impact on the decision.
In a very simple example from the book, researchers looked at the problem of getting consumer survey data. Most consumers are overwhelmingly very reluctant to respond to surveys. In an effort to get better data, or in fact any data at all, you sometimes encounter people in the shopping mall or a supermarket who are holding a clipboard asking for a few minutes of your time to answer a quick survey. Some surveys offer a free gift, what is essentially a bribe, albeit an ethical bribe to get you to answer a few questions.
A bigger more enticing gift surprisingly has little impact on the response rate to the survey. Researchers found that about 29% of people approached would agree to participate in the survey. This is a significantly higher response rate than you might get if the request for a survey came by email.
But here’s the surprising fact. When shoppers in the supermarket or the shopping mall were asked a simple question. “Do you consider yourself a helpful person?”, almost all respondents said “Yes”. When they were asked a second question to help with a few minutes to respond to a survey, the percentage who agreed to respond to the survey jumped to 77%. That’s a remarkable outcome. What is it about the question “Do you consider yourself to be a helpful person?” That compelled the majority of people to respond to the survey compared with those who were asked to participate in the survey directly?
When people who were asked to participate in a taste test of a new product, the affirmative response rate jumped dramatically when shoppers were asked another simple question. Not only that, 2/3 of respondents declined to give their email address. But when asked a simple question. “Are you an adventurous person?” 97 percent said they were adventurous! That’s clearly a ridiculous response, 97% of the population are not adventurous. But after answering yes to are you adventurous, not only did the number of people who participated in the product taste test jump, the number of people willing to give their email address jumped from 33% to 75.7%. Think about it, some stranger walks up to you in a mall and asks for your email address. Are you going to give out your email address?
The data says that 75.7% of the time you will igive your email address f you are asked if you are adventurous as a framing question. You probably have no idea that you were even open to being influenced in that way. For the ethical business, the ethics versus effectiveness question must be asked. But for the unscrupulous business, you are open to being manipulated, unless you have a high degree of awareness.
If you haven’t read Pre-suasion, you I would recommend that you read it and wake up to how you are being influenced in ways that you may not be aware of.
Today is Rosh Hashana, Jewish new year. Happy New Year to all our listeners of the Jewish faith. Today is also International podcast day.
Today is a great time to celebrate the podcast medium, which is really quite new. Think about it. The entire genre was invented by Apple with the advent of the iPodThose large clunky music players that had a tiny 1” spinning hard disc in order to get the storage density. I still have one of those ipods and it holds my entire music library. You had to plug it into a computer via USB cable in order to download your music or your podcasts. Today it streams wirelessly onto my phone, computer or tablet.
Some of the first podcasts I listened to back in the day were the Entrepreneurial Thought Leader Series, live recordings of lectures co-produced by the business and engineering schools at Stanford University.
Producing a daily show is a massive commitment. But it’s one that I take seriously. This weekend I was speaking at an event in Dallas hosted by the Real Estate Guys Radio Show. There were about 300 people in the audience and at the end of the talk I received a strong round of applause that lasted about 15 seconds. When you have the opportunity to speak in front of a live audience and they laugh at your jokes and they’re nodding in agreement with what you’re saying is a wonderful experience. As a speaker you get to know that your words were having an impact.
With a podcast, there are no applause. There is much less in the way of interaction. I will get a half dozen emails a week from listeners who let me know that a particular episode had a real impact on them. I’m truly grateful to receive these messages.
I’m also mindful to visualize the audience out there in cyber space. I see you all seated in a large auditorium of a few thousand seats, five or ten times the size the room that I spoke in on Friday in Dallas. I visualize every seat is taken and even a few people are standing in the back. The room is full. When the room is empty, there is an echo off the back wall. But when every seat is taken, the room absorbs the sound and there is no echo. I visualize people in the first few rows nodding in agreement as I’m speaking.
Just like in the large room, I recognize that not every episode will penetrate and connect with ever member of the audience. If your interest is self storage and on a particular day I’m talking about senior housing, I recognize that that particular episode may not be perfect for you. That’s OK. The purpose of each episode is to enter into a conversation. A conversation that stimulates thought. In each episode there ideally is something that is simultaneously both specific and universal. You may not connect with the specific example, but perhaps you will connect with the concept. Perhaps the idea has a parallel application in your domain.
The podcast medium is changing. There are more shows than ever before, and professional media companies have expanded their investments in podcasting. Celebrities from TV are also getting into the podcast game. Some of the most widely followed podcasts offer very little in the way of education. Some are purely entertainment. They may be story telling, mystery, comedy, drama, a love story, or perhaps something a little more racy.
If you’re listening to this show, you probably are interested in business, entrepreneurship, personal development, social psychology, and of course real estate.
The average new show fizzles after only 8 episodes. When I do speak at live events, I get to connect with many of you in person. It’s through that personal connection that it becomes a two way conversation. It’s through the AMA episodes, that we have a two way conversation. When a listener asks a question, I can guarantee that others have the same question too.
Josh and his wife Melanie come from Philadelphia where they specialize in repairing distressed resort properties. This talk is a fascinating conversation about the resort business and how they have built this from deeply distressed properties as a starting point.
George is a frequent guest. On today's show, we're getting George's thoughts on the responsibility for sponsors and syndicators to disclose news. This was driven by news this week that securities related charges were levied against three top executives at VW.
Barely a week ago, Adam Neumann was sitting atop the most valuable startup in the U.S. and getting ready for a blockbuster initial public offering.
Now he’s out of a job.
Back in April of 2018 I dedicated an episode to WeWork and the problems that I saw with their business model. I currently run a shared office rental business consisting of 5 offices. There is no comparison between what I’m doing and WeWork. They are operating on a much larger scale. But for someone who is actually in the same business, I understand the risks and pitfalls of what WeWork is doing, including staffing, master lease agreements, and how to position different product offers in the space.
I’m coming to you live from NYC where WeWork has their largest presence and 55 WeWork locations in Manhattan alone. If you want to rent a dedicated office in NY, it will cost you about $1,100 a month. A dedicated desk will run about $750, and a hot desk will be able $500 a month. All pretty reasonable prices. I think these low prices are both the reason for its widespread adoption, and one of the causes at the root of its financial problems.
The biggest problem with the WeWork business model is that they have signed multi-year master lease agreements and their customers only have a 30 day obligation. The buildings that are owned outright have long term debt. Again, their customers only are on the hook for 30 days.
But here’s the kicker. As if these risks are not enough, the company has never turned a profit. The S1 filing for the IPO was done back in August. A study of their S1 shows that not only were they losing money, they were also losing money from operations. That means that the startup costs for expansion of the business were not the only reason the company was losing money.
The company was losing money in their day to day operations. If they stopped their rabid expansion immediately and spent nothing on growth, they would still be bleeding red ink from operations. They brought in $1.8B in revenue. For every dollar they brought in, they spent $2. So their very survival is predicated on the assumption that they continue to get cash infusions until some point in the future when they might someday, who knows, turn a profit.
Their principal funder was Softbank, the Japanese cell phone carrier who opened an aggressive fund several years ago that was being managed by the founder’s son. But in the past week, the governance at Softbank seems to have stepped in and put a stop to the craziness.
Particularly egregious was the lavish spending by the founder on things that bring zero shareholder value. This included lavish parties, a private jet, and many other expenses.
How is it, that these situations that seem so obvious take months or even years to play out?
Now it looks like JP Morgan and Goldman Sachs are in discussions with the company to lend about $3B, and the company will need to tap the private markets for a couple of hundred million in additional equity. Given that equity investors just took a 66% haircut on the valuation, I personally think this is going to be a difficult sell. This is a $3B loan to keep the company afloat. It’s not to grow the company to profitability. So far, the larger the company has grown, the faster the losses have multiplied.
As a minimum, the new leadership will need to demonstrate to investors that they can manage the company’s finances. That’s going to mean significant headcount reductions and a steep cost cutting program.
I personally can’t imagine myself speaking to investors with a straight face and proposing a money losing proposition. Yes, there can be periods of negative cash flow during the construction and lease-up of a project. That’s different. But this company hasn’t turned a profit since its founding and the founders have sucked out hundreds of millions of dollars to fund their lavish lifestyle. It's the shareholders money!
The US is very concerned these days with the balance of trade. But the US has successfully exported one thing more than any other country on earth. It has exported elements of its culture world-wide. I’ve traveled all over the world and heard American music. I’ll never forget the day I was in Dusseldorf Germany. In the central square was a guy with blond hair, a guitar and a cowboy hat. He had the leather vest, the glasses, everything. He was singing one John Denver tune after another. He looked and sounded exactly like John Denver. Except he didn’t speak a word of English. I’ve heard American music in small family run restaurants in Japan and Taiwan. American fashion has been exported to all corners of the globe. It started in the 1960’s with denim jeans.
The latest thing to be exported to China is American design in senior living, of course, adapted to the unique needs of the Chinese market. Even the concept of senior living communities, whether they be independent living, assisted living, or skilled nursing, the concept originated in the US. If you look through most parts of Europe, Asia, the Middle East, multi-generational housing is the norm. Kids take care of aging parents. In particular, single income households made this the norm. As the societal changes have taken place first in North America, then Europe and now increasingly in Asia, most households are dual income households. There isn’t the flexibility for one member of the family nucleus to remain at home and care for aging parents. The entire senior housing industry owes its existence to the shift from single income to dual income households. We now take senior housing for granted as part of the societal norm in North America. But it’s relatively new elsewhere. For example, the cost of a paid full-time in-house care-giver is very high in North America. Enabling a senior citizen to remain in their own home with help is by far the preferred solution. But when the labor cost is high, it makes senior housing seem like a relative bargain, even though this too can be expensive compared with just renting an apartment.
Several premier US architecture firms are taking part in exporting the senior living concept around the world.
The more ambitious Chinese senior communities are giant resort-style campuses, connected by a centralized, amenity-rich building offering near-seamless integration between interiors and exteriors.
Los Angeles-based architecture firm Steinberg Hart is another active firm in the Chinese market. The firm has designed over 10.6 million square feet of senior housing in China since opening an office in Shanghai in 2000.
But not everything American is the way to go. When we spend time in Europe we love the community feel that is at the heart of virtually every town in Europe regardless of size. People live, work, dine and shop in walkable neighborhoods. I love the feel of these communities. It exists in the smallest villages of a few hundred people, or in cities of millions. In response to this, many new development projects in North America have embraced the mixed use concept with planned retail, residential, hospitality, office and dining all within a walkable distance. The most famous of these trend setting communities was Santana Row in San Jose California. The success of that project spawned numerous projects around North America that attempted to recreate that town center feeling. Today you see town center projects like this in communities like Plano Texas, West Palm Beach Florida, and more recently in my home town of Ottawa Canada. They lack the centuries of history around a medieval town square. But they are often able to recreate the vibrancy and sense of community that many sterile American cities have lost.
This blending of culture is the result of globalization, but not in the sense of trade. It’s the result of the exchange of ideas.
What is a Repo Rate and why did it jump to over 5% in just one day? The newspaper headlines were stating that the last time this happened the economy was in 2008 and was on the brink of collapse. The implication being that perhaps the economy is much weaker than the government is telling us. In my research, there is a much simpler explanation. Listen to today's show.
Coming to you live from NYC where we have the UN General Assembly in session. Today is the official first day of debate. According to UN rules, the debate is to last 9 days, although in recent years, they’ve managed to wrap things up usually in about 7 days.
It’s a crazy time to be in NYC. There is intense security everywhere. Traffic is gridlocked. There are private security firms guarding entire floors in the hotels that are housing visiting delegations. Hotels are incredibly expensive. Restaurants need to be booked well in advance.
There are lots of stories catching headlines, everything from protection of our environment to sustainable development.
This year brings new challenges overshadowing the international dialog. We read stories in the news, we see images on television. They’re a world away and it’s hard sometimes to connect the dots.
The central part of any economic development involves energy. Overshadowing the talks this year is the nuclear negotiation with Iran, and the bombing of Saudi oil production facilities that both UK and the US intelligence have connected directly with Iran. Earlier this year, President Trump seemed ready to try a negotiated approach to dialog with Iran. These drone strikes have cut Saudi Arabia’s oil production in half, representing about 5% of the global production of oil overnight. Iran has also re-started enriching weapons grade materials in contravention of their nuclear treaty. These signs of aggression from Iran are attracting widespread condemnation in the West.
As India’s economy has grown, so too has their appetite for energy. There is a clear and direct linkage between economic activity and energy consumption. For every unit of economic output, there is consumption of an equivalent unit of energy. India traditionally has been a major buyer of Oil from Iran.
If you want to see what is happening in the world economy, have a look at what is happening in the energy sector. That’s where the real stuff is happening.
Prime Minister Modi of India was in Houston this past weekend. This is not a traditional place for an Indian Prime Minister to visit while he is in the US for the UN General Assembly. In fact, Houston is really the center piece of his visit. In addition to a rally that he held for a packed house of 50,000 attendees, he visited with Houston based oil and gas companies. One of those companies is Houston based Tellurian. Tellurian just signed a $7.5B pact with India’s Petronet. The agreement was signed in the presence of Prime Minister Modi. Under this agreement, Petronet will initially spend $2.5 billion for an 18% equity stake in the $28 billion Driftwood LNG terminal. India will have the right to purchase 5 million tons of gas per year under this agreement. To put this in perspective, the US exported 22 million tons of LNG last year. So the deal with India is a big deal.
This is a real estate podcast. Why on earth would I be talking about natural gas? It turns out that I have 4 real estate projects within a 20 minute drive of the future site of the Driftwood LNG facility. When there is economic development on this scale, the people who work there need housing, they need retail, they need hospitals, they need storage, they need workforce housing. They need everything.
As a real estate investor, choosing where to invest is influenced by a number of factors. Some people like to invest close to where they live. If you happen to live in an area where the numbers are compelling for now. But the second you step outside that tiny radius around where you live, why would you go anywhere less than excellent? Why would you choose just good, or decent?
When we look to see what is happening at the UN General Assembly, we want to see what deals are being struck outside the UN headquarters.
Today is another Ask Me Anything episode.
Mike asks,
I love the podcast. Quick and packed with good info.
I have around 75 single family rental houses and recently it seems that people are applying more and more with emotional support animals. Apparently I can't say that I do not allow pets in my rental if they have an emotional support animal. Also, it's my understanding that they don't even have to tell me they have a pet, and they can just bring an animal into the house when they wish and claim that it is an emotional support animal. I have done quite a bit of research on this and am concerned with my lack of rights as the property owner. It seems as if I can't charge any pet fees or pet deposits as well. I can't really even ask any questions related to the animal at all once its in the house. I know its been a problem for airlines and college campuses and seems its increasingly become one for us.
I would love to hear your thoughts on this! Thanks again for a great podcast!
Mike this is a great question.
There are multiple sources of tenant damage that can happen. Pets for sure can be a source of damage. But they’re only one of several possible sources. Some of the literature I’ve read on the topic suggests that pets are nowhere near the top of the list in terms of sources of damage to a property.
The number one cause of property damage in terms of cost is children. There’s no way you would tell a tenant that they can’t have children on the property. That would violate every landlord tenant rule anywhere in existence.
The second highest cost in terms of damage is smoke damage from smokers. The reason is that a coat of paint won’t solve the problem. In the case of chain smokers, I’ve experienced having to put multiple barrier coats of sealing primer, and then finally two coats of finish paint. The smell infiltrates the carpets, and I’ve had to replace carpets. I’ve also had to replace laminate flooring that had absorbed a smell.
Pet damage usually falls into one of three categories:
- Pet waste. If a cat or a dog urinates on a carpet, carpet cleaner is often not enough to solve the problem. It can soak into the subfloor and can often require cutting out the subfloor and replacement of the boards. While the scope of that kind of fix can seem large, the actual cost is not really that high.
- Scratches on doorways and hardwood floors. Here too, the cost of these repairs is not usually that high. While the damage is very visible, the damage is usually confined to a few small areas. In my experience these repairs are much less than the spills that children can cause repeatedly.
- Landscaping. Some pet owners have a bad habit of letting their pet out into a fenced back yard to do their business. After a couple of years these yards look like a mine field of dead grass and craters where pets have been digging. The effort to repair a yard and re-do a lawn can be considerable.
As part of your lease negotiation, you should definitely detail a schedule of costs for damage repairs, regardless of the cause. Some tenants with pets will simply choose to go elsewhere.
Make sure you’ve taken thorough photos and send copies of the photos of the property condition as part of your move-in inspection with the tenant. These photos must include details of windows, doors, doorframes, screens on windows, kitchen appliances, blinds, carpet condition and so on. These photos will be your best defence when it comes time for the tenant to vacate. You can make an argument that they were delivered an apartment in pristine condition and that the damage experienced represents more than normal wear and tear.
My personal opinion is that pets have earned an unfair reputation for property damage compared with some of the other leading causes. They usually don’t do as much damage to a property as the urban legends would have you believe.
Today's episode is an excerpt of a Q&A session with Mayor Jim Watson. We grapple with questions on affordable housing and short term housing.
This episode is an excerpt of my conversation on The Real Estate Experts Summit where we're discussing my origin story and some of the fundamentals that I believe should underpin every investment strategy.
If you listen to some of the election rhetoric coming out of the most left leaning candidates, you might be alarmed. And you should be.
I don’t have any party affiliation. I don’t even get to vote in the US election. I’m not a US citizen.
I’ve read through Bernie Sander’s election platform to understand what the core items that are being proposed. I don’t want someone else’s interpretation or spin. I wanted to read the document first hand and make my own assessment.
If you’re going to be opinionated, I encourage you to form your own opinions. Sure it’s easier and less effort to adopt someone else’s opinion. After all, they’ve gone through the effort to form an opinion.
There are a lot of elements and it’s hard to determine which parts he would ultimately be successful in implementing. Politicians rarely get the chance to fully implement their agenda.
Bernie's entire platform contains too many items to cover in a 5 minute podcast. Of particular interest to real estate investors are some of the items related to housing.
He says in his platform and I quote:
“In America today, corrupt real estate developers are gentrifying neighborhoods and forcing working families out of the homes and apartments where they have lived their entire lives and replacing them with fancy condominiums and hotels that only the very rich can afford.”
He then goes on to say several paragraphs later..
If we are serious about addressing the affordable housing crisis, we need to build millions of apartments and homes throughout the country that will remain affordable in perpetuity to prevent displacement and serve future generations. And when we do that, we will create millions of good-paying jobs in the process.
These are in no particular order.
Invest $1.48 trillion over 10 years in the National Affordable Housing Trust Fund to build, rehabilitate, and preserve the 7.4 million quality, affordable and accessible housing units necessary to eliminate the affordable housing gap, which will remain affordable in perpetuity. Units constructed with this funding will be eligible to be located in mixed-income developments.
Use federal preemption laws to ensure these new units are not segregated or excluded by local zoning ordinances.
Invest an additional $400 billion to build 2 million mixed-income social housing units to be administered through the National Affordable Housing Trust Fund, which will help desegregate and integrate communities.
Bernie proposed a 25 percent "House Flipping tax" that would be levied against people who sell a non-owner occupied property at a profit within five years of purchase.
OK. There’s a lot to discuss in his platform. Way more than we could realistically cover on today’s show.
Here’s the thing. Property pricing follows the laws of supply and demand. When a property is listed for sale on the market, there is nothing compelling a buyer to pay the asking price. It is being offered for sale at that price. If there is no demand at a given price, then those properties don’t sell, they don’t rent and they remain vacant.
When someone who makes it their business to renovate homes and put them back into the market, they’re improving the housing stock. They’re taking the risk that there will be demand at a profitable price point. They’re taking properties that in many cases were not in livable condition.
The only solution would be to demolish them and start again. If a 25% flipping tax were to be instituted, I can predict with great certainty that historic buildings in low income areas would not be repaired. I’ve personally played a role in salvaging some beautiful buildings.
Saying that it’s the fault of the flippers that we don’t have affordable housing is a failure to understand the cause and effect relationships that are at play in our markets. Reducing the price of Tylenol won’t eradicate head-aches.
In this special bonus episode, I'm answering the question - "What does the quarter point cut in interest rates mean for your lending rates?"
Today’s show was inspired by a number of emails I’ve received over the past month. I’ll get to that in a minute. In reality, today’s show is about the myth of real estate. There is a Giant myth and it’s perpetuated by the people who promote the free evening intro to real estate investing workshop and the weekend bootcamp for $199. That myth is of passive income. Become a real estate investor and you’ll never work another day in your life.
Last month I was a guest on the Rich Dad Radio Show with Robert and Kim Kiyosaki. On that show we talked about senior housing as one of the best investment asset classes. Robert and Kim are great people and they’ve managed to put together a great deal with a senior living operator. Robert and Kim are pure investors, and they also run an active business. Their active business is education. They write and sell books and they have speaking engagements. They manage a portfolio of investments of about 8,000 multi-family apartments. They are hard working people.
They also happen to have mastered the art of maximizing their assets. For example, they have a parcel of land on Camelback Road in Scottsdale. It’s a prime location that had a fitness club on it. Then one of the new fancy fitness clubs opened with two swimming pools and everything was bigger and better. Their fitness club could not compete. They could have chosen to improve the fitness center, but that would not have been the right choice for Robert and Kim at this stage in their lives and careers. Instead, they negotiated a 99 year ground lease with the builder and operator of a senior assisted living business. Smart move. They get to maximize the value of their land and the investment appears as a passive investment to Robert and Kim.
Since the show aired, I’ve been inundated with offers for land to build assisted living projects around the country. The email is usually something like this. Hey Victor, I loved your episode with Robert and Kim. I have an idea for building an assisted living project on this parcel of land that’s near my house. Would you be interested in discussing this opportunity further?
I’m flattered that they appreciated the conversation with Robert and Kim. I’m flattered that they would love to work with me.
But here’s the thing. Imagine if I came to you and said. Hey, I’ve got a piece of land that I think would be great for a restaurant. I can point you to the land, and you worry about the restaurant, building the building, paving the parking lot, hiring the executive chef, hiring the staff, hiring the guys to valet park the cars, the marketing, the supply chain for fresh ingredients. We could be partners.
The land is perhaps expensive, but clearly contributes a very small percentage to the success of a restaurant. The same is true for assisted living. Nobody would ever mistake a restaurant business for a real estate business.
Assisted living is also a service business, just like the restaurant business. It has a real estate component, but the real estate is a small fraction of the value creation. It’s first and foremost an active business. It’s a service business. Yes, the business might get structured so that it looks like a piece of real estate for the purpose of having a tax advantageous structure. But it’s not a passive business.
Yes, you can invest passively in an active business. But don’t confuse being an active real estate project sponsor with being a passive investor. They’re vastly different.
Many businesses have a real estate component to them, but that doesn’t make it a real estate business per se. A restaurant isn’t a real estate business. A hotel isn’t a real estate business, and an assisted living and memory care business isn’t a real estate play either. They all reside in a piece of real estate, and there is definitely a real estate component to those businesses.
On today’s show we’re talking about how Assumptions create the mother of all catastrophes.
The latest case of this is in California where they just implemented rent cap legislation. It’s no secret that the tenant population in California is swelling. California is trending to the lowest levels of home ownership in the country.
If you’ve been listening to the podcast for a while, you will know that I’m a believer in two of the fundamental laws of economics. The first is the law of supply and demand. The second is a close cousin to the law of supply and demand, and that is called the price elasticity of demand.
Price elasticity affects both the supply and the demand side of the equation.
The lack of affordable housing is not because greedy landlords are lining their pockets at the expense and exploitation of poor tenants. It’s because government has made it difficult to add new supply to the market. The excess demand has pushed purchase prices up to the point where the economics of buying or building new product and putting it in the rental market doesn’t work. So when the conditions are not conducive to investment, investment won’t happen.
The latest ill-conceived policy from California is a statewide rent cap. The rent cap is in addition to any local rent controls that may have been implemented at the local level. So if a local ordinance is in place, the local ordinance takes precedence. If there is no local rule, the new statewide rule is there as a backstop.
Why are economists so overwhelmingly against rent controls? One reason is that they mistake the symptom for the problem.
We must ask ourselves why prices are high. They are high because the demand for housing in California is high relative to the supply of it. And why is that?
California has a wonderful climate, lots of great cultural things happening. It has strong employment overall and is a vibrant place to live. People love the outdoors, the mountains, the sea. They have also made it more difficult to build new construction. The poster child for that is the bizarre story of Bob Tillman’s five-year, $1.4 million legal battle to turn his coin-operated laundromat into an apartment building shows how regulations constraining supply coupled with rising demand have driven house prices ever higher. Bob wanted to redevelop his laundromat into residential housing. Opponents of development argued that new development was forcing lower income people out of their neighbourhoods in favour of high income earning people. Here’s the problem with that argument. Unless you increase the supply, you never have a chance of lowering prices. Moreover, nobody ever lived inside the laundromat.
But, wacky as it might sound, the supply of housing is responsive to price changes—it is “price elastic,” in the jargon. As profit increases, so does the supply. When the supply increases, prices fall. If you want proof of that, just look at the explosion of properties for rent on AirBnB. If landlords can make more money in short term rentals, they will do so.
Regarding the second problem, the “swelling homeless population,” rent control will do nothing whatsoever for these folks. The problem, remember, is too many people wanting to live in a given stock of housing. Capping the price of that housing by government decree will do nothing to solve that problem. What would help is getting rid of the government regulations that restrict the supply of housing.
Prices are not problems; they are signals of problems. Trying to solve the problem by treating the signal is like trying to slow down your car by fiddling with the speedometer.
Today is another AMA episode.
On today’s show Richard asks
“I have a seller who is in their mid 80’s and has been a little difficult to work with. He has a development site that is zoned R3 and we can build a profitable project on it. We can get 5 units by right, and maybe 6 if we are granted a variance. The land is expensive and therefore that sixth unit really makes the project profitable. I’m wondering if I should try and negotiate seller financing so that the borrower contribution is fully funded by the seller financing. What are your thoughts on the strategy?”
Rich, that’s a great question. Seller financing can be a great way to raise capital for a development project. It can also be the undoing of a development project. I’ve seen both happen. It all comes down to convincing yourself that you have a reliable partner in the development. Understand that the seller is going to be required to sign virtually every piece of paper that affects the title.
The debt structure is going to look something like this. You will have your senior construction lender in first lien position, and the seller financing will be in second lien position. But if the construction financing isn’t secured prior to purchasing the property, the seller will actually be in first lien position. They will need to sign mortgage subordination agreement in order to allow the construction lender to assume first position.
When you transition from your construction financing to your permanent financing, you will need to go through that process again. The seller’s signature will be required.
Any time the seller’s signature is required in order for you to make progress on the project, it represents an opportunity for someone who is not in control of the project to exercise a full veto on your project. That’s a risk.
You mentioned that the seller is in their 80’s. You are probably not 100% up to speed on their health. They could have a health condition and may be unable to sign when you need them to. They may have granted a power of attorney to a family member, and now all of a sudden you’re dealing with a family member who you’ve never met and who knows nothing about the project. They might be unwilling to take the risk of signing anything. If the seller dies, you have the same issue.
The alternate approach is to raise the capital to make a clean purchase of the land. Yes, when you raise money, that often means giving up an equity share to your investors. But here too, you may be better off than dealing with someone who you said could be difficult.
When you raise money you have a few choices.
The first is equity. You’ll need to decide how much equity you will need to give up in order for the project to make sense for you and for your investors.
If you can secure a loan from the seller in second lien position, you could secure a loan from someone else in second lien position. The source of funds will be different, but the security would be the same. It won’t be as lucrative as the 100% financing you’re contemplating with the seller financing.
Understand that your risk with the seller is higher that if you bring in investor funds. The construction loan will have a finite time period. This is usually less than 2 years. If the second lien mortgage holder delays you for whatever reason, you could face the problem of running out of time on your construction loan. The construction loan is in first lien position, but most construction lenders require the sponsors to sign a personal guarantee, or as a minimum they would require a completion guarantee. A default on a construction loan with personal guarantees could effectively end your career as a developer. So in my opinion, it’s not worth the risk.
Your description of the relationship sets off some flags for me that suggest you look elsewhere for the money in this instance.
Lee from Michigan writes. Hello, I really enjoy your podcast. Met you briefly at the Real Estate Guys Syndication conference in Sept. 2018.
Here's my question:
My real estate partners and I have the opportunity to purchase a great 14-acre parcel of vacant land in the best demographic area of our community. The land borders a freeway on the south, a highly-traveled secondary road to the east, and single family subdivisions on the north and west.
There are existing roads that dead-end into the land from the north and west. The city would like us to develop the land and connect these two roads, which would be a benefit to the community in the sense that community services (school buses, garbage trucks) could navigate within the community more efficiently.
To make this project economically feasible, we would have to develop some multi-family properties. Currently, the entire 14 acres is zoned R-1, or single family residential.
Our group is proposing that we rezone only part of the property, the part that is contiguous with the freeway and the highly traveled secondary road, to R-3 to allow multi-family construction. Of note, 4-plexes would be our largest footprint. Further, ALL the land that borders existing single family homes, we would propose to leave R-1 single family zoning.
We have a preliminary meeting with the local planning commission in the next couple weeks to discuss our intentions. The mayor informs me that there are already 1 or more NIMBYs that plan to show up to discourage our proposal.
Previously, a production builder wanted to purchase the land and put up 200 low income housing units. The city basically laughed at the idea.
In the 14 acres, we propose 19 single family building sites and only 8, 4-plex sites along the designated roads. If multi-family development is impractical, our interest in the land will plummet.
With all this in mind, how would you proceed at the planning meeting?
Lee this is a great question.
There are generally three types of approvals that could apply. I don’t know the rules for your specific community. What I’m describing is what I see most often. The first is a minor application. In the case of a minor application, you don’t require community input. The second is a major application, and in this case, residents within a radius of the property (usually 500 feet of the property) are given the opportunity to comment on the application. This is a very public process. The third involves a change to the zoning.
The first thing I would do is get my hands on the minutes of the planning commission or the city council meeting minutes. In almost all communities, these are a matter of public record. In some towns, you can listen to an audio recording of the meetings, or in some cases watch a video recording of the meeting.
In your case, you’re talking about 19 single family homes and 32 units of multifamily. This is pretty low density for 14 acres. A general rule of thumb is that you can get about 8 single family homes per acre and perhaps 12 units per acre if you build town houses. Apartments could be much higher density of course.
If you built the 19 homes on half acre parcels, that would consume 9.5 acres. That would leave 4.5 acres for the higher density product.
I would actually advise against building 4-plexes and suggest you consider townhouses that might fit the R1 designation better. Since all the homes are co-located at the same site, they’re no more or less difficult to manage if they were apartments, townhouses or single family homes. But before going into a public meeting, you want to make sure you’re really well informed of what each of the planning commission members feelings are. There may be consultants such as an urban planner, or an architect who knows the decision makers and can predict what will be accepted.
Ali Boone is the CEO of Hipster Investments. She got her start as an aerospace engineer and a pilot and quickly discovered that she was an entrepreneur at heart. Loved this conversation with Ali.
Dallas based Omar Kahn got his start in Investment Banking in Canada. Today he puts together large projects around the nation. We had a wide ranging conversation on the skills needed to make the transition from corporate life to being an entrepreneur.
Have you ever wondered how the hard core drinker can pound back a six pack of beers and not seem the least bit intoxicated? In the meantime, your tea toddling aunt gets silly after half a glass of wine?
It’s because the addict becomes resistant to the drug.
On today’s show we are talking about the latest mainline injection of hard core drugs into the economy. I’m not talking about actual drugs of course.
The drug in this case is cash. The European Central bank announced its most aggressive stimulus package in a while: interest rate cuts, money printing, quantitative easing, the whole nine yards.
It’s pretty amazing when you think about it: interest rates in Europe are already NEGATIVE. They’ve been cutting rates for years, and it hasn’t worked.
Back in July 2008, the European Central Bank’s main interest rate was 3.25%.
By the end of 2008, it was clear the global economy was slowing down, and the central bank had slashed interest rates to just 1%. But they kept going. By 2013, the ECB had reduced its primary interest rate all the way to zero. And in 2014, they took the unprecedented step of cutting rates even further into negative territory.
European rates have been negative now for FIVE YEARS. Yet Europe’s economies are still a mess. These results completely defy prevailing economic wisdom. According to the playbook that nearly all central bankers use, cutting interest rates is supposed to stimulate economic growth.
It’s not working. Why? Because another six pack of beers won’t work for the addict. Another trillion Euros won’t work either.
So if it’s not going to work, why would they do it? After all, these economists have a lot of university degrees. They’re pretty smart men and women. If I can see it, then surely they can see it.
So why? It doesn’t make any sense. Or does it?
What if the lower interest rates made the Euro even less attractive to bond investors than it is today. We could see a flight of capital from the Euro to the US dollar, or to Japanese Yen. That would cause the price of the Euro to fall against the US dollar. When that happens, the exports from Europe all of a sudden look like a better deal. They’re less expensive and all of a sudden Europe looks a lot more competitive.
A fall in the price of the Euro would definitely have a stimulative effect on the European economy. Those Mercedes, Fiats, BMW and Porche’s will be more attractively priced than ever before. Vacationing in Europe would be less expensive. Perhaps planeloads of Americans will line the cafes in the south of France.
Here’s the scary part.
The US is going to feel like they need to respond to this silly financial arms race. You can bet that with an election looming in Washington, there will be tremendous pressure to stimulate the American economy. After all, this White House ran on a platform of economic boom, and to a large extent they’ve managed to ride the wave of economic expansion and declare victory. But if that economic success story shows signs of weakness, and by the way it is showing signs of weakness, you can bet that the printing presses in Washington will be warming up for the biggest stimulus package we’ve ever seen.
The President is already pushing the Fed to lower interest rates and to weaken the US dollar.
We live in a funny world right now. It’s a place where good is bad, and bad is good. Where weak is strong and strong is weak.
You can bet that if the natural market forces don’t work, then that new Mercedes will probably come with a tariff in addition to the alloy wheels and a sun roof.
On today’s show we’re talking about the difference between a commodity and a home.
From an executive summary, or an Excel spreadsheet, multi-family offerings look pretty much the same. They have lovely photos, and the numbers look compelling. I find that newer investors are consumed with making sure they have a profitable project. It captures almost all their attention. But there is a level above that primitive profit motive.
When you have truly mastered the game of real estate development, you realize that creating a profitable project is simply part of the process. The true differentiator is community building. When you create an experience for residents where they truly love to come “home” at the end of each day, then you’ve mastered community building.
It’s not just one thing that accomplishes that. It the sum of a whole bunch of details. It means paying attention to the experience of living in a space. It requires forethought.
Now you might be saying, Victor I’m not a developer. I simply buy existing assets, reposition them and create value for investors that way. I’m stuck with the hand I’ve been dealt on a given property.
I’d like to challenge that way of thinking.
Whether you are building new from scratch or repositioning an existing asset, the development I’m talking about it the delivery of a finished product. That finished product has a specification that you can achieve with a new building, and in most cases within the envelope of an existing asset. But it requires you to think about it.
It’s small details like, what is the assignment of parking spaces? Does it make sense for your tenants? What is the experience of coming home with 4 bags of groceries and walking the path from the car to your front door?
What is the work-flow in the kitchen? Does it make sense? Is there a spot on the counter for the blender, within reach of the outlet and is there space for a cutting board and a bowl.
Have you designed the balcony so that a morning coffee on the balcony is a great experience. Perhaps a glass panel on one side would provide a bit of wind shelter and make the space usable.
Do the front office staff make it their business to know every resident by name and greet them in a warm and welcoming way?
The Excel spreadsheet doesn’t capture any of what I’m talking about.
Now if your investment is in workforce housing and C-class apartments, you might be thinking, Victor you are so out of touch with the reality of our tenant population. That means that some amenities are out of the question at some of the lower price points, and I get that. But thoughtful design doesn’t cost more than thoughtless design. Simply giving thought to flow and the end customer experience can result in design changes that cost nothing more. Does the refrigerator door swing in the best direction for flow in the kitchen? That decision is free. It costs nothing to get it right. But when things are awkward and cumbersome, those irritants contribute to a feeling that this place isn’t home. It’s not enough to complain about. They might not even be able to articulate the awkwardness, but they can feel it subconsciously. Your tenant might be staying there for now, but it’s not home.
Is the thermostat placed in a location that makes sense? Or does it get influenced by a local temperature shift so some of the apartment is too hot and the rest is too cold?
These decisions cost nothing to implement correctly, but they require thought, they require attention to detail, and they require that someone in your organization feels a strong sense of ownerships and responsibility for the customer experience. When they walk into the property for the first time, is there something that you’ve intentionally designed to create a spontaneous “Wow” reaction. It doesn’t have to be huge.
Think about how you transform the end customer experience.
Mobile home parks have long been a part of the senior living landscape, and they have emerged as one of the most in-demand product types in recent years. They offer investors stability and steady returns, and they provide older adults amenities found at other senior housing communities at more reasonable price points.
In fact, senior mobile home communities can be an affordable alternative to the ongoing trend of luxury active adult construction, and offer amenities and a sense of community on par with — and in some cases exceeding some of the new age-restricted housing offerings.
My friends at 4-Peaks Capital Partners have been investing in mobile home parks over the past several years. Today they own about 2000 pads. Mike Ayala from FourPeaks Capital Partners was a guest on episode 149, on June 16 of 2018.
In spite of the many misconceptions associated with mobile homes, the housing type has a long and rich history in the U.S. The first mobile homes in the country were built in the 1870s, and mobile home construction saw a boom period after World War II.
Today, 22 million people live in mobile homes in the U.S., according to data from the Manufactured Housing Institute. In 2017, 93,000 mobile homes were built in the U.S., accounting for 10% of new single-family home starts.
As more baby boomers enter retirement failing to fully recover the wealth they lost during the Great Recession, well-managed senior mobile home communities are viable options to extend quality of life and financial nest eggs.
Investors and major brokerage houses have taken notice. For example, I’m on a mailing list from Colliers International that is focused only on mobile home park and manufactured housing opportunities across North America. We just completed our own new RV Park last year. When the original purpose of that park reaches its end of life for workforce housing. It has been designed to convert to a mobile home park with the full infrastructure already in place for that conversion.
Demand for senior mobile home communities is also driven by how few opportunities there are in the market to acquire a quality community. There are some value add deals, and in my opinion a property should be somewhere near 50% occupancy to offer an effective value add opportunity.
A lot of investor interest is being driven by real estate investment trusts and private equity money seeking to build large portfolios, from which long-term value can be created via solid management and economies of scale.
Equity Lifestyle Properties is real estate mogul Sam Zell’s publicly traded mobile home REIT. It is the largest owner of U.S. mobile home communities in the country. Equity Lifestyle is also Zell’s best performing REIT in recent years, increasing in value from just over $40 per share in 2015 to a current 52-week high of $128.43 per share.
Like their brick-and-mortar counterparts, senior mobile home communities often offer extensive amenities packages to attract residents. Some of the more common amenities include swimming pools, fitness centers, softball fields, and golf courses and boat docks at more upscale communities.
Some of the communities are keeping current on trends for amenities. Shuffleboard courts, once common and prevalent, are being repurposed in favor of other sports such as bocce and newer trends like pickleball. For those of you who don’t know, Pickle ball is an extremely popular form of tennis that is played on a much smaller court. It involves less running, but still requires great racket skills.
Supply and demand dynamics also favor the investor. Sun Communities has wait lists across its portfolio; its internal data revealed that the REIT accepted 50,000 applications for housing last year, for 5,000 available homes.
When seniors do eventually age out, they hold the values of their homes, as long as they’re well maintained.
On today’s show we’re talking about a niche within senior living, and that is coop housing. It’s a small and slowly growing segment. For some, it has become a competitive option in some markets, and may gain further traction by addressing several pressures facing the industry.
Co-ops account for a fraction of senior housing inventory, but there are signs that they are growing in popularity.
The number of senior co-ops has grown from 103 in 2013 to 125 in 2019 totaling 7,700 units and about 10,500 residents nationwide. So their penetration of the market is still quite small.
But first, let’s define what coop housing is in the context of senior housing.
Buying into a cooperative is a cost-effective way to enter senior housing, and can be an alternative to independent living and active adult communities. In coop housing, residents purchase “shares” in a corporation that owns the building. These shares entitle stakeholders to lease a specific unit within a building and utilize common areas. Additionally, there is a monthly charge for assessments, maintenance and repairs.
Co-op living also gives residents a stake in how a community is managed, similar to a traditional homeowners association. Each co-operative has an elected executive board and members have a vote in how buildings are managed and operated.
Co-op shares appreciate in value incrementally — usually 1% to 2% annually. This maintains affordability and marketability for new residents, and because members are responsible for the monthly fees on empty units until they are occupied.
Due to the financial structure of co-ops, they tend to be overlooked by profit-driven investors, but they do offer consumers a more affordable living option.
Members looking to exit a co-op can see a small return on their investment, or they can hold on to their shares and rent out their unit to another tenant.
Residents who buy into a community can pay anywhere from 20% to 95% of their 40-year mortgage upfront. Now a 40 year financing can mean low monthly payments, and is a reflection of the kind of favourable financing that is possible in this asset class. There are also monthly fees to cover building maintenance and basic operations. The payment plans are designed to be flexible for seniors with more equity or higher personal income.
Where are they?
Minnesota, where the first senior co-op opened in 1978, is home to 82 communities, and the Twin Cities area is a competitive market. Ebenezer, the largest senior housing provider in the state, manages 38 co-ops, most of them under the Applewood Pointe and Realife Cooperative brands.
Last year, Ecumen launched a senior cooperative brand, Zvago, with the opening of a $20 million, 54-unit community in Minnetonka, Minnesota. Ecumen has also opened 5 more Zvago co-ops.
At Zvago, buy-in payments can range from more than $31,000 to nearly $500,000. Monthly fees can range from more than $500 to almost $3,300.
Another developer — Real Estate Equities Development of Eagan, Minnesota — focuses on building and managing senior co-ops under the Village Cooperative brand, and has a pipeline of 34 cooperatives completed or under construction in Colorado, Iowa, Kansas, Minnesota, Missouri, South Dakota, Wisconsin and Washington.
Late last week, The White House released its long-awaited plan to reform the nation’s housing finance system and privatize Fannie Mae and Freddie Mac, calling it the "last unfinished business of the financial crisis.” In the report, they call these mortgage insurers who are currently under government conservatorship, government sponsored enterprises or GSE for short.
In the good old days, Fannie and Freddie operated with different models. Freddie would sell its loans on the open market using mortgage backed securities as the vehicle. Fannie on the other hand kept the loans on its balance sheet.
The really high interest rates of the early 1980’s pushed Fannie Mae to the brink of insolvency, after which they adopted the same approach as Freddie Mac.
In the middle of the credit crisis of 2007-2008, the Government stepped in and bailed out both Fannie and Freddie in the middle of 2008, although it was apparent by early 2008, that some drastic steps would be required to save the financial system.
I’m quoting from the report issued by the Treasury Department to the White House late last week. “The housing finance system is in serious need of reform. The GSEs remain in conservatorship more than 10 years after the financial crisis, and they continue to be the dominant participants in the housing finance system. Although they remain critical to the functioning of that system, they are not yet subject to capital and other regulatory requirements tailored to the risks they pose to financial stability. This lack of reform has left taxpayers exposed to future bailouts. The lack of reform has also prolonged the Federal Housing Finance Agency’s (“FHFA”) management of the GSEs through the conservatorships, perpetuating far-reaching Government influence over the housing finance system.
The idea is that a conservatorship is temporary and therefore there should be a timetable and a framework for returning these enterprises to the private sector.
Most of the recommendations in the 53-page plan, released to the public on the eve of Friday's 11th anniversary of the government takeover of Fannie Mae and Freddie Mac, don’t require input from Congress.
Predictably, the Democratic Congress members were quick to denounce the plan.
The largest impact of the privatization is likely to be on the underwriting rules which would affect loan eligibility for borrowers. The second would be the cost of the mortgage insurance premium. Today in the multi-family market, that insurance premium varies according to the ratio and the risk factors calculated by the underwriters. It’s possible that under the new regime, once these enterprises are privatized, that insurance premiums increase. However, I personally don’t see these premiums being much higher than the actual government backed guarantees under the HUD and FHA programs. I expect the newly privatized offerings to be price competitive. They are, after all offering the same service.
While I do expect that privatizing these entities will reduce the taxpayer exposure to future bailouts, it won’t eliminate the exposure. Since the offering will need to be price competitive with the government offerings, I don’t anticipate major changes to the cost of these offerings.
Jim Murray is based in Rhode Island. He's a professional property manager who got his start in real estate through house hacking. Listen to this entertaining conversation about house hacking. Jim can be reached on Instagram at REICashFlowKing.
On today's show I'm talking with Ottawa investor Rich Danby about some of the painful real-life lessons earned from working with contractors. This is an important show that every investor needs to hear.
On today’s show we’re continuing our series on digital marketing. A few of my consulting clients have asked about SEO. So on today’s show we’re going to cover some of what’s new in search. It’s no secret that the majority of the business goes to the businesses that appear on the first page of Google’s search results. By some accounts, 50% of the business goes to the first organic search result. By the time you’re on page 2, your market share will be in the single digits. So ranking highly for your specific keyword search results is important if you rely on digital marketing for your business. Search engine optimization is all about appearing on page 1 of Google’s search results.
Search engine optimization is not one thing. It’s a menu of like 50 optimizations that each by themselves can improve your ranking.
These optimizations break down into two major categories.
- Eliminating the errors that are penalizing your ranking with Google.
- Making sure you have the elements that will have you rank well against your competition.
Before you spend any time competing for ranking, you need to fix the errors that are pushing you underwater.
First of all, Google’s algorithms have improved dramatically over the past few years.
If the address for your business isn’t verified, then Google will deem that you’re not serious about being in business.
If the address for your business is at a UPS Store or a residential address, Google will deem that you’re not serious about being in business and will push you down in the search rankings.
If your website has pages that have an un-natural use of certain keywords, then they will assess that you’re not actually speaking to your customers. They will assess that you’re using language for the sole purpose of fooling the search engine. That’s called keyword stuffing and they will penalize you accordingly.
In the past, one of the measures that featured heavily into a website’s ranking was how popular the site is. One of the principal measures of that popularity was how often the site appeared elsewhere on the internet. The more links to your site, the more popular it was deemed to be and therefore you would appear higher in the search rankings.
That gave rise to an entire industry of people offering to create links to your website. Link-building was one of the great artificial manipulations that web designers used to try and fool Google. Today, Google is a lot smarter.
In the good old days, search was very literal. For example, if your search included the word color, and you spell the word color the American way, COLOR, that would be a different search than if it was spelled with British way COLOUR. Google did not distinguish between those two. This often created some very awkward wording on your website. You would often see the same word spelled different ways on the same page so that Google’s search algorithm would see both spellings.
The fact is, most real estate investors don’t know about this. You can’t be an expert at everything. Many of the low cost SEO companies that are based offshore will make large promises for a low price. For $500 a month, they will get you on the first page of Google. All too often, these companies are not current with the latest Google algorithms, and they advocate tricks to try and fool Google. These tricks are increasingly caught by Google and will only hurt your search ranking.
It’s important to find the right digital marketing agency who can first, help you establish the right goals for your website, and then execute on those goals. The key to finding the right partner is, like many things to get referrals, and to conduct a detailed interview.
We are continuing our deep dive on digital marketing. If you’re in business, you need to make sure your clients know what you have to offer. The most valuable pile of gold bars hidden in the middle of the Sahara desert is worthless if nobody knows about it. As real estate investors, too often the importance of marketing is overlooked or outright ignored.
Let’s start with a few definitions. I’m going to make a distinction between advertising, marketing, and publicity. They sound similar, but they have vastly different meanings in my world.
The purpose of marketing is to generate interest, to tap into curiosity. It’s not to manipulate or convince, or even sell. In my world, the most preferred form of marketing today is educational marketing. People are willing to be educated. Very few people want to be subjected to a sales pitch.
Advertising is similar to marketing, but the main distinction is that it’s paid for. With advertising you pay a platform owner for the right to present your stuff to their audience. The platform might be something like Facebook, or it might be the conference organizer giving you the right to include your material in the conference registration kit.
Publicity is the by-product of getting visibility in the media. That could be radio, TV, a podcast, or a magazine article. Generally speaking, publicity is free. If you’re paying for publicity, I call that advertising and it’s very distinct from publicity. So with those definitions,
This podcast is a form of marketing. When I appear as a guest on someone else’s show, then it’s considered publicity. The purpose of the podcast is to generate interest, to trigger curiosity, to start a conversation. For a subset of you, that conversation may somewhere in the distant future translate into doing business together in some fashion. I truly have no idea what that will ultimately look like.
Google remains at the top of the heap as the most visited website. Its position as the search king is well established. Number two is Youtube, and Facebook is number three. 73% of Americans use Youtube on a monthly basis, 68% use Facebook, and 35% use Instagram. However, it’s important to know that less than 50% of millennials actively use Facebook and the vast majority are on instagram. LinkedIn, Twitter, Snapchat, and Pinterest are all hovering between 25%-30% penetration of the US population.
Each of these platforms serves a different purpose and has a different target audience. Too often we tend to use the tools that are interesting to us. But that may not be where your customers are hanging out. For example, if I’m looking to advertise student housing, then Google and Instagram are the platforms of choice. I would not waste any time with Facebook.
Conversely, Facebook once gave me the option of including Instagram users in an advertisement for one of our RV Parks. When I said yes, I didn’t expect 96% of the ad revenue to be spent on Instagram and only 4% on Facebook. That week’s worth of ad spending was completely wasted. Fortunately, I ran it as a small experiment.
If your content has a “how to” element, then Youtube can be the preferred search engine. If your customer is searching for how to market student rentals, then a video that speaks directly to that topic might be the perfect piece of content.
Successful businesses invest somewhere between 12%-20% of their resources, that’s both time and money on marketing.
The year was 1888 and Almon Strowger was the local undertaker. The phone systems of the day were answered by human operators who would make the physical connection for you using a giant patch panel. In his home town of La Porte Indiana, one of the telephone operators was the wife of another undertaker and his competitor. He felt that phone calls requesting to be connected to the undertaker were going to his competitor, the operator’s husband. So in 1891, Strowger introduced the first mechanical automated telephone exchange. It was installed in 1892 in his home town with 75 subscribers and a capacity for 99. The rotary dial phone was triggering a series of connections that informed the network of relays and switched how to route the call. It was adopted in the UK in 1912, and over the years, the Strowger Step by Step exchange became the global standard for the phone system for over the next 70 years. It levelled the playing field and took away the potential bias that an operator could exert over your phone connections.
This week we’re going to do a deep dive mini-series on digital marketing. If you’re in business, even as a real estate investor, knowledge and expertise in digital marketing is an essential element to your success.
Today, in 2019, we’ve gone backwards where the owner of the communications platforms are increasingly competing with their customers. We’re back to the days when a call to the undertaker was not being handled in a fair manner.
I believe, you need to be the gate-keeper to the information that enters your brain. But increasingly in the world of social media, many have abdicated that responsibility to the gatekeepers of various social media platforms. Today, 43 percent of Facebook of Americans get their new from Facebook. That’s a scary number. Moreover, 57 percent of Americans who get their news on social media say they believe that news is largely inaccurate. Even among the people who prefer to get their news on social media, 42 percent say that news is, again, largely inaccurate.
With that great power comes great responsibility. I might becoming cynical in my middle age, but there is increasing evidence that these decisions are self serving for the platform owners and not for the benefit of the end consumers.
A case in point, Facebook clearly wants people to spend time on their platform. The more time spent on platform, the more ads they can present to you, and the more they can charge for ads. This maximizes their ad revenue.
When Facebook launched their own video platform, they prioritized video content on their own platform ahead of youtube. I’ve run a very simple experiment. I uploaded the same video content onto Facebook and onto Youtube. I created two identical posts in Facebook, one had the embedded video, the other was a link to Youtube. The native Facebook video received 10x more views than the exact same content hosted by youtube. So if you’re using social media to promote your business, this is something you should take note of. Facebook wants to keep you on their platform and they don’t want to link to content outside their platform.
The latest change in the Facebook algorithm is to actually ban any link to an Apple hosted Podcast. That’s right, I can no longer post an update with a link to an episode of the podcast. That is considered a link to banned content. The same is true on Instagram, which is owned by Facebook. So far, if the show is distributed through another platform link, like say, Castbox, the link to my show displays with no problem. About 80% of US podcast traffic is going through the Apple platform, even though Apple only represents 39% of the overall phone market in the US and 22% of the phone market globally.
This is Facebook asserting control over how you access information. They are clearly targeting Apple as the enemy. But not only that, they’re targeting all the users of the Apple products as the enemy.
On today’s show we are talking about one of the factors that can be at play in a tight market. We have just gone through a period of more buyers than sellers, of rapidly rising prices and of multiple offers. That’s not all markets or sub markets. But many major markets including New York, Toronto, San Francisco, Seattle. My home town right now has less than two months of inventory in the market and frankly when you conduct searches in individual neighborhoods it’s pretty common to find only two or three homes for sale in the area. People looking for a larger home in the same area or those looking to downsize who want to remain in the same area have very little choice.
So why are there so few homes on the market? People clearly want to move.
The most common response is that they won’t sell their house because there is nothing to buy to replace it. It’s like that puzzle game with the squares whereby moving one square at a time you can rearrange the squares to match up and form an image. But that puzzle only works if there is an empty square. Otherwise there is no mobility possible for the squares. If there isn’t inventory for sale in the market, there is no mobility.
If you take my home city of Ottawa Canada, the inventory in the rental market is less than 1%. So even saying that you can rent temporarily until you find a new home doesn’t work. Most landlords are demanding a 12 month lease So if you find the perfect home in month 4 you can still be on the hook for a 12 month lease which means double the home ownership cost for an extended period of time.
In that situation the seller faces a dilemma. Do they sell now when they know they can get top dollar? Do they wait for better inventory conditions in the future? When will that be? Will prices fall at that point? What will be the interest rate at that time? Will prices continue to go up? Will you get priced out of the market?
When the market conditions change, will there be some warning? What will the warning signs be and will you even notice before the change has fully arrived?
What we see from looking at other markets across North America is that when changes occur, they occur quickly. But the market is actually several markets that don’t change in unison. For example when you segment the market by price, you discover that you might have 2 weeks of inventory at the entry level of the market and six months of inventory at the top end of the market. Some homes are sitting on the market for 18 months.
Let’s look at the San Francisco Bay Area and Silicon Valley in particular.
That market boasts some of the best paying jobs in the technology sector.
It’s no secret that homes are expensive in Silicon Valley. That’s been the battle cry for 30 years. But about 9 months ago, the market dynamic in Silicon Valley changed in a matter of weeks. The market was expensive before the shift. Taxes were high. Interest rates increased a quarter point. Hardly enough to fundamentally change affordability of a property.
Today, prices have moved down 4.3% since the high last fall.
It’s very tempting to believe that hot market conditions will continue. If the demand was being driven by foreign investment, and all of a sudden that source of capital coming into the market dries up for whatever reason, the market can turn very quickly. One such market is Miami where a high percentage of buyers come from outside the US, and South America in particular. Argentina just instituted capital controls after 4 years of eliminating capital controls. So it’s probably a safe bet that the number of Argentinian buyers in the Miami market is going to drop significantly. A few years ago there were a number of buyers from Venezuela trying to escape the economic malaise. Today, that wave has passed and Miami developers who assumed the demand would continue were caught off guard with excess supply.
Patrick from Austin Texas writes.
Hello Victor. Congrats on all of your success. I have followed you for years now. Do you suggest any good masterminds. I currently own 110 single family homes for rentals. I have them professionally managed so I only spend 15 minutes a month on my real estate and I’m looking to expand.
Patrick, thank you for the kind words and that is a great question. Masterminds are an amazing way of elevating your life to another level.
While the concept of a mastermind has been around for a long time, the greatest modern day articulation was in the book Think and grow rich by napoleon hill. In that book Napoleon Hill describes the masterminds of Henry Ford and Andrew Carnegie.
I’ve participated in many different types of masterminds over the years. I actively participate in them even today.
For example, I have a call every Sunday morning at 9AM. That conference call is an integrity mastermind. About 4-5 of us get on the phone each week and share what we have discovered in the past week about integrity. Now when I talk about integrity, I’m not talking about the honesty definition of the word. I’m talking about workability. For example, if you have a bicycle wheel with broken spokes, then that wheel is lacking in integrity. The wheel isn’t bad. The wheel isn’t dishonest. It’s just lacking integrity and more importantly, it’s possible to restore integrity. So we look at where things are breaking down in our lives and brainstorm structures that can be put in place to permanently restore integrity in that area.
There are larger masterminds that are run as a business. For example, I used to participate in a mastermind which had about 30 members. The price of admission was $25,000 a year. The host would bring in various speakers to share their wisdom. We had an Entrepreneur who built and sold a business for $800M. We had the CEO of Krispy Kreme donuts. We had a senator. All kinds of incredible people who we probably would not have been exposed to were it not for the mastermind.
My friend Kyle Wilson was Jim Rohn’s business partner for 18 years. Jim Rohn is considered the father of the modern day seminar industry. He mentored Tony Robbins, Zig Ziglar, and countless others who today have established themselves as thought leaders. Kyle has several mastermind groups that he leads across the country. There’s one in Dallas, Los Angeles and Philadelphia. These meetings are monthly and usually take place over two full days.
The thing to remember is that there is no one way to do this.
I host a monthly mastermind conference call with George Ross. George is 92 years old. He has over 60 years of business experience and he just recently retired at age 89. We record the calls and even if a member of the mastermind can’t make the live call, they can listen to the replay and still get huge value from the conversation with the participants on the call.
Here are a few best practices that in my experience make for a successful mastermind.
- The members have to commit to absolute confidentiality. If you don’t trust that you have a completely open non-judgemental environment, it’s going to be very difficult to have open honest conversations.
- You need to be very mindful of who is participating in the mastermind. Don’t admit new members without the unanimous consent of all the members.
- Keep the mastermind small, usually under 10 people. There are some examples of successful masterminds that are larger, but they’re harder to manage. Unless they’re a “for profit model” and professionally managed, keep them under 10 people (I find that 4-6 is ideal).
- Start each session with a round-table sharing of wins since the last session.
- When people commit to be part of the mastermind, they commit to protect that time slot and be a regular participant.
The book of the month this month is “Never Eat Alone” by Keith Ferrazzi.
This book is all about relationship building and the business and life success that comes from building relationships.
When I wrote the book Magnetic Capital, I realized that there were 5 principles that are essential to raising money. Briefly, the 5 are:
- Relationship
- Trust
- Results
- Compelling Opportunity
- Alignment between the goals for the money and the goals for your project.
I chose this book for the book of the month because raising money and real estate investing is a relationship business. It’s one of the 5 principles and if you don’t master this one, you’re going to struggle as an investor, as a developer, as a syndicator.
Never Eat Alone is not a new book. It was first published in 2005 and I think I read it around 2010. But it’s one of those books that continues, even 15 years later to be selling well, and to have impact. I know this because I recommend to all my consulting clients and they tell me how much of an impact the book has had on their approach to relationship building.
The author comes from humble beginnings. His father was an iron worker and an immigrant. All his father knew was hard work and low wages. But his father also knew there was another system at play that he wasn’t part of. He asked one day to speak with the CEO of the steel company, a pretty audacious move. But the CEO was so intrigued with the request that Keith’s father was granted the meeting. The result of that meeting was an opening that forever changed the course of the author’s life. Keith went to the most prestigious private elementary school in the area and then ultimately to Yale University and eventually Harvard Business School.
The success that becomes available from a school like Harvard has more to it than the quality of the information. The real differentiator is the relationships that come from being in that environment.
The author has developed global relationships that include the corridors of power in Washington, Hollywood’s A-list, and eventually led him to being elected as a global leader for tomorrow at the World Economic Forum in Davos. Keith Ferrazzi distinguishes genuine relationship building from the crude desperate business card dealing networking we so often encounter at conferences.
The core of the book is a shift in mindset. Some people immediately are looking for something. True relationship building means never keeping score. It’s never simply about getting what you want. It’s about making sure that people who are important to you get what they want too.
It’s about maintaining presence in people’s minds. It’s about connecting with people in your circle of contacts all the time, not just when you need something from them. In today’s world of social media connectedness, this is both easier than ever, and in some ways more difficult than ever. It’s easier because the effort to reach out has never been easier. The environment has become so much noisier than ever before. So your interactions have to add more value to stand apart from the rest of the pack.
The author addresses the difference between a cold call and a warm interaction. People are bombarded by so much content these days, that most of it gets ignored. Interruption marketing worked 20 years ago, not any more. People are tired of being interrupted.
If you’re going to get someone’s attention, then you need to be interesting. That sounds obvious, but people rarely examine what comes out of their own mouth and ask the question “Is this interesting?” That means it needs to sound fresh and different.
If you’ve struggled to build the quality of relationships with the kind of people who could make a meaningful difference to your business, the book Never Eat Alone is for you.
On today's show I'm talking with George about his background, our monthly mastermind, and his take on the US China trade negotiations.
How often to marketers create artificial scarcity and tap try to manipulate their prey through fear of missing out or the acronym FOMO for short.
This kind of manipulation is repulsive, see-through and yet we’re subjected to it time and time again.
It’s like the store that has a one day sale in the window. Today and today only. But the sign has been in the window so long, it’s been bleached by the sun.
You’re not off to a good start when the very first interaction is based on a lie. If they’re willing to lie to you to get to you to come into their store, what else are they willing to lie about?
Last year, my wife and I spent a couple of weeks at a resort in the sun. It was one of those resorts that gives you a bracelet so that the staff can easily see if someone if on the property who should not be. I was walking through a crowded market and a man walked up to me and started chatting me up. He said that he was my waiter last night at the resort.
So I asked him. Oh really? Where was I seated and what did I have for dinner? Of course he couldn’t answer correctly. So I asked him if he thought lying to me would somehow induce me to buy his stuff. It’s uncomfortable to confront someone who lies to you.
Now most manipulations are not as crude as the one I just described. But we’re still subjected to them on a daily basis.
One of the fundamental principles underlying investing in real estate is the psychological contract of trust. Trust is not just whether you dealing with an honest person. That’s an absolute must. Even that can’t be taken for granted. But it runs much deeper. It’s a layered nuanced complex relationship. It involves asking a number of questions.
- Can I trust you to put together a solid plan?
- Can I trust you to execute the plan
- Can I trust you to hire the right team?
- Can I trust you to communicate in an open and transparent way?
- Can I trust you to communicate when there is a problem?
- Can I trust you to keep small commitments?
- Can I trust you with my money?
- Can I trust you to be resourceful enough to solve virtually any problem that might come your way?
- Can I trust you to manage risk in a prudent manner?
And on and on. If any one of these items is missing, it starts to chip away at the trust. The final element of trust is your track record. What have been your results? Have you lost money for investors? If so, what was the reason and what did you do about it?
Now I know what you might be thinking. You might be new to raising capital and wondering how can I raise any money if I don’t have a track record. How can I get. Track record if I can’t raise any money. I’m stuck in a circular argument.
But here’s another way to think about it.
So when a deal sponsor says, boy do I have a deal for you. That’s the last thing you should be considering. Consider first, who are you doing business with.
I have no idea what the street vendor in the market was trying to sell me. I paid no attention to that. I needed to know first if this is someone I could do business with.
On today’s show we are talking about the impending recession. Yes, that’s right, the impending recession.
I believe that both Europe and the US are facing recession later this year if they are not already in an economic downturn. What is the reason?
Bloated inventories. Recessions happen when companies end up with bloated inventories. Most of the time, those inventories are the result of growing production in anticipation of continued demand growth. That’s the classic cause of inventory growth. Sometimes companies experience delays in delivery of parts because the supply chain is running at capacity. Inventory of materials or components can cushion and protect against those delays. But when the delays disappear, the excess inventory will be drawn down to normal levels before ordering more. That sharp halt in orders when it happens across a wide swath of the market is what we call an economic contraction.
So let’s take a look at inventories and see if there are situations where inventories are being built ahead of demand. If we see enough of them, and we don’t see a corresponding increase in demand to absorb those inventories, we can easily conclude that a recession is not far away.
I’m going to build the case for recession in three parts.
For exhibit A I give you Brexit
The UK has a deadline of the end of October to leave the European Union. But the terms of the departure haven’t been worked out and the risk is high of a no deal exodus. If there is no deal, there is a great deal of uncertainty about what that could mean for the flow of goods and commerce. Will goods be delayed at the border? Will customs inspections increase and materials be held up? Will there be new tariffs? British companies have responded to these uncertainties by building inventories to make sure their supply chains are not disrupted.
For exhibit B, I give you the European counterpart of Brexit. Companies on the continent that do business with the UK are also stockpiling in order to handle any possible supply chain disruptions.
For exhibit C, I give you the US China trade negotiations. Many companies in the US have ordered extra material in order to avoid the impact of tariffs on goods coming from China.
So here we have three significant places in the economy whereby there is an artificial increase in inventory ahead of demand.
We know that when that happens a stop in orders to draw down that inventory is not far away. When companies slam on the brakes and stop ordering it sends a negative shock wave through the economy. Customers who were placing steady orders week after week, suddenly stop ordering. Revenue from that customer drops to zero while the excess inventory is consumed. The supplier has no idea when orders will resume. So they respond the only way they can to protect the business. They send people on forced unpaid leave, or institute layoffs altogether to reduce expenses and protect the survival of the company.
When recessions happen, businesses fail, banks suffer losses in their commercial loan portfolio. Commercial real estate suffers as commercial vacancies increase. Some of these companies will not survive. That puts further pressure on lending institutions.
Banks today are better capitalized than they were in 2007, but still, they need to pay attention to their balance sheets. In recession times banks become more risk averse and have little choice, but to tighten their lending practices and only a fraction of the loans get approved that only months earlier would have been easily approved.
So pay close attention to your portfolio and use the current window of opportunity where loan interest rates are lower than they’ve been in a while, coupled with the favourable lending environment to lock into as long a fixed rate term as possible.
Kara from Ottawa Canada asks.
I have a firm agreement with a buyer for the sale of a property. Two weeks before closing the lender for the buyer indicated that they want to order a new appraisal and therefore the closing date cannot be met. The Buyer is proposing that we close the transaction with seller financing, or that we simply extend the closing date. I have very real carrying costs for the property and I don’t like the idea that this delay could cost me money. What do you suggest?
Kara, this is a great question, and an extremely common situation. You’re based in Canada and closings generally happen on time. In the US, it’s much more common to have delays on closing. A failure to close on a transaction in Canada usually results in litigation. In the US, delays are part of the fabric of real estate investing. In my experience, more than half of the transactions I’ve witnessed over the past decade have been delayed for one reason or another. Sometimes the cause is a delay with the title insurance. Sometimes it’s a delay with the lender. I’ve even seen delays at the closing table when the lender for the buyer requests additional documentation on closing.
You’re correct to be concerned about carrying costs. The daily and monthly carrying costs are real, and you should be compensated for the delay. The agreement for purchase at this point is not conditional. So it stands to reason that the buyer should pay for those carrying costs because they were going to own the property from the closing date anyway.
I don’t know exactly how much extra time the buyer will need, but let’s say for the sake of argument that they need an extra 30 days to close.
Let’s imagine that those costs are $2,000 a month. I don’t know the exact numbers so I’m making them up.
You have a couple of choices. You could increase the purchase price to compensate you for the added costs. But that runs the risk of causing the buyer to prequalify for a new loan amount. That could introduce even further delay. But you would be within your rights to ask for that. The second option, which I prefer is to ask for an increased deposit.
You could agree to, say, a 30 day extension under the following conditions:
- If your carrying cost is $2,000, I would as for a little more because you’ve probably forgotten something. I would ask for something between $5,000 to $10,000 in additional deposit monies.
- The Buyer should increase their deposit amount. But in this case, unlike the original deposit that was placed in trust with the real estate agent, this deposit will be non-refundable, and released immediately to the Seller. The purchase price won’t change, but you will get a chunk of cash immediately.
The added deposit will be deducted from the cash the buyer needs at closing since it was pre-paid. But it is reducing your risk.
I’m not a fan of closing with Seller financing. It puts too much of the risk in your hands. Let’s say that the lender for the buyer backs out of the deal. Now you’ve conveyed the property and you would need to go through a huge and expensive legal process to get the property back. This would involve a foreclosure or a power of sale, depending on where you live. In Ontario this would be a power of sale, but could only happen after the Buyer is in default on the terms of their Seller financing agreement. Meanwhile you’ve got a ton of cash tied up and you’re working with a buyer who is not capable of closing. You don’t have the flexibility to simply put the property back on the market.
I want to thank you Kara for a great question. I hope this gives you some ideas on how you can negotiate the situation.
On today’s show we’re looking at another economic indicator that might signal a weakening economy. Truckers have for months been sounding the alarm about a "bloodbath" in their $800 billion industry.
This year alone, some 2,500 truck drivers have lost their jobs as trucking companies large and small declare bankruptcy. That is a small number considering the scale of the industry. However, major public carriers like J.B. Hunt, Knight-Swift, and Schneider have been forced to cut their annual outlooks.
Trucking is often looked at as a leading indicator of where the rest of the economy is headed. As 71% of America's freight is moved on trucks, companies foreseeing needing fewer trucks is typically an omen of an economic downturn: If manufacturers are producing less and people are buying less, there's less of a need to move goods.
Trucking participates in all phases of commerce, everywhere in the supply chain. It increases as manufacturing starts to ramp up, giving it leading indication on economic growth.
When the rest of America is headed for a downturn, freight usually dips first, a new published report from Convoy's economic research division said. The industry went into a recession in April 2006, more than a year before the rest of the economy was clobbered by the Great Recession, starting in January 2008.
Rail and air cargo are also suffering. Air freight has declined year-over-year for eight consecutive months, according to the International Air Transport Association. The IATA head has said the China-US trade war is dragging down business.
Fuel is a massive expense for truck drivers — and the companies that employ them. Fueling up a truck fuel costs can easily total thousands of dollars per month; truckers are driving up to 11 hours a day in vehicles that get at best 6 miles per gallon. So, most companies give their employees gas cards to pay for the diesel fuel. Unless, of course, that company can't afford the fuel. The internet is full of stories of truckers who were laid off and their employer owed them for fuel.
In the first quarter of 2019, 100 more trucking companies failed compared to the same period in 2018.
Truckers large and small are likely to continue to feel the pain of bankruptcies. Diesel rates are expected to surge following IMO 2020, a new set of environmental standards slated to have "large and disruptive effects" on the oil and gas industry. We did a segment on the impact of new sulfur emission standards that are due to come out on January 1. If you missed that show, it was episode 462 on April 23 of this year.
According to the FreightWaves report, the surge in trucking bankruptcies has been historically linked to a jump in diesel prices. For smaller trucking companies, such increases in cost can't be passed down to their customer base of retailers and manufacturers - who can just go to a cheaper trucking company in the ultra-competitive space.
And now it appears clearer than ever that the economy is headed for a slowdown if not an outright recession. Remember, the definition of a recession is two consecutive quarters of negative growth.
Only a few years ago there was a shortage of independent truck drivers in the US, and they were being imported from India to make up the shortfall. Now that trend appears to be reversing.
On Wednesday, investors everywhere were spooked by an inverted yield curve, in which the spread between two- and 10-year Treasury yields fell below zero. We have had a few yield curve inversions over the past couple of years. They can sometimes accompany economic slowdowns, but not always.
Realogy Holdings Corp the largest full-service residential real estate services company in the United States, announced a couple of weeks ago a collaboration with Amazon. The new program is called TurnKey, a new homebuying program that simplifies the process of finding and settling into a new home. Now available in 15 U.S. cities, TurnKey combines Realogy's real estate expertise across its brands, including Better Homes and Gardens Real Estate, Century 21, Coldwell Banker, ERA and Sotheby's International Realty, with the ease and convenience of Amazon's Home Services and smart home products.
The program has two parts. The first is the connection with a real estate agent who is one of the designated TurnKey agents, and who are affiliated with one of Realogy's trusted residential real estate brands.
The second part of the program involves a free move-in benefit for the customer. Upon closing on a home, Amazon connects the buyer with services and experts in their area to help make the house a home.
Amazon is playing the long game. Imagine for a moment that Amazon is actually registered as a Real Estate brokerage that is entitled to the broker referral fee. Let’s imagine for a moment that Amazon credits 100% of that referral fee back to the customer in the form of Amazon credits that the home buyer can use to furnish their new home. What they’re building is a new set of habits. Imagine, you’ve got $5,000 to spend on new stuff for your house. What are the chances that you’re only going to spend $4,999 dollars and stop, never to spend money with Amazon again?
Chances are good that you’re going to establish a new set of buying patterns at a time when you are already facing disruption and need to establish a new set of buying patterns. You’ve moved into a new area and will probably change grocery store, hardware store, furniture store. Imagine that Amazon is disrupting that process and you’ve got $5,000 to spend. You’re probably going to continue to use Amazon beyond the first wave of spending to use up your credits. Amazon wants you to think of Amazon first when you need to buy something. By sending you on a shopping spree, they’re helping establish a new habit.
There is a fundamental conflict when a platform owner competes with its customers. Some people think that the end consumer are Amazon’s customers. But the users of its platform who sell through the amazon marketplace are also its customers. Competing with your customers can be considered an anti-competitive activity because it not a level playing field. Numerous companies have encountered this problem over the years and this has been the subject of numerous justice department probes into anti-competitive practices. When a single company becomes dominant in the marketplace, it becomes a target for accusations of anti-competitive behaviour. This happened to IBM when it dominated the computer industry. Microsoft has been the target of a probe. Now Google, Facebook and Amazon are increasingly under the microscope.
Certainly, the EU has put the dominant platforms under the microscope and they are in jeopardy of facing billions in fines from EU regulators.
So what does this mean for us as real estate investors? The most difficult part of any marketing funnel is the wide part of the funnel. It’s not the fulfillment end of the process. Those who control the widest part will achieve dominance, since that’s where the majority of the eyeballs are looking.
For now, Amazon is not at all involved in the world of commercial Real estate. They’re focused on the retail consumer end of real estate. But this is a shift of massive proportions that stands to tip the balance in the world of real estate brokerage.
You can assume that Amazon will bring a lot in the way of consumer analytics that few other companies can match.
Today’s show is a very special edition where I came across a lesson in marketing that was simply too brilliant not to share with you.
We’re talking about taking a commodity, a commodity that is traditionally sold by the pound, and elevating it to another level, by wrapping a few key concepts into it.
I’m coming to you live from Portugal where the economy here has been through its ups and downs over the years. This is my third trip to Portugal. My father owned an apartment here and spent the winters for a number of years.
The roots of this story started in 1926 with a military coup d’etat that resulted in a fascist dictatorship in 1933 under the direction of Antonio de Oliveira Salazar. Life was difficult under the Salazar regime, and many local people turned to the sea to find food and economic survival. It was during these years that the sardine fishery expanded dramatically. At the peak, there were 400 canneries in operation.
Canning of fish started in Nantes France in the year in 1824. By the 1850’s Portugal too had started canning fish and the abundant supply of high quality sardines combined with the extensive coastline and rich fishing tradition eventually turned sardines into one of Portugal’s main exports.
But folks, we’re talking about Sardines. They’re sold by the pound. We’re talking about $3-4 per pound.
Let me introduce you to Il Mundo Fantastico De Sarindha’s Portuguesas. Translated it means the Fantastic World of Portuguese Sardines. But the name itself doesn’t convey the image. Imagine a store where the motive is the brightest circus tent colors and the decoration is like that of the flashiest carnival or perhaps even Willy Wonka’s Chocolate Factory. Inside the store, tins of sardines line the walls from floor to ceiling.
There is an entire wall of sardines organized into columns where each column consists of a birth year. The tins are all painted in a period design and there is a custom design for each decade. There is a wall of tins with different types of fish including tuna, Octopus, smoked salmon, mussels, and eels.
The sardine cans have dates since 1916 until present day, with a relevant event from the year in question and signalling the birth of the most prominent personalities of that year. For example, in 1927, the very first motion picture movie to have sound “The Jazz Singer” was released. Each of these tins are a work of art. I can imagine people buying a tin and never opening it. It’s almost too beautiful to consume.
Now I have no interest in buying a can from 1931. That date bears no significance to me. But I might consider buying a can for the year I was born, or perhaps a gift for someone for their birthday.
When you go into the store, the staff tell you the story of the cannery, and how even today, all the cans are packed by hand, the same as when the factory was founded in 1942. They tell you about how the generations of people have made the sardine cannery their livelihood.
Understand, it’s not about the sardines. I don’t even eat sardines. But my wife and I were so taken with the store that we had to go inside. My wife informed the shop keeper that we would love to hear the story, but would not be buying anything since we have a Vegan diet.
You’ll never guess what happened next. The shop keeper showed us two cans with Vegetarian and Vegan contents. Of course we purchased a tin. I don’t even know what’s inside, but I paid 7 Euros for a hand painted tin with some kind of edible contents.
So as you think about your real estate offerings, what are you doing that connects uniquely with your clients that makes them feel special, like the product was designed specifically for them?
If it can be done with a commodity like sardines, you can customize anything to fit your client.
Chris is based in Newport Rhode Island, where he runs a family business investing in single family homes across four states. His recession proof strategy has positioned him extremely well for any economic conditions. He also has a free book for our listeners at freesrecbook.com. Mention that you heard him here on this show.
Linda from Katy Texas asks:
"I’ve been considering buying an apartment building in a depressed area with the hopes that I can fix it up and increase the value significantly. Even at today’s rents, the property is being marketed as a 10% cap rate property. I can’t seem to find properties that deliver that kind of rate of return in a more desirable area. Why would I pay that much more for a property in an expensive area and get a lower rate of return?"
The year was 211BC and ancient Rome introduced the denarius as its money. The coins were nearly pure silver and the coins had a theoretical weight of about 4.5 grams.
The standard, although not usually met in practice, remained fairly stable throughout the Republic, with the notable exception of times of war. The large number of coins required to raise an army and pay for supplies often necessitated the debasement of the coinage. An example of this is the denarii that were struck by Mark Antony to pay his army during his battles against Octavian. These coins, slightly smaller in diameter than a normal denarius, were made of noticeably debased silver.
The denarius continued to decline slowly in purity, with a notable reduction instituted by Septimius Severus. By the year 274, the denarius contained virtually no silver.
On today’s show we’re taking a closer look at the latest collapse of the Italian Government and what it might mean in the future.
Now I know what you’re thinking, I’m investing in real estate in the heartland of America. What does the resignation of an Italian Prime Minister have to do with my life?
Italy has had 61 governments since WW-II, more than any other nation on earth. Part of the problem is that Italy’s electoral system is based on proportional representation. That means that if there are a large number of parties, which there are, it’s virtually impossible for a single party to get enough votes to form a majority government. They almost always end up being a coalition government between parties with differing ideologies.
Italy is the 8th largest economy in the world and they rely heavily on exports for their economic sustenance.
Now Italy has had numerous failed governments in the past. Their electoral system appears a bit dysfunctional.
Prime Minister Giuseppe Conte resigned on Tuesday after Matteo Salvini, leader of the League Party withdrew support for the government.
Now none of this matters to real estate investors in North America. This is nothing more than a power struggle. But the issue runs a bit deeper, and here’s why we care. Italy is part of the European Union, one of 28 countries, soon to be 27 after the Great Britain exits later this year.
The European Union is like a family where each member of the family has their own personality and values. Oh, and like a lot of families, they fight about money. Italy has never really recovered from the 2008 financial crisis. When I was there a few weeks ago, the news media were still talking about the financial crisis like it was something new. But we’re 11 years later. It’s no longer a crisis. It’s the new normal and the Italian people have not yet woken up to the fact that they need to adapt.
Italy is trying every trick in the book to try and jump start their economy. They haven’t realized yet that some of their policies are in fact responsible for the anemic economic growth. It’s easier to print money. But wait, that’s in contravention of EU rules.
You probably remember a couple of years ago when all the financial markets were spooked over the possibility of Greece defaulting on their national debt. Greece is one of the smaller members of the EU. They only have 12M people. They’re a rounding error on the side of Europe.
I’ve been saying for some time that the next financial crisis is going to be a sovereign debt crisis. I still stand by that. I just can’t tell you which country is going to be the trigger. Will it be Greece, Turkey, Italy, Argentina, or the good ol US of A.
The headwaters of the next financial crisis are wrapped up in governments that believe spending their way to prosperity is the path to economic growth.
Today’s episode comes to us directly from Simon Black. If you don’t know Simon Black or know of him, he publishes the wildly popular Sovereign Man Newsletter.
Today's episode is the story of Tom's Diner in Denver, Colorado. It's about how some local activists nearly stole $5M in real estate value from the owner of a piece of real estate.
I want to thank Simon Black for writing today’s piece. If you don’t subscribe to Simon’s daily newsletter, I highly recommend it. He offers a perspective that few other in the world have. Simon’s a smart dude. He’s a former US intelligence officer and he served his country in Iraq during the Iraq war. Given his role in sending military intelligence information back to Washington, he was naturally surprised to see the news about Weapons of Mass Destruction. Simon and his colleagues looked at each other and said “What are they talking about? What Weapons of Mass Destruction?” That seminal moment put him on a quest to dig deeper and find the real story behind the story that is so often glossed over in the media, or mis-reported altogether.
On today’s show we’re talking about one of the hidden costs, and therefore one of the hidden values of a parcel of land. This has to do with access to fresh drinking water. Water is emerging as the master resource that will determine the very survival of the human species. We tend to think of our water needs in terms of drinking water for human consumption and for washing and bathing. That for sure is a very real need. What we don’t see is the water consumed to produce the food we eat.
Some forms of food production consume incredible amounts of water. For example in the state of California, 15% of the state’s water consumption goes towards the cultivation of almonds. That’s a huge number.
We are seeing erosion of the water table in many parts of the country. When Las Vegas was founded about a century ago, it was a valley in the desert. The people at the time drilled relatively shallow wells that seemed to flow without limits. The early users of that ground water did not pay any attention to conservation. Today, most of those wells are dry and the city of Las Vegas gets its water from the Colorado River. The water level in the Colorado River has fallen steadily over the years and today, the final stages of the Colorado river that flow into Mexico no longer reach the ocean. The river bed is bone dry. There have been multiple diversions of the mighty Colorado river to service agricultural and municipal water needs of the communities along its path. The Central Arizona Project diverted the river into the city of Phoenix to provide fresh water for a metro of over 4.3M people.
India is running out of water. Saudi Arabia is out of water. They have used their oil wealth to build the most elaborate desalination systems in the world. There’s no question that the cost and efficiency of desalination have come down dramatically over the past 50 years. The older evaporation based systems were the most power hungry of all. Today’s modern multi-stage reverse osmosis systems use 1/10th the energy of those original systems. Depending on the salinity of the source water, you’re looking at somewhere between $0.75 per cubic meter of water to $1.30 per cubic meter of water, that’s about 250 gallons. That assume that you have a large capacity municipal grade system. When you look the breakdown if these costs, about 45% of the cost of producing the water goes to direct energy costs. The remainder is tied up in the life cycle costs of the equipment and the operation of the plants.
Let’s look at how much water it takes to produce food. It takes 15 gallons of water to produce a pound of lettuce and about 22 gallons to produce a pound of tomatoes.
At the other end of the spectrum, it takes about 3,000 gallons to produce a pound of beef. So when you have that 8 ounce filet mignon steak, you should be mindful that you’ve just consumed about 1,500 gallons of water. If you have steak 7 days a week, and I know a few people who do, you’ve just consumed 10,500 gallons in a week for just your steak. That’s half a million gallons of water a year.
I’m not telling you this to advocate a vegetarian or Vegan diet. That’s entirely up to you. This is just the hidden resource consumption that goes into our personal consumption of the one master resource in the world.
So when you purchase a parcel of land, you want to pay close attention to the water rights and responsibilities that come with that parcel of land. In North America, the water rights generally date back to British common law and are based on the concept of riparian water rights. Generally speaking, you own the ground water under your property. You have no ownership of water that flows across your land and you have significant responsibility to protect and maintain the water that flows across your land.
On today’s show we are examining the difference between two prefixes
A prefix is the start of a word that modifies the meaning of a word. In the word anti-septic, anti is the prefix that changes the meaning of the word septic.
In today’s show we’re examine the prefixes Inter and Extra. These prefixes are used to create the word interpolate and the word extrapolate. Both involve predicting a point on a graph. But the math behind these two is different.
When you take an existing set of data points and you lack data in the middle of your data set, you can use interpolation to determine where on the graph this data point would reside. It generally results in a pretty good prediction of the outcome. For example, if you know what your profit was a 5% vacancy and at 10% vacancy, and you now have 8% vacancy, you can predict with a high degree of accuracy what the property performance will be at 8% vacancy. You have good data on either side of 8% with which to predict what the result will be at 8%.
Mathematically, interpolating is pretty safe.
Extrapolating on the other hand is fraught with risks. Take the example of Social media side tumblr. At the peak, they had more users than Instagram and Pinterest. In 2013, they sold to Yahoo for $1.1B.
They were just sold to the owners of Wordpress for less than the price of a modest home in silicon valley.
The problem isn’t that Tumblr is only worth a couple of million dollars today.
Tumblr was inherently ill-suited to advertising. Today, Google and Facebook suck up 57% of all the digital ad spending. Back in 2013, social media advertising was not well understood, even though most financial analysts knew that the path to revenue would be through advertising.
Tumblr’s billion dollar plus valuation was based on a forward looking financial model of the kind of income it might be able to generate in the future.
That meant that the valuation was based on another metric which doesn’t correlate directly to revenue. In those days, the number of users or eye-balls was the metric of choice. But you can’t extrapolate eyeballs into dollars directly.
Interpolation is using past and present day information to calculate things in the present. Extrapolation involves predicting the future.
Yes, today is my birthday and I’ve been thinking about what I might like for my birthday. We’re coming to you live on location in France.
If you’ve been wondering where you might want to retire, living the dream of owning a large, spectacular and historic building in many countries can often be somewhat difficult to realise. Not so, in France.
Many people thinking about retirement consider selling the suburban home and finding a place in the warm south where they don’t have to shovel snow or deal with the impersonal nature of most big cities.
Almost every region om France has its share of imposing tower-topped chateaux dominating the landscape.
French chateaux for sale encompass all states of preservation. From windowless shells requiring total renovation, to those requiring light decoration, to immaculate 19th century bourgeois stately homes, the amount you will need to spend will depend on how much work you are willing to undertake. Being large properties, renovations can be very costly and time-consuming but need not be outside the budget of most serious buyers if planned correctly. Typically, to arrive at a habitable building you will need to spend around a total of around 500,000 Euros, whether you opt to renovate or buy an already renovated example.
That’s really quite a bargain if you think about it.
If your taste goes toward a little grander property, there is a lovely 33 bedroom chateau in the Aquitaine region of France that is currently operating as a 3 star hotel and restaurant business. It’s currently for sale for the relatively low price of 5.7M. It sits on a total of 49 acres, and the buildings have about 40,000 square feet of living space. A property like this, properly marketed could be the perfect venue for destination weddings.
If you’re on a bit of a budget, then perhaps the 8 bedroom chateau located just 35 minutes from Toulouse in the South of France might be more your style. It has 9,000 square feet of living space and is located on 43 acres of land.
If you want to keep things below $1M, then perhaps you would be interested in an 11 bedroom chateau in the Burgundy region of France, just near a town called Nevers just 2 hours from Paris and currently used as a home and full chateau rental business, this property is being sold fully furnished and would offer a great family home or an investment business currently generating 5,000 Euros per week as a full chateau rental, would also be an ideal luxury and themed bed and breakfast business.
If that’s too rich for you, then perhaps you might consider an 11 bedroom, 7 bath manor house in the Pyrenees Atlantique region. This is close to the Basque region which means you are close to skiing, and not far from Spain. You have the coast and the mountains all within a very short drive.
So I’m thinking about what I might like for my birthday. I can’t wait to see what my wife has bought me.
Mike Lloyd is a specialist in business branding based in Silicon Valley. He started his career as a photographer and has translated that skill into having a broader impact.
The changing face of retail means that retailers don’t need as large a footprint as before. As more and more business shifts online, delivery is often cheaper than prime real estate.
But secure delivery is still one of the friction points that is affecting the adoption of e-commerce in a lot of cases. The reports of stolen amazon packages from door-steps has caused some customers to avoid ordering items online.
The solution? The Amazon locker. This is a locker bank like you might find at a train station for storing your luggage. But the boxes are generally much smaller. There are some boxes in the bank of lockers for large parcels, and a whole bunch of boxes for small parcels.
This past week, I saw a bank of these lockers in every major train station in Paris. These train stations are also major subway stops. So those who are on their way home can stop and pick up a package on their way home with complete confidence that their package has been securely delivered with no risk of theft, or problems with getting past building security.
Success in business is all about removing friction. My 94 year old aunt orders her groceries over the internet and they come delivered to her home.
This past week in Paris I used many of the hundreds of electric bikes and scooters that litter the city and can be picked up for 1 Euro plus 15 cents per minute. They travel 20 km per hour and you can use the bike lanes, and the bus lanes, even on a one way street. I was able to make multiple stops on my trips, something that would have been more difficult in a taxi or on the subway. In total, I spent less than a taxi and I had the flexibility of going where I wanted, when I wanted, without the investment or responsibility of owning a bike or scooter. It’s all about removing friction.
So these lockers solve a problem. They remove friction. They make receiving a parcel from Amazon easier than ever before. Amazon has even started putting lockers in Whole Foods stores which it now owns.
So why does this matter to a real estate audience?
If you live in NYC, chances are that the door-man in your building will accept an Amazon order for you and keep it secure until you get home. But that’s a feature that’s unique to luxury buildings in major cities like NY. If you live in most other cities, the parcel will be left on your doorstep or in the lobby of your building. Hundreds or thousands of people could pass in front of your package before you lay hands on it. The problem is so common that there is a new term for it. If you are a victim of a stolen package, then a porch pirate was to blame. That’s right a porch pirate.
As more and more commerce shifts to online, the problem of package theft has been growing.
Business is all about solving problems. So the question is, could you as a real estate investor, solve a problem for your tenants, or perhaps solve a problem for Amazon?
What if you own a multi-family apartment complex. Could you add a secure package drop off so that your tenants would be confident their parcels don’t go missing? If you have property across from a major public transit stop, would it make sense to rent a few square feet of space to Amazon so they can install a bank of lockers? If you own a drug store that also has a post office kiosk, would it make sense to rent a few square feet to Amazon?
The purpose of today’s episode is to get you thinking, to get you to see opportunities that were not obvious before today. What if you have a store front in a strip mall that gets a lot of traffic, but for whatever reason that store front just isn’t renting.
All the major financial newspapers from the Wall Street Journal to The Financial Times are sounding the alarm bell on economic contraction at the moment. On today’s show we’re going to take a deeper look at what the numbers are telling us and see what it means for us as real estate investors.
Economic cycles are the result of expansion of supply capacity and building of inventory ahead of demand. That’s the general cause. These types of cycles happen in everything from semiconductors to automotive to housing. Suppliers expand their capacity and output in response to rising demand during an economic boom. All the suppliers do this at once hoping to gain market share during the expansion. But once that demand gets satisfied, there is excess capacity in the market and often excess inventory. But it takes a while for the suppliers to notice the excess supply. By the time they notice, it’s usually a problem. Inventories have grown to unsafe levels and businesses slam on the brakes to protect the very survival of the business.
The latest news out of Europe is that Germany’s economy contracted by 0.1% in the second quarter and narrowly missed a contraction in the first quarter. Germany is the largest economy in Europe and is responsible for nearly 50% of the exports of all of Europe. There are 27 other countries and then there’s Germany. While this contraction isn’t huge. It’s barely a contraction at all, much of Germany’s output is export based, particularly in the automotive business. If we focus on manufacturing, Germany’s industrial output dropped 1.5 percent in June and is now down 5.2 percent year-on-year. This is a big shift.
Investors hate uncertainty. At the moment we’ve got plenty. The outcome of the trade negotiations between China and the US is far from known. We have the possibility of a no-deal Brexit less than 90 days away. The implications of a no-deal Brexit on the economies of the UK and the rest of Europe are hard to determine.
Europe’s economy is highly dependent on exports. A global trade war could have a major impact on the European economy. Europe has twice the population of the USA and it’s economy is of a similar size to the US.
I know that very little of what is happening in the trade dispute is affecting my business directly. The only significant impact has been on the price of steel which has jumped 25% in the past year. But structural steel only makes up a small fraction of our construction costs. The net result is an increase in prices of less than 1% on our overall project costs. This is happening at a time when the market overall has seen strong rent growth, averaging 5.1% in the past year as reported recently by Freddie Mac.
The bigger question is what will happen in the broader economy. Will we start to see businesses contracting their investments? Will we start to see workforce reductions like we have seen in past economic downturns? For the moment, we continue to see what might be a soft landing. We are not seeing the kind of overheated market conditions in 2007 with bloated inventories across the board.
In select real estate markets like the SF Bay Area and San Diego we are now seeing a slowdown in foreign investment, and a slowdown in construction activity.
As real estate investors we need to pay attention to what’s happening in your local market in order to make sound investment decisions. From the news this week, we’re not making any changes and holding to our plans.
On today’s show we’re talking about a new report from Freddie Mac on the state of the multi-family market nationwide. But the purpose of today’s show isn’t just to share information. It’s about what you do with the information.
When you prepare a financial pro-forma for investors and lenders, the numbers you choose for that financial model should not be arbitrary. They should be based on widely accepted principles and practices.
For example, no financial model should assume zero vacancy when the market vacancy is in fact much higher. Which number should you choose? Do you arbitrarily choose 10%, 5%, 8%. How do you justify your choice of that vacancy factor?
On today’s show Freddie Mac’s economics team has issued some guidance that could be particularly useful in forecasting and modelling.
The first thing we see is that despite the recent surge in new construction, there continues to be a modest shortage of housing on a national basis as household demand outpaces total supply.
We all know that national numbers are meaningless because real estate is a hyper local business. Within the average there can be a shortage in one market and a surplus in another. But still, on a national basis the folks at Freddie Mac are seeing continued demand. Total housing completions over the past three years have averaged 1.1 million housing units each year. During that same time, total households have increased on average 1.4 million each year.
The second noteworthy item in their report was rent growth and occupancy. The federal government has been telling us that inflation is low, worryingly low in fact. But Freddie Mac is stating clearly that rents grew an average of 5.1% in 2018 and vacancy rates closed the year at 4.8%.
It is interesting to note that housing makes about about 40% of the consumer price index in most markets. The government Bureau of Labor and Statistics reported that inflation was 2.44% for 2018. But if rents increased by 5.1% and housing makes up 40% of the CPI, then what they’re saying is that the only thing that went up in price in 2018 was rent. Everything else remained flat. Something isn’t adding for me.
But here’s the thing that I found interesting in the report. Freddie is reporting that rent growth will remain healthy but at more modest levels compared with the robust growth seen in 2018. They are expecting rent growth of around 4% in 2019 and 3.6% in 2020.
Now here’s where things get interesting for me. When I’m modelling the rent growth for a project, I typically use a very conservative number, typically the rate of inflation. So if the CPI is 2%, I model 2% rent growth year over year for, say, a 10 year hold period of a project.
But now we have Freddie Mac clearly saying that rent growth was 5.1% in 2018, and will be 4% in 2019 and 3.6% in 2020. All those numbers are a long way from 2% that has been the conventional wisdom for a number of years.
Now the Freddie report did have some local data that I think is quite useful. They provided a forecast for local market vacancies and new construction starts for 47 markets. This gives a rough graphical view of whether vacancies will be trending upwards or downwards in a given market.
They also gave a view of rent growth compared with historical averages for those same 47 markets.
So what should you use when you model rent growth for the next few years? Should you use 2%, like the conventional wisdom? Should you use the Freddie Mac numbers averaged at, say 4%, and back up your assertion with the Freddie Mac report? The difference in valuation for a project between a 2% rental growth rate and 4% is dramatic.
Julien in Cambridge Mass asks, "Should I get a real estate appraisal or a comparative market analysis?"
Julien, that’s a great question.
The simple answer is it depends on what you need it for. A comparable market analysis, or what is sometimes called a broker opinion of value is a quick and simple approximation of the market value of a property. However, it’s not of high enough quality for some purposes. Nor will it give you an accurate enough answer in all cases.
Let’s look at the different types of appraisals that can be ordered. Depending on how you constrain the appraisal, you can get a dramatically different result. So it’s important to understand the details of what you are getting.
Generally speaking, appraisers determine the value of a property using one of three methods.
- Replacement Cost
- Comaparable Sales
- Multiples of net income
The problem exists when the three methods don’t agree, which of the three do you select? Generally, the appraiser will choose the lowest of the three. But here too they need to apply judgement and discard the one that doesn’t apply.
The biggest problem in particular for commercial real estate is that in many cases there are no truly comparable properties in the same area. In those cases, a like for like comparison is truly impossible.
If your property is a 10 unit building, there may not be any other 10 unit buildings in the area. There might a 12 unit, a 16 unit, a 20 unit. So what do you compare? Do you compare price per unit? Do you compare price per square foot? Are the properties truly comparable meaning are they of a similar vintage with similar levels of finish and attracting a similar tenant base? If not, then they’re not true comps.
The appraiser will then look at replacement cost. They will look at the finishes of the building, and make a cost per square foot estimate construct the a new version of the same building today. Often times, buildings are trading below construction cost because they might have been built some number of years ago and the increase in value has not kept pace with the rising cost of new construction.
Finally, the third method is multiples of net income. This is where a property is valued on its ability to generate profit. That is, after all why we real estate investors are in this business altogether. The appraiser will look at what, say, B class apartment buildings are trading for in the area. It might be 6.5% cap rate. They will then analyze the financials for your building and determine the income and the expenses for the property based on a bank approved model for properties in the local area.
But here is where things get tricky. Not all appraisals are created equal. They’re not equal if they serve different purposes.
Imagine if a bank asks for an appraisal to value a property under fire sale conditions. What would this property sell for if the bank had to dump it and get its money in under 30 days? That would be a very different result than if the bank asked the appraiser to allow it to list for 6 months.
Sometimes the appraisal is to justify the purchase price for a lender who is about to lend against a property. In that case, the buyer may have got a real bargain. But the appraiser will likely list the purchase price as the appraised value even if the market value was higher than the purchase price. Why would they do that? You guessed it, the client for the appraisal was the bank, and that’s what the bank instructed the appraiser to do.
By now you’re probably getting the idea that the process of determining value is somewhat fluid. If that’s your conclusion, you’d be correct.
Farhana asks, “Given the real estate prices in big cities are skyrocketing, which small city would consider investing?”
Farhana, this is a great question. But before I answer the question directly, let’s ask another question. “Why would prices be skyrocketing?”
The housing market is a free market. That is to say, prices are subject to the laws of supply and demand. Excess demand and prices rise. Excess supply and prices fall.
Furthermore, Is it actually true that prices are skyrocketing?
First of all, Real estate is a business like any other business. That means that its about solving problems that real people have, that they’re willing to spend money to have solved. If housing is scarce and people have high paying jobs, then the price of housing gets bid up. You want to be able to solve those problems.
When cities are generating new jobs, once the unemployment is absorbed, new housing is needed. The tightest market for housing in the nation is the SF bay area. In the past couple of years that area has generated 3.5 jobs for every unit of housing created. This has resulted in longer commute times and even greater demand for housing in San Francisco itself. So are these markets skyrocketing? Well, they were for a while. Today, the price growth in a lot of these hot markets has levelled off and in some cases we are starting to see prices dip a little. But the fact remains, these markets are expensive.
If your goal is to be a buy and hold investor, I would not recommend San Francisco, just to pick an example of an expensive market because the numbers don’t work. The underlying assumption in your question, is that expensive markets don’t work from a rate of return perspective. You have to spend too much money to acquire a property compared with the rent you can get in the market. It comes down to the ratio of net income to your total investment. In other words the capitalization rate.
So the question then becomes which markets make sense?
Today's show is recorded live in front of Notre Dame Cathedral which suffered a devastating fire back in April. Check it out.
Several listeners have asked me what it's like living on board a boat. Today I'm taking you on a mini tour of the boat and what it's like living aboard.
On today’s show we’re talking about one of the other impacts of the 2008 recession. A decade later we are seeing a significant difference between the number of single family homes being built versus multi-family.
Multi-family is growing in share of new permits across the nation. But in select markets that already had a substantial footprint of multi-family, that growth has accelerated.
So let’s go back to 2008. As the national housing market collapsed amidst the subprime mortgage crisis, new construction ground to a halt, with building permit issuance bottoming out at the lowest level ever recorded in 2009. At the peak, there were nearly 1.7M single family homes permitted in 2005. By 2011, that number had dropped to 418,000. If you were working in single family home construction 75% of the nation’s business evaporated. No surprise there were many business failures in that industry.
In the recovery years that followed, multi-family housing construction rebounded fairly quickly, driven by a trend toward urbanization that increased demand for housing in and around city centers. The number of multi-family units permitted surpassed its pre-recession peak in 2015 and has since maintained that pace.
In a balanced market, a new housing unit should be built for every two new jobs that the economy adds. Markets that add more than two jobs-per-permit are considered to be undersupplied.
In Philadelphia, pre melt-down, the city was permitting about 15% of all units in the multi-family category. In the past decade, more than 45% of all units are multi-family. That statistic mirrors what I’m seeing on the ground in Philadelphia as well. Philly is one of the few coastal markets that is actually balanced. The job growth and housing growth have been pretty well balanced.
Since 2008, the San Francisco Bay Area has added 3.45 jobs for every new housing unit permitted, more than any other large metro in the nation. Furthermore, when we zoom in to the county level, we find that this housing is not being built in the same locations where jobs are being created.
In fact, many smaller metros throughout the country are actually building more new housing than needed based on local job growth. As the knowledge jobs of the modern economy cluster in a shrinking set of “superstar cities,” job growth has lagged in many other parts of the country. In these regions, it seems that struggles with housing affordability may have more to do with household income than with housing supply.
Even some major cities like Dallas, Charlotte, and Atlanta and Phoenix are adding enough units according to employment metrics. This analysis of course neglects migration due to retirement.
Pay close attention to permit activity. That will give you visibility of the market conditions 2-3 years from now when those units are in the market.
On today’s show we are going to reveal information that could dramatically alter your rental marketing. This is all about knowing your customer. You wouldn’t advertise pencils to someone searching for a fountain pen. If you know what your customer is looking for, connecting them with the right product is relatively easy. Sending the right message to the customer who is looking for what you have to offer has a 36 times greater chance of success than blind random advertising. The vast majority of paper flyers that come in the mail at my house are wasted. They’re all promoting things that I’m not interested in. And if there was something of interest, it’s so buried in the noise of things I’m not interested in, I’m not willing to go through the effort to check and see if its there.
Website Apartment List recently published something called the Renter Migration Report. This report analyzes millions of searches to see where users are preparing to move. So why does that matter?
If you have apartments for rent, and you are competing with all the other apartments in the market for attention from prospective tenants, you are stuck in the sea of sameness. You are in the same pond as everybody else. But what if you knew that for whatever reason, 7% of people moving to your city are coming from New york, and 5% are coming from Washington, and a similar number from Miami, that’s useful information.
How is it useful you might ask?
In today’s world of digital advertising, users compete for ad placement with the search engines, whether it’s with Google, Yahoo, Facebook, or Bing. All these search engines treat the process like an auction.
Now imagine if you were, say, in Atlanta and you are competing for ad placement for apartments for rent. You would pay a lot to have that keyword search present your advertisement. In the world of pay per click advertising, you bid for each keyword that you want to present an ad for. Let’s say for example your keywords are Atlanta Apartments for Rent. You select your audience to be people in the Atlanta and surrounding area. You usually exclude everywhere else. There’s no reason for people in the Philippines, Russia or in India to be presented with an advertisement for Atlanta Apartments for Rent. It doesn’t make any sense and it would be a waste of money. Conventional wisdom is to exclude those advertisements from outside the local geography.
In the Atlanta area, there are hundreds or even thousands competing locally for those precious keywords.
But if you knew that 7% of the people moving into Atlanta came from New York, then it would make sense to present an advertisement to New Yorkers for Atlanta Apartments for Rent, when that search term appears. Instead of paying a really high price for those keywords, you would pay mere pennies per click. Why because there aren’t a lot of people bidding for those keywords in the New York market. New Yorkers expect to see ads for other New York apartments for rent, not Atlanta. There’s very little competition for those Atlanta keywords in New York, so they are very inexpensive.
You can use this information to better optimize your ad campaigns.
Advertising that is targeted at a specific customer is always more effective than random ads that don’t speak to a specific individual.
You wouldn’t present an ad to locals from Atlanta that says “Escape the snow” in this beautiful swimming pool. But it makes complete sense to present that to a New Yorker looking to relocate to Atlanta.
On today’s show we’re talking about what to do when subcontractors are too busy. The front end of a project contains the most uncertainty. This is when you are perpetually in waiting mode. Waiting for engineering drawings, waiting for permits, waiting for lenders, waiting for inspectors, waiting for quotes, waiting, waiting, waiting.
The process that was supposed to take only a few months. Just when you think everything is ready, one of your chosen subcontractors says that they’ve taken other work and can’t do your job after all.
What are your options?
Accept a higher priced bid? Restart the bidding process all over again?
In today’s market conditions, many subcontractors are busy beyond their capacity. The folks who are good are busy. The ones who aren’t busy don’t meet your quality criteria. They’re not the ones you want. These are the ones who will accept the work and then not deliver. They’re the ones where materials will go missing.
It’s easy at moments like this to feel trapped. Your general contractor has certain subs that they prefer to work with. Do you defer to your GC and accept anything they recommend? Do you search for another GC? At the end of the day, it’s difficult to over-rule your GC, because as soon as you do, they start to shift responsibility for decisions to you, and that’s not what you want.
You’ve negotiated a guaranteed maximum price contract with your GC, but that contract won’t be firm until the construction loan is funded and the contract is signed. Until then, it’s merely a draft. The draft is based on quotes that were valid for 30 days and more than 30 days have passed since the quotes were submitted. The subcontractors put a time limit on these quotes for a number of reasons.
- They know that material prices can change. A severe weather event like a hurricane can cause a local material shortage that can cause prices to jump. The current trade negotiations with China have caused material prices to fluctuate.
- They know that delays can happen. They know that new projects can show up. They don’t want to have to keep their crew in a holding pattern for months until your project is ready to break ground.
Unless you are large enough that you have complete control over your subcontractors, or can maintain some of the highest value subcontractors in-house, you are always going to be negotiating both pricing and schedule with subcontractors. When you’re bidding a project, the key item is price. But when you’re finally in construction, the key item is schedule.
On today’s show we are talking about the importance of checking an often overlooked item when purchasing a property.
The question is, does the structure have all the required permits? Did it ever get a building permit? Were all the permits ever closed out?
When you consider making improvements or additions to your home, it can be tempting to try and skirt the permit process. In some cities and towns, the cost and hassle of getting a permit can seem unnecessary, especially if you are handy and like to do the work yourself.
Some buyers don’t do the proper due diligence and confirm that the permits were issued and property closed. This can significantly affect the marketability of a property.
The financial motivation for many homeowners to avoid permits is the re-assessment of property value that would result. Nearly every city and town in America collects taxes bases upon the assessed value of a home. Assessed value is calculated by looking at the size and characteristics of property.
What is the gross living area? How many bedrooms does it have? How many bathrooms? These are all factors in determining an appropriate assessed value.
Guess what happens when the tax assessor knows about the luxurious new finished basement with home theater, wet bar, home gym and beautiful bath you just added. If you guessed your taxes are going up, then you would be right.
Homeowners can save thousands of dollars over the course of owning a home when permits are not pulled. When selling a home, this becomes very problematic. If and when the town or city finds out about it, the new owner is the one who will bear the brunt of the increased taxes.
So how do you know if you need to pull a permit?
The simple answer is to call your local building department and review the scope of work with them. They will let you know what requires a permit. Generally speaking, anything involving safety will require a permit. This includes electrical work, plumbing work, or anything structural, or anything that will significantly alter a property. Simple repair work should not require a permit.
Many homeowners who are undertaking a renovation will start the process with good intentions and apply for a permit. It’s often the case that they forget to call the city for a final inspection to close out the permit.
This can create a liability for you. For example, if you are performing electrical upgrades and don’t complete the final electrical inspection, you can bet that your insurance company will argue that the unauthorized and incomplete electrical work was to blame for your insurance claim, and therefore the insurer is exempt from paying the claim.
One of the most famous examples is the Sagrada Familia cathedral in barcelona. This famous Cathedral is still under construction after 137 years. This landmark gets about 4.5 million visitors a year. It’s a breathtaking work of art. Back in the day, the year was 1882, the then designer of the Cathedral was Antony Gaudi. Gaudi’s architecture is all over Barcelona, famous for his unique style. At the time, he asked the city for permission to build the church.
But the city can’t find anywhere in its records that Gaudi was ever given a response to his request to build the church. The initial permit fee imposed by the city included penalties and interest dating back 137 years. Needless to say, the price tag was enormous. That was eventually negotiated down to $4.5 million Euros, still a huge price to pay.
One of the other risks of not pulling permits is getting sued later on down the road by the buyer who purchases your home. Unfortunately, we live in a litigious society. When you don’t pull a permit, and something tragic happens years down the road, who do you think they are going to come after?
As real estate investors we are very familiar with the difference between good debt and bad debt. Good debt is debt that is used to purchase income producing assets. Bad debt is merely for consumption. That’s the debt that is used to buy everything from your car to your home renovation.
A recent story in the Wall Street Journal illustrates how bad things have become, with bad debt. Families across the country are going deep into consumer debt to maintain a middle class lifestyle, even if they can’t afford it.
Cars, College, homes, medical care have all gone up in price over the past two decades, while incomes have not changed very much at all in that time frame. Increasingly, consumers are turning to credit to fill the gap.
Student debt has ballooned to $1.5 trillion last year, taking second place behind mortgages.
Automotive debt has increase 40% in the past decade, adjusted for inflation and is now at 1.3 trillion. Alarmingly, the default rate on automotive debt is way up.
Unsecured personal loans are up.
The simplest and easier form of consumer debt is the household refinance. Many people are continuing to bury consumer borrowing in their residential mortgage.
Inflation is an average. As always with an average, some items rise faster than inflation, and others rise slower than inflation. Wages are up 135% in the past 3 decades neglecting inflation. When you take the government reported numbers for inflation into account, incomes have not moved.
College tuitions have increase 540% in the same time period, without adjusting for inflation. Health care costs are up 276% over that time period. The middle class is shrinking, and they don’t know it.
The Trump administration is reducing how much home equity mortgage borrowers can withdraw through cash-out refinances.
Starting Sept. 1, the Federal Housing Administration will limit the money available for cash-out refinance activity to 80% of the home’s value or less. Previously, borrowers could take out up to 85% of the property’s equity.
The new loan amount limit is in line with the limits already in place at Fannie Mae and Freddie Mac.
Al Williamson is based in Sacramento California where he has focused on medium term rentals. This strategy is filling a gap in the market between short term rentals, hotel rooms, and long term rentals. Very smart approach. Check it out.
Pete Barrow is based in Indianapolis Indiana where he maintains a high volume business in wholesaling and redeveloping single family homes. Some real nuggets in this conversation.
The Fed lowered interest rates for the first time in a decade citing lower global economic activity.
Ray Dalio is the founder and co-chairman of Bridgewater Associates, which, over the last forty years, has become the largest and best performing hedge fund in the world. Dalio has appeared on the Time 100 list of the most influential people in the world as well as the Bloomberg Markets list of the 50 most influential people.
The first part of the book reads like a biography. It outlines the events that shaped this thinking including both his failures and his successes.
In the second part of the book, the author gets into the stuff that's incredibly important, but difficult to implement. In short, he provides a roadmap and tools (via algorithmic means) to accomplish anything you want in life. There's a ton of substance, definition, & practicality on how to action your objectives. He has a five-step process to achieve what you want out of life, and it couldn't be more understandable and reasonable. The tricky part for most people (in my humble opinion) is finding a goal or objective that they can focus and remain passionate about for an extended period. If that's not your problem, then Mr. Dalio's advice in the second part of the book is significantly profound.
In the third section of the book, the author teaches you how to build the mastermind group/organization that's going to achieve the goals/mission you outlined in the second part of the book. The knowledge and thought that went into these 300 pages of the book are quite impressive. In short, the reader needs to get the culture right, get the people right, and then build and evolve the protocols that run the organization at a fundamental level. There's so much granularity behind those core concepts that it'll keep you busy trying to absorb everything.
This book is not an easy read. It requires deep thinking. It's perfect for a summer holiday read when you have the time to integrate the lessons into your own life.
Today’s show is inspired by a conversation that I had with an investor about a project that they were undertaking.
The situation should never have happened and that is the purpose of today’s episode. The construction budget was based on a quote from a contractor, but unfortunately it was riddled with problems and the investor didn’t see it. As soon as I looked at the numbers, it was obvious that the budget would never work in the real world. I was able to see it instantly and the investor didn’t. I don’t have any special super powers. A few simple calculations immediately showed the problems. The goal of these calculations is to quickly answer a simple question: “Do these numbers make sense?”
The first thing I look at is the allowance for interest reserves in the project. I start with the loan amount and calculate the interest for the construction period, and then make a guess at how long it might take to lease the property followed by how long it might take to complete the refinance into permanent financing. I then compare the interest that would be due over that entire time period and compare to what is in the budget. In this particular instance, it looked to me like the budget took the time for construction into account, but not the period for leasing or refinance. I would even add a buffer to that of 50%. So the interest reserve in the budget needed to triple compared with the amount in the budget.
Next I look at the allowance for appliances. You can easily drive down to your nearest Best Buy and price our an appliance package for a single apartment. Choose items on sale and you will get s pretty good estimate. We are usually talking about 6-7 appliances. A good estimate is somewhere between $3500-$4000 for a class A apartment. In this particular instance, the budget was a little over $2000 per apartment. It was easy to see that the estimate was not close to where it should be.
Hardwood flooring costs about $3 per square foot to purchase the material and about $2.50 to install in large quantities. You are looking at about $$5.50 per square foot for hardwood. Ceramic tile starts at $1.00 per square foot and cost about $3.50 per square foot for installation. The cheapest tile will cost $4.50 per square foot installed. I usually budget $2.00 for square foot for the material which brings me total cost to $5.50 per square foot. It means that the price for ceramic versus hardwood is virtually the same and in this instance I didn’t have the breakdown of the different flooring types. Vinyl plank flooring is less expensive and can be done for about $2.50 installed on the best day ever.
My friend had received a budget allowance of slightly above &1.00 per square foot installed. If doesn’t require a huge skill to see that there is no flooring on the planet that would fit within that budget number. The estimate was off by anywhere from 250%-550%.
These are simple rules of thumb. But they can quickly show when a budget has problems.
Being in this business requires a high degree of diligence every step along the way.
Jonathan from Arlington Virginia asks,
The Fed signals of an imminent rate cut made me eager to consider how I can take advantage of reduced rates through additional real estate purchases and other business acquisitions. Then, the announcement from Deutsche Bank that 18,000 employees will be let go stunned me. The two seem eerily (albeit tangentially) connected - I can’t ignore the timing. Should one be bullish toward leveraging cheap debt to buy sensible assets with the real possibility of another financial crisis around the corner? Pursuing these acquisitions now can seize access to capital that likely won’t be available in tighter times, but the risk of holding such highly leveraged assets is intimidating.
Jonathan, this is a great question. My reading of the situation is a little different. I’m not saying that Deutsche Bank is the only major bank that is struggling, but the company had ambitions to compete in the world of investment banking along with Goldman Sachs and JP Morgan Chase. They made substantial investments to grow those operations to compete with the Wall Street heavyweights. This is an area of the business that earns a lot of its money on the basis of corporate financings, bond issuance, brokering mergers and acquisitions, and initial public offerings. The trading desk for stocks, bonds, commodities, and currencies is also included in this business unit. The number of large corporate transactions have reduced significantly in recent years, even though the bond market remains highly active in terms of new offerings. This division turned a profit last year, but had lost money every other year since 2014. Most of the volume of the trading desks is increasingly being done by computer with no human intervention. You simply don’t need as many people to execute the trades as you once did. While the volume of trades is up, this is a misleading statistic. The number of computer trades is up, while those initiated by paying clients is down.
The bank hasn’t disclosed where all of the 18,000 layoffs will occur. But they have said that their brokerage and investment banking business will be among the heaviest hit areas. The company has about 9,275 employees in North America, most of them in the NewYork area, and about 800 in Cary North Carolina.
About 150 software developers in the Cary North Carolina office have already received their layoff notices. Investment banking is not at all like general business banking or personal banking. Investment banking relies upon large commissions. I’ve seen these negotiated down to 1.5% in some cases. This too has an impact on profits at the investment banks.
The cuts are not limited to Deutsche Bank. Goldman Sachs, Citi Group, BMO, and in fact most of the European banks have announced substantial headcount cuts at their trading desks. Citigroup has announced a cut of 10% of their equity trading desk, and large numbers at their bond trading desk.
There is no question that the business of banking is changing across the board. The number of reasons for me to physically enter a bank branch continues to decline. I can now perform the majority of transactions from a web client or an app on my phone. I can now even make deposits using the camera on my cell phone which is integrated with the bank app. The one thing that kept me going to visit the branch every month will eventually disappear entirely. Banks across the country are reducing headcount and closing lower volume branches.
Borrowing money is not just about interest rates. A number of lenders have become more conservative in terms of underwriting rules and have tightened their lending criteria, even if money is cheap. They too are worried about making investments late in the business cycle. Continue to take advantage of the low interest rate environment and secure debt under the best terms, for as long as you can.
Today we're coming to you live from the Village of Montefollonico in Tuscany. This medieval village dates back to the year 1202. The richness of history here is incredible. If you haven't visited, I highly recommend it.
Our guest today is from Team Malizia (team-malizia.com), one of the IMOCA 60 racing boats scheduled to compete in the Vendee Globe single handed round the world sailing race in 2020.
My guest today is the skipper of Initiatives Coeur. You can find out more at https://www.initiatives-coeur.fr
On today’s show we are coming to you live on location in Italy. We are about an hour outside Rome at a seaside town called Santa Marinella. I come to Italy regularly and in the past decade, not much has changed. In this idyllic seaside town there are numerous properties for sale, many of which have been on the market for two years or more. In fact, they’re still talking about the financial crisis as the reason why things are so bad economically. When I was here in 2009 and 2010, I totally get why they were talking about the global impact of the financial crisis. But a decade later, I don’t think you get to use that excuse anymore. A decade later it’s called the new normal and there needs to be an acceptance of the situation and the that it will take bolder steps to create more economic activity.
Many of the properties we looked at were either waterfront properties or across the street from the sea. These are either single family homes or multi-family buildings facing the water. Many of them are distressed properties with visible signs of deferred maintenance. Sellers seem to be reluctant to reduce prices and the emphasis seems to be on the asset price and not the cash flow generated by the asset. This stands in stark contrast to the more fluid notion of valuation that we have in North America that values an asset as a business and that valuation is based on multiples of net income, or what we call the cap rate.
This week, the local news in Italy is talking about the widely anticipated interest rate cut in Europe. This would be the first interest rate cut since 2016 and outgoing ECB chairman Mario Draghi’s final move before he steps down in October.
But it also raises practical questions about how much more the ECB can accomplish with its current toolbox. The bank’s key interest rate is already below zero and its balance sheet has swollen to around 40% of eurozone economic output, double that of the Federal Reserve.
I believe that with interest rates already so low, the economic stimulus that would result from a lowering of rates is unlikely to have any measurable impact. Accompanying the rate reduction it is widely anticipated that the central bank will also participate in another round of bond buying. That’s code for printing more money and then buying the bonds. Printing money could have a stimulating effect, but here too it’s like a drug addict who becomes addicted to the drug and eventually develops a tolerance to the drug and needs more and more each time in order for the drug to have an impact.
So what does this mean for us as real estate investors?
If Europe lowers interest rates, that could put pressure on other central banks around the world to do the same. The US news media have been reporting that the Federal Reserve is predicted to drop rates somewhere between a quarter point and perhaps as much as half a point at the July meeting coming up in a few days.
For us, as real estate investors, lower interest rates are a good thing. They make the cost of doing business lower, and we can ultimately translate that into higher profits.
On today’s show we’re talking about several bids that were out of whack. You’ve sent the drawings over to three subcontractors and the numbers comes back with a wide variation. One of the bids is quite low and seems attractive. The other two are from subcontractors that you know better, but the numbers are much higher. What do you do? Do you take the low bid?
You go back to your tried and true subcontractors and ask them if they can do better. The answer is no, that’s the best they can do. You’re left scratching your head, wondering why such a large variation.
Contractors have a lot of experience with negotiations and they experience being played against each other on a daily basis. As a result, they tend to become less transparent in their bidding process in order to maintain their negotiating leverage. But that lack of transparency actually hurts the negotiation because you can’t tell why they bid what they did. You can’t tell whether they misunderstood the scope of work, whether they’re greedy and uncompetitive, or whether there is a structural problem that is causing the bid to be out of whack.
We had a situation with an electrical contract and all the bids came in much higher than we had ever expected. The numbers were truly out of whack. The numbers were truly double what we had expected. But they were consistently high. All three bids were high.
Only when we brought in another subcontractor who knew and understood our architect’s drawings did we get a bid that made sense.
So in that instance, the scope of work was not well understood. The contractors had misunderstood that the allowance for fixtures was not to be added on top of the specific fixtures that had been specified in the design. There was an absolute double count on the cost of the materials. But unless the contractors are willing to be transparent, you have no way of knowing why they bid what they did.
It would be too easy to point the finger at the contractors and say these guys are way too expensive.
In another instance, the engineer had specified items that was not what we had asked for. They specified surface mounted transformers which would require multiple levels of conduit buried in the ground at our expense. Instead, we requested that they change the design to incorporate pole mounted transformers from the electric utility and the final service from the transformers to the buildings would be buried in the ground resulting in a much shorter cable length and much less conduit in the ground. The bids from the contractor were high, but its because the specifications from the engineer were forcing much higher costs than were necessary in the project.
So how do you manage to get competitive bids that you can have confidence in?
You focus on developing relationships of trust with a small number of subcontractors who you commit to give regular business. You will treat them fairly if they commit to treat you fairly. Once that relationship of trust exists, you can create the transparency that is necessary to uncover problems in a bid. It starts with a conversation with the contractor whereby you let them know that transparency is required in the bidding process. You promise not to use the transparency against them. Hiring a contractor isn’t just a matter of getting the lowest price. It’s a matter of getting the job done reliably and with quality at an acceptable price.
Apple is in the product business. But before they can manufacture a product, they need to design it.
There was a time when Apple Computer used to rely upon components supplied by outside companies to incorporate into their products. The Mac first used a microprocessor based on the Power Architecture developed by Motorola and IBM. Then in 2005, Apple announced the decision to switch from the Power Architecture to processors from Intel Corporation. Shortly after that, in 2006 they made the change.
At around the same time, they aquired a company called PA-Semi that had a microprocessor development team in silicon valley. That team had been working on a low power consumption microprocessor for the notebook PC market using the Power Architecture that Apple had just abandoned. They clearly didn’t need the product that PA-Semi had been building. They spent $75M to buy a company with 150 talented engineers who knew how to build low power chips. Now in the US, it’s against the law to buy people. You can only buy a company and hope that enough of the team decide to stay together at the new company. Apple bought the company in order to buy the team. In order to build the next generation of products, they needed a crack microprocessor development team. But for what?
Then two years later, Apple announced the iPhone, a product that would transform the company and propel it from just a desktop and laptop computer company to one that would blur the lines between a phone and a computer and a camera, forever changing the landscape of mobile computing in the industry.
When I was in the microprocessor development business, I had hired a design team in Austin Texas of about 75 people at a small company called Intrinsity. They had developed a method for building high performance low power circuits and were among one of the better processor development teams in the world. They were used to augment my own processor development team that had staff in San Diego, Austin, Silicon Valley and France. Then in 2010, Apple announced that they were going to acquire Intrinsity. Today, most of the guys who used to work for me are now at Apple. Their first project was a power reduction for the graphics subsystem in the iPad. Getting higher performance graphics on the iPad with a 10 hour battery life was one of the goals for the iPad and this team delivered on that promise. They’ve gone on to work on other elements of the processor for both the iPhone and the iPad.
Most recently, it was disclosed that Apple is in discussion with Intel to acquire their mobile handset modem chip business.
Here too, Apple might be buying a business where they have little interest in the actual products that company was making. They would be buying the business for the team. The acquisition has not been completed as of yet and will probably take a few months to complete.
There’s a pattern here. Before Apple can bring a new product to market, they need to have the right people on board. Not just any people, the right people, the best people.
On today show we're talking about the incremental changes that if taken slowly enough can lull a docile population into submission. Opposition happens slowly at first and then all of a sudden. The current crisis in Hong Kong is a case in point.
The handover of Hong Kong, occurred at midnight on 1 July 1997, when the United Kingdom ended administration for the colony of Hong Kong and passed control of the territory to China. Hong Kong became a special administrative region and continues to maintain governing and economic systems separate from those of mainland China.
The protests have been large and vocal with anywhere from 200,000 people participating to 2M people depending on who is counting. Police estimates put the largest protest march at about 338,000 people. Let’s be clear, these are large protest marches.
Protests in more recent days have turned to vandalism and the Chinese government is signalling that they need to restore order and the rule of law. So now the concern is that Hong Kong experiences an escalation of violence involving the police or perhaps the military.
This could result in an ideological flashpoint between China and the West where the assertion of China’s muscle over Hong Kong creates a values based confrontation between China and the US.
The global economic impact of a confrontation over Hong Kong could be far greater than the current negotiation over trade practices. Global supply chains could be disrupted and we could experience significant price increases. This is something to pay attention to and ensure that alternate supply sources can service your business in the event of disruption.
On today’s show we are talking about the importance of digital marketing. Regardless what business you believe you’re in, today’s market requires an expertise in digital marketing. As real estate investors we are marketing products digitally as well. Whether it’s a vacant apartment, an empty pad in the mobile home park, lockers and eight self storage facility, or even listing a multi family apartment building for sale. Every single one of these, in someway shape or form are vying for attention from the target audience.
But here’s the problem, all of us are overwhelmed by the number and quantity of people, advertisers and opportunities that are vying for our attention. we have tune the vast majority of it out as a matter of simple survival.
So if we want our opportunity to be noticed, we need to go where people are looking. When we think of search, the name Google usually is the very first to come to mind.
The problem is the Google searches the entire universe. It is too big. We’ve all experienced the case where we conduct a search and Google reports that there are 3 million instances of our keyword search results. But the fact is, most people rarely search beyond page 2. In fact, 50% of the search traffic goes to the first one or two listings on page 1 of the search results from Google. Google is great at indexing keywords. But they are not great at determining search criteria that are not purely keyword-based.
For example, if you are looking for apartment complexes for sale of more than 100 units, and a cap rate of 6% or higher, google will not give you any useful search results. There are more specialized market places , and search engines that are specific to those market places. For example YouTube is another powerful search engine. If I am looking for instructions on how to do something like maybe repairing a fitting in my dishwasher I will use YouTube as search engine to find an instructional video. If I’m looking to buy or sell something locally, maybe a piece of furniture or some sporting equipment, then I would use craigslist or perhaps the Facebook marketplace as the search engine for something like that. If I am looking to hire a keynote speaker for an event, I would look to the national speakers Association as my search engine for finding a great keynote speaker. If I am looking to purchase a specialty item or a gift, I might choose Amazon as the search engine. If I am looking for a place to stay in the city on visiting I would choose Priceline.com, or Airbnb as my search engine. Every single one of these search engine’s use a different method, a different algorithm, for presenting their search results.
If I’m looking to hire a virtual assistant, I would use up work as the search engine. So when we think of search, there is much more than just Google we need to focus on.
Each one is different. To be successful, we need to find someone who is a specialist in that specific search engine so that we get the best possible results from our initiative. How do you stand out and get noticed on each of those platforms? You might have the best offer in the world, but it’s irrelevant if people don’t know about it.
One of the common mistakes is for someone to copy what is common on a given platform and make their listing looks like all the others. We often get trained at school to act like the other students, just like the other children in the classroom, and conform to the norms that society sets for us. We need to fit in. We need to act and look like we belong. That when you do that you get stuck in the sea of sameness. It’s virtually impossible to get noticed when your offer is unremarkable.
We're talking about market cycles this weekend. Love what Marco has to say, To connect with Marco, go to NoradaRealEstate.com or listen to the Passive Real Estate Investing Podcast.
Today's show is coming to you live on location from the French Island of Groix. If you've ever wanted to know about what owning a piece a paradise off the Atlantic coast of France, this show is for you.
On today’s show we are talking about a growing trend in retirement or pre-retirement living. A number of people are selling the family homestead and opting for life on the high seas. I’m not talking the billionaire mega-yachts. I’m also not talking about slumming it on a 25 foot wooden boat either. There is a large spectrum of options in the middle and I personally know of many people who have made this lifestyle choice.
In some cases, they maintain a land based option but often as a second vacation home. One story is of a friend named Ian, a former executive with the Nielsen Group of Companies. These are the folks who are responsible for the Nielsen TV ratings and all kinds of other statistics that businesses have come to rely upon. Ian retired sooner than most. He was in his mid fifties, a little unsure about whether he had enough saved up to last the next 40 years.
He sold his home in New Jersey about 5 years ago and bought a 45 foot yacht. He and his wife spend the winter months in the Bahamas, sailing from island to island.
When it’s too hot in the South, the boat gets pulled out of the water in Florida and spends the summer in a cradle. From there, it’s off to another vacation home in the Azores. This vacation property was purchased for about $45,000 dollars and is a small piece of paradise overlooking the other islands and the Atlantic. A large expat community means that finding English speakers on this Portuguese island is not difficult at all.
Modern navigation and communication equipment has come down in price in recent years. The latest systems use a collision avoidance system similar to what aircraft use in the skies. It’s now possible to get real time weather updates on your electronic charts. These systems are so much more sophisticated and have increase boating safety dramatically.
My wife and I are routinely spending time aboard our boat in Europe. Marina fees average about $500 per month, and it’s an extremely affordable way to keep a home base. Daily rates can run anywhere from $40 a day to $300 a day depending on the size of your vessel. We feel extremely secure on board everywhere we go.
Living on board means careful planning. Things like getting a haircut, or a large laundry requires more time than at home on land. We have a washing machine for clothing on board, but it lacks the capacity and features of the land based counterpart.
On those days when we are not connected to shore power, we have a large solar panel that keeps the batteries topped up. Our largest electricity draw is refrigeration, and we can go several days on battery power alone without having to run the engine to charge the batteries.
One of the latest trends in boats for retirement is the popularity of catamarans. The two hull vessels are very wide and stable. They don’t roll in an anchorage. The downside is that they are a bit more expensive to purchase. They are also more expensive to own since they occupy the same space as two boats in a marina, the marina’s charge double the price of a monohull boat. In some cases, finding space in a marina can be more difficult because not only do you need two spaces, you need two spaces side by side which is more difficult to find. So your operating costs can be much higher.
Some areas are experiencing a significant increase in permanent live-aboard residents. One of the larger marinas we recently visited in Europe has over 4,000 boats. I can tell you from walking the docks, you can tell which boats have live-aboard crew. If there is a small herb garden of basil and mint, chances are high that the owners live aboard.
On today’s show we are talking about something that is rarely talked about. Entrepreneurship has been put up on a pedestal and it cool to be an entrepreneur.
Today’s show is about the inner struggle of being an entrepreneur. It’s about handling the negative self talk that can surface when things don’t go as planned in your business. It’s when an employee or partner doesn’t fulfill their commitment. It might have been you. Maybe you made a mistake that needs to be corrected.
Every one of these events results in managing an exception. It means having to work extra hard to fix something that should never have happened. Even if it wasn’t your fault, you, as the business owner feel responsible. It’s that sense of responsibility that is healthy for the business and heavy for you as the business owner. It’s a weight that you carry with you all the time. It’s an extra sack of potatoes on your back all day long, all night long, even when you sleep.
The amount of effort that goes into managing exceptions is many times the effort associated with managing routine items. I’ll give you a simple example. If a tenant pays their rent on time, the money appears in the bank account, the book-keeper records the entry. All is good. But if a tenant vacates early, or if they fail to pay the rent, the amount of energy expended in managing that exception is many times what it would be in the normal case. The effort to manage an eviction is orders of magnitude more than the effort to receive a rent deposit.
When something doesn’t go as planned there can be emotional baggage that makes the task much heavier emotionally than the task itself.
In many cases, you don’t leave enough slack in the system or the calendar to handle these unplanned events. The effect is that other commitments are delayed. Here too, the cascade effect can result in more missed expectations. The feeling of overwhelm can be paralyzing.
But the fact is, every single one of these issues can be solved. All too often, entrepreneurs fall back on the skill-sets that have made them successful in the past. It’s true, that this approach will fix the immediate issue, but it won’t solve the underlying problem. In fact, it is really perpetuating the problem. It’s instinctive to ask “What should I do?” But the better question is “Who do I need to be?”.
Sure things need to get done, but they also need to be done the right way, by the right person in the organization.
Michael Gerber in his ground breaking book called “Emyth” talks about the three roles in the organization. There is the technician, the manager and the business owner. If your instinct is to do the work, then you’re being the technician. If you are the manager, then you are assuming responsibility for the task, and often delegating the task, but not the responsibility. Sometimes, that’s who you need to be. But if you’re truly the business owner, you will find the right people in the organization to own the responsibility for getting the job done, and for getting the problem solved. When I say solving the problem, I’m not just talking about the immediate issue, I’m talking about the underlying issue.
Your role as the business owner is to make sure the systems are put in place to make even these exceptions part of the standard operating procedure. When you engage with your team, the conversation should focus on the systems, and not the specific emergency. Yes, the emergency needs to be solved, but not at the expense of the systems. Otherwise you’re not solving a problem, it’s simply a bandaid and the problem will resurface.
On today’s show we are talking about erosion. But not the usual form of erosion that happens when it rains. I’m talking about the factors that erode your business. When we encounter erosion, the natural reaction is one of dismay of disappointment. This shouldn’t be happening.
So what could erode your business?
These are the small things that you hardly notice. These are the inefficiencies that individually are hardly noticeable.
On today’s show we are covering the top 5 sources of erosion for many businesses.
- Contractor theft. This is when your subcontractors order a little extra material. It’s natural that you need a little extra tile to handle the waste that results from cuts at the edge of the room. But general materials like lumber and drywall, fasteners, that you purchased often aren’t returned at the end of the job.
- Subscriptions. These are the software services that might have been ordered a few years ago. Today you would not subscribe to that same software. I’m actually guilty of this one. I have several examples of staff that are no longer part of the organization. But it’s important to keep an archive of their email. Our email is hosted by Google. The cost is $6 per month for their business suite. It would take about 15 minutes to shut down that specific user account and create an archive file. But before you actually delete the account and save the $6 per month you want to make sure that the archive is readable in the future should you need to access it. That process takes about another half hour or more. As you can imagine, saving those $6 hasn’t come to the top of the priority list this month anywhere in the organization. It wasn’t a priority last month, and it probably won’t be a priority next month either. So we have $6 of erosion every month. It’s been over a year.
- Increasing your tenants rent. In some cases, if your property is rent controlled, you might only be able to increase your rent by 2-3% per year. Sometimes, I’ve seen property management fail to increase the rent because it’s only an extra $22 a month, less than $1 a day. Increasing the rent isn’t urgent. You’ve got other more important things to work on. You have investor reports and accounting deadlines and the lady in unit 30 who wants her blinds repaired.
- Property tax appeals. Everyone who owns property needs to pay their fair share of property tax. But the property tax assessment process is not perfect and there are numerous examples of assessments that are out of whack with other comparable properties in the area. I know one investor with a large portfolio. The savings in property taxes are sufficient to justify a full time employee salary in his case. That’s all that person does. They appeal tax assessments.
- Insurance. Insurance prices and coverage vary widely. The easiest thing to do is to pay the same insurance company upon renewal. I have several recent examples where by shopping around I was able to save anywhere from 25%-65% on my insurance bill. I’m not talking about reducing coverage. I take the time to read the insurance policy and understand the coverage. In fact, many brokers are surprised when I request a copy of the policy. I’m told that I can get the policy after it is issued. But that’s like buying a brown paper bag and the salesman tells you that you can only see the contents of the bag after purchase. But trust us, you will like it.
All of these things are small on their own. But when your cash flow is a subset of your profit margin after debt service, that 1-3% erosion of the gross revenue can over time accumulate into wiping out a large percentage of your cash flow. Cash flow is the most important metric for a real estate investment business. It means that you need to pay attention.
When governments print money, where does it all go?
Imagine if you went to Las Vegas to play a game of blackjack, but there was one player at the table who had a very special ability. That one player could print more cards at will. the game would not seem very fair now would it?
If the player got found out they might justify that special ability as having a benefit to the game. It’s really just to stimulate the game and make it more interesting.
Today, half of all European government bonds have a negative yield, with the total amount outstanding at €4.4 trillion. At the end of May, 20% of European investment-grade corporate debt had negative yields.
In the latest case of things that don’t make any sense, more than a dozen companies with bonds having junk status, which usually carry high yields, now trade in Europe with a negative yield.
These same bonds that have a coupon of 6-8% are now trading in the open market at or below zero.
Brett is a specialist in a tax deferral mechanism called the Deferred Sales Trust. For US investors, this is one of the most important episodes so far this year. Check it out.
Karen Briscoe is based in Washington DC. We had a great conversation about the market dynamics in Washington and the impact of Amazon coming into the market. She's the author of two books and host of the "5 Minute Success" podcast. You can reach Karen and learn more at 5minutesuccess.com.
On today’s show we are talking about a problem that many real estate investors experience. It’s also rarely talked about. We’re talking about solitary confinement.
A large number of real estate investors spend a large percentage of their time working on their own. For many investors, the list of solo tasks seems endless.
The bill payments, reviewing leases, reviewing construction reports, posting updates on social media, responding to email, completing the application for a building permit, reading the latest update to your insurance policy. The list is endless. It all feels like busy work.
This was not the carefree life of passive income and financial freedom that was talked about in the weekend seminar when you got into real estate at the very beginning.
Well folks I’m here to tell you that there is no such thing as passive income. Real estate is an active business, just like running a service business. It is like running an engineering firm, or an airline. Real estate is a capital intensive business and therefore a disproportionate amount of emphasis is placed on the capital aspects of the venture.
There is a problem with the do it yourself model of real estate investing. It means that you are doing it all yourself. It means that you have not hired the staff needed to build a sustainable business.
I was talking earlier this week with an investor who was struggling with this very issue.
The key is to hire. But before you can hire, you need to be working on projects that have sufficient scale to afford hiring. Your first hire absolutely should be a professional book keeper.
After that, you want to hire someone who can truly step into your shoes and perform just about any task that you might do yourself. Your goal is to replace yourself.
If you hire a virtual assistant, you can definitely get some help. But in my experience, the caliber of work you can delegate is limited. In most cases you end up delegating tasks, but not the responsibility. The delegated task even when completed, come back to you. If it comes back to you, then the leverage you get from hiring is dramatically diminished.
The next issue with hiring is whether to hire full time or part time. You might not have enough work, or even enough money to afford full time.
In my experience, part time employees have a number of things going on in their lives. It can be difficult to count on deliverables when you only have a part time commitment.
In particular, I find that part time arrangements are rarely long term arrangements. You are likely to get into a cycle where your employee gets a full time job elsewhere and then you are hiring again, training again, and in the transition all of the work come back to you. Whatever help you had in the past vanishes. Whatever life balance had been restored, disappears.
On today’s show we are talking about what it’s like to stand on the other side of the fence.
Last week my wife and I stayed in a short term rental. The location was amazing and the price was low. The reviews were good but not great. The property manager put out three bottles of wine for the guests, and they were prominently on display as we arrived. Nice touch.
The property advertised free parking included. But what that really meant was that street parking exists in the area, if it’s available.
The interior featured high speed internet, and the performance was excellent. The air conditioning was limited to the bedroom. The beds were two single beds side by side. The sheets were old. The mattress was old. The towels were old. The soap rack in the shower was rusted and hazardous.
Here we were, in the most amazing location, paying only $110 per night in the height of the tourist season.
On our last morning I spoke with the property manager as we were leaving. He manages 44 units. I told him about the short term rentals that I own and how we are commanding prices of over $700 per night in peak season. He seemed to dismiss what I was saying by positioning my property as a luxury property.
What is the difference between cheap towels and expensive towels?
Does it really cost that much more to put proper chefs knives and everything you need to prepare a meal?
Does it really cost that much more to provide salt and pepper and the essentials?
When you assume a perspective that every dollar spent on the customer experience is a dollar less in profit, you may not be focused on what it takes to maximize revenue.
In a market where there is a lot of supply, it’s important to make sure that your product offer is differentiated in the market.
Even if you’re convinced that you will be full in the high season, you will experience vacancy during the low season. If you want to get more than your fair share of occupancy during the low season, you want to have the best possible property reviews, The best photos, and be positioned as one of the premier offerings in the marketplace. You always have the choice of lowering your price at a later time. If there’s going to be vacancy, do you want the vacancy to go to the junk in the market not your property.
Today is another AMA episode - "Ask me anything".
Reed from Indianapolis asks.
“One of the things that I don't like about the class B and C multifamily syndications that I'm in is that it seems like at least somebody is having or has had a problem with cockroaches per google reviews. Maybe you could do a podcast related to pest control in real estate? Are cockroaches something one just has to live with at some level or can they be completely eradicated?”
Very few things spark as much fear into both landlords and tenants than the spectre of an insect infestation.
There have been widely publicized reports of bed bugs in New York to cockroaches in Hong Kong.
So what do you do if you get that phone call from a tenant reporting a bug problem?
You have spent considerable time, money and effort to make your property desirable. The occupancy is high. The property has never looked better.
News of bug problems can spread like wildfire. A bug infestation can cause tenants to abandon a property and break their lease. Things can get unpredictable fast.
Bug infestations can be incredibly difficult and frustrating for landlords and tenants alike. Some warmer climates are known for having active insect populations, whether its ants, termites, or cockroaches. Termite control is often done proactively with perimeter spraying of buildings on a monthly basis.
Cockroaches are much more difficult. First of all, a thorough cleaning is essential. The insects need to have their source of food eliminated. This can be a difficult conversation with tenants. Many take offence at having their landlord accuse them of being dirty.
I recommend having a document for your tenants that describes the process for eliminating the pests, which also details their responsibility in the process.
Spraying alone to eliminate cockroaches is difficult. They have a way of hiding and avoiding exposure to the insecticides. If you only spray the affected apartment, chances are that the cockroaches will move next door to safety and then come back at a later time. Sometimes the only solution is to notify all residents and perform a coordinated spraying campaign in the entire building.
Understandably, landlords are reluctant to raise an issue with tenants who have not experienced a problem. In some cases, such a notification can create more of a PR problem than the spraying would solve.
Bedbugs require a completely different approach to eradication. Bedbugs tend to hide in the stitching of mattresses, sofas, clothing, they tend to hide in the baseboards of a room, or the electrical outlets.
Bedbugs also lay eggs. Getting rid of them requires spraying at specific intervals in order to intercept the reproductive cycle of bedbugs. Here too, you need to spray the affected apartment and the neighbouring apartments on either side, above and below.
This is not a job for the do it yourself landlord. Always hire a professional and make sure that your tenants are fully on board with the process for getting rid of bedbugs. That means they must give you access to the apartment on a timely basis. They also need to do their part by bagging and washing all of their clothing at a laundromat utilizing hot water, And the heat of the dryer to make sure nothing survives the washing process in their clothing.
Some apartment buildings and hotels in New York City have earned a reputation for having problems with bedbugs. Once that reputation is embedded in the community the reputation may live long after the bedbugs are gone. It’s your job as a landlord to attack the problem aggressively and proactively. Most importantly, your tenants need to feel as though you are taking action and communicating with them on a regular basis.
Today's show is a real life personal story about fire fighting and what it means. What areas of your life are you fire fighting?
On today’s show we are talking about reading between the lines.
This is the ability to fill in the blanks when the seller of a property provides incomplete information. Any professional real estate investor has the full information about their own property. If the seller truly lacks the information, then that’s a sign that they have been grossly mismanaging the property. But then you may already know that by now.
When the seller only provides a partial picture, we are left wondering what it means. The fact is, it could mean one of several things.
Some sellers use the shortage of information as a way of signaling to the buyer that they have the upper hand in the negotiation. This is one of those misguided knowledge is power plays.
I will ask the seller if they are interested in selling the property. That usually brings a response like: “Yes, but only at the right price.”
To which my response is, “Great. We are on the same page. In order for me to buy the property, I need to complete my due diligence to justify your price. I will send you the list of minimum information I need to make an offer, and a second list of what I will need to complete due diligence.”
Sometimes, the seller is using incomplete information information as a way of hiding something about the property. By hiding the truth, they believe that they are not lying.
At the end of the day, I rarely rely upon the seller’s information in due diligence. I construct a new financial model that is based on how the property would operate in my hands. After all, I’m going to be using my systems to operate the property, not the seller’s. They are the one selling the property, which means they have a problem. It’s not the buyer who has a problem.
The due diligence falls into a few categories.
- The physical asset.
- Anything recorded on title
- The tenants.
- The operating history.
- Land use restrictions
Today I take you on a short walk in the ancient walled city of Valletta, a UNESCO World Heritage Site. Enjoy...
I’m coming to you on location from the island of Malta. This small island country joined the European Union back in 2004.
Since then it has seen tremendous population growth as the open borders of Europe has allowed the free movement of people.
Malta has always been a natural hub for relocation. Ever since the 1994 Malta Permanent Residence Scheme and more recently the renewed schemes, Global Residence Programme and the Malta Residence Regulations 2014, the country has seen a steady interest in purchasing real estate in Malta as one of the criteria to obtain the residency status.
By 2014, the number of properties in the country exceeded the local population by 65,000 units. In the past few years that excess has been absorbed, and the entire island is undergoing an unprecedented construction boom. There are construction cranes everywhere.
One of the drivers for immigration has been the rules in Malta which permits businesses which operate in the online gambling arena. These gaming companies are everywhere and real estate agents report that 30% of tenants looking for rental accommodations are employees in the gaming industry.
Rental rates have increased about 40% over the past 5 years. Some rental apartments that opened with starting rents of 600 Euros a month only a few years ago are now charging 1000 Euros a month. Some tenants have seen increases of 200 Euros a month in a single year.
The country’s lower cost structure has attracted retirees from all over Europe, including the ultra wealthy.
Malta offers an advantageous tax structure for those who have large capital gains and the island offers greater anonymity than, say Monaco.
Depending on the investment one takes, cap rates range between 4%-7% and according to the folks at Remax and historical capital appreciation has been between 2% and 6%.
Home ownership rate in the country is 81.9% which is high by global standards.
The current construction industry accounts for 7% of the economic activity in the country. In historical terms, that’s a very high percentage for any market.
In my estimation, the market will reach a point in the near future where the market will appear overbuilt. In the high summer season, short term rentals are numerous and the nightly rates rival hotel rates. But in the low season, vacancies can be extremely high and number in the tens of thousands.
Malta recorded a government budget surplus of 76.5m Euros in May of 2019.
The government debt to GDP ratio was at 50% a couple of years ago. Today the debt to GDP ratio is at 46%. This compares with over 100% of GDP in the US.
Tourism is one of the main drivers of the economy and makes up 16% of the country’s GDP.
Tourist Arrivals in Malta increased to 250,000 in April, 2019.
Considering that Malta’s permanent population is 433,000, a monthly tourism arrival rate of 244,000 is significant. If you consider that the island is a top destination for cruise ships in the Mediterranean, about 35,000 of the visitors come by ship and stay less than one day. The remainder stay longer with more than half staying a week or longer.
Today’s episode is a companion to yesterday’s show. If you haven’t already listened to yesterday’s podcast, I suggest you listen to that one first. Today’s show will make so much more sense if you do.
On yesterday’s show we talked about the promise of 5G wireless technology and the fact that having good internet access is a component that affects property value. But in order to achieve the advertised performance you need to be much closer to the cell tower than in previous generations.
The number of cell towers is expected to more than double from the 323,000 in 2017 to over 750,000. Not only that, a 5G base station uses so much bandwidth that the network infrastructure to power it must be upgraded to optical fibre.
So the real cost of deployment for 5G is far greater than for any previous wireless generation.
If you are adding nearly 400,000 cell sites across the nation, and you need to get optical fibre to the cell site, then multiple utilities will need to negotiate easements to bury conduit and optical fibre on potentially millions of properties.
So let’s dig into the implications of an easement. An easement gives the right to the holder of the easement to access the property within the boundaries of the easement for the purpose of maintaining or upgrading their services.
These rights are often located along the edge of a property where they do no harm. For example, most zoning codes do not permit building structures right up to the property line. Easements are usually located in the setback where you can’t build anything anyway.
But easements can also cloud title and negatively affect the value of a property.
If a cell site is needed every 800-1000 feet in order to achieve the benchmark 5G performance, there is hardly a property in the country that won’t be affected in some way.
Now let’s be clear, many properties today carry utility easements. This isn’t a new concept by any means.
The cellular towers themselves are actually easements where the cellular carrier pays a monthly rent to land owner for the right to use the easement.
There is no doubt that the economic model for 5G cell towers will have to change compared with previous generations. Cell carriers cannot afford to pay as much as they have in the past for a cell tower.
Cellular towers are income properties that essentially trade in the cell tower market. Once a tower has been installed, it’s common to have several carriers share the same tower infrastructure. They would each pay rent to the property owner independently.
Cellular towers generally are valued at a 7% cap rate.
You can sell that easement on the open market and truly collect a check. That’s the upside. But there is a downside too. An easement on your property could ultimately negatively affect the marketability of your property. Before accepting an easement on your property, get a legal opinion from a competent land attorney.
Today’s question comes from Natalia in Toronto.
Could 5G wireless impact the value of my property, and if so how?
That’s a great question. This is a large topic with several elements to it. In fact, so much so that we’re going to answer it over two days.
On today’s show we are talking about the wireless technology itself and how it works. On tomorrow’s show we will address the specific impacts that the infrastructure related to the wireless technology can have on your land.
There is no question that having internet service available at your property definitely affects your property value. It’s right up there with water and electricity. Very few people would buy a property without electricity. The cost to add it is high and very few people want to install and maintain their own diesel generator. High speed internet service ranks high on buyers list of requirements.
Traditionally, high speed internet service has relied upon wired service to your home and more recently, optical fibre. Fiberoptics can deliver extremely high bandwidth and experiences very low signal degradation. It’s not subject to interference and you can easily have a fibre cable of 60 miles or 100km without needing a repeater.
Today mobile devices have become extremely powerful. I’m able to do most things from a mobile device that used to require a desktop computer. 5G wireless technology offers the promise of wireless performance that is similar to today’s wired solutions. Wouldn’t it be great if you didn’t have to worry about that and you could roam freely and get great service everywhere you go.
How can one radio technology be faster than another? The secret lies in the encoding and in eliminating noise.
The first idea that I’d like to introduce is the coding scheme. Most people know that computers use binary math to make decisions. The individual transistors inside a microprocessor are only capable of counting from zero to one, and back to zero.
But in the world of wireless where we have limited spectrum available, the key is to pack more info into the same airspace. We as humans rely mostly on more complex coding schemes. Each character on a written page represents one of 10 numbers or one of 26 letters, plus all the different punctuation symbols and a space to separate words from each other. But not only that, we have upper case and lower case characters which are distinct. Add all that together and we have about 100 times more information in a single character than a computer does.
Each new generation of wireless technology has introduced a more complex coding scheme in order to pack more information into the same airspace.
But the airspace is a noisy environment. The ability to have so many simultaneous conversations is a function of the signal to noise ratio. This is the difference between two people having a conversation in a quiet room and a crowded cocktail party. In order to have a meaningful conversation at a cocktail party, people need to stand close together and speak very loudly. You can’t hold an effective conversation across the room. There is too much interference from the other conversations for you to be understood. In technical terms, we call that the signal to noise ratio.
In order to achieve the benchmark performance, these cellular towers in 5G will need to be spaced much closer together than today’s 3G and 4G towers. The number of cell towers will need to approximately double compared with today. In fact you will need a cell tower every 800 to 1000 feet.
Areas which have lower population density will not be worth the investment by the carrier. In the world of 5G, you can expect much more sporadic coverage than we have today with 4G
Today's show is a specific case study of a building permit refusal and how we ultimately prevailed. It's a powerful lesson in how a well crafted argument can sometimes win the day. We have the utmost respect for the government officials who work tirelessly to be good stewards of public safety. Our appeal process was respectful, and utilized the tools made available by government to influence a different interpretation of the rules.
On today show we are featuring the book of the month. In order to be considered for book of the month, a book has to meet a very simple criteria. Work must be impactful enough to change your life or your perspective on the world. Whether it does or not of course is up to you. You might consume the content, remark on how good it is, and continue your life as before. But if you do you’re missing the point.
Our book this month is by two brothers who are both university professors on opposite sides of the country. Chip and Dan Heath are professors at Duke and Stanford University. They have written several books together and the book I’d like to showcase is called “Made to Stick: Why Some Ideas Survive and Others Die”. It examines why some ideas are highly memorable and others are completely forgettable.
If you want your words to be remembered, and if there exists a formula for why some things are memorable, would you want to know that?
For example, the sentence “ A bird in the hand, is worth two in the tree.”
That sentence is nearly 1000 years old. Why is it that sentence has been repeated time and time again and has lasted nearly 1000 years? Of all the other sentences that have been uttered in the last thousand years this one has been repeated billions of times. Not only that, the same sentence also exists in multiple languages almost Word for Word.
I’ll give you a simple example from modern day politics. I have no political affiliation in the US. I live in Canada. There’s lots going on in US politics on both sides of the aisle that I disagree with. If you go back to the last presidential election, Donald Trump’s slogan was “Make America Great Again “. Even democrats remember that slogan.
But if you were to ask any American what Hilary Clinton’s slogan was, the vast majority have no idea. Even most democrats can’t remember Hillary Clinton’s slogan. Speaking in a way that is memorable is vitally important.
Robert Kiyosaki is another person who has mastered the art of memorable communication. Rich Dad, Poor Dad. Savers are losers. Your house is not an asset. The central ideas of a book published 20 years ago are easy to remember and repeat.
Oh, I almost forgot to tell you. Hillary Clinton’s slogan was “I’m with her”. That’s right, “I’m with her”.
The book's outline follows the acronym "SUCCES" (with the last s omitted). Each letter refers to a characteristic that can help make an idea "sticky":
- Simple – find the core of any idea
- Unexpected – grab people's attention by surprising them
- Concrete – make sure an idea can be grasped and remembered later
- Credible – give an idea believability
- Emotional – help people see the importance of an idea
- Stories – empower people to use an idea through narrative
As scriptwriters have learned, curiosity is the intellectual need to answer questions and close patterns. Story tellers oppose this universal desire by doing the opposite, posing questions and opening situations. So, they key is to open gaps first in presenting your ideas, then work to close them; the tendency is to give facts first. The local news uses this technique very well: They might use a hook like
Coming up after the break, Real estate expert Victor Menasce will be here to show you that if you can’t afford a house, you should buy two.
That’s an example of a hook that has a surprise twist to it. The idea is simple. If you buy a duplex, you can use the income from renting the other half to subsidize your home ownership.
If speaking in a memorable way matters to you, "Made to Stick" could change your life.
Paul Moore is the principal at Wellings Capital. He can be reached at WellingsCapital.com. Join me for this wide ranging conversation on market sentiment and investment strategy.
DJ Scruggs spent most of his career in the tech industry, much like myself. On today's show we talk about making the transition from startup corporate life into real estate investing. Join me for this insightful and wide ranging conversation.
Everyone needs a place to live, right? That’s one of the arguments that underpins the demand for real estate. But in some markets, that is not an appropriate statement. Let me take you back to the financial crisis of 2008 and it’s aftermath. There were a few counties in the US that stood out for the very high rate of foreclosures.
Two markets that come to mind are Florida’s Dade county and Arizona’s Maricopa County. Miami is in Dade County, and Phoenix/Scottsdale is in Maricopa County. In fact it’s a long list of communities including Mesa, Tempe, Chandler, Glendale, El Mirage, 24 municipalities in total.
Let’s be clear, a lot of people lost their primary residence to foreclosure in the financial crisis. The scale and human impact of that hard to comprehend.
But both Miami and Phoenix have a few things in common. They are both sun destinations, and a lot of people own second homes in those markets.
Given a choice, people overwhelmingly chose to protect their primary residence and allow their second home to fall into foreclosure. There was a much stronger attachment to the primary residence than a second home. At the peak, there were 42,000 brand new vacant condos in Miami. Most were pre-sold in 2005-2007. When the financial crisis hit, buyers chose to walk away from their deposits rather than get financing on a property that would be underwater. That was then.
Eventually, over time those units got absorbed by the market and new construction resumed.
When I was in Miami a few months ago, I was struck by the large number of construction cranes. It felt like the market was becoming overheated again. Back in 2015, some 80% of condo purchases went to foreign buyers. Today that number is about 20% of buyers come from outside the country.
Again, one of the reasons I believe the demand is highly variable, is the high proportion of second homes. A second home is a luxury. It’s an investment. But it’s not essential to everyday living.
Developers often don’t seem to realize the difference. When units are selling quickly, It’s too easy to assume the demand will persist.
Unlike in past cycles, this time around, developers have been asking buyers for a 50 percent deposit to purchase a condo. Those funds have helped developers pour more equity into their projects, which meant they didn’t have to borrow a lot of money from banks. As a result, their leverage is a lot less than in the past cycle. Back then, projects were over-leveraged and developers had no room for sales prices to drop because they needed every dollar to pay back the construction loans. Also, back then, developers only required a 20 percent down payment, so it was easier for buyers to walk away from the closing table when the market turned. Now, buyers are motivated to close because they already paid 50 percent of the purchase price.
On today’s show we’re talking about a couple of widely publicized articles on the state of the oil and gas industry. Oil and Gas are major drivers of the economy, and as such, the cascade into real estate is inescapable.
The first was a presentation by Steve Schlotterbeck, who led drilling company EQT as it expanded to become the nation’s largest producer of natural gas in 2017, arrived at a petrochemical industry conference in Pittsburgh Friday morning with a blunt message about shale gas drilling and fracking.
“The shale gas revolution has frankly been an unmitigated disaster for any buy-and-hold investor in the shale gas industry with very few limited exceptions,” according to Schlotterbeck, who left the helm of EQT last year. Schlotterbeck is not the first industry insider to ring alarm bells about the shale industry’s record of producing vast amounts of gas while burning through far more cash than it has earned by selling that gas. And drillers’ own numbers speak for themselves. Reported spending outweighed income for a group of 29 large public shale gas companies by $6.7 billion in 2018, bringing the group’s 2010 to 2018 cash flow to a total of negative $181 billion over the past decade.
Schlotterbeck is right in saying that the price of gas has to rise in order for the industry to survive. The main issue is that natural gas needs a way to get to market. If not, then there will be local excess of supply and prices will fall. That’s exactly what has happened.
The payback on the investment is often happening far past the initial gusher of oil or gas. Shale wells have a steep production decline curve where production flows fall by 85% in the first year. A well might produce for 20-25 years, but the volumes will be low. About 50% of the well’s lifetime yield is given up in the first 18 months. Since Wall Street always expects revenue growth, companies need to expand drilling operations in order to show revenue growth. But if a well doesn’t achieve break-even in the first 18 months, the only solution is to invest ahead of production. That results ultimately in negative cash flow. The local glut of gas has caused prices to fall which has killed the financial model.
Only when global distribution is in place, prices for US production will normalize. Prices vary widely around the globe and it all has to do with distribution. The end buyers of natural gas will pay the cost of the gas, plus the cost of transportation. The sum of those two is the real cost to the end-customer.
The major investments in infrastructure in Lake Charles are taking advantage of the pipeline infrastructure that is already in place. Tellurian is also adding another 120 miles of pipeline from Texas to Lake Charles. The other plants like the Ethane Crackers are producing the end-product (plastic) without any further transportation. So yes, infrastructure investments like in Lake Charles are key to solving the problems that are referenced in both articles.
If your real estate is dependent on the economics of a major industry, it’s vital that you understand that industry. Otherwise you’re taking a major risk that your revenue projections may not come true.
Can you negotiate with government? The simple answer is yes you can. But the real answer requires an understanding of what the other side wants. When you are involved in a negotiation, any negotiation, having an understanding of what the other side wants is critical to an effective negotiation.
When you are negotiating with a seller, they might be looking for the highest price, or perhaps greater certainty that the transaction will happen on time, or happen at all. They might be looking for a quick closing.
But when you are dealing with government, you are negotiating with people who are not owners. They are employees of the government and stewards of public resources. What drives their decision making is going to be different than a private business.
In one case, we had a regulatory body imposing a different section of the building code upon a project, despite clear specification to the contrary. You might say that you can never fight city hall. I’m here to tell you that a well researched and well presented case can often result in a successful negotiation.
Most of the time when you negotiate with government, you are not dealing with elected officials, but with paid bureaucrats.
There are two different circumstances that require a vastly different approaches.
- Case falls within a defined regulation or procedure.
- Case falls outside a defined procedure.
In the case of a defined procedure, the ability to negotiate can be much narrower.
But often, there are conflicting regulations, and negotiation involves convincing the government official on which set of rules to apply under the circumstances.
Most government negotiations fall into some variation of that idea. This type of negotiating requires deep research and the expertise of those who have an understanding of the inner workings of the government department.
The second case involves circumstances where there is no defined procedure. That involves someone taking a risk and making a decision that they might need to defend in the future.
For many government employees, their job is to keep their boss and the elected official from appearing in the newspaper. Any negotiation will require a risk assessment.
If the government employee is comfortable with the risk, then you can effectively negotiate. But if they’re not, then you might be stopped dead in your tracks.
When that happens, your job is to see if there is an existing regulation that is similar to your specific circumstance, and try to convince the official that that rule should apply in this case. You really want to make the case of no rule look like the first circumstance of conflicting rules, where some discretion can be applied to choose the most appropriate rule to fit the circumstance.
Let me give a specific example. There are two properties that were purchased with federal deed restrictions requiring the building of affordable multi family housing within a defined time. In the meantime, the city changed the zoning to single family.
So here we have two levels of government imposing conflicting rules. Unless both sets of rules are in agreement, the project can’t move forward.
These types of situations arise frequently. There are often experts, many of them are attorneys who specialize in navigating the web of conflicting rules who can help you negotiate a winning solution.
If your issue is zoning, you may consult an urban planner or a zoning attorney.
On today’s show we are examining home buying for the next generation of home buyers. Last week we talked about a bubble forming in the luxury home segment where older home-owners are aging out of the home market, and through a combination of affordability, sheer demographic numbers, and market taste, there is a fall in demand at the top of the market where in fact there is a shortage of homes at the entry level.
On today’s show we are looking deeper at new buyers entering the market for the first time.
We saw home buying rates bottom out in 2011 and 2012 for new home buyers. This was the bottom of the real estate market following the 2008 financial crisis. Young home buyers were taught that home ownership was risky. But the truth is that the opportunity of a lifetime existed in 2011 and 2012. Home prices have increased ever since. They’ve increased as banks started lending money agains, and home buyers came back into the market. Prices rose in response to the supply demand equilibrium at that moment in time. The actual number of young home buyers has increase every year since 2012. It points to a real rebound in home buying patterns. Or does it?
According to US Census data, the percentage of home ownership for the age group from 25-34 years of age was at 20% for that age group in 2006. It has fallen every year since and now sits at 15% of that age group. Despite the rebound in home ownership in the millennial group in absolute numbers, the actual percentage of home ownership participation continues to fall year over year.
It would be easy to conclude that millennials simply aren’t as inclined to buy homes as the previous generation. But the folks at Fannie Mae decided to look deeper at the data. They measured the rates of home ownership of specific cohorts and compared them by year.
When I asked Dr. Doug Duncan, Chief Economist at Fannie Mae about this, he had a simple answer. He concluded that Millennials tend to buy houses based on specific life events. They tend to buy houses when they get married or have babies. He is saying that people are getting married and having babies about two years later than the previous generation. But once the decision to have children kicks in, home buying isn’t far behind.
In fact, the data in the Fannie Mae report seems to support that, along with the idea that the rebound in home ownership for a specific cohort is the best measure of current home buying sentiment.
According to Fannie Mae, The conclusion to be drawn is that cumulative age-group rates of homeownership clearly do not represent current market behavior, and it is current behavior that drives current housing market activity.
I believe there is another simple explanation which the analysts have overlooked. Student debt in the past decade has exploded. Folks in their 20’s with an average of $39,000 in student debt are not rushing out and buying houses.
If the national home ownership rate is 60%, which is low compared with historical norms, and millennial home ownership sits at 15%, that’s a large gap to make up. It says that the bulk of people are not buying their first home until well into their 40’s.
So what does this all mean? It means that people still need a place to live. It means that if home ownership is falling, the demand for rental housing is only going to increase.
We are already seeing that in some states in the country. California is seeing its rate of home ownership declining. People who grew up living in a single family home will want to live in a single family home when they grow up, even if they don’t own it.
Securities law is one of the fasted moving areas of the law. In fact, even lawyers who practice regularly in this area often have to check on items they may have completed even a week ago.
For example, the SEC had numerous exemptions under regulation D. Exemption 505 was repealed, and as a result we have seen a significant increase in use of exemption 504 and 506.
The Securities and Exchange Commission published a release earlier this week to solicit comment on several exemptions from registration under the Securities Act of 1933 that facilitate capital raising. Over the years, and particularly since the JOBS Act of 2012, several exemptions from registration have been introduced, expanded, or otherwise revised. As a result, the overall framework for exempt offerings has changed significantly. The SEC believes capital markets would benefit from a comprehensive review of the design and scope of our framework for offerings that are exempt from registration. More specifically, the commission also believes that issuers and investors could benefit from a framework that is more consistent and eliminates gaps and complexities. Therefore, the commission is seeking comment on possible ways to simplify, harmonize, and improve the exempt offering framework to promote capital formation and expand investment opportunities while maintaining appropriate investor protections.
The SEC seeks to explore whether overlapping exemptions may create confusion for issuers trying to determine and navigate the most efficient path to raise capital. At the same time, they seek to identify gaps in our framework that may make it difficult, especially for smaller issuers, to rely on an exemption from registration to raise capital at key stages of their business cycle.
If you go back to 2011, there were approximately 1T in registered offerings. At that time there were about $1.6T in exempt offerings. In 2018, there were about $1.5T in registered offerings and nearly 3T in exempt offerings.
There are a number of areas where the SEC is looking for input. Here is one of them.
In light of the fact that some exemptions impose limited or no restrictions at the time of the offer, should the SEC revise our exemptions across the board to focus consistently on investor protections at the time of sale rather than at the time of offer? If exemptions focused on investor protections at the time of sale rather than at the time of offer, should offers be deregulated altogether? How would that affect capital formation in the exempt market and what investor protections would be necessary or beneficial in such a framework?
The questions they are asking are really great questions, and frankly are not what you typically expect from governments.
Which conditions or requirements are most or least effective at protecting investors in exempt offerings? Are there changes to these investor protections or additional measures we should implement to provide more effective investor protection in exempt offerings? Are there investor protection conditions that we should eliminate or modify because they are ineffective or unnecessary?
One of the main areas the SEC is looking at is to expand the definition of accredited investor beyond just a net worth test. The report also discussed whether individuals with certain professional degrees or licenses or financial experience, or who are advised by professionals, should be considered accredited investors.
You can find out more about the process by visiting the SEC website. The link to the document is contained in the show notes for the podcast.
https://www.sec.gov/rules/concept/2019/33-10649.pdf
Edna Keep is based in Regina, Saskatchewan. Regina isn't on the radar as a top market, but Edna has built a portfolio of over 500 units over a period of time with an emphasis on cash flow. You can learn more about Edna at ednakeep.com
On today's show I'm talking with George Ross about managing your loan portfolio and negotiating with lenders.
Wednesday, Federal Reserve Chairman Powell announced the outcome of two days of meetings of the Federal Reserve. The Fed is a board of the heads of each of the regional Federal reserve banks and their board of Governors. The focus is often on the Chair of the Federal Reserve. But the board is really made up of a committee who vote on the policy. Interest-rate projections released Wednesday showed eight of 17 officials—the reserve bank presidents and board governors who participate in the Fed meetings—expect they will cut the benchmark rate by year’s end from its current level in a range between 2.25% and 2.5%. Seven of those officials see lowering the rate by a half percentage point by the close of 2019, and one expects just a quarter-percentage-point reduction. Eight officials projected the Fed would hold rates steady, and one projected a rate increase. The Fed this week announced that they were holding interest rates steady at this meeting, but signalled strongly that we can expect a rate cut at the July meeting, about 6 weeks from now. The guidance is for a half point reduction between now and the end of the year, based on economic indicators. The fed is seeing a slowdown in economic activity, party due to global economic slowdown, and some linked to the current trade discussions between the US and China. The central bank’s rate-setting committee on Wednesday dropped language from its policy statement describing its stance as “patient”—which implied rates were on hold. Instead, it said uncertainties about the economic outlook have increased, a phrase it has used during past periods of rate cuts. “The committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion,” the statement said. That’s code for they plan to reduce rates on signs of economic weakness. So this is a strange situation where no change in interest rates is actually news worthy. In response to the announcement, the stock market seems to have responded positively. But the real news is that low interest rates mean that the government’s out of control spending is going to continue to enjoy low interest rates making their over-spending less unaffordable. I’m deliberately using a double negative here because the spending isn’t affordable at all, it’s less unaffordable with lower interest rates. For us as real estate investors, short term loans are typically linked to short term rates like LIBOR, and permanent financing is typically linked to the yield on the 10 year treasury. That’s why Wednesday’s news is actually news for real estate investors. Yields on the 10 year treasury fell to the lowest level since November 2016. The rate now stands at 1.98%. That means that the rate for most HUD and agency loans will be solidly below 4% for the first time in a couple of years. Now is the time to position your portfolios to take advantage of the lower interest rates. If you start the process in June, by the time you exit the underwriting process in July, you will likely see an even lower rate locking into your permanent financing. These financings take considerable time. The lender has to underwrite the deal, the market conditions, and the borrower. The commercial appraisal won’t be ordered immediately. That’s typically one of the last steps in the underwriting process and typically takes several weeks to complete. So if you want to take advantage of lower interest rates that are here now, and in our near future, now is the time to start the process to rate lock for the long term.
June 1 marks the start of hurricane season in the Northern Atlantic. Some years are incredibly active like 2017. By comparison, 2013 had no hurricanes make landfall at all. While there were several tropical storms, none developed into full blown hurricanes. The names for the storms in 2019 have already been established, and the first few will be called:
- Andrea
- Barry
- Chantal
- Dorian
- Erin
- Fernand
On today’s show we’re talking about the kinds of fraudsters that crawl out of the woodwork whenever a natural disaster strikes. This can be an earthquake, a hurricane, a tornado, any major natural disaster.
There are numerous scams out there. Some of them target unsuspecting property owners. Others target assistance programs and insurance companies. These are the top 5.
While many individuals respond to natural disasters with kindness and generosity – opening their hearts and their wallets to those in need, providing aid and assistance when it is needed most – some unscrupulous individuals will take advantage of the situation to line their own pockets through fraud.
Here are the top 5:
1) Benefits Fraud
2) Charities Fraud
3) Cyber Scams
4) Loan Modification Scam
5) Repair Scam
There’s no question that beautiful homes are just that, beautiful. As always, fashion and tastes are always changing. Like clothing, homes make a fashion statement. They have a life span. The gold door knobs of the 1980’s and 1990’s are replaced with the cleaner look of brushed stainless steel.
Colors like hunter green are out, and white subway tiles are in. Colonial style mouldings and trim are out, and clean lines are in. Thick pile carpeting is out and hardwood is in. Warm tile colours are out and cool colours like grey are in.
But fashion goes far beyond finishings. The large mansions of the 2000’s were in hot demand. Today, there simply are not as many buyers for those homes. It’s partly demographics. But it’s also tastes that have changed. The 5,000 square foot home on acreage is not selling as well as the more modern, smaller home in a walkable community with access to the local coffee shop, the art gallery, and the neighborhood gourmet establishment.
One of my clients is building two residential subdivisions in Asheville North Carolina. This area in North Carolina’s Buncombe County, draws retirees with its mild climate and Blue Ridge Mountain scenery.
Homes under $800,000 have been selling quickly. So much so, that there is a shortage at that price point. Many are electing to custom build. Mountain gated communities like Ventana are doing really well. Homes below $500,000 are flying off the shelf. Homes over $2M are sitting on the market. Last year, there were 32 homes in Asheville over $2M on the market, and only 16 of them actually sold. Asheville is a wonderful community. It’s very artsy with great restaurants. The town has earned a reputation as a food lovers haven. There are lots of craft breweries and converted industrial buildings. This is a story that is playing out all over the country.
A lot has been written about the growth in senior housing as baby boomers are aging. But the thing to remember is that all those people going into senior housing are coming from somewhere. What properties are they leaving behind? Boomers currently own 32 million homes and account for two out of five homeowners in the USA. The picture is pretty similar in Canada and other western nations.
The problem is expected to worsen in the next decade, as more baby boomers advance into their 70s and 80s, the age group where people typically exit homeownership due to poor health or death.
The problem is particularly acute at the high end of the market. About a year ago, Fannie Made published a report which takes a deep look at the problem from a demographics perspective. But you don’t need to be an economist to see the problem.
That brings us back to talking about fashion. Even assuming that there were enough buyers, which there aren’t. Even assuming that younger home owners could afford these larger home, and many of them can’t. Even if you update the home and get rid of the dated finishes and colours to match modern tastes, these homes are not in the most desirable locations for younger home buyers. Most younger home owners are not looking for such a large home. They want to be closer into the city. They want to spend their money on experiences, not accumulating possessions. The 1980’s and 1990’s were all about material possessions. Social values are changing and younger people would rather create memories than buy more stuff.
It is said that real estate investing is a mental game.
But what does that really mean? It means having the discipline of investing and managing projects overcome your emotions. It’s been said that most decisions are made emotionally, and the logic to support the decision is then brought to the forefront to bring justify the emotional decision.
On today’s show we are talking about deal momentum.
Let’s say that you have your eye on a property that you think has potential. The initial analysis looks favourable. You manage to get it under contract with all the usual due diligence conditions.
You have a term sheet from the lender and you have several investors who like the deal.
You have completed your due diligence and everything seems ready to go. But late in the game a week before closing an issue arises on title.
In addition, just one week before closing you’re starting to see signs regarding your property manager that are alarming. You don’t live in the same city, and you don’t have time in the next week to fly and recruit a new property manager to replace the one you’ve got.
The title issue will not affect your use of the property but might affect the salability of the property in the future.
You have spent two months working on the project. You have spent money on appraisals, phase 1 environmental, legal fees reviewing documents, and countless hours putting the whole deal together. In one week time you will get all of those fees reimbursed and you’ll earn The acquisition fee that you put in the offering memorandum with your investors.
Most purchase contracts include a clause that is an open condition requiring the transfer of marketable title. That condition does not expire right up until the time of closing. Even though you have waived conditions, the title condition remains in full force and effect.
If you had known the issues with title and the issues within your team at the start of the project, you probably would have chosen not to proceed with the deal.
But here you are, a week before closing and all systems are go.
This is clearly a case of deal momentum.
I remember watching the launch of a NASA rocket. The countdown was well underway and 10 seconds before launch mission control scrubbed the launch.
Every single project requires a continuous risk assessment. In the case of a space launch the consequences are clear.
Like a rocket once fully launched, a project becomes like a one way street. There is no backing up. You can only go forward.
But when you have a deal that runs into problems, the correct solution is to stop, inform all the stake holders of the issue and then negotiate accordingly with the seller. They’re the one with the problem. By taking the more conservative stance, you are letting your stakeholders know that you take their money seriously, that you won’t skip steps and take risks with their capital.
They will respect you for it. It builds trust.
That doesn’t mean the deal is dead. It means that there are some problems that must be resolved before you can move forward. If there is an issue with title, perhaps it can be cleared up prior to closing. If it’s a problem for you, then it could be a problem for virtually any buyer. The problem is not a buyer problem. The seller owns the problem and they have significant incentive to resolve it prior to closing. After closing, your negotiating leverage has evaporated.
Now I’ve outlined an fictitious example here. Deal momentum comes in many shapes and sizes. As a deal sponsor, you have the same responsibility as the launch director for a rocket. That doesn’t mean the entire mission is scrubbed. It means not today. It means we need to make the deal safer.
If real estate is a mental game, be mindful of deal momentum.
Warning. Today’s show contains a real life story that some listeners may find disturbing.
On today’s show we are talking about how to maximize your profit. Profit, simply calculated is revenue minus expenses. You can increase profit by increasing revenues or by reducing expenses. Often it is tempting to reduce expenses. When something needs to be done on a project you can hire an expert, which can be costly, or if the work is simple, do it yourself.
I’m here to tell you that doing it yourself is the path to ruin.
On today’s show we have a cautionary tale about Tony, a pilot with 21,000 hours of flight experience. Tony had a number of trees on his property that needed pruning. But the tree cutting service was going to charge $600 per tree. He did the math and decided to rent a professional cherry picker. These are one of the machines that hoists you high in the air in the safety of a basket with a railing. Most of the controls are at your fingertips. Joystick control makes it quite easy to position the basket exactly where you need it.
At one point, the cherry picker detected the beginning of instability. When that happens, the joystick controls are disabled and the cherry picker stops working. The only problem is that Tony was by himself. The only way to fix it is to use the manual crank on the base of the cherry picker. But Tony was 30 feet up in the air and he was by himself. Rather than call for help, Tony decided to try and jump onto the roof of the house which was nearby. Only he missed the house and fell to the ground. Sadly, Tony did not survive the fall. Now folks, this is a real life story about a man who made a series of bad decisions, about a wife who lost her husband, about children who lost their dad.
There is so much do it yourself mentality in our culture. We are thought to do it yourself at school. We are taught to get a job. On the job we are to do the work.
Even if you didn’t do something involving heights, I’m sure you can relate to Tony’s lapse in judgment. Maybe you decided to do a quick and easy plumbing repair rather than call a professional. Maybe you cut your own grass.
Overwhelmingly, when I think about increasing profits, I don’t think about reducing expenses. I think about increasing revenue. You can hire the skills to do the work. You can increase revenue to pay for the work. You can’t recover the time it took to do the work.
Billy Keels is based in Barcelona, Spain, but invests in the USA. You can learn more about long distance investing from Billy at billykeels.com or at keeponcashflow.com. He has a free e-book for our listeners at growyourmoneythesmartway.com.
Justin and Keisha Brooks are based in Kansas City where they own and operate assisted living assets, and multi-family. They are also hosts of the Real Life Real Equity Podcast. They can be reached at realliferealequity.com.
On today’s show we’re talking about professional tenants. These are the ones who present well during the screening process, who fabricate elaborate stories, and who encourage landlords to skip steps in their due diligence. Ultimately, the professional tenant has one goal, to squat in your property rent free for as long as the legal system will protect them. They use every trick in the book to delay proceedings.
On today’s show we hi-light the top 5 tricks that professional tenants use to cheat a landlord.
On today’s show we are talking about the process of finding life balance, while living in several different time zones concurrently.
We have spent the past two weeks living on board a boat in Northern France, all the while working to repair things on board, maintain client meetings by phone, keeping in mind the time zone differences with home.
Everything seems to be a little off balance.
On the west coast of France, we are actually further west than much of the UK. But we are on Central European time and an hour ahead of Britain. As a result, it’s daylight here until well after 10:30 PM. We are eating much later than normal, often having dinner at 9PM.
Our phone calls with North America start at 3PM, which is the start of the business day in eastern and central North America.
The mornings are spent working on the boat and doing paperwork. Fortunately our internet access has been excellent which has made getting work done much easier.
Many of our meetings are held by video conference using either Skype or Zoom.
Structure is vitally important in maintaining a sense of organization and order. Without that structure, life seems chaotic. Our business day has been shortened to only a few hours of time zone overlap. It would be too easy to allow meetings to go on until 11PM at night. That actually happened once this week already.
On today’s show we’re talking about the lowest and best use of a property. Traditionally, we are trained as real estate investors to seek the highest and best use for a property. This might be a high rise building, or a hotel.
But sometimes, the best use is the one that buys you certainty. That may not necessarily maximize the revenue. Sure you want to build that hi-rise condo tower on the property. But you won’t know for some time if the zoning is going to be approved. In the meantime you need a way to carry the property during that period of uncertainty.
For some properties there might be an existing single family home on the property. But the rent for a single family home probably won’t generate enough income to cover the costs of a property that is valued for development of a major property. You don’t really know how long it will take to get the entitlements. On paper the city might say its a four month process. But by the time the concept is developed, the required traffic studies are completed, public consultations, submission of 15 copies of the drawings 30 days in advance, you could easily be facing a six month process before the zoning board. Chances are, there will be some objections to the minor variances. If you require an appeal or a resubmission, then you could be easily facing another 3 months delay. Once you pass the zoning board, then you might be facing another delay to get the project on the agenda at city council. All of this uncertainty means carrying a property without the knowledge that you are gong to be approved. OK, so now you’ve got zoning approval to build the project. From here you can start the detailed design of your project, the full construction drawings will take several months to complete with all of the engineering aspects including civil, structural, mechanical, electrical, plumbing, acoustic. Once that’s all done, you need to satisfy the long list of deliverables for the actual building permit including the demolition permit, the stormwater runoff permit, the road closure permit, the sign-off from the fire Marshall and so on. That entire process can take several months. Then you’ve got to get firm construction bids from all the subcontractors. That entire process can take a year. So now you might be two years into the process and you haven’t broken ground. What do you do? How do you carry a multi-million dollar piece of land with no income? How do you raise the capital for the entire project before you even know if its going to be approved? You don’t even know what its going to cost to complete the project.
So what is the answer?
Parking.
If your property is in a desirable area with a shortage of parking, you can create a surface parking lot. A surface lot is relatively inexpensive to build. I’m not talking about a monthly parking lot. I’m talking hourly parking. You install a payment machine and you have a security company visit the property on a regular schedule to enforce the parking. If your area has a shortage of parking, you should be able to charge $3-4 per hour for parking during peak times. You should be able to average $20 per day for a parking space in a downtown location.
Parking spaces consume an average of 320 square feet including the parking spot at 200 square feet, plus the space for the laneway.
The beauty is that most zonings do allocate for parking. Getting a parking lot approved is relatively easy in most cases. A property that is actually an income producing property like a parking lot is easier to finance than vacant land. This can be one of the least expensive ways to land bank during the entitlement process.
It’s no secret that Italy is running out of cash. Much like in the US, some US states are in better shape than others financially. The US federal government has one extra trick up its sleeve. The feds can go to their friends at the federal Reserve and ask them to print more money. The individual states can’t do that. So they are under much greater pressure to live within their means.
In the European Union, individual countries that had control over their currency could print money at will and inflate their way out of their short term financial troubles.
Italy’s populist leaders are discussing paying public-sector suppliers with IOUs instead of Euros. Some who oppose European controls have proposed this as the starting point for a new currency in case Italy has to leave Europe’s currency union.
The heads of the League Party and the 5 Star Movement, which make up the governing coalition in Rome, want to assess the idea of paying off government arrears using IOUs with denominations as small as €50 ($56), dubbed “Mini-BOTs” after Italy’s BOT treasury bills. BOT is an acronym that stands for BOT (Buoni Ordinari del Tesoro, or loosely translated Ordinary Treasury Bonds.
“One can debate the instrument…it’s a proposal. But the urgent need to pay the tens of billions of euros of public-administration arrears to companies and families should be clear to all,” Matteo Salvini, head of the far-right League party, said Sunday.
Italy’s finance minister, Giovanni Tria, has tried and failed to stop the discussion, arguing that the IOUs would be either an illegal parallel currency, or they would be extra government debt at a time when Rome is struggling to rein in its deficit.
So the question simply is, when is a piece of paper considered currency?
Is a US T-bill as good as cash? What is the difference between a one dollar bill that is essentially a government IOU. It says on the front face of the dollar bill, “Federal Reserve Note”. It then goes on to say “This note is legal tender for all debts public and private “.
It used to say “This certifies that there is on deposit in the treasury of the United States of America one dollar in silver payable to the bearer on demand. But that was when our currency was actually money and backed by tangible hard assets. That’s an entirely separate discussion.
So let’s go back to Italy. Italian government bonds currently have a yield of 2.35%. This compares with US treasuries at 2.15%. Considering the additional risk associated with fiscal management in Italy, such a small risk premium seems inappropriate to me.
Claudio Borghi, chairman of the budget committee of Italy’s lower house of parliament, has said such small-denomination IOUs could be a fallback instrument for Italy’s economy in case of a clash with eurozone authorities. Mr. Borghi tweeted on Sunday that the European Central Bank forced Greece into submission in 2015 “in a shameful humiliation of democracy. I would like to avoid this to my country.”
European officials last week called for disciplinary proceedings against Italy for flouting fiscal rules. Italy’s national debt stands at 132% of gross domestic product and is projected to rise above 135% next year. Among developed countries, only Greece and Japan have higher government debt ratios. Unlike euro members, Japan borrows in a national currency that it can print. Japan’s debt is currently priced at negative 0.11%. Here too, the pricing seems out of whack.
I’ve been predicting for some time that the next financial crisis will be caused by a sovereign debt crisis that spills into the global financial markets. The signs will appear slowly at first and then quickly when the realization kicks in that the problem has no solution.
On today’s show we’re talking about a debt bubble. There have been numerous debt bubbles over time. There was the sub-prime debt bubble. There’s clearly a sovereign debt bubble in many countries around the world including the US. There is arguably a debt bubble in automotive loans as the number of auto loan defaults in the US is skyrocketing. But we’re not going to talk about any of those. The debt bubble that is going to have a ripple effect throughout the economy is the student housing debt bubble.
You might say that students are making an investment in themselves. We’re not giving a bunch of 18 years olds $40,000 in debt to go buy large screen TV’s. We’re investing in our youth. They are our future. A university education is essential to succeeding in this increasingly competitive world. I’m extremely grateful for my degree in engineering. It has served me very well.
There are some degrees that lead directly to a career. We’re talking about degrees in medicine, law, engineering, physics, chemistry, psychology. These degrees have commercial value because they are valued in the marketplace. But then there are Students are spending tens of thousands of dollars on degrees that frankly have questionable value in the marketplace.
I believe 100% in making an investment in yourself. Like any investment, there should be a return on that investment. What exactly does a bachelor of commerce prepare you for? What would a degree in European and Russian studies prepare you for in the marketplace? I have not come across any job descriptions that call for a bachelors degree in humanities.
Now I’m not degrading any of those fields of study. I’m just not buying into the idea that students take on thousands of dollars of debt where there is zero ROI. If you grew up in a wealthy family and they can fund your degree in philosophy, then great. But the idea that you borrow tens of thousand for a degree in Linguistics seems questionable to me.
So what does this mean for you as a real estate investor?
Universities are anchors in many communities. Housing is built around them. Commercial amenities are built around them. Public transit infrastructure is built around them.
We know from demographics that University enrolment is scheduled to decline starting in 2025. There simply are not as many young people graduating high school over the next several years. Naturally, you can expect that universities will aim to offset the decline with foreign students. But that too will eventually be limited by the number of student visas. Some Universities will do a better job than others in marketing to and attracting foreign students. This means that we will see a number of outright university failures. Some of these schools will be absorbed by nearby schools resulting in a consolidation. Others will simply go into bankruptcy.
A good example of that was Mount Ida College, a private college in Newton Massachusetts. It closed its doors about a year ago. Some of the assets of the school were purchased by the university of Mass. The students were given automatic admission to UMass Dartmouth, even though their academic programs are different. Student’s were also given the chance to join Newbury college which is also closing.
If you are investing in a community that has a university as one of the economic anchors, there is additional due diligence necessary. One of the measures is how many scholarships are the school offering to students? Scholarships sound like something that student’s have earned. But in the business of universities, a scholarship is nothing more than putting the tuition on sale. It’s a discount, designed to induce students to choose this school over then next one. If you see tuitions rising, and the number of scholarships increasing, that may be a warning
AJ Osborne was paralyzed from head to toe and on life support. He used real estate to carry his family during those difficult times and today manages a portfolio of 14 storage facilities across several states. You can learn more by reaching out to AJ at cashflow2freedom.com.
This week we've been talking about golf courses and how the landscape is changing. Today's guest has owned and operated 36 holes for the past 19 years. Listen to today's conversation about what it means to own a golf course from someone who is deeply immersed in the business. You can also get in touch with Deb directly at Greensmere.com.
On today’s show we’re talking about what happens when a neighborhood goes downhill. As real estate developers we’re always thinking about improving things. But what happens when things go bad in a neighborhood, and quickly? When you hear something like, there goes the neighborhood, many people think that some undesirable people have moved in. That’s not what we’re talking about. People are people, and they all have the right to live on this planet.
We are talking about the abrupt destruction of property value with the death of area amenities. There is actually an extremely common case of a neighborhood taking a significant hit.
Throughout the 1970’s, 1980’s and 1990’s, there were many residential communities planned around a golf course.
The residential properties backing onto the golf course were sold at a premium. They had large back yards and the large open spaces behind those homes were a beautiful thing to look at. Golf courses were being built at a feverish pace. We now have an oversupply of courses fueled by the infamous National Golf Foundation’s edict to “Build a course a day to keep up with demand.” Fast forward to today, and that demand isn’t there. Oversupply causes price drops and business failures in any industry. Golf is no exception.
As some private clubs have faced declining membership, many started opening their door to daily play some changing entirely to a semi-private model. This has had the effect of increasing golf course availability 20-30% overnight. Much of that latent over-supply was hidden behind private memberships.
As we’ve talked about on the show previously, some courses are being sold and redeveloped as development land. But in reality, many golf courses go through a period of decline, long before being redeveloped. How many?
About 2,000 golf courses across North America have closed down in the past 12 years to put a number on it. That’s a lot of golf courses. In fact, with that many closures, these courses fall quickly into disrepair. The once beautiful view out your back window is now replaced by a weed infested, swampy mosquito pit.
The impact to your property value is swift and steep. Any buyer for your home will want to know what’s going to happen to the golf course. In the meantime, if there’s uncertainty, the resale value of your property is impacted. If the golf course is sold for redevelopment, then your property is going to be negatively impacted. Some of these courses are very large and span hundreds of acres.
When you’re looking out your back window at the beautiful green fairways, it’s easy to think it would be great to get outdoors and take a nature walk. But the business of golf is not very environmentally friendly. The perfectly green short cut fairways are the result of some pretty harsh and toxic chemistry.
New environmental regulations have also increased costs for some operators. Some chemical treatments have been outright banned, leaving only costlier and sometimes less effect alternatives.
Let’s be clear, I’m in favour of a clean environment. The point of this, is that if you’re in the business of golf, your job just got harder and more expensive at a time when you are experiencing falling revenue.
So what does this mean for you as an investor? It means that buying an operating golf course for its value as a golf business could represent a very low cost land bank. You would be buying development land with a modest income stream to carry the land during the entitlement process.
Once your project is entitled, you can build the infrastructure including roads, and utilities. From there you can sell the parcels of entitled land to home builders who will do the heavy lifting.
Today is June 6, The 75th anniversary of D-Day. We are coming to you live from northern France.
D-day was the coordinated assault by Allied forces on the beaches of Normandy. It was the beginning of the liberation of Europe from Nazi occupation.
The assault on the beaches of Normandy had several coordinated steps. The first involved a diversion to draw the attention of the German forces away from the intended landings. The second what is the landing of paratroopers behind enemy lines to secure several key bridges that would prevent the Nazi army from bringing in reinforcements. Finally there was the simultaneous landing on several beaches. Those beaches were given codenames like Juno Beach, and Omaha Beach. Those code names have become so important to world history, that in many ways they have replaced the actual names of the beaches that preceded that day.
Immediately behind the beaches were steep cliffs that were heavily fortified with gunners and infantrymen holed up in concrete bunkers.
The casualties suffered by Allied forces on that day were significant. But eventually with the help of artillery from the ships offshore pounding the cliffs, the troops eventually made a successful landfall and managed to secure the beaches.
The very first troops to come ashore came in amphibious landing craft and had to wade through waist deep water with heavy equipment all the while making sure to keep their weapon dry.
Many soldiers perished in those last few feet before reaching the beach.
Once the beaches were secured, the allied forces brought floating docks that could facilitate the process of bringing thousands of trucks, jeeps, tanks and artillery ashore. Eventually, the allied forces under the command of General George Patton, were able to secure the liberation of Western Europe.
Today is a day much like the recent memorial day holiday in the US to remember those who sacrificed so that we could regain freedom through much of the western world.
There are very few families who were untouched by the calamity of the second world war. Both of my parents escaped Europe in 1939.
My father boarded a ship from Italy and landed in New York City. His name is among the millions who are listed in the registry at Ellis Island. My mother boarded a ship bound for Argentina. They sought refuge in Buenos Aires for about six months before making the journey where she too came through Ellis Island.
Sadly hundreds of members of my extended family grandparents, aunts and uncles, and cousins never made it to freedom. The entire community on the island of Rhodes perished in concentration camps in 1944.
I am enormously grateful to be alive today and do you benefit from the freedoms and liberties that we enjoy.
I also recognize that my parents would never have met had it not been for the war. My wife and I would never have met had it not been for the war.
In the years that followed since 1945, The world has seen countless other conflicts. My wish and prayer is that we see a future world devoid of ego driven conflict.
Joseph asks:
“My wife and I are getting ready to move into rental properties and we are at a sticking point of what a rental should be like inside. I’m okay with things being clean, unbroken, & liveable; she is more of the opinion of caring about the person renting and providing them something new or like new, as she wants to care about them as a person. We are stalled in moving forward as we can not agree.
How say you? What is the right amount of quality and care for a rental vs. your own home. Is there a difference?”
Thank you Joseph for a great question. In order to answer the question, I think it would be helpful to reframe the question. I’ll start by saying that you’re both right. But ultimately the finer points of what to upgrade versus what to repair will depend on the answer to the following questions.
A very important question to answer whenever you are looking to market any product is: Who is your target customer ? Who is your ideal client?
In virtually every industry there are products positioned at different segments of the market at different price points.
For example you would not expect the same amenities at eight Fairmont hotel compared with Motel 6. Everything about those two product offers is different.
The Motel 6 is going to be right off the exit from the freeway. The Fairmont hotel will be an amazing location, will have striking architecture, and will offer luxury services that are simply not of interest to a trucker looking for a place to crash for the night.
They are also priced very differently. The motel 6 might be $60 a night and the Fairmont could be over $300.
While a beautiful plush terry cloth robe is lovely for just about anyone, you won’t get a higher nightly rate at Motel 6 if you put a terry cloth robe in every room. In fact, it would be out of place. But if there wasn’t a terry cloth robe for each guest in the closet at the Fairmont, you would be disappointed. It would be conspicuous by its absence.
It all comes down to knowing your target client and positioning your product to that target client.
So back to your situation with a rental property. Who is going to be your target client?
Are you targeting young families, students, senior citizens who are on their own, army veterans with disabilities, young professionals, tenants with rent subsidies, or workers at a nearby hospital or factory?
All of these ideal clients will be looking for a different product with different amenities.
Some may want interesting spaces to showcase their collection of trophies. Others will want a space to hang a 60 inch TV. Some may want cloth drapes, versus aluminum blinds. You may want two sinks in the bathroom instead of one. You may want a standing shower versus a tub/ shower combination. All of these decisions start with knowing your target client.
Look in the local market and see where the shortage is. There almost always is a shortage. For example, we noticed that in Philadelphia, there was a shortage of parking. Whenever possible, we build our new apartment buildings with ground level structured parking and we elevate the building on top of the parking. Dedicated parking is so rare in Philadelphia that it would take decades for enough parking to be built to satisfy the demand. We are hugely confident that we will almost never experience vacancy in a building with parking. Even if the market went through a huge downturn, a building with parking would be in high demand.
Figure out what will differentiate your product in the market and more specifically speak directly to your target client.
On today’s show we’re talking about what happens when businesses shrink. The latest earnings season for retail brought some more bad news. But let’s be clear, retail isn’t dead. It just has too much friction.
There is the perception that the lowest prices can be found on-line.
I as an average consumer believe that there are some things that I simply can’t buy online. I haven’t got my mind around buying shoes online. I find that only a small percentage of shoes fit my feet. I need to try them on. Shipping shoes that don’t fit back to the online shoe retailer is more work than going to the shoe store. But if there is a specific pair of shoes that I already own, and I’m looking to buy the exact replacement, then I definitely would consider buying that shoe online. Or if there is an article of clothing like a white dress shirt, here too I would buy that online. If I can save an hour of my time by ordering online, the savings are significant because my time is worth a lot, to me anyway.
So what does this have to do with real estate?
If bricks and mortar stores are facing declining sales, all retail commercial real estate will suffer, not just the ones that are landlords to Sears or JC Penney.
This past week, the shares of Gap, Abercrombie and Fitch, and J. Jill were absolutely hammered. The shares at Gap fell 9% on Friday. Shares at PVH which owns Calvin Klein and Tommy Hilfiger fell 10%. Abercrombie and Fitch was off 26% last Wednesday alone, and J.Jill fell 53% in a single day last week. What do all these retailers have in common? They rely primarily on shopping malls for the majority of their sales.
Last year it looked like retailers were poised to rebound. It turns out that in 2018, many retailers numbers improved due to better inventory management. That change was short lived. So far sales in North America have been slow as cooler than seasonal weather has kept shoppers at home.
Here’s the problem. Businesses either grow or they shrink. If they can’t move their inventory, they resort to selling at a discount to move the inventory. You can’t wait another 15 years until that color comes back in style. The product has a shelf life and it’s about 16 weeks in the case of fashion clothing.
Once a store closes in a mall, I’m not seeing legions of new businesses looking to open up in the mall at $65 per square foot just waiting for a vacancy to open up. Sometimes, you will see a store reduce their footprint in the mall as a larger proportion of their sales shift to online.
When there is excess inventory in the retail market, prices drop. When there is excess inventory in real estate, prices also drop. You don’t need that much vacancy to cause a precipitous drop in rents. Rents will drop to the point where any rent is better than no rent. We’ve seen mall after mall close down. So what will cause people to get up from their sofa, get in their car and drive to a business?
On today’s show we are talking about what is up or down with interest rates.
Interest rates are traditionally influenced by two main factors, inflation and risk. If inflation goes up, then naturally investors will want their bonds to at least keep pace with inflation. If the investment is perceived to have higher risk, then investors will want a premium to compensate them for the higher risk. These are the two principles at work in pricing interest rates.
But of course there isn’t a single interest rate. There are short term rates and long term rates. The short term rates will often experience larger swings than the long term rates. Shorter loans tend to be linked to short term interest rates like libor. Longer permanent financings tend to be linked to the yield on the 10 year government treasury bill.
In recent weeks, the yield on the 10 year treasury has fallen to the lowest level in two years. The US dollar has remained persistently strong as the uncertainty over global trade has sent investors globally looking for safety. The vehicle of choice seems to be US treasury bills. That explains why the yield for 10 year T-bills is falling.
But since long term mortgage rates are tied to the 10 year treasury, mortgage rates have fallen to below 4% on the longer 30-35 year loans.
So what does this all mean for real estate investors?
I believe that the period of low interest rates is here for a while longer. That means that prices for commercial properties will broadly remain stable. Even an modest economic downturn will not have a dramatic negative impact on prices for commercial multi-family properties.
If you’re considering a bit of profit taking, or rebalancing your debt to equity ratios, now might be the perfect time to do that.
You may have one more year remaining on a conventional loan. Locking in for another 5-10 years at today’s rates would make a lot of sense even if you had to pay a 1% pre-payment penalty. Often times, if there is only one year remaining on a loan, the bank may waive the pre-payment penalty if you refinance with the same bank. They would rather keep the business and waiving the pre-payment penalty might be the necessary inducement to stay with your present bank. But even if you elect to pay the penalty, remember that you’re going to amortize that penalty over 5 or seven years, so a 1% penalty has roughly the same cost as a 0.2% increase in the interest rate over 5 years. If you can save more than 0.2% in the interest rate by refinancing, it would be worth paying the pre-payment penalty. Many people refinance in order to increase a loan amount, or reduce it. As long as you can maintain a responsible debt coverage ratio, you might consider increasing your loan amounts and pulling some equity to build up a war chest of cash to prepare for new acquisitions in the coming years. There is still a lot of money sitting on the sidelines and while there aren’t too many bargains in the market today, there will be a time when bargains will re-appear.
Andrew Keel is an expert in repositioning manufactured home parks. He currently operates 14 parks in 6 states. To find out more, contact Andrew at keelteam.com.
Today is June the first and on the first day of each month we feature a new book on our book of the month episode. In order to be considered for a book of the month the book has to meet a very simple criteria. It has to be impactful enough that it will change your life or your perspective on the world. Whether it does or not is entirely up to you. You might read the book and comment on what a great book it was. But if you don’t internalize the book and make a part of you, you’re missing the point.
The book of the month this month is “The War of Art” by Steven Pressfield. This book describes in mythical terms the different forms of resistance that prevent you and I and most people from achieving their creative potential. In the book he describes the different forms of resistance that systematically seek to undermine creative work. They include:
- Rationalizing
- Fear and anxiety
- Distractions
- The inner critic
These ego driven saboteurs prevent you from getting down to the business of fulfilling your calling.
In the war of art Steven Pressfield shows how to get into a flow by being into the present moment and losing yourself into the doing. You can be doing and thinking about the doing at the same time. If you’re thinking about doing, you’re not doing.
The secret isn’t to ignore the fear. You need to dance with the fear.
Steven Pressfield writes.
If you're overwhelmed with dread, that's a good sign.
The real artist is always terrified.
The fake artist is wildly self-confident.
Remember, Resistance always comes second. The dream comes first. The more Resistance you're feeling, the bigger the dream in your heart.
The resistance shows up any time you seek to elevate yourself from a lower state to a higher state. The resistance is described like a force of nature whose aim is to maintain the status quo.
The most common areas where resistance shows up include:
- The launching of any entrepreneurial venture
- Any diet or exercise regimen
- Any program of spiritual advancement
- Any activity whose aim is tighter abdominals
- Any course of program designed to overcome an unwholesome habit or addiction.
- Education of any kind
- The undertaking of an enterprise whose aim is to help others
- Any act that entails commitment of the heart such as a decision to get married or have a child.
Steven wrote The War of Art in many ways as his own life story describing the struggles as a writer. In the process, he discovered that the struggle was universal and that’s why the book was the first book that really put him on the map. In the book he writes:
Resistance is a negative force that attempts to prevent us from taking the first step to achieving our dreams. Resistance doesn’t just show up at the beginning. It can show up daily. The battle with resistance is an ongoing one. Even the most successful, talented, acclaimed authors, business leaders, all face resistance. There are some days when I’m producing the podcast where it takes me far longer than part of my mind says it should to come up with the concept for a show.
Overcoming resistance is more important than talent.
A single sheet of paper is enough to outline even the most complex project. The single sheet of paper enables you to cut through the Resistance and concentrate the mind.
It’s one of the most quoted books in recent years. Steven has been interviewed by Oprah, Marie Forleo, Joe Rogan and countless others. If you have been struggling to get something started, or to get something completed, then the War of Art is for you.
David from Placencia in Belize asks:
"I was wondering your thoughts on opportunity zones. Specifically do you feel this can trigger a mass exit in the market that will drop stock prices for ones wanting to get into Opportunity Zones and trigger a crash or at least a a major correction?"
David, that’s a great question.
First let’s define the opportunity zone and what it’s used for, and then we’ll talk about the source of funds for opportunity zone investment.
Opportunity Zones are low income census tracts nominated by governors and certified by the U.S. Department of the Treasury into which investors can now put capital to work financing new projects and enterprises in exchange for certain federal capital gains tax advantages. The country now has over 8,700 Opportunity Zones in every state and territory.
They make up about 25% of the low income areas in the country.
Opportunity Funds are new private sector investment vehicles where the fund must invest at least 90 percent of their capital in qualifying assets in Opportunity Zones. Opportunity Zone investments offer a number of benefits for the investor.
- A temporary tax deferral for capital gains reinvested in an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is sold or December 31, 2026.
- A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis of the original investment is increased by 10% if the investment in the qualified opportunity zone fund is held by the taxpayer for at least 5 years, and by an additional 5% if held for at least 7 years, excluding up to 15% of the original gain from taxation.
- A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in a qualified opportunity zone fund, if the investment is held for at least 10 years. (Note: this exclusion applies to the gains accrued from an investment in an Opportunity Fund, not the original gains).
So virtually any capital gain would qualify to be reinvested in an OZ fund. You might have made a ton of money in, say, Bitcoin, or a piece of rare art work.
There is a ton of money in the stock market. But remember, less than 10% of the transactions on the stock market are made up of actual bona-fide value investing. About 90% of the volume on the stock market are program trades by the brokerage houses for their own account or for institutional investors. Those vast sums of money are largely seeking arbitrage profits. These short term trades fall under the category of trading, and not investing. The hold period is often too short to be considered eligible for treatment as a capital gain.
There are likely a spectrum of opinions on the topic and there are likely people who disagree with me.
I really don’t see the advent of opportunity zone tax sheltering as driving a selloff in the equity markets. There is a mismatch between liquidities in those two types of investments. I really don’t see stock market investors who have the ability to execute a trade on a moments notice then agreeing to tie up their money for the next 10 years. I think those investors are fundamentally different investors. Most of the long term money in the stock market is in the form of mutual funds, and a lot of that money is tied up in retirement accounts.
I expect that the majority of money going into opportunity zone investments is going to come from the sale of businesses where there is a substantial capital gain from a single event, the sale of other real estate assets where the purchase of a suitable replacement asset is proving to be difficult under a section 1031 exchange.
The recent tornadoes to hit the midwest have cut a swath of damage and devastation. The storms hit populated areas including Dayton Ohio, and Kansas City. Over 100 tornados have hit the midwest in 12 straight days. Federal government weather forecasters logged preliminary reports of more than 500 tornadoes in a 30-day period.
These storms touch down quickly and offer little time to escape, especially in heavily populated areas where you don’t have a clear line of sight of the sky. Some people become complacent and ignore the severe weather alerts that are broadcast onto cell phones using the emergency preparedness system.
Even areas that are not known for tornado activity like New Jersey and Staten Island in the heart of New York City had tornado warnings this week. They can truly strike anywhere. Last summer, four tornadoes narrowly missed our home in Ottawa Canada.
A particularly destructive storm splintered homes, ripped up trees and downed power lines southwest of Kansas City.
One of our regular listeners to the show had a tornado damage their car, uproot trees, and destroy multiples homes in the neighborhood. Their own home fortunately was spared a direct hit and the impact was a lengthy loss of electricity.
Every year, homeowners dutifully pay their insurance premium, expecting that they will be covered against major risks like tornadoes.
Insurance companies are not in the habit of losing money. So it’s important to read your policy carefully.
Policies come in two major forms. There are named peril policies and broad form policies. In a named peril policy, you are insured against the specific risks that are named in the policy. These usually include policy limits both in terms of the scope of coverage provided and dollar limits for each named peril.
If your risk isn’t specifically insured you’re probably not covered.
The second type of policy is broad form. This basically covers everything and the exclusions are named specifically. Broad form policies generally cover more. But either way you still want to read the policy and ensure that you are properly covered.
Tornadoes represent several major risks. These include wind, hail, flooding, fire.
You might discover that the insurance company will attempt to assess which damage was caused by wind and which was caused by water. Water damage is the number one category for insurance claims and is therefore subject to the greatest limitations.
You may be able to purchase a separate flood insurance policy through the National Flood Insurance Program. Only 12% of homes in the US actually have flood insurance coverage. The remaining 88% are making the bet that they will not experience that risk, or they mistakenly think that they are covered.
However, if rain water gets into your home because your roof was damaged by wind, you may find that your insurance offers some protection — but only if your policy includes coverage for wind. Some policies that offer coverage for wind, list named storms as being excluded. For example if a storm is given a name like, say, Hurricane Andrew, that would be excluded from the policy coverage. Tornadoes are so short lived that they are not named storms. By the time they could be given a name, the storm is over.
It’s really important to read the policy, not just the one page term sheet that your insurance broker give you.
On today’s show we are talking about leverage. But folks I’m here to tell you that most people think of the word leverage in a very narrow way.
Most of the time when we say the word leverage it’s assumed that we are talking about borrowing money, financial leverage.
Let’s go back to the root of the word. A lever is used to describe what happens when you take a large stick or a pole and use it to multiply the forces. For example, I have a shovel with a really long handle. If I’m trying to remove a rock in my garden, I will use that long shovel as a lever. The force applied at the end of the handle is not very large and I’m able to multiply the force considerably at the end of the spade and pull that rock out of the ground easily. A lever can multiply forces, or it can multiply distance traveled.
There are many places in real estate investing that we can seek to get a multiplier. Financial leverage is what most people think of first.
But we can get a multiplier many different ways. For example it doesn’t take very much energy to release a huge amount of energy when you apply a needle to a balloon. Popping a balloon is a form of leverage where you get a huge multiplier.
The second form of leverage is when you can multiply your time. The easiest way to do that is to hire someone to do the work for you. That multiplier comes simply from saving you time. But if you hire the right people, they will also have skills that you lack in some areas. They will perform that same task many times faster than you could.
Another form of leverage is education. When you know of a better way, you can take a huge shortcut and reduce something complex into something that is extremely easy.
But there is one other form of leverage that is extremely powerful for real estate investors. That is scale.
You might work for days on a renovation of small single family home in an older neighborhood. When it’s complete, you might make $20,000 or $30,000 profit on that deal.
But even if you apply the other forms of leverage, you can leverage money by using other people’s money. You can hire people to leverage your time. You can use systems, processes and automation to make the use of time even more efficient. But at the end of the day, your profit potential is still that $20,000 or $30,000 profit.
But if you are working on a project with 100 apartments or 1,000 apartments you are leveraging scale. Instead of improving one single family home, you’re improving 100 or 1,000.
There are so many places in the system when you can get a multiplier in your business. Each one of these is an opportunity to exercise leverage. For example, an insurance policy is a form of leverage. You pay a relatively small insurance premium and in exchange, the insurance company promises to cover the risks named in the policy.
So many of you are stuck because you’re thinking linearly. You are thinking using simple the math of addition and subtraction. If you want an extra dollar, then you need to add a dollar to your bank account. There’s no question that addition and subtraction are essential to what we do. But given the choice between using addition or multiplication to bring cash into your bank account, a multiplier seems very attractive.
U-Haul is known for the do-it yourself mover. Frankly they have a great product.
I especially have a soft spot in my heart for their smaller moving trucks. Are used to rent them on a regular basis when I was in my teens and early 20s.
One of the great things about Uhaul is that you can do a one-way rental without having a drop charge. But this also represents a problem for Uhaul. Eventually over time as people migrate around the country trucks and a bunch up in cities the people are moving to, leaving a shortage in cities where people are moving from.
Today as a real estate investor, Uhaul is a powerful source of data. They know where those excess trucks and trailers are bunching up. And I can mean only one thing. People are moving there.
The government also provides very useful information about net migration when they conduct their census every few years. But this information only gets updated every few years. Uhaul has the ability to measure statistically when and where people are moving on a real-time basis.
One of my criteria for investing in a particular location is influx of population. I will not invest in a shrinking city. I don’t care how good the deals are.
The state of Texas ranked number one in Uhaul‘s growth state for the third consecutive year in Florida ranked second and the Carolina’s ranked third.
The three states at the bottom of the list having the largest number of people leaving work Illinois California and Michigan.
Uhaul has a pretty good statistical data set. They compile their data from more than 2 million one-way truck and trailer rentals each year. And while migration trends do not correlate directly to population wreaking on the growth, the Uhaul data is an effective gauge of how well states and cities are attracting and maintaining residents.
In 2018, the North Dallas suburbs of Frisco and McKinney are some of the fastest growing areas. In fact the entire Dallas-Fort Worth metroplex is it tracking more population than any metro area in the country.
In Florida, Orlando topped the list as the number one growth market. Orlando offers a number of great opportunities. The city became known for its theme parks and resorts. But it's one of the top transportation hubs in the country. Within a few hours drive, you have access to 20 million population. The warm weather, low taxes, affordable cost of living, makes Orlando a top destination for retirement, and a vibrant place to work. It's one of the best connected cities in the country in terms of air travel with a large number of low cost direct flights to most cities.
It’s only one hour drive to the coast. So a day at the beach is easily accomplished.
Today is another AMA episode, Ask Me Anything. Ryan from Fresno, California asks.
"I really enjoy your Real Estate Espresso podcast. Thanks for the great work.
The silly question has in my mind for a while. Why do banks, including lenders backed by Fannie Mae, make 30 year fixed loan to home buyers? When I bought first home in China, all home loans are adjustable rate. Let's say the interest rate goes back to normal level like 6-8% 2 years later, the bank (or whoever bought the security from bank) can still only get 4% for the remaining 28 years, do they lose money? On other hand, if interest rates go even lower, the home owner can always refinance. The bank does not have such freedom, will it put them at a disadvantage?
Regarding refinance, what is good criteria to apply for refinance? Interest rate dropped 10%? 20%? "
Ryan, that is a great question. In fact two great questions.
Let’s talk for a moment about how the banking system works. And let’s talk about how the banks make money. In the US, Canada, Europe, and much of the world banking system is based on a fractional reserve system.
That means that when depositors put say, $1 million in deposit at the bank, the bank makes money in several different ways. The bank is taking 1 million in deposits, but has the authority to write $10 million worth of loans against that 1M in deposits. The bank makes money on the difference between the interest rate it pays to depositors and the interest it collects from borrowers. Let’s do some simple math. Let’s say that the bank pays 1% interest to its depositor on the $1m deposit. Let’s say that it’s lending the money at 4%. The difference between the deposit and the loan is 3%. So the bank is making 3% on the money it loaned out for the first loan that it makes. But the bank gets to loan the money out another 9 times. In that case it’s making a full 4% interest times 9, which is 36%, plus the 3% from the original loan. So the bank is making 39% interest on the original deposit. That’s a pretty good rate of return. Now let’s say that interest rates go up during the term of the loan. Let’s say that the bank now needs to pay 4% to the depositors instead of 1%. In that situation the banks rate of return drops from 39% to 36%. They’re still very far from losing money.
Understand, when the bank makes a loan that is insured by a federally backed insurer, whether it is Fannie Mae, Freddie Mac, or the US government directly through the department of housing and urban development (HUD ), that is about the lowest risk loan you can write.
The business of banking is made lucrative by the bank leverage, that 10:1 leverage we just talked about. The other side of that is what happens when a loan goes bad.
If the loan is a conventional loan, then the bank has to write down the loss from the loan and it needs to find another $1m in cash quickly, otherwise it can’t pay the depositors their money when they go to the bank to make a withdrawal.
The other way that the bank makes money is through fees. They typically charge an origination fee at the start of a new loan. That fee is usually 1% of the loan amount. In the first year of the loan, the bank makes another 1% on each loan, which brings their total rate of return to 49% instead of the measly 39% they will make in subsequent years.
The second part of your question was about refinancing. Your question was about interest rates. It is true that getting a lower interest rate is part of the motivation for a refinance. But usually the main reason to refinance is to change how your equity is being used. Let’s say you own a building that has 50% equity. You might refinance to increase the loan amount and free up a bunch of equity. You can then take that money and go buy another building.
On today's show I'm talking with George Ross on the current state of the negotiations between the administration and China surrounding Huawei, who happens to have a leading next generation cellular infrastructure offering with their 5G base stations.
Sonia Lee is a syndicator based in San Francisco. She invests in multiple asset classes. On today's show we take a look at a 252 unit apartment complex in Evansville Indiana. Sonia's company can be found at leewardrei.com
Earlier we talked about the economics of solar power compared with purchasing electricity from the power grid. On today’s show we’re talking about another form of power co-generation.
Many larger commercial facilities are turning to co-generation as a way of reducing high electricity costs. This only makes sense in areas where the cost of natural gas is considerably cheaper than the comparable cost of electricity.
Where these systems really shine is in the harnessing of the waste heat to heat water. The use of energy for producing hot water means that the savings can be substantial. If you’re familiar with the internal combustion engine, or the diesel engine, you are already aware that most of the energy is wasted in the form of excess heat. The diesel cycle generates much more mechanical work and relatively much less wasted heat than other systems. It’s about 44% efficient, which means 56% of the energy is wasted as heat. But if you can harness that heat and put it to good use, the savings can be substantial. The are particularly true in areas where the cost of electricity is high.
The latest example is a new hotel that just opened at JFK airport in NYC on the site of the old TWA flight center. The original structure was built in 1962 and was updated to create a 512 room hotel. The hotel incorporates some of the most innovative power generation technology. It stands apart because their system is so good that the hotel has fully disconnected from the utility’s power grid.
The system has four main features. The roof mounted generators are powered by low cost natural gas. Second, the hotel has a sizeable battery bank which allows the power plant to store excess energy during periods of lower demand. This means that a smaller power plant is needed to handle peak demand and the plant can operate with less fuel on average.
Third, they use the cooling system for the power plant to produce the hotel’s hot water rather than allow the excess heat to go to waste. Finally, the hotel also uses absorption chillers to create cold water from the hot water.
The hotel calculated their power consumption based on other hotel metrics and determined that their annual electricity bill with the utility would be about $5M. The payback on their entire installation is estimated at 3 years. Now that number definitely makes sense. But it makes sense partly because NY power rates are $0.21 per Kwh, the highest in the country. If the same hotel were located in Texas where electricity costs $0.11 per kWh, the payback period would double to 6 years, which frankly is still pretty good.
To date, about 600 buildings in NY state have installed systems like this. But most of them still connect to the power grid. The TWA hotel is one of the rare buildings that has gone fully off-grid.
There are an increasing number of systems like the one at the TWA hotel where the connection to the power grid is used to sell excess power back to the utility. Many health care facilities are required to have backup power generation systems under the building code. Rather than have these systems which have a high capital cost sit idle, many facilities choose to operate the systems to produce their critical power needs on a regular basis. They may draw peak power demand from the utility and sell the excess power back to the utility.
The final piece of the puzzle is the financing of these systems. An entirely new group of company s have surface which are willing to install the systems for a low monthly lease cost where the lease cost is offset by the power sales to the utility. The operation of power plant is maintained by the supplier, and the lower electricity bill can often result in operational savings in addition to the up front capital savings.
Have you ever had a situation where you had purchased something and then couldn’t find it? So you went out and bought another one? It happened to me. I couldn’t find my tape measure. It was in my toolbox. Eventually, I really needed it so I went out and bought another one. A few weeks later I found my tape measure. Now I have two.
The latest bit of insanity to come out of Albany New York is a proposed new bureaucracy.
Earlier this week, NY State Senate Deputy Leader Michael Gianaris joined members of the Neighbors Beyond Amazon coalition today to launch a new platform of policy proposals aimed at improving New York’s economic development climate. Senator Gianaris is leading the way with legislation that would require a social impact study for any major economic development project.
"For too long we have funded economic development without considering the impact it has on our neighborhoods,” said Senate Deputy Leader Michael Gianaris. “It’s time to change that and insist on development that helps our communities rather than hurts them. We must prioritize the benefit of everyday people and not just wealthy interests."
Senator Gianaris’ new legislation would require a Social Impact Study, similar to the currently required Environmental Impact Study, to be completed before major economic development projects are undertaken. This would give communities a chance to understand the need for addressing housing and transportation before funding is permitted.
It’s inconceivable that any major project gets undertaken in the state of NY without involving a zoning application. The zoning process is a 5 step process. This is required for anything that does not fit the criteria of being built “by right”.
The final review process once all the applications have been submitted is also a 6 step process called the Uniform Land Use Review Procedure.
- Certification
- Community Board Review
- Borough President Review
- City Planning Commission Review
- City Council Review
- Mayoral Review
Within sixty (60) days of receiving the certified application, the Community Board is required to hold a public hearing and adopt and submit a written recommendation to CPC, the applicant, the Borough President and when appropriate, the Borough Board. The entire process takes 265 days according to the City of NY disclosures. The ULURP rules include provisions relating to the notice and conduct of a Community Board public hearing.
The senator is concerned with the financial impact on infrastructure for any planned project. It seems to me that the City Planning Commission, City Council, and the Mayor are already tasked and mandated with managing those aspects of the impact of a project. That’s why those organizations exist.
If an environmental impact study is required, then you can add a minimum of 110 days to the process, and that’s a minimum. That’s the fastest the process could ever be. If you read the environmental impact study rules, chapter 5 already deals with social and economic impact. It lays out the rules for conducting a social impact study in addition to the environmental impact study. A socioeconomic assessment should be conducted if a project may be reasonably expected to create socioeconomic changes within the area affected by the project that would not be expected to occur without the project. There are chapters that deal specifically with Water and Sewer Infrastructure, Transportation, Energy, Air Quality, Noise, Neighborhood Character, Sanitation, and Public Health.
The whole thing reminds me of the time when I lost my tape measure. Our legal system is so stuffed with regulations that our own lawmakers have no idea what’s in there.
Billy from Barcelona Spain asks:
I’ve been listening to you RE Espresso podcast recently and I really enjoy your perspective and the content…
I’ve been thinking of starting a podcast and have gotten stuck on the design of the show, and some of the technical aspects of creating a podcast. What has been your experience in producing a daily show?
Billy, that's a great question.
I had three main ideas in designing the show.
1) I felt that if I was going to get good at podcasting, it would need to be a regular show. Putting out a show once a week, or less didn’t seem to make sense to me.
2) The current population of podcast listeners is about 75 million people in the US. It’s growing about 15% -20% per year. Those listeners on average subscribe to 6 and listen to 5 because that’s all they have time for.
Increasingly, podcasting is attracting the same kind of attention and production values that radio and TV have been known for. The major networks are starting to enter the fray with well produced shows. If I’m going to be one of 5-6 shows, I need to be that good.
3) I’m a huge fan of Seth Godin. He’s written 18 books in his career so far.
He has a daily blog that aims to communicate one idea each day. Not two, not three, just one. That idea seemed very appealing to me.
So I designed a show that incorporated those three ideas at the core of the show.
I’m a huge fan of solar energy. My boat has solar panels and I can go weeks without plugging into shore power. I love everything about it. So today I’m going to share an analysis of solar power economics that I recently undertook. I do this every few years, because someday soon, I hope, it will make sense for me to install solar power on every project I undertake. It hasn’t happened yet.
In the early days, solar power has largely relied upon government subsidies to make financial sense. The panels were expensive and inefficient. The payback on many installations was over 40 years. I don’t know too many investors who would wait that long for an ROI. So governments created incentives by purchasing the electricity generated at a higher price than the cost to the consumer for electricity. That shortened the payback to somewhere between 10 and 20 years in many cases. But as solar technology has improved, the panels have become more efficient, and the cost of manufacturing the panels has improved. Solar is on the cusp of making sense financially on its own. In response the government subsidies have been scaled back significantly.
Back in 2014, SolarCity was the largest residential solar installer in the world. Tesla, Elon Musk's car company acquired/rescued his cousins' troubled firm in late 2016 for $2.6 billion in stock and the assumption of approximately $3 billion in debt.
The sales at SolarCity, now a unit of Tesla have been sliding ever since the acquisition. They installed only 1/3 the number of panels last year compared to when they were independent. Today, Sunrun has taken over as the largest supplier of installations in the US and has the most economic
As the company has been trying to achieve profitability, it has changed the sales model for solar installations several times. They eliminated the door to door sales team as part of a company restructuring. In some ways, that’s a shame because the door to door sales model seems to be the most effective in the industry. Tesla’s competitors are still using it because it works.
Tesla will be allowing customers to purchase "directly from their website, in standardized 4kW increments of capacity. The aim is to put customers in a position of cash generation after deployment with only a $99 deposit upfront.
The Tesla website allows prospective solar customers to take out a loan for a 4-kilowatt system that will generate an estimated "$600 to $800 per year" at a cost of $85 per month for 240 months at a 5.99 percent APR. If you want the Teslas Powerwall, you are looking at another $58 per month. The entire system will give you about 4,000 watts of power generation capacity and about 14 kWh of storage. But remember, you’re only getting about 4-6 hours of useful sunlight each day to produce that kind of power. If you average consumption over the entire day, you’re only getting about 700 watts of useful power on a sustained basis. That’s enough to power your refrigeration, basic lighting, the fan for your furnace, home appliances.
The oven will need to be powered from the utility. So will the clothes dryer and the air conditioner.
The payback on the system is in about 18.5 years depending on the cost of electricity. In California where the electricity is much more expensive, the payback is closer to 10 years.
Thank you to all the loyal listeners. I’m truly astounded that The Real Estate Espresso Podcast now has listeners in 114 countries. Whether you are located on an island in the Pacific, central Africa, South America, Europe or the good ol USA. Thank you for listening.
On today’s show we’re talking about the opportunity trap. We’ve all seen it happen. Maybe some of you have done it. I’ve fallen prey to my own desire to grow faster than I was capable. The picture looks something like this.
You’re in business, you’ve got a great product. Let’s call it super duper. Customer orders are coming in. The growth has been good. Most of the sales have been online and the order fulfillment process is working pretty well. The marketing efforts have grown the company consistently month by month. Then one day Walmart calls and asks if you would like to supply Super Duper to Walmart. Simple math suggests that this one customer could increase sales by a factor of 10. The opportunity is so huge compared with your present business that the only correct answer is yes. It’s a huge stretch. It could possibly break the company, but the opportunity is so great that you can’t say no. You can’t say no for several reasons. You recognize that your product is filling a gap in the market. But there are some competitors who are a little behind you. So far you’re doing well. Walmart has recognized the gap in the market and is asking for Super Duper. If you say no, then Walmart will probably approach your closest competitor, and the explosive growth will go to the competition. Most importantly, the market share will go to the competition. Saying no is not an option.
Sure there will be problems. Walmart will negotiate pricing that will hurt margins, but the company will make it up on volume. The team will figure it out. They always do.
Walmart pays their bills, but they manage their payment terms so that most of the time the product spends on the floor in the department store, the inventory is actually being funded by the supplier. That means requiring a huge increase in capital to fund that inventory.
The scenario I’ve described sounds pretty compelling. Almost every business has encountered some version of the narrative that I’ve described.
Now imagine you’re an existing customer of the company. You’re going to suffer terribly when the company starts to supply to Walmart. Walmart will get all the attention. Customer service will suffer. Order lead times will suffer. You were one of their best customers and now you’re a second class citizen. Super Duper is strategic to your business. You can’t meet your business commitments without it. Buying the product off the shelf at Walmart won’t deliver the quantities you need. The company has signed a supply agreement with you and they’re not living up to the terms of that agreement. They can’t be counted on to meet their commitments. They’re not an honourable company. They can’t be trusted. You are angry at the company because they’re harming your business.
Does this scenario sound familiar?
Devin Redmond is with Stessa, a new property management software startup based in the San Francisco Bay area. On today's show we are talking about some of the limitations of many of the established applications in the market and how a bigger picture can help investors manage their business overall.
Tom Krol is a specialist in Wholesaling. He has raised the art of wholesaling above real estate and totally separated it from the science of real estate investing. This is a perspective on wholesale transactions that you likely have never heard before. Check it out.
The Yale endowment is considered as one the best institutional investors. In 2018 it earned a 12.3% return, beating the average endowment return in 2018 at 8.2%. For 2019 they are allocating 49% to illiquid / alternative assets (VC, leveraged buyouts, real estate, natural resources). I'm somewhat surprised to see that real estate only takes up 19% of their alternative assets and not more. Their real estate return in the last 10 years was also an anemic 2.7%. In contrast, they've had a lot of success with venture capital (165% in last 20 years. Given Yale's endowment at a whopping $29.4B, how and what can the everyday investors learn from them and the super rich?
It’s true that they’ve grown the endowment from about $6.6B to 29.4B in the past 20 years. That’s impressive considering that the endowment is the single greatest source of cash for the university programs. Tuition is second.
First of all, there are numerous ways to make money.
I have some first hand visibility into the Yale endowment and where they invest. The Yale Endowment is a major investor in a private equity firm called Golden Gate Capital. They were the firm that was funding my buy-out of IBM’s microprocessor division in 2004. From my exposure to family offices, and other “old money” over the past while, I can share what I’ve learned. I believe that their goals are different from the average investor.
First of all, they are more concerned with preservation of capital than rate of return. They also employ sophisticated consultants to evaluate their investment decisions.
The line between late stage venture capital and private equity is quite blurry. I don’t believe Yale is investing in early stage startups. These are late stage startups where the capital requirements are larger. These businesses are proven and need funds to scale up. This is not that different in the world of private equity. Generally speaking, private equity firms make low risk bets on re-engineering businesses and executing business turn-arounds.
David Swensen is the chief investment officer at the Yale Endowment. He outlines his investment philosophy in his book entitled Pioneering Portfolio Management. In that book he divides the portfolio into five or six roughly equal parts and investing each in a different asset class. Central in the Yale Model is broad diversification and an equity orientation, avoiding asset classes with low expected returns such as fixed income and commodities.
He also maintains a low cash position. He maintains a low exposure to traditional wall street equity investments, and a high exposure to alternative investments that are not readily marketed. That’s why he’s investing directly in funds like those of the Golden Gate Capital Group. These firms have some of the most sophisticated money managers involved. For example, they routinely use the services of Bain Consulting. This is the consulting division of Mitt Romney’s Bain Capital Group. I can say from first hand experience that these folks
It’s no surprise that Bain consulting recruits heavily each year at Yale University. They have developed a way of looking at the investment world that is different from most. They realize that these are businesses that need to be run, and they know how to run successful businesses.
In your question you mentioned that the real estate performance of the Yale Endowment was surprisingly low. But remember that the measurement notes in the article you referenced is over a 10 year period. Note that the fund would have experienced significant losses from 2008-2012, and these deficits would have started to be recovered only starting in 2012.
On today’s show we’re talking about how properties disappear from the market. No, they weren’t demolished. I’ll tell you where they went.
Harry Dent is an economist who bases his entire thesis about the economy on demographics. Demographics can predict so much about human behaviour. We know that there is a range of ages when people spend the most money on education. That’s usually between 18 and 24 years of age. We can use the number of live births to predict the number of diapers that will sell in a given year. We can use demographic data to predict housing trends.
As real estate investors we know that real estate is hyper-local. So how do you map the knowledge of the macro economy and demographics to the specifics of your local market?
It’s by understanding who your ideal customer is, and then overlaying demographics on top of the needs of your ideal customer.
Today we’re going to talk about that huge demographic group called the baby boomers. The oldest baby boomer is 73 years old today, and the youngest is 55. For the next decade we’re going to see that demographic group retire in growing numbers. That’s worth paying close attention to.
This past weekend I was speaking at an investor conference about a vacation destination. I actually met several people who had purchased in the same destination, but not as investments. They chose to live there.
When people retire, they often have certain life goals. They want to downsize. They don’t need such a large house. They don’t want the effort and expense of cleaning and heating a large space that they’re only using a small fraction of.
They also want to travel, so for many that means having a place where they can confidently leave and know that the property will be safe. If the property has a large yard with grass that needs to be cut, or a laneway that needs snow clearing, that’s not as good a fit as a condo in a complex where there is maintenance staff onsite and the majority of maintenance items are the responsibility of the condo corporation.
Some people want to retire to the beach. Some will want to retire to the chalet in the mountains. They want to spend time in an environment that is emotionally uplifting and inspires them on a daily basis.
Some will choose to rent and experiment with a number of locations over a period of 4-5 years before finally settling on a single location. Others will choose their dream pad very quickly. For others, they will maintain multiple residences and move with the seasons.
This particular demographic group is looking for walkable communities with lots of community amenities. They’re looking for desirable destinations. They’re looking for buildings with on-site amenities and strong on-site management. They’re looking for a resort lifestyle where they can walk to the beach, or breath in the mountain air.
These properties were often built as condo’s in resort complexes. They were intended to be part of a rental pool under the hotel management. But the condo hotel model means that an individual owner can purchase a unit and owner occupy the unit whenever they want. Of course, when it’s owner occupied, the hotel can’t rent it out and the owner gets zero revenue for those nights.
The investor will value the property based on multiples of income, where the income is determined by the seasonal factors and the nightly rate. For the owner occupant, their price criteria is based on the value to them as a home.
As you pay attention to the laws of supply and demand, consider that supply may actually shrink in some rare cases where properties are highly desirable. We always look for those special situation where there is more demand than supply.
On today's show we’re talking about President Trump’s visit to a project located just down the road from several of our own new development projects. The president was in lake Charles Louisiana to promote the expansion and job creation opportunities associated with liquified natural gas.
The oil and gas industry in America has evolved over the years from conventional oil that some of the very first oil wells in Texas and California produced. These were relatively shallow wells in fairly porous rock. They produced oil, and virtually no natural gas.
The more recent shale wells produce oil or gas and in some cases both. These rock structures have the oil and gas trapped in the rock which is not very porous, and not very permeable. If you think of the rock like Swiss cheese, the porosity of the rock is the size of the holes in the cheese and the permeability is the ability for oil or gas to flow between the holes in the cheese or in this case the rock. In order to get the oil out of the ground, the drillers push water down into the well at about 2000 psi. That high pressure smashes the rock and allows the oil and gas to flow. The oil gets pumped to the surface and is stored in tanks that get emptied on a regular basis and is then transported by truck to the refinery. The gas is lighter than air and just wants to float away. The only way to capture the gas is to pressurize it and transport it by pipeline to an local mini refinery which gets rid of the impurities to ensure the gas is of pipeline grade before being sent down one of the major pipelines.
Natural gas is a great source of energy. But it’s so inconvenient to handle that the average consumer has trouble dealing with it. Most of the worldwide consumption of natural gas is for the production of electricity or home heating.
Natural gas is is one of the cleanest ways of producing electricity behind wind solar and hydro. Much of the electricity in Europe, Asia is turning to natural gas as a cleaner alternative to coal or oil. For example, in 2016, Spain didn’t import any natural gas from the US. In 2018, Spain imported 29 billion cubic feet of natural gas and growing. France is buying from the US, so is Portugal, Italy, and Greece.
Last year the US exported 22M tons of LNG. This export capability was only made possible in 2015 when president Obama authorized the export of hydrocarbons from the US. Today, Lake Charles Louisiana is the largest LNG export hub in the US. The export capacity for LNG is expected to grow by huge multiples over the next decade. Lake Charles is undergoing tremendous growth as a result of these energy projects. It’s driving population growth and employment growth. Most importantly, these jobs are not linked to the price of oil or gas. It’s all about global distribution of natural gas. The widening of the Panama Canal in 2016 opened up markets in Asia.
So what does this have to do with real estate?
We look for market opportunities where the demand is growing and there is a shortage of supply. The president’s motorcade passed directly behind our Maplewood Place RV Park. We built that facility over the past year to house the legions of construction workers who will be temporarily in Lake Charles over the next decade to build the mega plants.
This town needs everything from housing to retail, to office and medical. The President’s trip to the area is shining a spotlight on the opportunity. We believe that the additional visibility will make the market more broadly recognized in the financial markets.
The President’s visit will bring attention to this market and may facilitate future investment. Have a lookout for other places, anywhere in the world where major business activity is taking place. As always, look at those opportunities through the lens of supply and demand.
Today’s show is about protecting rookie investors from making bad investment decisions.
This weekend I was speaking at an investment conference. I had several people approach me and ask advice about buying properties in markets where purchase prices were low and tenants don’t have the funds to pay the rent.
Yes folks, don’t get ahead of me now. I know many of you have seen this movie before. You know the ending.
One investor in particular bought a multi-family property in Chicago. It was clear to me that he did not do his due diligence. He didn’t know which streets were the dividing lines for rival gangs in the area. He relied upon the publicly available heat maps that were available on the crime statistics websites. He didn’t know that the city had cut back on policing in many neighbourhoods and that violent crime had jumped by 60% in a period of months. He relied upon the broker’s information about the property. The financial model he constructed followed what he had been taught in a real estate training workshop. He had allocated 8% of his gross monthly income to maintenance. He chose that percentage in his financial model because that’s what he was taught. He liked the fact that the government subsidies for rent were above the market rent and the property was going to produce strong cash flow.
But here’s the problem with that approach. All of these spreadsheet based approaches neglect the reality on the ground. The spreadsheet approaches neglects the true cost of maintaining the property when maintenance events occur. Some maintenance events are somewhat difficult to predict. You don’t know when a refrigerator will die and need to be replaced. You don’t know exactly when a water heater will die and need to be replaced. But you do know that a water heater costs exactly the same in an apartment that rents for $2,000 per month as an apartment that rents for $650 per month.
The water heater doesn’t care how much rent you are collecting. You are looking at hiring a plumber to replace it. If it is powered by natural gas, you may also need to hire a gas contractor to disconnect the old one and reconnect the new one.
If the water heater died the way most of them do, you are probably facing a significant cleanup and repair from the water damage. You are replacing flooring, repainting, possibly having mold remediation. All these things happen the same to an apartment that brings $650 per month or $2,000 per month.
If the 8% budgetary number is appropriate for the $2,000 apartment, then it’s way too low for the $650 apartment. You would need to reserve 24% in the case of the $650 apartment to equal the same dollar amount.
When a tenant moves out and the apartment needs to be cleaned, the cost of the cleaning is going to be roughly the same, regardless how much rent was being charged.
Your financial model needs to consist of listing all the expected maintenance costs that could come up for an apartment. It’s then your job to estimate how frequently these events will occur. A water heater will need to be replaced every 10-15 years. Carpeting will need to be replaced every 5-8 years. Ceramic tile will need to be replaced every 15-20 years. Air conditioners will probably last 15-20 years. Apartments will need to be painted every 3 years.
When you add all that up, then you can estimate the real dollar value that you need to reserve.
But here’s the other problem that often arises in the financial model. You construct a model where the rents increase with the rate of inflation, perhaps 2% per year. You might model the same 2% for your expenses.
I can show you examples where energy costs have increased 10-15% in a single year. If you construct your model using arbitrary percentages, you run the risk of overlooking the real situation on the ground.
What can we learn from the Uber and Lyft Initial Public Offerings? Both companies have grown to the point where they have a strong share of the market globally in just a few short years. Both companies have seen Luke-warm demand for their stock post-IPO. Uber and Lyft have never been profitable.
One of the stated reasons that both Uber and Lyft have not achieved profitability is that the two companies have been locked in a battle over market share. If one company could achieve commanding market dominance, it could seal their fate for years to come.
Lyft went public on March 29 and their shares are currently trading 42% below the peak achieved shortly after their IPO. The company just announced their first results as a public company. Riders increased by7% in the quarter. But the company lost $1.1B for the quarter.
The picture isn’t that much different at Uber. The company went public this past week and they too are losing a breathtaking amount of money.
So here is why we are looking at these two companies. I speak with investors on a regular basis. I’m trying to imagine myself having a conversation with an investor where I tell them that we are going to have an operating loss of $8B dollars over before we transition to profitability. In the meantime, we’re going to focus on market share and when we have millions of customers we’re going to take the company public. We will all get rich from the IPO as new investors step in and buy new shares. The company will be worth billions.
I’m trying to imagine having that conversation with the most sophisticated angel investors in Silicon Valley and the top tier venture capitalists.
Now I’m perhaps being a little unfair because I doubt that the early conversations truly foresaw a future of $8B in losses followed by an IPO.
But here is what the broader market is saying to the likes of Uber and Lyft. We want to see profitability. The market has been extremely tolerant of companies like Netflix and Tesla, and Uber. Somehow these companies have been able to raise billions of dollars on a promise that hasn’t been proven. Part of that promise is profitability. Delivering the product and gaining market share is incredibly difficult and I applaud all of those companies that have managed to do so. But investors aren’t investing for the product or the service. They’re investing for profit, and profit is at the core.
The only way Uber and Lyft can achieve profitability is by raising fares. To maintain market share they need a price advantage compared with the traditional licensed taxis. If the price gap gets too narrow, then the number of riders will fall and we will see revenue fall. The issue always comes down to economic fundamentals. In the case of Uber, the critical concept is price elasticity of demand. If I’m looking for a drive to the airport, I evaluate the cost of the ride to the airport and back and compare that against the cost of parking my own car at the airport. If the ride is too expensive, I’ll take my own car.
Not only do those companies need to achieve operating profitability. They need to generate positive cash flow. I honestly can’t imagine proposing a real estate project to investors with the kind of blue sky dream that Uber and Lyft have been pushing for years.
Raising more money is prudent to extend the runway to profitability. But there are limits to the runway that most investors will consider reasonable. Uber has been operating for 10 years. In that decade they’ve generated 8 billion in losses. How do you spin that into a story for investors? Are you lining up for that investment? It wouldn’t be me. Now that they’re public, they will come under immense pressure to generate profits and cash flow.
When you evaluate your business, focus on profitability and cash flow.
Kyle Humphreys oversees the building of new construction projects in the high arctic. The considerations there are completely different from the dense urban projects most of us are involved with. Join me for this fascinating conversation.
Rod is one of the most well known apartment real estate investors with a large following. On today's show we had a wide ranging conversation about goal setting and setting life priorities. His upcoming bootcamp in Denver is always widely attended. If you go to rodsbootcamp.com and enter the discount code "espresso" you can get $100 off the admission to the bootcamp.
On today’s show we are talking about some low-cost improvements that can build tenant loyalty, and create a lot of goodwill between landlords and tenants. When tenants are late with their rent, it’s often because there is something about their accommodation that isn’t right. Maybe they haven’t told you about it. But somehow they have the feeling that they’re not getting their money’s worth. Of course, if there’s something really wrong, you should fix it. Whenever a tenant feels ripped off, they will find a way to get even. Maintaining tenant loyalty means eliminating the irritants and the problems. It also means creating pleasant surprises. These are the small WOW experiences that people remember. As the seasons change, properties also need to adapt. Leasing activity picks up significantly in the Spring in most markets. If you’ve had a vacancy through the winter months, now is the time to improve your curb appeal and get rid of the winter residue on the property. The dead grass and leaves should be cleaned up, and any debris that accumulated over the winter. This is also the perfect time to perform scheduled maintenance on the inside of your property. After the winter heating season, air filters need to be changed. Screens on windows should be inspected and repaired. Take the time to repair any broken blinds at the same time. If your windows are standard sizes, you can often get some pretty significant savings by having blinds cut to size in larger quantities. If you have a few extra in inventory, you will need them eventually. The largest energy cost in the summer months is air conditioning. Functioning blinds can reduce cooling costs. Ceiling fans can be another huge energy saver. They can also go along way to making an apartment more comfortable during the hottest months. A little bit of air movement makes the room feel cooler. It also improves the heat transfer to the outside when the windows are open. If you don’t have ceiling fans, you may want to consider installing them. They are a low-cost upgrade. If you surprise your tenant with that improvement they will be highly appreciative. Part of maintaining low vacancy is creating a feeling with your tenants that you care about their experience living in your property. Regular maintenance of your property shows your tenants that you are serious about maintaining your property. It also gives the management team the opportunity to inspect the condition inside each apartment. There’s a balance between allowing your tenants the quiet uninterrupted enjoyment of their property, and regular inspections to protect your investment. If a tenant refuses the upgrade and attempts to refuse entry, that could be a red flag. You should insist on requiring entry to the unit to replace the air filters and maintain the HVAC system since this is a health issue and is therefore not negotiable. As always, make sure that any request to enter property complies with your local landlord tenant regulations. If your property has amenities like a swimming pool or hot tub, start the process of preparing the pool for summer. They haven’t used the pool in months and will be looking forward in anticipation of dipping into the water when the weather heats up. If you want to build a sense of community, how about hosting a social event for residents during the upcoming long weekend in May. You don’t have to spend a lot on refreshments. You could heat up some BBQ’s and make it a pot-luck event. The sense of community after a long winter creates a stronger emotional connection between your tenants and the place they’re living. People won’t remember that they got a $20 break on their rent for one month. But they will remember how you made them feel. That’s where it’s your job as a landlord or property manager to create a spontaneous WOW experience.
Frank from Portugal asks: “I’ve had my eye on a 6 plex that has been on the market for 5 years. The original owner who built them went into bankruptcy 8 years ago and only completed 60% of the project. I’ve spoken with the local bank manager that owns the property and I explained my reasoning for a low offer and we agreed on a reasonable figure for the property. The property is listed at 855,000. And 4 different builders have quoted around 600,000 to complete the project giving a total of 1.45m.
I've had 3 different local agents value the completed properties and the valuations on the low side are 225,000 per unit. Which is a total sale value of 1.35m. We made several offers our highest being 400,000 but the bank won’t budge.
The opportunity is in short term rentals where you can possibly get 1000€ a week for about 12 weeks as the area is a hot tourism local. Perhaps the property could also be reconfigured into a larger number of smaller units in the same footprint.
It’s important to know that the decision on the sale of the property is being made at the Banks head office 70 miles away. We are not sure what is driving the valuation but it’s out of context with the local property market. How would you proceed in this case or would you just move on?”
Frank that is a great question.
I don’t have an exact answer to your question because there are a number of additional questions that need to be answered before you make a decision.
Whenever you consider a business opportunity you need to examine 3 aspects:
- The market opportunity
- The team who will operate it
- The specific deal
1) Let’s start with the market opportunity. You identified seasonal short term rentals as the market opportunity. There is no question that the region of Portugal you are located in attracts a lot of visitors from all over the world. It’s considered one of the top retirement destinations for people in the UK. I believe the demand is strong. But it is seasonal. You need to do a detailed study of the local market where you understand the seasonal aspect and the revenue potential by month.
2) Let’s look at the team. Short term rentals are a service business, not that different from a hotel. The way we operate short term rentals results in 5 star reviews across the board. That doesn’t just happen by accident. We took the time to define the systems and processes that would deliver that result and we hired the team that we could rely upon to consistently deliver that result. If you want to travel, if you want to have a life, you need to hire the team that can deliver. That means that the project needs to be large enough to generate sufficient cash to afford the staff and pay suitable profits to you as the property owner. If not, then you just spent a lot of money to buy yourself a job as a cleaner.
3) The deal. It sounds like you have worked backwards from the rental income to determine the maximum you can afford to pay for the property.
If the bank has been holding onto the property for that long, And they have a skewed view of its value, then there must be something funny going on behind the scenes. Banks are not usually in the business of owning property. If they are carrying the property on the box at an inflated value maybe they are keeping it intentionally to make their balance sheet appear stronger than it is in reality. I don’t really know. I’m just speculating on the reason why they might be behaving in this way.
This isn't a direct answer to your question, but rather it's what I would examine to make a decision on whether to get into that business in that location, with that specific property.
On today’s show we’re going to talk about how many people in business are confusing their customers with their business cards. In particular, I’m talking about real estate investors.
I was sitting with a client today having an intellectual conversation about what should be on a business card. So I reached into my briefcase and pulled out a stack of business cards that I’ve received over the past couple of weeks at various events.
I laid out the cards in an array on the table and asked my clients to rate the cards in terms of communicating a clear message to the person holding the card.
There must have been about 20 cards in total.
I asked my clients to rate the cards simply on the basis of whether they would want to initiate a follow-up phone call purely on the strength of the business card.
These cards were chosen totally at random. Out of all the cards, only one of them was for a globally recognized brand. The Vice President from Goldman Sachs got a high rating on the clarity of his card, mostly on the strength of the Goldman Sachs brand.
Half of the cards had no clear marking of the geographic location of the person or their business. While the geographic location of a business isn’t as important as it once was, we didn’t even know what country the business was located in. One business card said that the person was the new york regional manager, but listed new orleans, Louisiana as a physical address. That was confusing.
From there, we saw numerous inconsistencies other on the cards. In some cases, the company name didn’t match the domain name for the website, and the email address didn’t match the domain name for the company. If your card is using a free email service like hotmail, you’re sending a message to your potential customers that you’re not serious about being in business. You’re saying that you can’t afford the $6 per month to have a properly hosted email service.
Many of the business cards had corporate tag lines that were next to the company name.
I’m going to share some of the tag lines with you, but not the company names. I’m not here to embarrass anyone, but to highlight how confusing some of the tag lines are. It’s been said that a confused mind doesn’t buy. So if you are confusing your customers at the point of introduction with your business card, you’re doing yourself a huge disservice.
Out of all the cards, only one stood out as being really worth calling the next day. The prize goes to a syndication attorney who told the potential customer clearly what they did.
It spoke directly to the target customer. The business card said clearly who the target customer was. It triggered a positive response from the recipient of the card.
In some cases the name of the business states clearly what the business does. One of the common naming conventions for a company is to combine a distinctive term with a descriptive term. For example “Al’s Barber Shop” has the distinctive term “Al” and the descriptive term barber shop. You can tell from the name that Al is probably the owner and that’s where you will probably go for a haircut.
One company simply had a 4 letter company name. They were all consonants and no vowels. I’m guessing that the 4 letters had some meaning, but it was really unclear on what it could be.
After that, it got difficult to figure out what the companies did.
The goal is for the holder of the card to say “I need that”. Get me more of what’s on that card. One card was divided in half. On the top half, the person listed their software development business. The bottom half was in a different colour and listed their family owned restaurant. When you confuse people about what you do, they choose neither.
The front page of the wall street journal this week had a story on Dean Foods. Dean Foods is America’s biggest milk dairy. Milk consumption has been declining for nearly 30 years and the company is starting to feel the pinch. Multiplying the problem, Walmart used to represent 15% of the company’s sales, and Walmart is now building their own captive supply chain for Milk and opening their own milk production plants. For Dean Foods, the revenue from that one customer is about to go to zero. The company has hired bankers to review options including a sale of the company, privatization or divestiture of some assets as milk consumption continues to decline in the U.S.
There could be several factors that contribute to declining sales. Part of the decline in consumption could be easily predicted through demographics. There are fewer young people in our population, and as a result, fewer new milk drinkers.
Second, the health benefits of cows milk for humans is being questioned by many nutrition experts. That too is partly responsible for the decline.
But Dean Food is suffering a far bigger problem than a shrinking customer base. They are suffering from a failure to assess their strengths and to truly leverage their strengths.
As the largest dairy in America, they have a robust channel to market and they have well established relationships with the nations supermarkets. Milk is a commodity. When the value of a product is not clear, then the customers’ buying decision always degenerates to price. When the wife calls the husband at the office and ask the husband to pick some milk on the way home” She doesn’t say “Honey can you please pick up some Dean Foods Milk on the way home?” She is likely to say, can you pick up some 1% milk on the way home, or can you pick up some lactose free milk on the way home.
The husband is going to stop at the wall of glass doors in the supermarket and pick out a carton of 1% milk. If there’s a difference in price, they will probably choose the lease expensive one. If one brand of milk is 25% off this week, chances are good that they will buy the one on sale.
In the absence of value, the decision always comes down to price. But Dean Foods has a channel to market. There are numerous products that they could put down that same channel to market. In an effort to improve revenues they purchased good karma Foods company which makes dairy free products from flax seeds. But this will not be enough. Flax Seed products do not have enough market share to replace dairy. They would need to have a soy offering and almond milk, and cashew milk. The problem is that they are still thinking of themselves as a milk company.
They could put iced coffee drinks through that same channel. The could do a partnership with other companies that are looking to break into the market with specialty products. There is a hot market trend for fermented iced teas like Kombucha that have health benefits. If those companies could gain access to the national supermarket shelf through the Dean Foods channel, there are numerous win-win opportunities.
Dean Foods could bring specialty products that are specifically geared towards people with specific medical conditions like diabetes. They need to think much more aggressively about growth.
So what does this have to do with real estate? Every business on the planet that defines itself as a commodity is likely to suffer the same fate as Dean Foods. If your real estate product is a 2 bedroom one bath apartment with laminate counters in the kitchen, that’s about as unremarkable as Skim Milk, you will forever be treated as a commodity.
Nicholas asks:
"I see you having interviews with lots of celebrities. These are not people I ordinarily run into. If I’m looking to elevate my game and build relationships with successful people, how would you suggest that I go about connecting with those people?"
That’s a great question. The first thing I’ll tell you is that it doesn’t happen overnight. I’m not out there networking, I’m relationship building. There’s a huge difference between those two. Networking has a utilitarian feel to it. You should be not out there to use people. I don’t know anybody who likes to be used.
For example, if you meet somebody famous and you immediately ask to take a picture with them, you asking to use their fame and celebrity to somehow elevate your status. They might be gracious enough to say yes to that request, but you’ve immediately started the relationship with them by telling them that you intend to use them. That’s not a good start to the relationship.
When I meet someone, regardless of their social or financial position in life, I approach them the same way. I get to know them. I get into conversation with them about real life. I approach them on a human level. I look for ways to add value to them immediately. It doesn’t have to be anything huge. It starts with finding interests in common. One of the simplest and easiest ways to add value is to make introductions that could be helpful for them.
Now many of you might be thinking. Wait a minute, how do you even get to meet them? I don’t even know of opportunities to meet celebrities.
This takes a bit of intentional work. I’m going to give you our listeners a bit of homework that is normally reserved for my consulting clients. This is a very powerful exercise that ultimately over an extended period of time will result in new opportunities. So here’s the exercise.
I want you to brainstorm a list of 50 names of people you would like to develop relationships with. Some of them can be big names. You could put politicians on your list. You could put celebrities on your list. You could put high net worth individuals on your list. But remember, your goal is to develop relationships with them. You’re not there to use them. If you’re just creating a list of people you’re going to get selfies with, then please don’t do the exercise.
What will happen is that the opportunities to connect with people that were present all along will start to come into focus and become visible to you. Your goal is to contribute something to them that would be valuable to them. If you contribute to a relationship in a meaningful way, You can get several things coming back to you that could be valuable.
- You might gain a friendship
- You might get advice
- You might introductions to other amazing people
- The relationship might elevate your credibility or visibility.
- You might gain access to opportunities that you might not have otherwise have found.
Now here’s the magic. The more famous the person, the more difficult it will be to develop a relationship with them. But famous people typically have an inner circle of people that they have a deep relationships with. Sometimes, it’s easier to connect with someone in their inner circle. They know all the same people, and they’re more accessible than the person who has a big brand. If you develop a relationship with someone in their inner circle, it might be just as good as developing a relationship with the brand in terms of all the benefits that flow back to you. Once you have a relationship with someone in the inner circle it could ultimately result in a relationship with the big brand. If it doesn’t, that’s perfectly fine. Your goal is to develop quality relationships with quality people.
On today's show I'm answering questions on capital raising because it's not easy to raise funds if you've never done it.
Today's talk was recorded live in Lancaster Pennsylvania. We're talking about the laws of supply and demand.
Today we're talking about the Inflation Deflator.
The rate of inflation in the US, Canada, Europe and much of the industrialized world is reported by each respective central government. These statistics follow a methodology that is publicized, but highly complex and rather difficult to understand. The measure of price inflation is the consumer price index. In the good old days, the statisticians followed a simple process of comparing the price of a basket of goods over time.
Over the years, governments have made small tweaks to the inflation adjustment.
We’re being told today that inflation is very low, in fact worryingly low. Governments in Europe, the US and Canada have set a 2% target for inflation. But I’m not sure that governments are being fully truthful with the numbers they’re reporting. I’ll give you an example.
Most educated people would agree that there is a link between the price of energy and the cost of goods. From December 1 until today, the price of oil has gone up 39% in the past 5 months. Shockingly, the US Bureau of Labor and Statistics reported that inflation in Q1 was a stunning 0.9%.
This past week, I paid $6 for a bunch of celery. Yes, we are in the middle of spring. This is not the time to be harvesting celery. So it’s being shipped from a long way away. Much of our produce during these months comes from Mexico and South America.
So the price of energy is a significant component of much of what we consume. So how is it that items like celery can cost $6 and yet the inflation index is running at 0.9%. It turns out there are numerous adjustments that the government applies. The first is the so-called seasonal adjustment. If prices are expected to fluctuate with the seasons, then those seasonal fluctuations are removed from the inflation number.
- Since many government costs like social security, hourly wages of government workers are tied to the rate of inflation, a lower reported rate of inflation means the government saves a ton of money
- The measurement of gross domestic product is based on adding up all the economic activity in the economy and comparing it to the previous period. If the number is higher, then the economy is said to have grown. But in the presence of inflation, we would need to subtract the rate of inflation from the measurement of GDP. Otherwise we would have a false GDP measurement. So we take the nominal GDP measurement, subtract inflation, and we get the real GDP measurement. But if the inflation is understated, then the real GDP is overstated. Governments like to report economic growth. It’s one of the measures that they use to show the voting population how great a job they’re doing.
There are several more adjustments applied by the statisticians in addition to the seasonal effects. The second is something called substitution. This is based on the concept that if the price of a Lexus goes up, consumers will switch to a cheaper Toyota.
The third is the concept of imputation. This is where there is no actual economic activity. So the Bureau of Labor and Statistics assigns a value to the contribution to the economy, even though no money changed hands. The largest and most questionable of these measures is the concept of imputed rent. If you own your own home and do not rent, the government adds in the value of the rent that you should have paid if you were renting.
The fourth sleight of hand is in fact weighting. This is where they determine how much of the CPI should be attributed to each part of the household expenditures. Today, healthcare makes up about 8% of the consumer price index. But healthcare actually makes up closer to 18% of the US economy.
The final and most outrageous adjustment is hedonics. These are the arbitrary price adjustments the government make to suit their rationale.
Today’s episode is another AMA episode. That is ask me anything.
Dominic asks
While I am new into real estate investing, I do have prior business experience. I am primarily interested in passive investing, for now, with a main interest being multifamily projects. With that in mind, your podcast “Money without a clue” really struck a chord with me. I have been listening to fundraising conference calls, reviewing the operating agreements, and so forth. I go through my due diligence checklist and my personal investment criteria. If things look promising, I ask questions to clarify any outstanding issues. I am new, so this process takes me a few hours, and ideally I like to sleep on it before I wire $100k. But what do you do when there are so many gamblers at the table who are apparently not doing any due diligence? Much like the lady you mentioned in your podcast. It seems that many deals that I’m seeing are subscribed before the conference call is held. On the basis of a few lines of information and no specifics. At any rate, I thought I would reach out and ask your take on this. Perhaps the same question has occurred to other listeners.
Dominic, thank you for an excellent question.
It is true that there is a lot of money sitting on the sidelines these days. That money often gets deployed quickly when a good opportunity comes along. What you will probably discover is that the people who move quickly on opportunities like the one you described are not in fact gamblers, although there could always be a few hiding in their midst.
I suspect that what you are seeing are people who have made repeat investments with the same deal sponsors.
I know from my own inner circle of investors that once we have returned capital to investors several times, they get to know us. They understand how we underwrite our projects. They have seen our legal agreements before and have completed due diligence on us as a team.
I know that if I’m looking to raise money quickly, I’m going to call people who have invested with us in the past. I’m going to see if there is a fit between our near term requirements and the funds they have available. It’s pretty common for me to raise funds in a couple of days in that type of situation.
But if I’m working with a new investor, it could take much longer. When I say new, I don’t mean that they’re necessarily a rookie, they’re just new to us. They haven’t invested with us before. In that situation, I will suggest that the investor put in the minimum investment, or in some cases I’ll suggest an amount that is even below the minimum investment, simply to start the relationship building process. I consider an investment of this type to be a get acquainted round of investment. Even with a large investor I often suggest a small initial investment to get acquainted with one another.
I as a sponsor will have qualified the investor on the first engagement and the process for making subsequent investments is much faster. Both the investor and the sponsor of the project know what to expect.
If you’re having trouble getting into a deal, my suggestion is that you speak with sponsors who look like they might be a good fit for you. They may not have an open opportunity right at this moment. Ask to see their last representative deal and ask to go through a partial due diligence with them so that you could be ready for an upcoming project when it becomes available. You will have qualified them, and they will have qualified you. You can do all the reference checks you need to in the un-rushed comfort of a no-deal situation.
The book of the month this month is "The Miracle Morning” by Hal Elrod.
Hal is a human enigma. He’s the cat with 9 lives. When he was 20 years old, he barely survived a car crash that should have left him crippled for life, and with permanent brain damage. After six minutes with no pulse, he was brought back to life, evacuated by helicopter to the hospital. After six days in a coma he awoke to his new reality in hospital. He would be crippled for life. Instead, he made a decision to control his emotional state. From that launch pad, he was able to reprogram his life narrative and physically, mentally, emotionally, and financially put his life back together.
So much of life’s success has nothing to do with what actually happens to us. Our perception of what it means is completely of our own creation. Hal is living proof of that.
We are all born with many things in common. One of them is the innate desire to grow, to improve our lives and ourselves.
Hal figured out while he was lying in the hospital bed staring at the ceiling, that he alone could control his mental state, not his circumstance. He knew that he had a steep setback to overcome. If he was going to truly overcome his predicament, it would take an extraordinary series of steps. One simple change was unlikely to be enough to have a measurable impact. So he made a decision to combine the best practices of several practices into a single intense explosion of activity to start his day.
His doctors thought he was delusional. He was not supposed to be able to walk again. Only weeks after his accident, he started taking the steps that would ultimately regain full physical ability.
Years later after writing the book, Hal suffered another major setback. He recently was diagnosed with a life threatening form of cancer and only given a few weeks to live. Here again, Hal dug deep into his archive of knowledge about how to control his mental state. He combined a healthy lifestyle, the cocktail of drugs the oncology threw at him, and the practices of the Miracle Morning. Hal should not be alive today.
At one point in his career, Hal faced near financial ruin. Strangely, he found that experience more difficult and more isolating than his real near death experiences. There is really something to managing your emotional state.
Hal made the decision not to focus on loss, on the bad things. He decided to focus 100% on making the best of what he had. He could not change the past. He could only move forward, and he dedicated his life to fulfilling his potential.
The book is based on the core principles.
- You are just as worthy, deserving and capable of creating and sustaining health, wealth, happiness, love and success in your life as anybody else on earth
- In order for you to stop settling for less than you deserve, you must dedicate time each day to becoming the person you need to be, one who is qualified and capable of consistently attracting, creating and sustaining the levels of success you want.
- How you wake up each day and your morning routine dramatically affects your levels of success in every single area of your life.
Simply by changing the way you wake up in the morning you can transform any area of your life faster than you thought possible.
Today’s show is about how a bad appraisal can adversely affect your business.
Appraisers determine the value of your property in the eyes of a lender and they help the lender independently justify the loan to their loan committee and to the bank regulators. This independence prevents the kind of loan manipulation that unfortunately became far too commonplace in the 1970’s and 1980’s.
The banks have the right to choose their appraiser independently, and the borrower is not to influence the appraisal process. There is a significant incentive for the borrower to get a high number for their appraised value. The higher the number, then perhaps the more the bank may be willing to lend. If the appraised value is artificially high, then the bank ends up taking on much more risk.
Appraisers use three principal methods to value a property. These methods are:
- Replacement cost
- Multiples of net income
- Comparable sales
Generally speaking, the appraiser needs to apply their professional judgement on which of the three methods to give the greatest weight to. If the property is unique and there are no comparable sales, then they may have to rely on one of the other methods. If the property has no income yet, then the income multiples method doesn’t apply. If the property consists of vacant land, then the construction cost won’t apply.
On today’s show, we’re going to focus on what to do when the appraiser for your lender gives a value that is far from what you believe the true value of the property to be. There can be several reasons why the appraiser comes to a surprising conclusion.
In 2017, many cities started accepting carriage houses as legal accessory dwelling units. These separate buildings would be treated the same as an in-law suite located in a residential home. Here too, there were few if any examples in the market, and appraisers struggled with how to value them. They had no comps. None of the appraisers I spoke with were willing to blaze a trail and take the personal risk of setting price precedents in the market.
In another case, an appraiser valued a parcel of land as if it was agricultural land, instead of valuing it with the improvements that had been approved by city council.
It happens that sometimes you get a bad appraisal. It first happened to me back in 2012. The result was that instead of a refinance taking 3 months, it ultimately took 9 months and three separate lenders to complete the transaction. Bad appraisals were at the root of the issue in each dead-end loan application.
So what can you do to prevent a bad appraisal? As a property owner, you don’t get the opportunity to direct the appraiser. They have to do their work independently.
However, I believe it is perfectly fair to show the lender your analysis at the start of the project. To show the lender you’ve done your homework and that you have a good understanding of the market. Include all of the relevant data in your executive summary that forms part of your loan request. Not all real estate transactions are advertised on the MLS. Private sales which are transacted outside of the public eye are no less real. They too should count when considering the landscape of transactions considered in the market analysis. You can include all those off-market transactions that you might be aware of that the appraiser is unlikely to find because they’re not advertised.
The impact of a bad appraisal can be significant delays. It can put a borrower in the impossible situation of having to seek an emergency extension of a loan while they complete a refinance. Show the lender your analysis and it may increase the chances of a fair and accurate appraisal.
Today’s show was inspired by something that happened recently. I was at a party and I met someone who said they knew who I was, but I didn’t know them. That happens often when you speak frequently as I do. She was asking me about the projects we have underway. She was telling me about the ideas she had for flipping houses in our local market, something she had never done before. The ideas she was suggesting sounded risky to me. The path to success is filled with land mines and she really would need to work with someone who has a lot of experience and help her avoid the many pitfalls along the path. At that point she offered to invest passively with me in some of my projects. Now I don’t know if she would even qualify to invest in our projects. That’s not the point of the story. The point is that it was clear to me that she had not developed a clear idea of what constitutes a good investment. The idea that she would part with large sums of money without having that clear criteria is the part I found disturbing. Sadly, I encounter this situation very very frequently.
So on today’s show we are talking about the importance of developing a clear investment criteria.
Making an investment decision requires discipline. It requires a formal due diligence process. I see of people making insanely rash and poor investment decisions all the time. Frankly it’s hard to stand by and watch it happen.
Due diligence requires a separate focus on three areas. These are:
- The local market conditions
- The people running the project
- The specifics of the deal itself.
The idea here is that you develop your own due diligence checklist. The step that most people miss in that exercise is to have some clear pass/fail criteria for each of the checklist items.
I look at the overall supply and demand situation to confirm that the market conditions are truly favorable for investment. If there is much more supply than demand, it’s going to be difficult to create value in the market. Business is all about solving real problems. If there is excess supply, whether it is because people are leaving or it has become overbuilt, the outcome is the same. If there is an excess of supply, there’s no reason to invest.
When it comes to the team, I look deeply at the people who are sponsoring the project. I look at their track record. I want to see projects that have experienced adverse situations to see how the team handled those situations. The deal itself also has to meet very specific criteria.
My own due diligence checklist consists of about 60 items. Your list doesn’t need to be excessive. But I believe a due diligence list of between 40 - 60 meaningful questions is about right.
The questions should be categorized by grouping. Within each subset list some questions can allow for some grayscale in the answers. Others will require a black or white binary pass or fail answer. If you color code the answers to the checklist you will be able to see in a couple of pages whether the deal is going to work or not. You will see if there are a few solvable problems, or if there are too many problem areas to overcome. If the problems are confined to a few areas. You may be able to have a meaningful negotiation with the deal sponsor. Maybe an additional piece of collateral, or an additional process step can eliminate a risk item. Ask other more experienced investors to review your checklist and provide both ideas and input.
It will take several iterations to develop a checklist that you feel truly confident in. You may refine that checklist over a period of months or years. That doesn’t mean you should wait until the checklist is perfect before you make an investment. But the simple act of having a checklist and a defined process for making decisions will put you ahead of the vast majority of investors.
Patrick Francey is CEO and Managing Partner of The Real Estate Investment Network. He can be reached at reincanada.com.
Matthew Sullivan is the CEO of QuantmRE.com, a firm that specializes in a different form of financing for property owners. Chances are that you've not heard of this business model before. It's a fascinating twist on how to take advantage of the equity in a property.
We tend to think of most investors as rational beings who think through each situation and look for the best economic solution for a given investment.
But if that were true, there would be very few good deals on the market. There must be something else in play.
The root cause of good deals is a human emotion called pain. There are two types of pain. There is acute pain. This is the kind of pain that results when you hit your thumb with a hammer by accident. In that moment, the throbbing pain in your thumb is all you can think about. Your child asking for an ice cream cone won’t get your attention. The phone ringing won’t get your attention. Your entire world is your thumb.
That’s acute pain.
The second kind of pain is chronic pain. This is when you have a pebble in your shoe. It’s annoying. You might limp a little or rotate your ankle a certain way to avoid the pain. But it’s not bad enough to consume you. It’s not even bad enough to get your focused attention.
Chronic pain is not usually enough to cause people to take action.
So what does this have to do with real estate?
One of the fundamental human needs is for certainty. If a human is experiencing financial stress, they are probably experiencing uncertainty along with it. They might be able to pay the bills this week, but what about next month? What if there’s an emergency? Will they have the funds to cope with an emergency, even a small one?
That feeds directly into their decision making process. Let’s look at a purely fictitious example. Let’s say Fred owns a couple of rental properties. His wife is undergoing medical tests and may have to take an extended medical leave of absence depending on the outcome of those tests. He has a decent amount of equity in the rental properties, but they have not been producing a lot of cash flow. In fact, he recently had to replace the water heater in one home, and the air conditioner in another. Then Fred gets the news that a tenant is going to be moving out. That’s going to mean spending more money on paint, cleaning, carpet replacement and dealing with at least a month of vacancy. Fred is feeling financial stress.
Fred decides that he’s going to sell one of the homes. We think that investors make rational decisions that are based on maximizing investment returns. But in Fred’s case, his return on investment isn’t even on his radar. His over-riding concern is bringing certainty to the situation. That’s more important to him at that moment than maximizing his return. He is experiencing acute emotional pain. That pain isn’t real. The origin of that pain is his own mind. He doesn’t know what’s going to happen. His wife might be fine. He might find a tenant quickly who is looking for a home in a great location. But Fred is consumed with fear. His mind is projecting into the future all the things that could go wrong and he is experiencing them very vividly as if they are happening right now.
Fred probably won’t even evaluate a spectrum of solutions to his financial predicament. He could refinance one of the properties. But he doesn’t know how much more equity he can pull from the property. He’s pretty sure he can get some, but will it be enough? He is likely to pick the first solution that will restore financial certainty to his life.
The marketplace is full of vultures who are waiting to pounce all over guys like Fred and take advantage of them. They’ll play mind games with them and further exploit Fred’s fragile emotional state to get a lower purchase price. Fred is what the vultures call a motivated seller.
Make sure you are sitting on some cash and have the ability to maintain financial certainty for yourself, and have the ability to restore financial certainty for someone else should they need it.
Last week I was in Toronto and my meeting was right downtown. Hotels were incredibly expensive, and the hotel where my meeting was being held was advertising rooms for $600 per night. So rather than stay near the airport and fighting rush hour traffic, I decided to look at short term rentals. I came across a listing for a penthouse apartment that was only two blocks from my meeting in the downtown. Better still, it was only $78 per night. The chances of finding a comparable hotel offer were pretty slim. So I jumped on it and seconds later I had a firm reservation.
When I received the information about the accommodations, there were very strict instructions to enter the building only through the parking garage, and not to interact with the building’s concierge staff. Under no circumstances should I mention Air BnB. The key was located in the laneway behind the building in a lock box. The instructions for locating the key were pretty clear. There was nothing saying explicitly that I was in a prohibited short term rental. But I suspect that I was.
I am an owner of short term rentals. I do this as a business. So staying in another short term rental was interesting from the perspective of someone who is in the business. This particular unit did not live up to the standards of what we provide our guests. The unit was clean and everything was in working order. I have no complaints. But the apartment was minimally furnished. The quality of the furniture was minimal. The apartment had not been painted since construction and had the original builder’s white paint on the walls. There were no decorations or art work. It looked very bare. Definitely not the kind of product we would offer our guests. But the location was amazing and the price was right.
Short term rentals have been controversial in many cities. In Toronto, there are new rules that govern short term rentals. But the city has said they’re not going to enforce them until late into 2019, and only after the next consultation hearing which is scheduled for August.
The owners who claim a right to rent to whoever they want often do not realize that they are not just renting out their unit. They are, in effect, renting out the common elements and all of the shared facilities. The other occupants now have to share the lobby, pool, sauna and gym with strangers and have to deal with increased traffic in their garage. The guests are not informed of the condominium rules and by-laws, and they often impose an additional burden on the rest of the building residents. They are less invested and less concerned about the security and comfort of the rest of the occupants. After all, they view your home as a hotel.
One building in Toronto sends a legal letter to owners who violate the rules of the condominium corporation. According to the bylaws of that building, the condo board has the right to charge the owner for the legal cost of preparing each letter. This can amount to $500 - $600 per letter. Some home owners simply choose to pay for the cost of the letter and keep doing what they’re doing.
All of my short term rentals are zoned for short term rentals. They are in buildings that embrace short term rentals, and they fully comply with all the rules for short term rentals. There’s no grey zone, no bending of the rules, and no breaking of the rules. If you’re going to be in business on a sustained basis and you’re truly a professional, how could you imagine to do anything otherwise?
On Monday the Social Security Administration issued their annual report. This story was relegated to a back page of the paper. Somehow the one and only story that’s going to affect every person in the country was less important than the optics of Mike Pence’s tax returns, which ultimately affects nobody directly.
This 270 page report lists a number of issues. I’m going to read directly from the report and expand on some of its findings and what it means to us as real estate investors.
When social security was brought into being by Congress on August 14, 1935 and then president Roosevelt signed it into law. At that time there were 13 people in the workforce for every one person who would ultimately collect on social security benefits.
The average life expectancy in the US was 60 years of age in 1935. Today average life expectancy is 78 years of age. Today there are 2.8 people in the workforce for every person collected social security benefits. Over the next decade, the number of workers to beneficiaries is expected to decline from 2.8 today to 2.3. We will have fewer people contributing and more people collecting, a lot more.
Together Social security and medicare accounts for 45% of US Federal Government Spending. Interest on the federal government debt accounts for 13% of spending, and military accounts for 17% of total spending.
Last year 63 million people received social security benefits. 47 million retired workers and dependents of retired workers, 6 million survivors of deceased workers, and 10 million disabled workers and dependents of disabled workers.
We have known for some time that social security is running out of money. It’s been reported for years. It’s not a surprise . It’s simple demographics. But by law, the social security administration is limited in how it can invest its approximately 3 trillion dollars in reserves. That nest egg is expected to be depleted over the next 15 years to zero. The interest it earns on that 3 trillion dollars is a measly 2.8%. The only investment approved by the social security legislation is for the administration to invest in US treasuries. That’s right, the only permitted investment is US government debt. Let me get this straight. The US government prints money, then pays interest to itself on the money it printed in order to help fund its obligations. Does anyone else see a problem with this logic?
As investors, I expect that virtually everyone listening to this podcast knows how to consistently earn more than 2.8% on their money. The private sector knows how to do this with a high degree of confidence.
So let’s look at the options available to the government. I don’t envy those in government. They really don’t have a lot of great choices, regardless of who is elected.
They can increase taxes. They can lie about inflation, by under-reporting the real rate of inflation and thereby reduce the actual cost of living adjustments. That means that as time goes on, the revenue increases with the real rate of inflation and payouts are indexed to the reported rate of inflation which is less. That’s a way of reducing benefits without changing any existing rules. Or they can do the politically unpopular thing and explicitly reduce benefits. They could do this by raising the age of eligibility as has been done in many European countries, or by reducing the actual amount paid out. They could redirect revenue from other sources into social security. Finally, they could change how they invest the remaining 3T dollars and hope for a higher rate of return on their money.
That’s about it. There aren’t really many choices left. Politicians are still 15 years away from the system being completely 100% bankrupt. I predict they will kick the can down the road again.
Virtually everything we buy emits sulphur to get it to the destination.
On today’s show we’re talking about a major shift in shipping that is not capturing major headlines, but will have a significant and measurable economic impact on global trade. 90% of the world’s trade is carried by ship. So anything that affects shipping is going to have an impact on the global economy.
One of the least regulated and dirtiest fuels has been the fuel used by cargo ships around the world. New global environmental regulations are requiring ships to use low sulphur fuel and ships are being forced to reduce their emissions starting Jan 1, 2020. Low sulphur fuel is more expensive than the predecessor bunker fuels. Most bunker fuel burned on ships is derived from the left overs, from the ”residue" that remains after all of the more valuable light fuels such as gasoline and diesel have been removed from crude oil in a refinery.
The tighter pollution rules by the International Maritime Organization, called IMO 2020, are set to take effect Jan. 1, 2020, resulting in the sulphur content limit of "bunker" fuel on ships dropping from 3.5 per cent to just 0.5 per cent. That means ships will have to either switch to alternative fuels, which could include marine gas oil, liquefied natural gas or biofuels, or install scrubbers to remove sulphur from exhaust gas.
It is estimated he emissions mandate taking effect at the start of 2020 will affect at least 60,000 vessels and cost the industry up to $50 billion, according to shipping industry insiders.
Cargo owners expect a significant jump in freight rates, which over the past five years have been hovering below break-even levels for vessel operators as a result of a glut of ships in the water and numerous price wars.
“If the extra costs related to low-sulphur fuel go to shipping companies and end there, it would result in bankruptcies,” according to Soren Skou, CEO of Moller-Maersk A/S, the world’s biggest container ship operator. Shipping executives expect to pay 25% to 40% more than they pay for bunker because of the higher cost for producing the fuel and setting up new distribution sites.
Be prepared for economic impact that will be either reflected in higher shipping costs, and ultimately higher prices at the checkout.
This weekend I spent a couple of hours in a flight simulator. My sister is the chief pilot for a major executive jet manufacturer.
Together we practiced take-offs, landings, ground taxi, instrument landings, avoiding thunder storms, low ceiling conditions, cross-winds, and engine fires.
I’m talking one of those $20M machines that is cheaper than the $80 million dollar aircraft it imitates. It sits in one of those large bays with a 60 foot ceiling.
Every aspect of the aircraft’s cockpit has been replicated. The outdoor view of the windscreen was incredibly realistic. The avionics, the seats, the power systems, the air vents, the communications systems, the landing gear. Everything was made to feel and sound like the real aircraft. When you lower the landing gear, the sound of the wind rushing past the the open wheel bay is clearly audible in the cockpit, just like on the real aircraft. The entire simulator is on 3 axis hydraulics and is capable of replicating most of the physical aircraft attitudes.
When you taxi on the ground and the turn is too radical, you feel the forces and the skidding of the nose wheel.
If there is a rut on the runway, you feel it in the shaking of the entire simulator. When you make mistakes, the systems on the aircraft. When my son simulated a landing with an engine failure, the hard landing was physically jarring, just like a hard landing on a real aircraft.
Pilots use simulation to replicate test conditions that are not easily found in the real world. If you are training and practicing how to land with a nose gear failure, the simulator is the perfect tool. Using the real aircraft would be difficult, unsafe, and incredibly expensive.
The learning process requires us to make mistakes. That’s how we learn.
I was on a final approach and my sister advised me to pull up. Her direction put me above the glide slope. It was her mistake, but it could have been mine. We reset the simulation about 4 miles back and re-ran the landing sequence. When I had control of the aircraft, I was routinely making small mistakes in controlling the aircraft. But I was able to correct them easily and the consequence of these mistakes was that I made fewer and fewer of them as I improved.
Flying a plane is full of metaphors for real life.
On the investor summit at sea, we had a group of about 40 people playing the game Cash Flow together, under the direction of Robert Kiyosaki, the inventor of the game. Cash Flow is a simulation.
It gives you the chance to make offers on properties, to borrow funds, to sell assets, to spend money on luxuries, all the things that are present in real life. In the game, errors in accounting cause delays in the game, just like in real life. In the simulation, the increase in interest rates can cause financial hardship, just like in real life.
In the game, some people thought the idea was to compete against the others, more like in the game monopoly. They were going to do it all by themselves. Others had the idea to collaborate and help each other. Just like in real life, whatever beliefs you have at home show up in the game as behaviours, and they show up in business.
How often do we run simulations in our own business to train ourselves?
I see rookie investors go out and randomly buy a property. There is little in the way of guidance. It reminds me a lot of jumping into the cockpit of a live aircraft with little to no instruction, and hoping for the best.
Peter Schiff is a well known author, economics commentator, fund manager, and radio host. His show, the Peter Schiff Show is consistently among the top business and economics shows. He's a frequent guest commentator on TV. He's the principal at schiffgold.com and now lives in Puerto Rico with his wife Lauren and his two children.
Brad Smotherman specializes in notes and creative financing. His take on how to use creative financing to generate revenue streams out of properties that are in financial distress is utterly fascinating. You will definitely want to pay close attention to what Brad has to say. You can reach Brad at bradsmotherman.com.
How would you like the government has your home ownership partner?
This week the Canadian government announced a new program that as far as I know is the first of its kind in the world. The measure would make it easier for first time home buyers with household incomes less than $120,000 per year to buy a home. But in this case, the government would register a lien against the equity in the home, and not just the debt.
Under the program, the buyer would bring a 5% downpayment in the form of equity. This is the same as the ratio loan currently offered by our federally owned mortgage insurer.
- The Incentive would allow eligible first-time home buyers who have the minimum down payment for an insured mortgage to apply to finance a portion of their home purchase through a shared equity mortgage with Canada Mortgage and Housing Corporation (CMHC).
- It is expected that approximately 100,000 first-time home buyers would be able to benefit from the Incentive over the next three years.
- Since no ongoing payments would be required with the Incentive, Canadian families would have lower monthly mortgage payments. For example, if a borrower purchases a new $400,000 home with a 5 per cent down payment and a 10 per cent CMHC shared equity mortgage ($40,000), the borrower’s total mortgage size would be reduced from $380,000 to $340,000, reducing the borrower’s monthly mortgage costs by as much as $228 per month. Terms and conditions for the First-Time Home Buyer Incentive would be released by CMHC.
- CMHC would offer qualified first-time home buyers a 10 per cent shared equity mortgage for a newly constructed home or a 5 per cent shared equity mortgage for an existing home. This larger shared equity mortgage for newly constructed homes could help encourage the home construction needed to address some of the housing supply shortages in Canada, particularly in our largest cities.
The terms of the announcement are not completely clear. From what I understand, Functionally, it's more like an almost interest-free loan — one where the repayment plan doesn't require any payback until years in the future.
The Government budget document is far from clear on how much the buyer would owe; is it the same dollar amount the CMHC provided up front, or does the bill go up based on how much the house has appreciated in value?
Government officials say details of the plan will be hashed out in the coming months. I really don’t know how I would feel about having the government own a portion of my home. In my case, I am not eligible for this program because I’m not a first time home buyer.
David from Seattle asks.
Your recent episodes on the Fed and the worrying size of their balance sheet are timely but also quite unnerving. Given the potential strong inflationary pressure in the coming years, two popular hard assets come to mind: gold and real estate. In terms of cash flow, gold bars generally don't cash flow, whereas apartments can cashflow very well. Moreover, fixed rate mortgage carried by most real estate also works for the owner under high inflation. On the other hand, physical gold is free of counter party risk, whereas real estate might have some limited counter party risk (e.g. from the mortgage). Which one is "better" in hedging against inflation? How should investors think about their asset allocation between gold and real estate as we head into inflation or even stagflation?
I like how you've addressed gold and real estate in depth separately in many other episodes. I know quite a few investors have this gold vs real estate debate, and hence the question.
David, that’s a great question. I’m left feeling like it’s a little like asking which is better for you Broccoli or Tofu. The truth is you need both vegetables and protein. It’s not really a choice between one or the other. Rather it’s a question of proportion.
You are correct in stating that gold has no counter party risk. For those who don’t know or don’t remember what counter party risk is. If I loan you money, that loan shows up as a liability on your balance sheet and as an asset on my balance sheet. However, it remains as an asset as long as you repay. That asset is said to carry counterparty risk. The reason the financial system nearly collapsed in 2008 was because of counter party risk. Holding the physical metal has no counterparty risk. If you hold gold certificates, you are holding a claim on gold. That claim is subject to counterparty risk.
In terms of creating long term wealth, real estate is an effective hedge against inflation. As you pointed out in your question. I firmly believe that governments are under-reporting inflation. Not only are there multiple reasons for them to do so, there is ample evidence that they are in fact under-reporting inflation.
We don’t typically leverage our ownership of precious metals. Whereas real estate is much better suited to leverage. Here too, the leverage must be responsible. Too much leverage would expose you to financial risk. But generally speaking, with income producing assets, leverage can be your friend. Inflation increases rents. Inflation pumps up asset prices.
On today’s show we’re talking about a strategy for creating value in expensive markets.
In some of the most expensive cities in North America, cities are increasingly charging development fees or impact fees for new construction. These fees pay for paving new roads, for the cost of expanding water, sewer and public transit infrastructure. The rationale is that urban expansion costs money long before the new properties are completed and contributing to the expanded property tax base. So development charges, levied against the developers makes sure that the cost of these expansions are covered by those who stand to profit the most from the growth. In these expensive markets it can sometime be difficult to make the numbers work for new construction. When you add the cost of the development charges, a new home can be extremely expensive compared with resale homes in the marketplace. This is particularly true for the smaller player who doesn’t have the economies of scale of a larger builder.
The methods to make money in these conditions requires much more creativity than a simple flip project.
The first strategy is the increase density with accessory dwelling units, sometimes called in-law suites. This might be a basement apartment, or sometimes a carriage house if your local zoning allows for a separate building on the property that takes its utilities from the main house.
But remember, the development charges only apply to an increase in density. If the property had a single family home on it, and the finished product is still a single family home, then no development charges apply. You haven’t increased the density.
Some single story ranch bungalows simply don’t have the flexibility to be transformed into a modern home that the market would embrace.
Many investors consider a complete tear-down and rebuild if the existing home is functionally obsolete.
There is a middle ground solution that can save a lot of cost and still deliver a new home. That is the so-called pop-top. This is where you cut off the roof, demolish the interior and utilize the existing foundation and footprint of the home as a basis for a new two-story home.
You get to re-use the foundation which saves about $40-50k off the cost of construction. By re-using the utilities coming to the home, you save about $20k-30k in utility servicing costs. Compared with new construction, the savings of the foundations and utilities can generate considerable profit for the home builder.
The ground floor layout will be completely redesigned. You can create large open spaces that are consistent with a new home of today’s vintage. The structural supporting walls, columns and beams for the upper level can be easily incorporated at this time. The second level will house the bedrooms and bathrooms.
Today’s show is focused on the consequences of the shrinking middle class. If you go back to the 1960’s and 1970’s it was possible for a single income family with blue collar employment to join the ranks of the middle class. Today, the number of two income families has grown and families are finding it harder than ever to make ends meet. The shrinking middle class has enormous economic and social consequences. It’s has given rise to a new wave of socialism as the average person feels like they’re getting the short end of the stick.
The Organization for Economic Cooperation and Development defines the middle class as comprising households with incomes between 75% and 200% of the median.
Across member nations, the proportion of the population who are in the category has fallen over the last 30 years, from 64% to 61%. Today the middle class makes up 50% of the population.
That definition of middle class doesn’t really tell the full story. It neglects family size and local cost of living. The fact is there has been an continual erosion of our purchasing power over the years. Those on fixed incomes are the ones who are losing the most.
We can learn a lot from history. We are facing a growing class warfare where those with less blame those with more for their situation and for exploitation.
I don’t believe that entrepreneurs are to blame for the plight of those who are struggling. Entrepreneurs and business owners struggle too. The vast majority of them suffer setbacks on a regular basis. Only a few manage to rise above water to build sustainable businesses and sustained wealth.
The problem with the tax the rich approach is that it works to a point. Once you reach a threshold of pain, the ultra-rich have the financial means and the incentive to organize their affairs in a manner that legally minimizes their tax liability.
Many will simply relocate to a lower tax jurisdiction.
There is no question that people who have succeeded in business have attracted envy, admiration, and most importantly jealousy. It’s that jealousy, combined with the genuine hardship that many families are experiencing that has fuelled the latest round of anti-rich sentiment.
Increasingly, newly elected left leaning politicians want wealth taxes, dramatically higher income taxes, corporate taxes, surtaxes, and so on.
The amount of economic activity has been a larger contributor to tax revenue than the actual tax rate. As individual investors we don’t control the political climate, nor do we control the tax rules. Entrepreneurs generate economic activity, they give people employment, they create better living spaces for families to grow and thrive, and they should be rewarded for taking those risks along the way.
The tax code does not tax you on your income, it taxes you on the manner in which you receive your income. Pay close attention to not only your income, but how it comes to you. Be prepared for lots of changes to the tax rules in the coming years as governments become increasingly desperate and creative for ways to pull more revenue.
Today is another Ask Me Anything episode. Robin from Ottawa asks.
“How do you build relationships with high net worth individuals? In your book Magnetic Capital, this is one of the primary factors you touch upon. Let's say you meet an individual at an event and exchanged cards/contact information, what are the next steps?“
Robin,
This is a great question. It’s one that I get frequently. In fact, if I do an updated edition of Magnetic Capital, I will certainly dedicate an entire chapter to answering that question.
Let’s go back to the fundamentals of raising capital that are clearly outlined in my book Magnetic Capital.
- Relationship
- Trust
- Results
- Compelling Opportunity
- Alignment
If you don’t have a perfect fit between the goals for the money and the goals for your project, it’s not going to work.
The main thing to remember about high net worth people is that they are people too. They have different perspectives and different values because of their circumstances.
They recognize that their most valuable resource is not money, but time. As a result, high net worth people tend to be much more time conscious than the average person. They don’t want to develop relationships with people who want them just for their money. They don’t want to be used.
They also don’t want to waste time with people who can’t help them with their mission.
High net worth people are slow to develop relationships. High net worth people know how to make money. They know how hard it is, and they don’t want to have to go back and do the hard work to make it back. As a result, they are much more focused on safety and preservation of capital. You will face a lot of scrutiny and due diligence from high net worth people. These relationships take time to develop and do not happen quickly.
In terms of how I build these relationships, it comes down to one simple characteristic. I approach high net worth people as peers. I approach them with confidence and with humility. I work quickly to establish rapport with them by showing them that I understand their world, but not in a presumptive way. That’s a subtle but important distinction.
One thing that helps me in that regard is that I’m incredibly well traveled. I’ve been to a lot of places in the world and chances are good that I can start up a conversation about somewhere we’ve both explored. That’s a pretty safe bet.
I do my research and find out as much as I can about a person before I meet them. We probably know some people in common.
People who don’t have money look at the ultra-wealthy as having it made, as if they don’t have a single care in the world. Nothing could be further from the truth. They too are constantly learning, evolving, developing, figuring things out. The ultra-wealthy circulate in a community that spills opportunity at every turn. These people are inundated with opportunity. If they don’t focus, they will become time and energy bankrupt due to 1000 inquiries. They have to become very good at saying no. It’s a matter of survival. The key to breaking through that barrier is to show that you’re mindful of their time and energy management challenge. If you have a phone call with them, keep it to 10-15 minutes, no more. Communicate in a way that pierces through the noise and gets to the heart of the matter. It won’t be rude. They will respect you for it. You’re speaking their language. That doesn’t mean skipping steps in the relationship building process. That’s creepy. It means communicating in a concise and insightful way.
Today's conversation is a lunchtime discussion about how to negotiate development projects and some ideas on how development deals can be structured.
Enjoy...
Brien Lundin is the publisher of The Gold Newsletter, the foremost publication and oldest on precious metals. He's also the promoter of the New Orleans Investment Conference, the longest running investment conference in North America, now in its 45th year. Today we're talking about interest rate policy, government printing of money (quantitative easing), and the demand for gold on a global basis.
Today’s show is my perspective on the college admission scandal that has been grabbing headlines across the US. At the center of the scandal is a Rick Singer, a former Canadian football League player who has more recently been in the speaking circuit and working as a college admissions consultant.
Fifty people, including 33 parents, were charged last month for their alleged roles in a scam by which California college-admissions consultant William “Rick” Singer said he helped get their children into selective schools either by creating fake athletic profiles and bribing coaches to list the students as recruited athletes, or boosting their ACT or SAT scores by having someone fix their wrong answers.
Here’s the problem with the whole story. Who was really harmed by all of this? Some people say that the students who legitimately should have been accepted to these elite schools are the ones who were harmed.
I have a different view. The parents who engaged in this deceit have hurt their own children. I believe that children learn by modelling the behaviour they witness. Rather than teach their kids to work for their accomplishments, the parents are leaving the field open for their kids to create several unhelpful interpretations.
- You can take a shortcut in life when things don’t work out the way you want them to.
- The parents don’t have faith in their child to succeed on their own. The kids could spend their entire lives thinking they’re a screw up and will never measure up.
- The optics of graduating from an elite school is more important to the parent’s ego than the substance of living a happy and fulfilled life. At that point the kids stop being human. They become an object for the purpose of satisfying the parent’s ego.
There is so much about this story that is screwed up on so many levels.
A university education is a valuable step in many people’s lives. But it’s not everything. In fact, numerous studies have shown that graduating near the top of the class from a smaller lesser known school results in better life outcomes than graduating in the bottom half of the class from an elite school.
It comes down to reinforcing beliefs. If you are doing well in high-school, you might represent the top few percent in your class. When you get accepted at Harvard, you might be at the bottom of your class and still represent the top 0.1% of the global student population in terms of academic achievement. But if you spend 4 or 6 or 9 years at the bottom of your class, the message is you’re a screwup. When kids are in their formative years, developing self reinforcing patterns of high self esteem is incredibly important to constructive life outcomes.
Let’s frame this story in a larger context. In 2017, Kessler international published a study based on a survey of 300 students.
The survey found:
- 86 percent claimed they cheated in school.
- 54 percent indicated that cheating was OK. Some said it it is necessary to stay competitive.
- 97 percent of admitted cheaters say they have never been caught.
- 76 percent copied word for word someone else's assignments..
- 12 percent indicated they would never cheat because of ethics.
- 42 percent said they purchased custom term papers, essays and thesis online.
There is something wrong with our culture that places more emphasis on the appearance of credentials than the substance of actual education. The education is the real knowledge, wisdom, perspective, and resilience that comes from integrating experience gained on the journey of life.
On today’s show we are asking the question is flipping a legitimate form of real estate investing?
A lot of people enter the world of real estate investing because they are drawn by the lure of mailbox money. They are drawn by this thing called passive income.
Well folks, money comes in one of three ways.
- Earned income
- Residual Income
- Capital Gains
Most of the wealth in the world has been created through a combination of #2 or #3. The simple test of whether what you’re doing is earned income is to ask a simple question:
"If you took two months vacation, would the business come to a stop?"
If the answer is yes, then you’ve just purchased a job. It might be a job with greater freedom than being chained to a desk. But it’s a job nevertheless.
It gets confusing because sometimes a job requires investment of capital to do the job. Just because it requires investment doesn’t make it the same as investing. It’s the presence of that active component that makes it more like a job.
I know a number of professional volume flippers. They perform anywhere from 20 to 1,000 homes per year. Once you put some scale behind it and it becomes a self sustaining business, there is dedicated staff in each of the key roles. You have acquisitions specialists, construction managers, sales people, a legal team. At that point the business owner can step away from the business and the business will continue to run itself. The cash generated by that business falls into the category of residual income. But it’s business income, not passive investment income. The properties are held for as short a time period as possible. The profits are unlikely to be considered capital gains.
So is flipping investing? My answer to that question is no. It’s a business, like any other active business that produces a product. It’s the same as a bakery, or a business that manufactures children’s toys. It takes in raw materials and manufactures a new product which gets sold. That product happens to involve real estate and buildings. The raw materials consist of an existing property that is in some level of distress. You add new materials, some design sensibility and transform as property that was less desirable into one that the market really wants.
You need money to fund the inventory for the manufacturing business. If you’re baking muffins, you need to buy flour and yeast and all the other ingredients. If you’re product is toys, you may need to invest in the manufacturing capacity, and purchase the raw materials. Flipping houses is exactly the same. It’s more like a manufacturing business than an investing business. Yes, the numbers are bigger because the sale price is not under $10, the sale price is in the hundreds of thousands. It’s a high price low volume business. An effective bakery would probably be a low price high volume business.
On today’s show we’re talking about how to make sense of confusing market trends. These days there is no shortage of contradictory data.
I’m continually reminded that real estate is hyper-local. The news media reports the averages, the macro trends across the nation, across a continent, and even globally. Somehow the news media is attempting to connect the dots and warn you that a slower growth in manufacturing in China will translate into a loss of jobs in your home town, or that a higher price of oil will mean fewer home sales in
Some local real estate markets are bucking the trends. It is completely possible to have cities that are at different stages in the cycle.
In Silicon Valley, we’ve seen inventory of homes on the market increase 132% in a very short time period. The main factor is that the number of buyers entering the market in silicon valley seem to have vanished. There simply aren’t as many buyers.
We’re seeing the same in Dallas, Seattle, Portland. We’re seeing dramatically higher inventory and homes are taking a lot longer to sell. Prices have levelled off and are either flat or slightly down in many major US cities.
In my home city of Ottawa Canada, we’re seeing the opposite. Inventories have dropped to the lowest level I can remember. We have just over 2 months of inventory on the market for both single family homes and condominiums. I can remember just two years ago when we had 10 months of inventory in the condo market.
In some areas of the city, the inventory is even lower. The number of days on market has fallen by 24% for single family homes and by 48% for condos.
Prices increased 7.7% year over year and inventory is down 25%. When I talk with friends who are brokers, they speak about how difficult it is for a buyer agent to close a deal under $500,000. There are multiple offers and homes often sell above asking price. Some buyer agents are getting burnt out. Some agents are worried about the traditional uptick in market volume in the spring. The current market inventory is at 2.2 months. But when you consider the traditional increase in sales during the Spring, we can expect an even more acute shortage.
So when a market diverges from the norm, there can be two explanations.
- The market is truly a market unto itself and is not influenced that much by outside forces.
- The market follows the macro market trends but is merely delayed. Some secondary markets attract investment when the primary markets get overheated.
We often see a lag between a hot submarket and a neighbouring submarket. Buyers say, well, if I can’t afford to live here, why don’t I look another 5 minutes down the road.
If I can’t afford to live in NY, why don’t I look at New Jersey, or Philadelphia. If I can’t afford to live in Palo Alto, why don’t I look in Freemont.
Some cities like Ottawa and Washington DC as capital cities tend to live in an economic bubble. So much of the local economy is dominated by government spending that they’re somewhat insulated from broader market forces. In the last downturn in the wake of the 2008 financial crisis, real estate prices in Washington DC only fell 19% from the top of the market in 2007 to the bottom of the market in July 2010 before rebounding by 14% in only a few months later that year.
By comparison, prices in Phoenix Arizona fell by 67% in the last downturn and took almost a decade to rebound to prior levels. So please folks, stop listening to the macro housing data and using that infer meaning to your real estate decisions.
Real Estate is hyper local. Prices changes are highly linked to mobility of people. If people don’t move very much, prices don’t change much. If people move in or out of the market easily, you can expect prices to move a lot.
David from Seattle asks. Within the realm of private placements, how should investors think about investing in a fund vs in a project? Funds pool money and share the risk across multiples projects. However, funds further separate investors from the actual assets and deals. For example, a passive investor can't choose which individual project the fund may take on down the road, and it may be overburdensome for the investor to review the financial details of each project, if the fund shares those information at all. Given these complexities and layers of abstraction in a fund, it seems to me that one should generally only invest in funds managed by people they are most comfortable with (such as by seeing them perform in a single project before). Would love to hear your thought on this.
David, this is a great question. It’s one that we grapple with ourselves.
There can be multiple reasons to form a fund. One idea is diversification. The second is scale. Both could bring you greater safety.
Diversification would span multiple asset classes and multiple geographies. I believe that sophisticated investors don’t want a fund manager to manage their diversification for them. It becomes incredibly difficult to figure out how a fund is going to perform if its diversified. An exchange traded fund is an example of a fund that embraces diversification. By tracking the S&P 500 index, you are by definition embracing diversity. You have zero ability to perform due diligence on the underlying assets. They’re all in the fund whether you like it or not. Not only that, they’ve put the whole thing in a blender and made a pureed soup out of it. I do not embrace this approach.
I believe that investors want a fund manager to be the best at what they’re good at within a narrow field of specialty. You still want your fund to be resilient. If you’re in a medical office building fund, you only want medical office buildings, and you want them to follow a proven formula. If you’re in a self storage fund, then you want only self storage and you want that fund to invest in a manner that follows a proven formula. The resilience can come from scale. A single family home as a rental property is less resilient than a multi-family apartment building. If you have a vacancy in the home, you go from 100% occupancy to 100% vacancy in an instant. If you’re in a 100 unit building, then a single vacancy produces a very manageable 1% vacancy. There is resilience in scale.
A lot of investors who invest in funds believe that you should not invest in fund #1 with a company. They would rather you invest in fund 2, 3 or 4. That creates a startup problem. Rather than starting with a brand new fund from a blank sheet of paper, we’re considering forming the fund out of existing investments in the portfolio. The fund unit holders would come largely from the existing investors in individual projects. The advantage for investors in this scenario is to create a bit of diversification compared with just a single project. Even if you design all of your projects to offer a similar rate of return, there will be variation. A fund helps bring greater scale and more stability to the overall financial picture.
From the sponsor’s perspective, a fund can be beneficial because it puts the resources at your fingertips to go and get some great deals. There’s no delay in raising funds for a project. The downside is that the fund comes with an expectation of a rate of return. If you are holding onto money that hasn’t been put to work yet, it is earning zero, and the investors still have an expectation of a rate of return. Funds that are too large run into the problem of having to deploy funds simply to put the money to work.
I believe the same criteria should apply when you consider investing in a fund versus a single project. A fund is more difficult to evaluate.
On a public show such as this, there is a tendency to focus on the positive, to highlight successes, to inspire you the listener to greater heights. On today’s show we’re talking about one of the darker sides of being in business. But as Jim Collins, the author of Good to Great says, you must confront the brutal facts. That’s what we’re going to do today.
Earlier today I got a phone call from another investor. He's a good friend and we’ve known each other many years. He’s a good person with strong values and strong ethics. The story he told was so sad. Sad because it happened to him. Sad because it’s happened to me. Sad because nearly everyone I know who has been in business for a while has a similar story.
On today’s show we’re talking about what to do when you face a theft in your business. Often the victim is a high profile individual. A few weeks ago I was speaking with a high profile author and he was describing the times when he was a victim of theft. A month ago I was speaking with a high profile jeweller. The jeweller was the victim of employee theft. When the employee was confronted, their response was “You didn’t seem like you needed the money, and I did, so I took it.”
My friend had hired a general contractor. The contractor asked for draws on the construction in advance of the work being done. The contractor had lots of good reasons why the funds should be advanced before the schedule said they were needed. Inconsistencies started to appear between the story being told by the contractor and the facts on the ground. When everything was eventually laid bare, it was clear that the contractor had in his words “borrowed funds” and in the end far more than the borrowed funds were missing. The subcontractors had not been paid, and the jobs had been under-bid. The net result is a project with a contractual commitment that cannot be fulfilled and then there are stolen funds on top of the situation.
I’ve encountered a very similar situation several years ago. The crooks who do this are very adept at establishing trust and using a fabricated web of evidence to create that trust and support their stories.
I’m sorry for my friend. I feel for what he is going through. While what happened is not his fault, he still is responsible. That’s where the painful part hits home. You can do everything right, and if someone on your team does something wrong, you’re still responsible, even if you’re not at fault.
Every employee at Boeing is sharing responsibility for two jets that crashed, even though the actual fault probably lies with only a handful of people who made a hasty decision. When you put diligence in the context of approving an aircraft’s control software, the standards are pretty clear. But what about hiring a general contractor? The stakes aren’t as high. Or are they?
You don’t need a crook in your midst. Innocent mistakes can be as dangerous. We all make mistakes. I certainly do. They’re embarrassing. They’re painful, and they’re a necessary part of learning. Mistakes are not to be avoided altogether. The only true way to avoid mistakes is to do nothing at all. Mistakes are to be expected. They are there to learn from and to be caught and corrected before the consequences are catastrophic.
Robert and I sat down on the balcony of his suite on the Investor Summit at Sea for a conversation about his new book "Fake" which launches on his birthday April 8.
On today's show, special guest Ed Griffin joins me to talk about what it means to swallow the red pill. For those of you fans of the movie "The Matrix", you'll know exactly what we're talking about. For the rest of you, watch the movie.
We held a private screening of "The Matrix" on board The Investor Summit at Sea and then had a group discussion about what the movie meant in the context of the time in which the movie was launched, and more importantly today.
The upcoming Red Pill Expo is designed to lay bare the truth to many things that are in fact illusions in our day to day lives. Check it out at redpillexpo.net and put it on your calendar for June 7-9 in Hartford, Connecticut. .
On today’s show we’re talking about demographics and the senior housing market. The baby boomers began turning 65 years of age in 2011. Today the oldest baby boomer is 72 years old. By 2029 the remainder will also reach age 65 and account for more than 20% of the total population. By 2050 the population of senior citizens is estimated to equal 88 million people nearly double the current population of 49 million.
Much of the new capacity in senior housing has been billed in anticipation of this massive future growth. But that growth will not hit assisted living and skilled nursing for at least another decade. The near term growth area is in independent living. One of the primary drivers for senior housing the aging population is longer life expectancy. in the 1970s the average life expectancy was 80.2 years of age buy 2018-expectancy hey Snell 85 1/2 years of age. It’s also estimated that one in 4 will live to be 90 years of age and one in 10 will live past 95 years of age
A report issued last week by Fannie Mae’s research team takes a broad summary view of the senior housing across the nation. Generally speaking, nationwide occupancy in assisted living peaked back in 2015 at 89% occupancy. Since that time, there has been a lot of new product injected into the market causing average occupancies to fall to about 85%. In spite of the low occupancies, we continue to see year over year rent increases of about 3% per year.
The report notes that occupancy is falling marginally across the nation, driven largely by the amount of new product that entered the market last year. Thankfully, the amount of new supply is also slowing. The number of new starts this year declined by 21% in Q4. This shows that the market has gotten a little ahead of itself. Much of the new capacity has been built in anticipation of our aging population.
The silver lining in this is the absorption rates have reached record levels in 2018 with nearly 14,000 units being absorbed during the year. That’s a 34% increase in absorption compared with the prior quarter. So if absorption rates hold steady or continue their upward trend, we can expect occupancies in AL to increase into the high 80’s and eventually into the 90’s, depending on the rate of new construction in the future.
The most troubled segment in senior housing is the skilled nursing sector. One of the nations largest operators is Five Star based in Newton Mass. The company operates with 213 senior living communities it owns or leases and 70 it manages across 32 states.
Skilled nursing occupancy dropped again this year and rests at 78%. The skilled nursing segment has lost market share to the newer assisted living and memory care model, which offers a lower cost alternative for many clients who have enough of the basic human functions to qualify for assisted living.
We know that demand is going to double over the next 15 years. So operators are clearly trying to position themselves to win, even if it means suffering a little bit of short term pain with lower occupancies.
The UK is past the deadline for leaving the EU with no deal that has been accepted by the British parliament.
The entire Brexit situation is incredibly complex. Prime minister may has set a new deadline for leaving the European Union by May 22. If the departure is delayed beyond that date, Britain would need to participate in the upcoming elections for the European Parliament. The prime ministers proposal in front of the British Parliament have defeated three times. However she survived a vote of non-confidence. Her latest effort to negotiate a new deal involves a coalition with the opposition Labour Party which favours a stronger customs and economic union with the European continent.
It’s a pretty high risk move by the prime minister. She is essentially looking to form a consensus that ignores her own conservative political party.
The entire question period in parliament was a loud raucous chaotic experience punctuated by numerous interruptions by the speaker of the house calling for order.
Members of the house would stand as a way of requesting to speak, waiting to be recognized by the speaker of the house. Some of the comments and questions for the prime minister were directly related to the matter at hand.
Other matters seemed to drop into the middle of the discussion out of left field. One member of the house of commons asked for the prime minister’s support in furthering recognition and training for members of parliament regarding autism. Another member of Parliament requested the prime minister support for improved handicap accessibility at a local train station.
The entire process seems like one where everybody’s talking all at once, but nobody’s listening. I very much doubt that anyone‘s opinions were swayed by anything that was said in Parliament today.
When we talk about Brexit there are five principal areas that we can examine
- Single market
- Courts of justice
- Customs union
- Immigration and border protection
- Financial benefits, financial support and funding for EU institutions
Proponents of a hard Brexit would see all of those areas severed from the eu.
Proponents of a soft break want a continued customs union, and a single market, but full autonomous control over justice, borders and funding. It’s as if they want all of the benefits but none of the responsibilities of being part of the European Union. While it may be possible to gain a new consensus among the parties in the UK, it’s not obvious that the rest of Europe would agree to such an arrangement. Agreeing to a proposal like this would be synonymous with the death of the European Union. You would see other countries demanding the benefits but not the obligations of being part of the union.
The current deadline to leave the EU is April 12. Any extension requires unanimous agreement by all 27 member nations. That’s not assured. If the April 12 deadline passes with no deal and no extension, then the prospect exists that the UK leaves with no transition period and get treated just like any other country that’s outside the EU. It would be the same as Vietnam or Thailand. There would be tariffs in place on goods, there would be restrictions on the movement of people. Licenses that were valid across the EU would cease to be valid. The level of economic and social disruption that could result is staggering.
You might be thinking that the UK is a distant land. You might have visited the UK and strolled through the grounds of Windsor Castle, but if there are problems there, they really do affect you.
Think again. We live in a single global village. No country is an island unto itself. No country is fully self sufficient.
On today’s show we’re talking about how a remodel can destroy the value of a property. The TV Reno Shows are sometimes bringing people into the remodelling business that only see one thing. They say, I can make this house nicer too. They become inspired to replicate what they see on TV. They believe they have a design sensibility. Of course, everyone thinks they have good taste and believe that they can make some money improving a house and putting it for sale. On today’s show we’re going to look at a case study where the value of a house that was destroyed by a renovation. The home is located in Arlington Texas, exactly one block from the University of Texas campus. It had been owner occupied since it was built. It had changed hands a few times over its life, but basically it was the same house built in 1940. It appears to have been updated in the 1970’s, and again most recently immediately before it was put on the market. The owner put about $50,000 worth of improvements to the property immediately before putting it on the market. They assumed that the property would be purchased by another owner occupant. After all, they lived happily in that home for many years. Naturally, the home owner hoped and expected that they would gain more than their added investment in the way of a higher sale price. The failure of this renovation was in a fundamental assumption. It’s as if they failed to notice that the university next door had grown from 22,000 students to 51,000 students in the past decade. They had failed to pay attention to how other properties a couple of blocks away that used to house single family homes, are now part of the university campus. They failed to notice that other properties had been assembled into larger parcels and a dozen or more student housing residences were built where perhaps a couple of families used to live. The failure was in assuming the buyer would be another family, just like them. The real buyer would have been a guy like me, someone who would have talked to the planning department at the city and conceived of a new use for the property taking into consideration the new needs of the local marketplace. I had conversations with the planning department to determine the allowable density, and the parking requirements. I had my eye on the neighbor's property as well. The two properties put together would give access to a larger parcel from two sides and make it easier to design the parking for the desired number of units. On this show we talk often about the difference between content and context. The problem was not with the content of the homeowners renovation. It was with the context of the sale. The seller failed to recognize who the ideal buyer would be. The owner probably spent a lot of time selecting the perfect materials for the renovation. I feel sad for him because it was a wasted effort. An improvement isn’t an improvement if it misses the target.
On today’s show we’re examining the idea of seeing over the horizon.
The horizon is the distance that you can see before the curvature of the earth obscures what is just a bit further away.
Generally speaking For an observer standing on the ground with h = 2 metres (6 ft 7 in), the horizon is at a distance of 5 kilometres (3.1 mi). You can’t see over the horizon. But that’s not the only horizon that exists. We as humans construct many artificial horizons. There are horizons in time. There are financial horizons. There are career horizons.
There are horizons in the game of chess. Some chess players only think one move ahead. World class grandmasters can see anywhere from 15-20 moves ahead. It is said that Garry Kasparov knew he had lost a game 11 moves before he was ultimately defeated. The horizon for Garry Kasparov is substantially further than for most other chess players.
You may know some people who only plan a few days ahead. That is their planning horizon.
The real horizon is what is within our line of sight. If you’re lying on the beach you may be able to see only a few hundred yards or meters. Someone standing upright at a height of 6 feet or a couple of meters, they can see about 3 miles or 5 km. But for an observer standing on a hill or tower 100 feet (30 m) above sea level, the horizon is at a distance of 12.2 miles (19.6 km). How hard is it to find that higher vantage point so you can see further? Often all it takes is a conscious decision to seek out that higher vantage point so you can see further.
Often all it takes is a decision to plan further into the future. There is no real obstacle. Yes, you may have to make some assumptions about how the future will unfold, but these can often be reasonable assumptions.
But then there are people who seem to have the ability to see around corners. Do they have supernatural powers?
Not really. What they have is experience. They can draw upon a history book of past projects that have similar metrics in terms of cost, schedule, resource requirements, and risks. They have relationships with experts, mentors and consultants that they can draw upon to help double check their assumptions. Each one of these steps creates a higher vantage point enabling you to see further, to extend the horizon, and to ultimately see past the horizon.
This month’s book is a 600 page classic called “The Creature From Jekyll Island”. The subtitle is “A Second Look at the Federal Reserve”, by G. Edward Griffin. The subtitle really tells the story of what the book is about.
The fact is, very few people really know what the federal reserve is. Most think it is an arm of the US government. The fact is the Federal Reserve Bank is neither federal, nor has any reserves.
If you’re going to be a player in this game called business and you care at all about money. Then you might want to invest some time into learning about what money is, where it comes from, and what some of the rules are that govern our financial system. If you’re playing a game and you don’t know the rules, well then, you probably won’t win the game. In fact, you might get crushed.
I know what you’re thinking. “I know everything I need to know about money”. How complicated can it be? How will knowing a bit of history help me with my money problems today?
I’ve had the pleasure of getting to know the author G. Edward Griffin over the past several years. He’s one of the gentlest of gentlemen you could ever meet. He has been a documentary film maker for much of his life.
This story begins late at nigh in a New Jersey railway station in 1910. The trains at that time consisted of coach cars immediately behind the locomotive which belched out massive quantities of thick black smoke that would infiltrate the guest accommodations through the unseen cracks. After that was the dining car, and then after that were the sleeping cars with the hard upper and lower bunks that made up the better class of service. At the very back of the train was a private car that was a 5 star rail car with the finest in furnishings and mahogany paneling. The name Aldrich was stencilled on the side of the car. Aldrich was senator Nelson Aldrich from Rhode Island. Aboard this last car were 7 men who represented about one fourth of the wealth of the entire world at the time. Nelson Aldrich was chairman of the national monetary commission, a business associate of JP Morgan and father in law of John D Rockefeller Jr. Some of the others aboard the train were:
- Abraham Piatt Andrew - Assistant Secretary of the US Treasury
- Frank Vanderlip - President of the National City Bank of NY
- Henry Davison - Senior Partner at JP Morgan
- Charles Norton - President of JP Morgans First National Bank of NY
- Benjamin Strong - head of JP Morgan’s banker trust
- Paul Warburg - a representative of the Rothschild banking dynasty in England and France. His brother was Max Warburg who was head of the Warburg banking consortium in Germany and the Netherlands.
This clandestine trip to Jeckyll Island in Georgia was for the purpose of creating a new solution to the banking system’s problems, but this time owned and controlled by the banks, and legally sanctioned by the US government.
The genesis of the book was a quest to create a documentary on the origins of the Federal Reserve. As Ed Griffin researched the works of prior authors, he became more fascinated with the topic. This culminated in Ed making his own trip to Jekyll Island in Georgia. There is a small museum on Jeckyll island where you can visit and see some of the original documents that date back to 1910. It was here that the uncomfortable truth was laid bare.
The story of the history of the Federal Reserve is an unpopular one, because its uncomfortable. But unless you know that what we call money isn’t actually money, you won’t understand the rules of how to play the game.
Joe Quirk is one of the founders of SeaSteading.org and the author of the new book "Seasteading". I got spend time with Joe over the past few weeks and learned more about his project. The first fully autonomous seastead is now floating 12 miles off the coast of Thailand. This idea is groundbreaking and is at the frontier of human and societal exploration. While it's not mainstream yet, the concept challenges many closely held beliefs. I believe that expanding the mind is always a valuable exercise. Check out this very special episode.
On today's show we're getting George's perspective on two of the latest stories in the news.
Jonny asks:
"I invest in single family rentals in several different US markets. Most are midwestern conservative and stable environments with steadily growing populations and economies - there's modest appreciation, but solid and dependable cash flow.
The outlier is Chicago. I enjoy the very strong cash flow I receive from Section 8 tenants, but the impending pension crisis presents a precarious situation in the future. Chicago's pension situation looks abysmal with a future reckoning not far away.
While I see this down the road and pause with concern, I also know that there are few states and municipalities without a pension dilemma. The perenial question "Compared To What?" comes to mind. Also, even if there is a pension crisis that becomes fully actualized, people will still fundamentally need housing. Is this a matter investors do need to consider regarding long term buy and hold strategies or is Chicken Little saying the sky is falling?"
Jonny, that is a great question. My response is based on my personal experience and you should take my response as a point of view , or an opinion, not as the gospel.
With that disclaimer, here goes. One of my cardinal rules is to invest in growing markets. I like influx of jobs and influx of population. Both Chicago and the State of Illinois have lost population in the last several years. Illinois lost 115,000 population last year. That means that both the state and the city are experiencing a falling tax base.
Cities like Chicago are struggling with meeting the obligations of their entitlement programs, whether they be public housing, pensions, education, infrastructure maintenance, or public transit, all of these aspects can place huge demands for money on the city.
The City of Chicago has been so desperate for cash, that they sold their parking meter business to a private company. The private company paid a little over $2 billion for the right to collect parking revenue in the city of Chicago for the next 20 years. Shortly thereafter, parking rates in Chicago skyrocketed. Anyone with basic math skills figured out that the city did a bad deal and that the buyer of the parking meter business is on the path to tremendous riches.
I had some section 8 tenants in my properties in Chicago. The Chicago Housing Authority does pay a premium over market rent to landlords who except tenants with CHA vouchers. However, while these numbers look great on a spreadsheet, the extra $150 per month in rent did not cover the higher costs associated with meeting the extra ordinary demands made by CHA inspectors, nor to cover the much higher property maintenance and property damage costs incurred by many section 8 tenants.
We had experiences that should never happen. We had tenants who would smash the electrical cover plates on the outlets and then lodge a complaint with the housing authority that we were not properly maintaining the property. The Housing Authority with then fine us one month rent and refused to pay rent until the repairs were made. So we would lose $1,500 in rent because the tenant intentionally damaged about five dollars worth of electrical cover plates. That was one of many situations that made no sense whatsoever. The tenant did not benefit financially from this action. It was purely destructive action and we could not find any financial gain for any of the parties.
When cities are strapped for cash, they experience deferred maintenance. People don’t like to move into cities with crumbling infrastructure. Its not just about pensions. It's about how the city will manage itself financially, and will people leave as a result.
We’ve all heard about the benefits of diversification. Don’t put all your eggs in one basket. You might have heard a family member preach about it. On the other hand, if your eggs are in one basket and guarded really well, then you will have a greater amount of control over your investments.
I had an in depth conversation with an investor this week who had made the decision to diversify his holdings across nine assets, many of them in separate geographies. All of a sudden, within a short period of time, several of them were under-performing at the same time. Diversification was supposed to protect him against that.
I’m a big believer in diversification, but only as a secondary strategy. It’s lower priority than making sure you have a critical mass of assets under the watchful eye of a competent management team.
Another investor I know well purchased multiples properties at the peak of the downturn. They were all bargains. But here too, they were spread across multiple markets. It wasn’t long before all five properties were performing poorly. Eventually it took hurricane Sandy to hit NYC and Atlantic City to create a success. The city was so impacted by the hurricane that suddenly her property which was undamaged, became in high demand.
By comparison, I’ve always believed in concentration of assets until you achieve optimum performance. The key item in the success of a property is not the property. It’s the management of the property. All too often I see investors focus on the physical asset. I can tell you from first hand experience that my worst investment experiences were bargains that were mismanaged. Management quality trumps asset price almost every time. If you own rental property, even if you have it professionally managed, you will need to get the attention of your property manager. The relationship you have with your property manager is a critically important relationship. I like to talk with my property managers every week, sometimes multiple times per week. But if you only have one or two units with that property manager, that frequency of communication will be burdensome for the property manager. They will look at you like you’re a nuisance.
I believe that the ideal ratio of units to property managers is somewhere between 75:1 and 150:1. It’s somewhere in that range, depending on the type of asset. If you have 75 units with a property manager, then it’s perfectly acceptable and appropriate to speak with them once a week. You can focus your energies and your attention on that single property management relationship. 75 units starts to look like critical mass. Once you grow beyond a single multi-family property with a large number of units, you can then consider diversifying.
If you look at much of the real wealth that has been created in the world, there has been very little diversification. The Zuckerberg family is firmly focused on Facebook. If they had divided their time and attention between Facebook, real estate, oil and gas, and restaurants, they would be nowhere close to having accomplished what they have.
Diversification is important, but it’s a distant second in importance to having the business properly managed.
Last week the federal Reserve announced its interest rate guidance for the current period and for the remainder of the year. Back in December the federal Reserve increased short term interest rates by 1/4 of one Percent. At the same time chairman Powell also forecast three rate increases for 2019. In a stunning reversal, the federal Reserve is holding rates steady and is forecasting no further increases in 2019.
Last week the Bank of Canada also announced that it was holding rates steady.
The European Central Bank also has kept rates study at essentially zero or negative interest rates.
All of this is against a backdrop of slowing economic activity on a global basis. The growth forecast of the US economy has been revised to 1.75% to 2% this year, down from the last estimate of 2019 growth at 2.25%.
Central bankers have been using interest rate policy to engineer the so-called soft landing. Briefly raising interest rates would prevent the economy from overheating. It would also give the central bank a tool with which to stimulate the economy should it slow down.
Europe has lost the ammunition to stimulate the economy. By maintaining rates low, they have nowhere to go. Printing money is the only tool they have left. They’re going to try it, but it hasn’t worked so far. I see no reason for it to work now.
Here in North America, all of this is good news for real estate developers. One of the biggest risks that we face as developers is the uncertainty of interest rates once a construction project is completed. However, a period of interest rate stability makes it much easier to budget and model in the future. Construction projects are typically funded by construction loans only during the construction phase. Upon completion of leasing, the projects are typically refinanced into permanent fully amortized loans. Without knowing what interest rates will be in 18 months time when the project completes, it is difficult to forecast the operating model for the project with permanent financing.
Now is the time to take advantage of these low rates and lock into permanent financing for as long as you can.
Today’s episode is the story that started for me back in 1974. For two years in a row in 1974 in 1975 I visited Caracas Venezuela. I was 11 years old and I was struck by the huge contrasts in the city of Caracas.
The city is in the centre of a valley surrounded virtually on all sides by tall steep hills.
In the centre of the valley floor was a bustling modern city with freeways, and tall modern buildings.
Surrounding the city lining the Steep hill sides were thousands and thousands of makeshift shelters where the poorest people were living in absolutely horrible conditions.
Our family became friends with an older couple who lived in Caracas and we traveled with them on several trips over the subsequent years. One of the frequent topics of conversation at that time was the inevitable social, economic and political unrest that would likely result if the economic disparity in the society was not properly addressed.
Fast forward to today and Venezuela is in economic collapse. The gross domestic product has fallen by more than 60% in real terms. The government has been trying to solve its financial problems by printing money. Inflation has been replaced by hyperinflation. In January of 2019 alone, inflation was 345%.
Today a school teacher earns enough money in one month to afford a carton of eggs and 2 litres of milk. About 3M people have left the country. Those who have left are sending money back to family members who have remained in the country. On average, the Wall Street Journal is estimating that the average money going back to family members is about $80 per month. But those funds are in US dollars which is rapidly becoming the black market currency of choice.
It took 45 years for the economic collapse to happen. We foresaw saw it back in 1974. Venezuela was a relatively vibrant country with lots of natural resources.
It’s really easy to be complacent and dismiss Venezuela or Zimbabwe as distant lands with their own issues.
Zimbabwe was previously Rhodesia. My family lived in Rhodesia before things became politically unstable there. We need to be students of history. Every time a country has debased its currency, it has ended in disaster. It happened to the Roman Empire. It happened in Germany. It happened in the United States prior to the signature of the US constitution.
It has happened in Zimbabwe, Argentina, and now in Venezuela. The headwaters of those disasters look just like the conditions in the US, Canada, and the European Union.
I don’t know if we have 45 years until the runaway train of inflation and economic contraction happens here in North America.
The more you know about your potential customers, the better you can target your offer to the needs of your customers.
People make a number of life decisions that alter their demand for housing. Housing is so much more than a dry roof over your head. Children grow up and move out on their own. Some will move to be walking distance from a university. Maybe they lose their employment and move back home. The decision to get married and start a family. Sometimes its the decision to end a relationship. People sometimes move due to the loss of a loved one. They move to experience a different climate. They move to experience a different culture. They move to escape persecution. They move for employment. They could move because of a health reason. They sometimes move to create a fresh start. They may move to care for an ailing family member. They could move to be closer to friends. They could move to be closer to the action. Maybe to be closer to recreation. They could move to get away from the pace of the city. They might move to save money. Some will move to create the home of their dreams. They might move to make room for a growing family. They might move to start a garden. They might move because they’re tired of caring for a garden. They might move to have a home that can be left vacant during periods of extended travel.
Every one of these reasons could bring housing requirements unique to the reason for moving.
The averages are a fog that make it impossible to see what is really happening at a tangible granular level. If you’re looking at a 5% vacancy rate in the market, that number could obscure what is happening in each of these specific market segments.
You have no idea whether there is a shortage of housing within walking distance of the university if you’re stuck in market averages? You don’t know whether there is a surplus of 3 and 4 bedroom units and a shortage of 1’s and 2’s.
The more you know about the needs of your clients, the better you can market to them. Someone with health problems might not be able to navigate steps and would prefer a single story home. The averages tell you nothing about homes with stairs.
If you’re looking at cancelling your commercial office lease and working form a home office to save money, you may need a larger home. The averages tell you very little about the suitability of a property for a specific customer.
When you understand who your target customer is, you can better package your final product. The features of the finished product can be tailored to meet the needs of your customer. If your target is families with aging parents, a separate accessory suite might be the perfect feature. The market might have 5% average market vacancy, but absolutely zero inventory for properties with accessory suites.
Averages are for businesses that don’t care to know their customers. When you go to the average grocery store for average customers and buy a head of lettuce, they know how many lettuce they sell per day on average. They know how many cases of Coke they sell each day. These are completely anonymous transactions They don’t know who is buying it.
But when you go to whole foods and you give your amazon prime number for a discount, they know that if you bought a head of kale lettuce, you’re probably going to buy tofu. They know that you won’t buy a Coke, and they know where you live. That’s a level of detailed knowledge about the customer that few other businesses have, and it’s the reason why Amazon continues to grow so quickly and virtually dominate every segment they choose to enter. They dominate because they know their customers so much better.
Sep is a multifamily real estate investor who has made an unusual transition from multifamily to portfolios of single family homes. When I first heard about the transition, I was a little skeptical. But the rationale for the shift makes sense and is sound. Sep has dealt first hand with the difficulties of managing economically challenged properties in rough neighborhoods. That learning has shaped his current investment choices. Many investors have made the same mistakes in some form. I love his willingness to share his mistakes so that all of us can learn from them.
I’m coming to you on location from the 17th annual investor summit at sea. This annual event is like no other. Every night, I’m seated with a new group of investors at my dinner table. One of the frequent questions that I ask people at my table is “What are your goals?”
The typical story goes something like this.
They have a full-time job. They like what I do, but I’m ready to change careers in favour of something with passive income. So They’ve started buying a few rental properties. They haven’t figured out how to scale up beyond a few properties. Each of the properties are a lot more work than they anticipated. They don’t have the investment capital to buy a larger multi-family project by themselves.
In talking with a number of people at length over an extended period of time I’ve noticed a few trends. I can broadly put the investors on board the summit at sea into four major categories.
- there are the beginner to intermediate investors who are still working as employees in their day job and moonlighting with a small rental portfolio, trying to figure out how to transition from their current life to one where passive income has replaced their employment income.
- There are investors who have decided to become the full-time operator of the business. They have traded their day jobs for the role of a small business owner. They have recognize that owning a portfolio of properties is not a passive endeavor. It takes a lot of work. They have reached the limits of scalability not only based on capital but based on time. They’re still on the hamster wheel, running faster than ever before with a larger number of the small projects.
- Number three there are full-time investors and developers who have decided to focus on larger projects. He’s larger projects or afford the possibility of hiring dedicated full-time staff in all of the critical roles that are necessary to operate the business on a daily basis. The focus of time and energy goes into managing the project but not the day-to-day operations. The time and energy is put into growth of the portfolio. Once the projects are complete and they are on auto pilot the dedicated staff manage the daily operations with little to no intervention from the business owner. If at some point in the future I decide to take my foot off the gas and either slow down or stop growing the portfolio, it will be a flow of residual and passive income. My role as the business owner focuses on making sure the right people are in the right roles. I’m focused on building the organization. This is not that different from a senior role in corporate America.
- The fourth and final group have figured out that managing all these projects is a ton of work. We have decided to focus their time and energy on selecting a handful of high-quality operators who they trust the building management portfolio. And that you to invest passively in private syndications. These are the same types of projects and investments that large family offices of the wealthy and ultra wealthy invest in.
Back in November, Californians voted on a proposition to eliminate the current state wide rent control legislation that was enacted in 1995. California’s rent-control regime is governed by a state law called the Costa-Hawkins Rental Housing Act. It prevents cities and counties from imposing rent control on single-family homes or apartments built after 1995, among other prohibitions. The law also froze rent control rules in cities such as Los Angeles that had policies before Costa-Hawkins was implemented.
By repealing Costa Hawkins, it would leave the field wide open for individual cities to implement their own rent control rules.
The defeat of the proposition by a vote of 60% in which voters rejected the initiative and landlords spent $100-million-plus in a campaign to sway public opinion.
The state government is trying again with a new set of measures aimed at weakening the Costa Hawkins rules.
About 9.5 million renters — more than half of California’s tenant population — are burdened by high rents, spending at least 30% of their income on housing costs, according to a UC Berkeley Study.
The authors of the study are recommending rent control again, at the same time they acknowledge it will not solve the problem of inadequate supply.
I'm coming to you live from The Investor Summit at Sea. This is an event like no other.
It's here that you have the opportunity to learn from some of the biggest brains on the planet.
On today’s show I want to share a perspective on the world of investing.
My mother started an investment holding company back in 1976. She had a portfolio of investments, largely in the stock market. When my mother passed away in 1981, I was 18 years old, I had the task of taking over that investment holding company.
At the time, the conventional wisdom was that you could routinely earn an average return of 10-11 percent. In my world, as a relatively young investor, our target was to invest in primarily high dividend yield stocks like utility companies. They would deliver about an 8% rate of return on their dividends and another 2-3% in long term appreciation. These stable high yield stocks were the so-called granny stocks of the day. We chose these because at the time, my father who would be retiring in the coming 2-3 years would be reliant on the income from the stock portfolio for his retirement income. My sister and I would ultimately become the capital beneficiaries of the portfolio, but my father was the to be the income beneficiary. I was effectively managing a small pension fund for my father as the sole benficary. The market conditions enabled a solid investment strategy at the time. The large pension funds that are responsible for police departments, fire departments, schools boards, public sector employees have had very similar investment objectives as part of their charter.
But the problem is that in the last decade, ever since the 2008 financial crisis, the rates of return experienced by pension funds have been approximately half of what they were in the 1980’s and 1990’s. They’ve been averaging around 5% for the past decade. You don’t need to be a financial wizard to understand that this is a ticking time bomb.
When I talk about stock market yields, I’m not talking about the price of Apple, Facebook, Amazon or Alibaba. Those stocks are not the mainstay of pension funds. They are too volatile and they don’t offer the kind of capital protection that responsible pension fund managers require.
So now if yields in the stock market are falling, investors are going in search of yield elsewhere.
In the world of real estate, I can tell you that I would never undertake a project for only a 5% annualized yield. That’s far too risky.
But if you’re coming from the world of public stock investing, and you’re seeing the types of returns that are possible in real estate, you’re probably getting excited. We’ve seen a lot of investors attracted by the stability and the kind of appreciation that is possible through the combination of forced appreciation and leverage.
These new entrants have been bidding up the prices for real estate, because by comparison, the stock market alternative is too volatile and less attractive. That’s made it harder for the professional real estate investors like you and I who are not willing to pay too much for an asset.
This question has been asked so many times by audience members, I'm not going to attribute it to a single person. It's a great question, and the answer is highly situation dependent.
I’ve experienced situations where raising money has been easy, and other times when it has been very time consuming.
The main issue is whether the venture is going to be appealing to the sources of debt financing and the sources of equity financing you are talking to. It’s easy when you get a quick yes. It’s hard when you get a lot of no’s. It means that you need to figure out what is the reason why you’re being declined. Are you talking to the wrong people, or is there something fundamentally wrong with your offer?
I strongly believe that if you have a compelling opportunity, your job is to find the money and most importantly make sure you create that perfect fit between the goals for the money and the goals for the project. If you don’t have that perfect alignment, then raising the money is going to be extremely difficult.
For example, sometimes you need to match the type of money to the phase of the project. The cheapest money for permanent financing will almost always be bank debt. The risk premium attached to the debt is a function of risk.
If you’re undertaking a construction project. You might be better off working with a lender who specializes in construction financing. You will pay more for that money in the short term. Once the project is leased and stabilized with an income history, you can then refinance and get very low cost permanent financing on a 25 year, 35 year, or perhaps even 40 year term. But you may not qualify for that financing during the construction phase.
If on the other hand, you look for a conventional lender to fund both the construction and the permanent financing, you will pay a premium because of the added risk, and that higher risk premium might carry forward for the life of the project. You will pay less during the construction phase, but more during the entire life cycle of the project.
Sometimes packaging the investment to have the best possible characteristics during each phase of the project can make the difference between difficult and easy.
Sometimes you may find that you need additional balance sheet strength in order to get a large loan. In that case, you may need to bring a partner into the project with a very strong balance sheet in order to co-sign on the loan. In that case, you’re going to be giving up some equity share in order to secure the debt. That’s different than raising equity money in exchange for an equity share.
It’s a fallacy to think that a project is hard to finance, assuming you haven’t made any major mistakes that would make the project broadly unattractive. If a large established developer could do it easily, then so could you. The only difference between them and you is that they have established better relationships than you. They may have more financial capital but they also have greater relationship capital. Relationship capital is the value of their relationships. If an established developer were to lose all their money, it would not take very long for them to make a substantial amount of it back. The reason for that is that they have the relationships.
If you’re like many, you have experienced some success in raising money. But perhaps you have some relationships, but have exhausted the capacity of your existing ecosystem. So you may need to expand your Network of relationships. This means getting out and building relationships that you won’t need next week, but perhaps in 6-12 months, or beyond.
Quentin D'Souza is a Toronto based investor who runs one of the local Real Estate Investment clubs there. You can reach Quentin at durhamrei.com.
One of his specialties is legal secondary units. These in-law suites are a great way to multiply the revenue and increase the overall value of a property for minimal investment. It's particularly attractive in a high priced markets like Toronto.
This segment was part of a live meetup in which I shared several real life examples of design decisions that were made to reduce cost without having an impact on quality.
Today’s show is a personal story of an inner struggle.
I’m in the middle of a project and I’m in the process of updating the financial projections based on a revised construction budget, new information about the debt structure, and a more accurate view of the schedule.
In the process of updating the spreadsheet I discovered that there were a number of places where numbers had been hard coded into cells, rather than being calculated from variables.
I’ll give you a couple of examples. When you model the effects of inflation on both income and expenses, you could take the numbers from year 1 and increase them by 3% in year 2, or you could increase them by a variable inflation rate. So that if you were to change the inflation rate assumption, you would change a single number and all the inflation adjusted numbers would be updated automatically.
You would want to do the same thing with interest rates for loans, any fees that are calculated as a percentage of another expense and so on.
The other major change was to telescope in on the first three years of the project and model them on a monthly basis rather than an annual basis. There is too much change happening during the first few years of the project for a yearly projection to be accurate.
Needless to say, a lot of the spreadsheet was affected by these changes. The additional layers of complexity come from ensuring that the loan to cost ratio, the loan to value ratio, the debt coverage ratio, and the numerous other constraints of the loan agreement are properly modelled.
These changes took an entire day to implement. I sent the spreadsheet out for review and within a few short minutes, my partner had found a schedule mistake in the spreadsheet.
I set about fixing the mistake which meant moving about 20 numbers by 5 months. That’s nearly 100 items that moved in the spreadsheet. At the end of that process, the financial rate of return forecast to our investors looked surprisingly poor.
How could a shift of a few months destroy the financial viability of the project? It didn’t make any sense. My partner and I had numerous phone calls throughout the day to discuss various solutions to the problem. At one point, we were even talking about whether we should sell the project.
I spent the next 7 hours pouring over all 10 pages in the spreadsheet, checking formulas, refining estimates, experimenting with different possible solutions.
After dinner, I went back to work. After a few more hours I noticed that on one of the pages, inflows of cash used positive numbers, and outflows used negative numbers. But I wasn’t consistent in that convention. On another page they were all positive numbers, and the expenses were subtracted from the income make it all work.
But in the process of converting the spreadsheet to use more formulas, some of the negative numbers started to appear on pages that had previously only had positive numbers. It was at that point when I saw the error in the rate of return calculation. Negative numbers represent an investment of cash and positive numbers represent cash flow back to the investors. Well, my spreadsheet was showing 5 years of negative cash flow to investors. The minus sign was a complete mistake. No wonder the rate of return looked so terrible.
As soon as the minus signs flipped and became pluses, a sense of calm washed over my home, the tightness in my back relaxed, and I could take a full deep breath again. The rate of return to the investors was in the expected range.
I sat back and reflected on the past 13 hours spent diligently working on the spreadsheet. I asked myself what would have happened if I had given up after 8 hours of trying to solve the problem.
If you’re a business owner, would you like to know which country your business is licensed to conduct business in?
If you conduct business in multiple countries, would you like to know the rules of engagement for continuing to do so?
If you set up your head office in a global financial center hoping and expecting it would act as a gateway to conducting business across an entire continent, would you like to know if that was a good investment?
If you live in the United Kingdom and you own a business, you are dealing with all of these questions. In fact you’ve had this uncertainty hanging over your head since June 23, 2016. The day when the Brexit vote took place.
The deadline for the UK to complete its exit negotiations from the European Union is at the end of March. On Tuesday of this week the British Parliament voted against the last and final negotiation between the UK and the European Union on the terms of its exit.
So we really have no idea what Brexit actually means. We don’t know what it means for U citizens who currently reside in the United Kingdom. We don’t know what it means for British nationals who reside in continental Europe. We don’t know what it means for goods and services that are crossing the English channel. Further complicating matters is the fact that Ireland has chosen to remain within the European Union. There is no hard customs border between the Republic of Ireland and Northern Ireland. This means that for the time being the Republic of Ireland represents a giant back door into the United Kingdom.
Many North American companies had set up their European headquarters in London or other cities in the United Kingdom. This has facilitated communications with English as a common language, and has provided companies with a highly educated and skilled talent pool.
Here’s the problem that I see with the entire Brexit fiasco. The vote to exit the European Union one by a very narrow margin. It was less than 1%. In the day that followed the actual vote, it was disclosed that the pro Brexit movement had falsified projections and mislead the public on the benefits of departing the economic union with Europe.
After having experienced the steep and dramatic economic fallout over the past three years, it is not at all clear whether the UK population remains in favor of leaving Europe. If a second referendum were held today, I believe a vote to leave Europe would be defeated.
So here again we have a political stalemate. The UK is still scheduled to leave the European Union with Ireland remaining. The terms of the exit are unclear. Prime minister may survived a non-confidence vote. But both exit agreements negotiated with European Union were resoundingly defeated by the British Parliament.
EU officials have said that the current negotiations represent the best and final offer from Europe.
London lost 93,000 in population in 2016, and 106,000 in population in 2017. In fact over the past 14 years, London has lost approximately 1M in population. I mean think about that. It’s a huge number. The only other city that I can think of that has experienced a similar loss of population is Detroit. We know what that has done for Detroit. It’s been an absolute disaster.
Since the Brexit vote, real estate prices in central London have dropped an average of 10%. Remember, that’s an average. Many properties have been converted from owner occupied to rentals. The last time I was in London, most of the old homes in central London had been converted into guest houses or hotels.
One thing I can say for sure is that London has not attracted new investment in nearly 3 years. In fact, there has been a marked period of disinvestment. At some point it will represent an opportunity for new investment.
On today’s show Patrick asks “How important is making site visits prior to purchasing a property?”
The simple answer is “It depends”. Certainly, you need to get a lot of information about a property before you buy. Some of it requires a site visit. That doesn’t mean it has to be you to go to the property. But you do need the information one way or another.
When I perform due diligence on a property, I’m looking for a few important things.
I want to know what is around it. If the value of a property is determined by location location location, then you want to learn as much as you can about the area surrounding the property. You need to evaluate the context of the property. You can have 1000 pictures of the subject property, but still know nothing about the value of the property because you haven’t seen what is around it.
I want to see the amenities in the area. What is the traffic like? How easy is it to get on the freeway from the subject property? How close is good quality shopping? If the closest Whole Foods is 20 miles away, then that might color your decision.
I want to look at the subject property and properties immediately surrounding the subject property for evidence of erosion or standing water.
I want to look at the zoning map and the municipal plan overlay. The properties next to me might be zoned according to their current use, but if the city has designated them for another use, I would want to know that. Is the city going to widen a major road and take a 20 foot or 40 foot strip from my property at some point in the future? You might think I’m exaggerating. But I’m not. I’m currently building two project where the city has taken and additional 40 feet of land from all the properties on the street and added it to the road allowance. This will enable the city to widen the road when it feels the need arises. Instead of having 851 feet of land depth from the road, I have 811 feet of depth. It definitely has an impact on the project.
I’m going to want the environmental phase 1 survey. That survey will require a site visit. But it doesn’t have to be me. The site visit will be performed by the consultant who performs the survey.
If I don’t feel like getting on an airplane, and visiting a property, then I’ll find somebody local who is willing to perform a live video conference walking tour of the property and the area. I record the video, and by being connected to the live video, I’m able to direct the camera to anything I want to take a deeper look at.
So far, everything I’ve talked about is outside the building. If the property has a structure on it, you will definitely want to get a detailed view of key items. What is the finished product that you have in mind? How easy will it be to transform the existing structure into that new finished product?
If the property has a basement and you wan to develop the basement, you need to take a detailed look at the supporting columns, the vertical clearances, and the routing of utilities to determine the scope of work. You will want to know the capacity of the electrical panel and find out if there is expansion room for what you want to accomplish. Adding a few breakers is a very manageable scope. Replacing the entire electrical main wiring and replacing the panel with a larger one might not be. Again, you don’t need to visit the property yourself. But you do need answers to the key questions.
The key is to have clarity on your due diligence checklist. Some items will require documentation. Some will require consultants. Some will require conversations with neighbours, local politicians, people in the planning department at the city.
It all starts with a vision for the finished product, and developing a detailed due diligence checklist before you step away from your desk.
Today’s show is a fascinating story about industry insiders who are challenging the state of the banking industry.
Last week I published an episode called "Not worth a Continental". If you have not listened to that episode, I suggest you stop today’s show and go listen to that earlier episode first. Today’s show will make so much more sense if you do.
The players in the story are James McAndrews, former research director for the New York Federal Reserve Bank., And the Federal Reserve itself on the other side of the table.
The Wall Street Journal reported on Friday that The Federal Reserve is pushing back against a new private bank that is suing the central bank for access to its services.
The New York Fed filed a motion last Friday in U.S. federal court asking the court to dismiss a lawsuit filed against it last August by TNB USA Inc., a private bank formed in 2017 by James McAndrews, the New York Fed’s former research director.
TNB, is a bank chartered in Connecticut, and they sued the New York Fed for taking no action on its request for an interest-bearing account at the central bank like those that member banks have, and which are necessary to obtain Fed services.
Under its business model, TNB would accept deposits from large investors and park the money on the Fed’s books to earn interest.
The Fed would pay TNB the same rate it pays banks on the money, called excess reserves, they hold at the central bank. TNB would pay a slightly lower rate of interest to its depositors, pocketing the difference while still enabling its depositors to earn more than they might at a conventional bank.
The interesting part here is that TNB’s model isn’t novel at all. It’s called arbitrage, and its been at the foundation of the banking industry since the beginning of banking. Loan money at a higher rate, and give deposit interest to depositors at a lower rate. The real issue is that the Fed is loaning money to member banks and then taking back the excess reserves as deposits.
TNB is a private bank and not a Fed member bank. Therefore it doesn’t automatically get to take advantage of all the same privileges that member banks do. It’s a closed club. It took an industry insider, James McAndrews to expose the issue and to try and take advantage of the system that was put in place.
Think about it. If you could put money on deposit with the Fed, and earn virtually the same rate of interest as you would with US Treasury bills with the zero risk of the Fed defaulting, would you make that investment as a place to park cash?
If you put your money at Wells Fargo or Bank of America, you’re going to get 1.44% on your money and you’re locked into to a certificate of deposit. For something even more restrictive, you can get 2.3% at one of the major banks. But imagine if you could get 2.5% and park your money at the Fed and have full liquidity?
The point of today’s episode is that there are multiple sets of rule books. If you’re going to be playing the game of finance, recognize that context is very important. It determines which set of rules will apply to you. If you change your context, you can change the game you’re playing altogether. Most people aren’t playing the game because they don’t know the rules.
When I was 10 years old, I made my first investment. I didn’t know it at the time. Apparently I had $10,000 kicking around that my grandmother had put in my account. My uncle who owned a seat on the NY Stock exchange was an aggressive trader and a very wealthy man. He lived on 5th Avenue next to the Italian consulate overlooking Central Park. It was as good an address as you could possibly have in the financial center of the world. He would actively trade all day long. He would trade stocks in Asia after dinner, and he would get up early in the morning and catch the end of the trading day in Hong Kong. He had a 4 hour break before the opening bell on Wall Street. He was the expert when it came to investing. So my mother asked his advice when it came to making the first investment for her 10 year old son.
My uncle suggest that we buy two mining companies that traded on the Vancouver Stock exchange. Mountain State Resources Exploration and another small cap mining company. I’ve long since even forgotten the name of the company.
My uncle said that both companies had made some solid discoveries in the world of mining. The two companies were expected to merge. As a result, he predicted that the value of both companies would multiply.
Well, you might have guessed it by now, the merger never happened. Both companies went broke, and my $10,000 evaporated. I was 10 years old and my life savings to that point in time evaporated. But, none of this is the reason I’m telling you this story.
There were several powerful lessons in that story. Do I wish I still had those $10,000? Of course. Had I invested them myself, I expect that I would have multiplied them many times over. What you get when you don’t get what you want is an education. So all I have to show for those $10,000 is an education.
So what was the lesson?
Listen to find out.
Mark and Tami Kenney are multi-family investors. In a few short years they have acquired about 4,500 units of multi-family apartments together with their partners. It's enabled them to abandon the corporate life, and focus on their passion. Join me for a great conversation about how to make the transition from small projects to larger multi-family apartment investing.
Michael Flight is a principal at Concordia Realty from the Chicago suburb of Oak Brook. He specializes in shopping center investing nationwide. Just because retail is going through major changes, doesn't mean there isn't opportunity. Join me for this immensely educational conversation about investing in shopping centers.
You can reach Mike at www.concordiarealty.com
In late-18th-century America, something of minimal value was often described as being “Not worth a Continental,” which referred to the Continental Dollar, the American currency at the time of the American Revolution.
The continental was paper money. It had occurred to the colonists that, as their revolution was costing quite a bit to maintain, they could go into “temporary” debt to finance the war. Pretty soon it became clear that the debt could not be repaid. The printing of paper banknotes resulted in inflation. The solution? Print more of them. Further devaluation of the continental motivated the colonists to print more… then more… then still more. The Continental became worthless, either for trade or for repayment of debt.
The new country, the United States, then did something quite unusual. In its new Constitution, it created a clause to assure that this would never happen again. Under Article I, Section 10, the states were not permitted to “coin Money; emit Bills of Credit; [or] make any Thing but gold and silver Coin a Tender in Payment of Debts.”
This week, Federal Reserve Chairman Jerome Powell testified in front of the Senate Banking Committee in its semi-annual Report on monetary policy. In that discourse, Chairman Powell described one of the debates inside the Federal Reserve. The question was whether the 2% target for inflation was a maximum or an average. It was felt that during times of economic weakness, prices would not rise as fast, and therefore there could be some relaxation on the inflation target during times of economic boom such as we are experiencing now. This would average out over time.
It’s interesting that this particular statement didn’t invite any discussion with the committee members.
There seems to be a misconception among law makers that inflation is the increase of prices, when in fact, the increase of prices is actually the symptom of inflation. The real inflation is the inflation of the money supply. Every time a government prints money, there is inflation. When there is more money available, then people become more willing to pay more for goods and services. The increase in prices is the consequence of too much money in the system. Lord knows we’ve been pumping money into the system over the past 10 years like never before. Quantitative easing was the new buzzword for printing money. We went through 3 rounds of quantitative easing over the past decade. The fact is, much of the money never made it into the broader economy. It was held within the banking system to restore profitability to banks that otherwise would have needed to earn their profits the old fashioned way.
Before the financial crisis, the fed balance sheet represented about 6% of GDP. Most of the demand for funds was for currency, and a small amount for reserves. After the financial crisis, the Fed balance sheet grew to about 25% of GDP. Most of that was to fund demands for reserves at banks, and the Fed also purchased assets. Assets is code for the Fed purchasing long term government debt. So when the US government borrowed money to bail out the financial system, the Fed printed the money, and the government issued bonds which the Fed purchased and earned interest on. Pretty good gig.
Banks made 237B in profits last year, some of which came from cash reserves given to banks using printed money by the Fed. The excess reserves held by the banks above their statutory requirements were in turn loaned back to the Fed and the banks earned interest on those excess reserves. Wait, what? The loan had zero risk, and was basically a license to print money for the banks.
So here’s the bottom line. Inflation is a phenomenon of having too much money in the system. It causes prices to rise, albeit not uniformly.
If you’re going to be playing the finance game, it makes sense to know the rules of the game.
Today’s show is a personal story. We are all part of this journey called life. The daily struggles are universal. Managing time, energy, diet, exercise, finances, commitments, friendships, cleaning up messes and mistakes. Finding the time, and creating the space to live out your dreams.
I’m a pretty driven individual. If you’ve been listening to the podcast you probably have that sense by now.
On today’s show I want to share with you something deeply personal about how I start my day each day.
I’ve discovered that some days are better than others. Some are more productive than others. There are a number of factors that can come into play which affect the quality of my day.
Sleep is high on the list. Sometimes I sleep really well, and other nights I don’t. There doesn’t seem to be a consistent pattern.
My mindset in the morning is consistently the best indication of what kind of day I will have.
This morning was one of those when I woke up at 5:00. I had got to bed late and it took me a long time to fall asleep. I was really tired, my mind was already racing with thoughts about the day ahead and the insurmountable todo list. I was tired and I was anxious.
My wife was still sound asleep next to me and I didn’t want to wake her. So I put earphones on and listened to several podcast episodes including Hal Elrod, author of the Miracle Morning. By the time my wife was stirring, I was full of energy, determination and focus on the one thing that would be my focus for the day.
And then I slipped into the best part of my morning routine. I rolled over, gave my wife a hug for several minutes. We then put on the recording of our guided meditation. We both lay in bed, side by side, holding hands, while we did our meditation together. I gave her a kiss on the back of her neck and thanked her for being my best friend.
We then got out of bed and continued with our morning routine.
On today’s episode we are going to slow things down. Often in this fast-paced world, with a short attention span we only see a very small snapshots what is really happening. When you turn on the television news you will see a nine second segment of the Federal Reserve Chairman‘s testimony in front of the US congressional committee. We are talking nine seconds out of a two hour hearing. There is no way that any nine second snapshot taken at random in those two hours can be an accurate representation of the full two hours.
So today I want to introduce a concept that is not new in the world of cinematography. It might be a first on a real estate podcast however. On a podcast we don’t have the benefit of visual aids. So I want you to close your eyes and imagine a beautiful scene of a mountain panorama. There’s a big blue sky. there are the snow capped peaks. There is a Valley down below.
To start with we’re looking at a single panoramic image a single snapshot in time.
Now we’re going to do an upgrade and technology and go to live motion video. Whether the video is shot at 30 frames per second, or 60 frames per second very little changes from one minute to the next. After about 20 seconds, we’re starting to get bored.
Your attention is starting to wander and you were easily distracted.
But imagine for a moment if the cinematographer left the camera in place for several months and shot one frame every 10 minutes. By animating those individual images into a time lapse sequence over a longer period of time you see the movement of the clouds. you see the change of color from Dawn through mid day, until dusk. You see the change of the seasons. You see the weather storms come through and attack the mountain peaks with great fury. A time lapse sequence gives you a completely different perspective than a still image, or a live stream video.
Find let’s photography was invented by Louis Schwartzberg. As it turns out, he did not set out to develop time lapse photography. When he was just starting out early in his career, he did not have a lot of money. He wanted to capture high quality images. By shooting a single frame every 20 minutes, he could make a four minute roll of film last a lot longer.
Little did he know he was going to invent an entirely new way of looking at the world.
If time I photography can be more effective at helping you see a flower open from a close bud to a full-blown blossom, or the morning sunrise on the beach, what else can this technique be applied to?
Today’s episode is another AMA episode. Today's question comes from BJ in Raleigh North Carolina. He sent me quite a detailed package of information that is far too much to cover in a single episode. However, I will summarize his project and give my initial reaction based on the information provided.
BJ is looking to assemble five different parcels of land into a single large development site for a multi family apartment complex. His question relates to how he should best negotiate with the five independent landowners, hoping to make the land part of the equity contribution to the deal. Presumably that would reduce the amount of capital required and would have the benefit of allowing the landowners to participate in the future value creation of the apartment complex.
First of all, congratulations BJ for having the guts to consider a project of this size. Larger projects have the benefit of providing enough value and enough cash flow in order to afford all of the necessary skills you need to pull it off. Having said that, large projects also represent more risk. Larger projects come with larger problems.
While there are many aspects of this project that I could provide comments on, I’m going to zero in on three items.
- Undertaking a project of this size requires that you have the right experience team working with you. You can still be one of the principals of the project, but you need to bring in people with significant development experience building multi family apartment complexes as partners in the project.
- If the success of the project requires all five landowners to agree to similar terms in order for the project to be successful, your chances of success start to drop very very quickly. Complexity, is the enemy of any project. The land assembly process can be lengthy, and the negotiation can be difficult. Sometimes, it is simpler to raise the money and buy the landowners out. However, you only want to do that once you are assured that you will be given the entitlements that you require. You want to negotiate a deal with the landowners whereby you offer a lower price today that is a reflection of the as-is market value for the land, or a higher price once the entitlements have been granted. Land that is entitled for an apartment project is worth substantially more than land which is being used for agriculture. By keeping the negotiations with each of the sellers simple and straightforward, you increase your chances of success. Also want to look at the minimum land assembly required for your project to be viable. That may not require all five parcels of land. You might be able to get away with only three parcels. Yes it will be a smaller project, but it will also be simpler.
- The third area that I noticed in the information you provided is the construction budget. I am currently building a project of similar size and scope in another state. However, construction costs in North Carolina will not differ materially from other locations in the south. When I look at your construction budget, it seems quite low to me. If you under estimate the cost of construction, you are setting yourself up for failure. The definition of success or failure of any project often has little to do with the actual cost of the project. It has more to do with the expectations that were set at the beginning. If you set the expectation of too low a construction cost, you are almost certain to fail. My third piece of feedback on the construction cost is easily solved with my first piece of feedback which is to make sure you get some experienced apartment constructors involved as part of your core team.
On today’s episode we are talking about the laws of economics and how they apply to the world of investing.
As real estate investors, we make choices about where to invest, when to invest, what us a class to invest in, and the positioning of the product in the marketplace. When you perform due diligence on a particular opportunity there are always three elements to look at in detail.
- The team.
- The overall market
- The specific deal.
One of the realities of our modern world is that nothing ever stays the same. You’ll either be in a period of growth, or a period of decline. That is true of companies. That is true of cities. That is also true of individuals.
Often, the period of growth or decline can be self reinforcing. What I mean by that is growth attracts growth. decline attracts decline. During periods of decline, people tend to run the other way.
Whenever you have a self reinforcing function, it has the effect of accelerating. That is why you see companies experience financial difficulty slowly at first and then all of a sudden they’re in bankruptcy.
Cities can experience the same phenomenon.
Most cities are incorporated. It’s a special type of corporation that gets its power from the province or state in which it resides. Cities are not enshrined in the constitution. Municipal governments get their power usually from an act of the state or provincial legislature.
So why is all of this important?
The financial health of any municipality is determined by a number of complex factors. Most cities get the bulk of their revenue from property taxes. In an environment of rising property values, property taxes increase in proportion to the value of the property. As long as there is an influx of population, and an influx of jobs. We will tend to see rising prices for real estate and rising tax revenues
If people are leaving the market, and prices are falling then local government revenues will fall unless the city raises the tax rates. This is politically unpopular, and therefore politicians are reluctant to use that approach.
The other major variables are on the expenditure site. Cities spend most of their money maintaining the infrastructure of the city, paying local welfare checks, education, and funding other entitlement programs like pensions for those city workers who used to be in the police department, the fire department, or one of the numerous municipal bureaucracies.
It’s no secret that the number of people retiring has accelerated to an unprecedented level. We can expect about 10,000 baby boomers to be entering retirement across North America every day for the next 15 years.
So what happens when a city can no longer afford to meet its pension obligations? At first they start to cut back on discretionary spending. Next they start to defer maintenance on critical infrastructure including roads, water, sewer, and public parks. Then they cut back on the number of teachers in the schools. We see class-size is increasing.
When that trick stop working the city has no choice but to declare bankruptcy. We have seen it in Detroit which owed $18.5B in debt. We have seen it in Stockton California. Even Jefferson county Alabama had to seek bankruptcy protection with 4 billion in debt. The 36 cities across the United States that have declared bankruptcy are just the tip of the iceberg.
So my question to you was a simple one. When you make an investment decision to invest in any municipality, are you taking a close look at that city’s upcoming pension liabilities? Are you paying attention to their ability to fund those liabilities?
On today’s episode, we are discussing what it’s like to work with an architect on a new development project. Few people understand the myriad of constraints that have to be balanced when developing a new building. Justin Greenleaf is one of the principals at the architecture firm of Greenleaf Lawson based in New Orlean, Louisiana. Join me for this insightful conversation.
Limor Markman is a Toronto based real estate educator and host of the national TV show The Fortunate Future. She's one of those folks flying around the country hosting weekend workshops for new investors. Unlike many educators, she's still an active investor. On today's show we pull back the curtain on what it means to be a real estate trainer.
Today’s episode is the book of the month book review. In order to be considered for a book of the month the book has to meet a very simple criteria. It has to be impactful enough that it will change your life or your perspective on the world. Whether it does or not is entirely up to you. You might read the book and comment on what a great book it was. But if you don’t internalize the book and make a part of you, you’re missing the point. The book selection this month is certainly worthy of meeting the book of the month criteria. Many people go through life looking for answers. But before you can look for answers you need to be looking for better questions. Our book this month is “The one thing” by Gary Keller. Gary Keller is the founder of the Keller Williams real estate empire. He began this brokerage and grew it systematically organically into the dominant and largest brand in real estate brokerage in the world. The ONE Thing has made more than 400 appearances on national bestseller lists, including #1 Wall Street Journal, NewYork Times, and USA Today. It won 12 book awards, has been translated into 30 languages. Unless you have been living under a rock, you have probably heard of the title. I’m certain that many of you have read it. So why would I be selecting the one thing for the book of the month? I read the book about 4 years ago. It had a big impression on me at the time. Fast forward to 2019 and the memory of the book and its lessons have faded. I need this book every bit as much today as I did in 2014 when I read it for the first time.
On today’s show we are talking about a new rule under the generally accepted accounting principles that could profoundly affect the way commercial real estate leases are written in the future. If you’re a property owner where your commercial tenants sign multi-year leases, you need to pay close attention.
There is a new rule under GAAP that requires companies to disclose long term lease obligations on their financial statements.
For all leases with terms of more than 12 months, the revised standard requires a right-to-use asset to be added to the asset section of the balance sheet and the present value of the related lease obligations to be included as liabilities.
So let’s say you have just signed a 10 year lease with lease payments of $100,000 a month, of which there are, say 9 years remaining. You would be required to add a right of use asset on your balance sheet in the value of 9 x 1.2M or 10.8M. You would also have a liability added to your balance sheet in the amount of $10.8M. Next month that liability would be 10.7M, 10.6M and so on as you draw down the residual balance of the lease.
You might argue that there is no change really since the you’re adding an asset and a liability to the balance sheet and they fully offset each other.
However, not everyone looks at liabilities the same way. These changes could make lessees appear significantly more leveraged and cause unprepared entities to violate their loan covenants.
Remember, just because the generally excepted accounting principles have changed, doesn’t mean that banks and lenders are going to change their underwriting rules to accommodate the changes in GAAP. Many bank underwriting rules compare the loan amount to the total liabilities. If these long term liabilities now appear on the company balance sheet, it can change the way a bank looks at a borrower.
This week Berkshire Hathaway published their investor newsletter. It’s widely read and many people look to the newsletter for clues on how to invest. Warren Buffett and Charlie Munger are legendary in their sustained performance. The company has been conservative and continues to build cash reserves. They haven’t made a major acquisition in nearly 3 years. The part that I noticed in the newsletter has nothing to do with investing, but instead on financial reporting. With the latest changes in GAAP rules, it will become increasingly difficult for investors to make sense of what is happening with a company. In 2018, Berkshire Hathaway reported 24.8B in operating earnings, a 3B non cash loss from its interest in Kraft Heinz, a $2.8B cash gain on the sale of assets, and a $20.6B loss from a reduction in unrealized capital gains. The net result of all those items is a report of only $4B in net income, down from $44.94B a year earlier. So here’s the problem, the company reported a record in terms of operating earnings, but rather dismal results against GAAP earnings. A new GAAP rule requires the company to include the a reduction in unrealized capital gains as part of their earnings. Both Warren Buffett and Charlie Munger, believe that rule is silly. They argue that the new rule would produce wild swings in their bottom line. Let’s look at their quarterly results during 2018. In the first and fourth quarters, they reported GAAP losses of $1.1 billion and $25.4 billion respectively. In the second and third quarters, they reported profits of $12 billion and $18.5 billion. In complete contrast to these gyrations, the many businesses that Berkshire owns delivered consistent and satisfactory operating earnings in all quarters. For the year, those earnings exceeded their 2016 high of $17.6 billion by 41%. What is Warren Buffet’s advice? Focus on operating earnings, paying little attention to gains or losses of any variety. So here’s the problem. Investor shave long since had a hard time making sense of corporate financials. The emphasis has been on operating earnings for a long time. But a complete set of financials requires a look at the income statement and the balance sheet. If you ignore the balance sheet, you can hide an awful lot of really important facts about the company in balance sheet transactions. When you add another layer of noise on top of the accounting to include unrealized gains or losses, it makes the balance sheet virtually impossible to use as a tool. I know why the accounting profession has added this rule. Many companies have avoided making prudent transactions in order to avoid declaring losses. This will force an additional level of transparency. But the quarterly report will cease to be a meaningful trend indicator when you consider the level of stock market volatility. The financial statements will be valid for only a few hours. After that, they will cease to be a meaningful representation of what is happening at a company. We live in an era of fake news. We have now entered an era of fake financials.
About a decade ago a Brazilian private equity firm called 3G Gapital made waves in the US when it spent billions to buy Americas most notable food brands including Kraft, Heinz, Burger King, Oscar Mayer and Budweiser.
Following the acquisitions the new owners relentlessly cut costs including mass layoffs to create greater efficiency and profitability. The companies single minded ability to improve profit margin‘s through cost cutting sent ripples throughout the entire food industry. A decade later 3G‘s strategy appears to have failed. Earlier this week craft Heinz wrote down the value of its Kraft an Oscar Meyer brands and other assets by $15.4 billion and disclosed an investigation by the federal securities and exchange commission into their accounting practices. In after hours trading shares fell nearly 28%.
While they were paying attention to the expense line and the bottom line, they failed to pay attention to what it might take to grow the top line revenue. During that time consumer tastes have changed. Consumers are seeking healthier alternatives, more organic food, and many younger consumers have shifted away from beer towards drinking cocktails. Through a series of acquisitions 3G bought its way into the beer market and owns 40% of the volume of beer consumed in the United States. They completely missed the microbrewery threat to their business. Maintaining a healthy business requires adapting your product offer to your customers tastes.
Real estate is a business like any other business. It is the same as selling beer, and ketchup, and hotdogs. Even in housing customer tastes do change over time.
If you fail to invest in developing product that is going to be at the forefront of customer demand this year and next year, you will find yourself on the slow road to obsolescence.
Putting a fresh coat of paint on that 1950s bungalow is just like putting a new label on the can of Budweiser. For the loyal consumer of Budweiser, the new label maybe eye-catching. But if your customers have shifted to craft beers or cocktails, the new label won’t do it. You will be playing catch-up in the market at best, or possibly bankrupt at worst.
So what do today’s tenants want? They want certain amenities in a rental property, or an office building.
Your customers don’t want 6 inch floor tiles. They want large rectangular 12 x 24 floor tiles. They don’t want laminate counters. They want natural stone like granite or a semi synthetic stone like quartz.
They don’t want ornate colonial style trim on the windows and doors. They want clean lines that are crisp and modern.
They may tolerate the old stuff, but that doesn’t mean they want it. I will tolerate Heinz Ketchup, but my taste has shifted towards other brands that have more vinegar and less sugar. You see the folks at Heinz never asked me. I had been buying Heinz ketchup for years. But then one day, my taste changed. I wanted a more natural ketchup. I never gave them the feedback. There was no way for them to know I had stopped buying Heinz. The folks at Heinz were busy looking internally for ways to save money. They eliminated single sided printing to save paper. They cut the corporate jet that the Heinz family used to use. Profits were growing, so everything looked good. All of a sudden they woke up one day and discovered that Victor and thousands like me had stopped buying Ketchup and Oscar Meyer hot dogs.
On today’s episode we’re talking about how you can prevent the next violent social revolution. History has seen its share of violent uprisings.
The French revolution which began in 1789 was not just a single event this was a protracted period of a people that lasted over 10 years. The causes of the French revolution or complex and still debated amongst historians. The French revolution took place after a seven-year war and the American Revolution. The French government was deeply in debt. it attempted it’s financial status through some pretty unpopular taxation’s games. Years of worsening living conditions for the general population combined with several years of bad harvests inflamed popular resentment of the privileges enjoyed by the establishment and the Aristocracy.
The American Revolution was a Revolt that took place also over an extended period of time. It started in 1765 and ended in 1783.
I believe we are witnessing a moment in history right now that is not that different from the early days of the French revolution.
The yellow vest movement has brought hundreds of thousands of protesters into the streets all over France for 15 weeks in a row.
The five star movement in Italy which was elected to lead the current governing coalition had its roots roots in a similar Anti establishment popular uprising.
Increasingly a disenfranchised segment of the population is looking to government to solve the problem. There is no question that there are millions of honest hard-working people who are struggling to create and maintain a minimum living standard.
I believe that lack of financial education is one of the major causes of financial hardship, and what will emerge as social unrest.
Even in the United States there are political movements afoot that could be enormously destabilizing. One of the best examples is Alexandria Ocasio Cortez who was recently elected to the US Congress. She was a very vocal opponent of Amazon creating jobs and investing in the New York area.
When the population is angry and politicians get elected who don’t have the most basic understanding of grade 3 level arithmetic, the outcome can be extremely dangerous. The newly elected Congress woman does not understand the difference between a tax reduction and a tax credit.
Most of us would agree that there’s a big difference between a gift card and a discount. You can’t spend a discount but you can spend the gift card. Amazon was given a discount not a gift card. When politicians who don’t understand the difference between a gift card and a discount further confused and in rage the public , The results can be highly unpredictable. Arguments get made and they are completely irrational and have no basis in actual fact. Whether the lie is intentional or simply naïve, both are equally dangerous.
This is where the importance of financial education comes into play. Every single one of us shares a burden of responsibility for ensuring not only that our children become financially educated, but also those members of our society who are most Disconnected from understanding how money and our financial system works.
If we fail the educator society on how money works, more and more members of our society will continue to look up in the sky with arms outstretched waiting for the giant piggy bank in the sky to shower money up on them. If the piggy bank doesn’t produce enough, they will band together and smash the piggy bank in a violent uprising.
If you don’t believe me, take a deeper look at what’s happening in France right now. These are not just the usual protests in the center of Paris or in other major cities like Lyon. These protests are occurring even in small villages and towns all over the country.
Today's episode is a real life case study recorded live at the Real Estate Guys, "Secrets of Successful Syndication" conference in Dallas Texas. This project started like many of our projects with a clear plan and solid market data to support the thesis for the project. Everything changed when the city announced a plan to expropriate 1344 properties in the area, including the land for this project.
Today's episode is about a purchase that ended in a lawsuit. This story is packed with suspense, uncertainty, stress, and wisdom. Check it out.
On today's episode we are talking about the major considerations when designing a new development site.
Developers often look at a site from the perspective of how many units of finished product you can place on the parcel of land. This is an area that is fraught with complications.
I can tell you from first-hand experience that the number one constraint on virtually every project is road access and parking. It is relatively easy to increase density by going vertical. However every time you do so, The density is going to gobble up more land for parking. Whether you're building an apartment complex, or a small residential subdivision, or even an office complex, parking and driveway requirements will dictate the design of the overall project.
On today’s show we’re talking about how to negotiate with your general contractor.
Often times, when a project is designed by an architect there are design tradeoffs that seem perfectly reasonable at the time. The design process consists of a complex puzzle of conflicting constraints of function, aesthetic, zoning constraints, building code, and cost. At the end of that process you get a few hundred pages of detailed drawings and specifications.
The General Contractor will take the drawings send them out for bid to multiple subcontractors and get multiple bids for each sub trade. When the results come back, how should you as the project owner respond to the General Contractor?
Most of the time the General Contractor will provide you with summary data for each of the major divisions of work. You will get a number for site work, another one for framing. You will have a bid for electrical, for plumbing and so on. This will probably consist of about 25 line items.
So the question is, how do you decide if any of the numbers are acceptable? Even if the summary numbers match your budget, you may still have a problem. If the numbers are too high relative to your budget, you definitely have a problem.
So how do you resolve it? You could try and negotiate with the General Contractor. But in my estimation, that kind of arm twisting is a pretty blunt instrument. You may get a little bit of savings but not much.
In my experience the problems in most construction budgets are the result of mismatches in assumptions. In some cases, design decisions have unintended consequences that if they were fully understood at design time, would never have been made.
We were recently reviewing a construction budget for a project and were shocked to see $225,000 in expenses for outdoor electrical work on the site. Only by digging deeper, we were able to determine that the electrician had specified 25,000 linear feet of 1” conduit on a site that measures 300 feet by 800 feet. Where on earth could you even begin to bury that much conduit on such a small site?
By digging into the details we were able to determine that by using building mounted lighting, we could eliminate the lamp posts, and by using optical fibre that is specified for outdoor underground placement, we could eliminate the need for the 1” conduit almost entirely.
This whole process is called value engineering. By systematically digging into the details of the specifications with the General Contractor, and the architecture team you can create major savings in a project.
I’ll give you another example. We had completed the site plan and everything was working. But when we looked at the routing of the utilities, we had far more pipe circulating around the property than necessary. This was because the spacing between the buildings was too narrow to allow the utilities to be routed between buildings. They had to be routed around the buildings at much higher cost. By making a minor change to the site plan, we were able to move the buildings apart and save a bunch of money on the underground utilities. We also noted that when the buildings were close together, we had to use fire rated windows on the walls that were close to the neighbouring buildings. Fire rated windows cost about double the price of regular windows. The end user can’t tell the difference. The windows look the same. By moving the buildings apart we were also able to save 50% of the cost of the windows.
Each one of these savings are not huge by themselves. In every case, we were able to save cost without sacrificing quality or the value of the end product. The changes would be completely invisible to the end user of the property.
After you’ve completed that exercise, and saved as much as you can save on the scope of work, then it's time to negotiate with the contractor and save a few pennies more.
On today’s show we are talking about the most insane statements to come from economists in recent memory. I’m acutely aware as I’m sure many of our listeners are, of the unsustainable levels of government debt in the US, Canada, the UK, France, Switzerland, Italy. I could go on. The justification for the debt is that as long as the interest rates are lower than the level of real economic growth, that is growth of real GDP, the debt is sustainable. But folks here is where the argument falls apart. We know that our population is aging. That’s not a secret. We also know that as people age, their spending patterns change. They spend less. They also borrow less. So the argument that economic growth will continue at the same 2.1% rate in the coming years in the western economies makes no sense. We saw in Japan that economic activity stagnated as soon as the working population peaked as a result of the aging process. Japan’s lost decade happened as soon as the domestic spending shrank. In other countries in the west We have a population that as it retires switches from actively contributing to economic output to one that is strictly consuming from society. They spend less. They pay less in taxes. They demand more from the society in terms of social security and health care. The deficit spending at the federal level gets the most attention. But the federal government has the tool to print money at will and inflate its way out of the problem by effectively devaluing the currency. That’s a way of taxing the population without them really noticing. The government racked up a new debt of $2750 for every man, woman and child in America this year. That comes to $7,100 per household. That’s in addition to the already existing debt of 22T dollars. That debt comes to $67,000 for every man woman and child in the country, or a total of $173,000 per household. Nobody seems to be talking about this. This is a train wreck in the making. Here’s what my friend Peter Schiff had to say about the 22T in debt. He says, "This is just a funded portion of the debt. This is where the US government sells a bond and somebody owns that bond. It doesn't include the 70T in unfunded liabilities like what the government owes for Social Security, or guaranteed bank deposits, or mortgages, or student loans, or all that nonsense. That's not there. Those are contingent liabilities. They're just as real. They're not even part of the national debt calculation." I may not be an economist, but I can perform pretty basic arithmetic. The economy will not grow faster than interest rates. A country will never grow its way out of a deficit. Remember, interest rates reflect a connection to the rate of inflation and also carry a risk premium. When countries carry irresponsible levels of debt, the risk of default clearly goes up. It’s not the Federal reserve who will establish the risk premium, it’s the open market. When China decides it no longer wants to hold 25% of the global float of US treasury bills, who will step in to buy them? When Saudi Arabia decides it no longer wants to hold dollars so much, who will step in to buy them? We see countries in South America with much higher interest rates than the US. Why? Because they’re at higher risk of default. When investor sentiment shifts and global investors don’t want to hold US dollars any more, then the US dollar will carry a risk premium, the same as Argentina.
My friend Michael from Pennsylvania has started a Real Estate Meetup, and in a short time has attracted a sizeable high quality audience. His question is “What is the benefit of hosting a free event versus a paid event?” Michael, this is a great question. There are two main ideas that I want to get across in answering this question.
We are familiar with the concept that you go to the marketplace and buy something, you are the customer, and the thing that you bought is the product. If you buy a cake, the cake is the product. If you buy Spanish lessons, the Spanish lessons are the product. We are also familiar with things that are offered for free in the marketplace. If you’ve ever used Facebook, or watched a YouTube video, you’re comfortable with the notion that you are getting something for free. In exchange for that, you’re allowing the owner of that platform to present a bunch of different advertisements. In that instance, while you are the consumer of the content, you are no longer the customer. You are the product. You are being used. The question is when does it cross a line and you start to become abused. In some circles this is called an “ethical bribe”. The advertiser offers you a free white paper in exchange for your email address. You know that you are going to receive more emails in the future with offers for some kind of product sales. You might want the free white paper and judge that the value you will get from the free report is worth the hassle of getting an occasional email. You are being used, and hopefully not going to be abused. The second idea I want to leave you with is that of culture. When you create a culture of education, of community, of abundance and you stick to that, then you weed out the takers. You know who those people are. They’re only in it for themselves. They are the ones who come in to your house and steal the bar of soap, who take an extra can of soda for the road from the buffet at the end of the meeting. They’re the ones who walk around and put their business card on every chair without asking the host of the event if its OK to do that. Sometimes the taker is the host of the event itself. We’ve all been to those events. They’re the ones who will lavish compliments upon you while they’re trying to sell you something, and then not pay any attention to you after they’ve made the sale. They’re off hunting for their next victim. With a paid event, you tend to weed out the takers from the audience. Those who are willing to make an investment of cash, are willing to pay for value. They’re not just in it for something free.
On today’s show we’re talking about one of the key take-aways from the World Economic Forum in Davos Switzerland only a few weeks ago.
A few weeks ago the Forum published their annual Global Risks Report. This 114 page document was developed in partnership by the Zurich Insurance Group and Marsh and McLennan Companies.
Insurance companies make it their business to understand risk. But before we can dive into the content of the report, it’s important to actually define what risk means.
Risk, by definition is something that is not in your plan. If you’ve planned for 4 weeks of weather delay in your project, and you only experience 3 weeks of weather delay, then weather delays are not a risk because they’ve been already accounted for in your plan. Risks are anything outside your plan.
When we talk about risk, we divide the risk into two components, likelihood and impact. The likelihood is the likelihood of the risk coming true. The impact is the actual impact of the risk if it comes true.
The purpose of talking about risks is to ensure you have contingency plans for the risks that represent a threat to your business.
The top 3 risks in terms of likelihood are all environmental. This encompasses extreme weather events, earthquakes and the like. It’s amazing to me how in this day and age in 2019 the number of commercial property owners that are still under-insured in high risk areas. Taking the time to read and understand your insurance policies to understand their limitations. Insurance policies can be incredibly complex to understand. There can be language in one section that is in conflict and superseded by opposing language in another addendum. When a claim is made under a policy, the claims department will send the policy off to the legal department for review. That process makes the insurance company your legal adversary at that point in time. Their job is to pay as little as possible under the policy.
The two highest likelihood man made risks are theft, data theft, and cyber attacks.
Here too, this is an area where there are simple procedural safeguards that you can employ which will protect your business. This past week I was speaking with the owner of a jewelry business who has experienced employee theft on multiple occassions. We’re talking theft in the hundreds of thousands of dollars.
Cybertheft is a major issue that continues to make headlines. Data breaches have exposed personal data of billions of people.
The largest was in India, where the government ID database, Aadhaar, reportedly suffered multiple breaches that potentially compromised the records of all 1.1 billion registered citizens. It was reported in January that criminals were selling access to the database at a rate of 500 rupees for 10 minutes, while in March a leak at a state-owned utility company allowed anyone to download names and ID numbers.
It amazes me that in that environment, people still send wire transfer instructions via email without an old fashioned safety protocol to doublecheck the details by phone. If your investor sends a wire transfer and the email is hacked and the money ends up in the wrong account, you may be liable for hundreds of thousands of irrecoverable stolen funds.
Kevin Bupp is an expert in Mobile Home Investing. It's clear from our conversation that Kevin has developed a very deep expertise. He's the host of the Real Estate Investing for Cashflow Podcast.
Russell Gray is the co-host of the Real Estate Guys Radio Show. He is also the co-host of The Investor Summit at Sea, one of the most incredible professional growth events in the world. On today's show we are talking about the Investor Summit at Sea and why we both attend each year.
This is a special bonus episode about the recent Amazon announcement that they were pulling out of the NY second headquarters.
I predicted that Amazon might take this step despite the public announcement back in November.
The major political objection was the tax incentives that were negotiated with Amazon as part of the overall decision to locate in the NY area.
On the surface, you could spin the story to say that the government was caving to the interests of big business and handing the richest man in the world a check for $2.5B dollars.
But there is another narrative that is equally valid.
Before the Amazon announcement, there were no 25,000 jobs and none of those people were paying federal and NY state income tax and NYC property tax.
After the investment of $2.5B by Amazon, getting a $2.5B tax break, the 25,000 employees would pay an estimated $875M a year in taxes each year, every year. When the 2.5B in initial tax breaks are exhausted, then Amazon corporate becomes an even larger contributor to the tax base.
It’s pretty simple math. Before Amazon there was no tax income to the government. After Amazon arrives in NY there would have been $875,000 a year in new tax income, and going up from there.
The handful of very vocal politicians who opposed Amazon coming to town are not business people. How do I know this? Because they cannot do the most basic of grade school arithmetic.
Before Amazon no $875 million in tax. After, $875 million in tax.
It’s pretty simple math. The most vocal opponent has been senator Mike Gianaris.
In this case he decided that jobs coming to his area was a bad idea. He didn’t want more investment coming into the area. He opposed gentrification.
It’s kind of like the person who is in a fight with someone else. But you drink the poison hoping the other person gets sick.
The other nuance to this story is the boom and bust cycle in the area resulting from the boom that never happened. Over $500M of Real estate changed hands since the November announcement. Some of that may have been under contract prior to the Amazon announcement.
The biggest loser is the owner of the Citigroup tower who now needs to find a tenant for close to 1M square feet of space that Citicorp is vacating in 2020.
The big winners will likely be Virginia, Nashville, Austin and Dallas.
On today’s show we’re examining a potential source of revenue for your income property that has the benefit of a little extra cash flow, plus being environmentally green.
The economics of solar power have been somewhat marginal over the past several decades. That’s why governments have stepped in and offered generous incentives to subsidize the cost of a solar installation. That subsidy usually came in the form of higher purchase prices for electricity contributed to the electrical grid from a solar farm. These projects would not have been economically viable without the subsidy.
But in recent years, the cost of electrical panels have come down to nearly $1.00 per watt of produced capacity. The total installed cost is about double that amount. Most of the subsidies have disappeared. The payback on a solar project is anywhere from 10 years to 20 years depending on the local cost of electricity and the number of effective daylight producing hours. The high capital cost of these projects have made them unattractive due to the long payback. Two alternatives are the solar lease or the power purchase agreement.
Solar Leases have been around for years now, but in recent years they mostly come with performance guarantees, which can make the difference between them and power purchase agreements pretty small. On today’s show I will explain the differences, but in practice, none of this should matter and whether it’s a lease or PPA probably won’t have a huge impact on your decision making.
You might be thinking, “Wait, you mean you can lease a solar system?”
The answer is yes.
Welcome to the Valentines Day edition of The Real Estate Espresso Podcast.
I’m celebrating Valentines Day with my wife on the beach in Mexico. We take time each year to recharge. Sometimes taking holidays is easier than others. We have both been working really hard over the past several months and even into our holiday, there hasn’t been a day of true disconnect or relaxation for both of us. Project timelines spanning several months or years can mean that a holiday in the middle of a critical time of a project can be problematic. Whether it’s making sure the podcast is loaded and ready for the next day, sending a document to a lender, or dealing with an issue at the office, it seems there is always something requiring attention.
Through the process, I’ve learned that life is a journey. The global independence that the internet affords makes it possible for me to produce shows from my home office, from a hotel room anywhere in the world, or sitting by the beach in the South of France. You might have heard the birds chirping in the background over the past week.
So on this Valentines day, I’m asking the simple question “what is love?” Is it a thing?
The dictionary isn’t quite sure what it is. It’s defined both as a noun and a verb. As a noun, it’s described as an intense feeling of affection.
It is also defined as a verb, as in the sentence “Do you love me?” Or “I’d love a cup of Espresso.”
But even when you describe love as a feeling, the feeling doesn’t just magically happen on its own. It requires some kind of action for the feeling to result. So in that context, I believe love is really a verb. By describing love as a verb, it’s clear that its an action word. Love of any kind requires action.
Love doesn’t just happen. It’s the result of a choice, a choice to love. All persistent choices require commitment, conviction, tenacity, and integrity. Long term decisions require long term commitments. All too often people make decisions based on transient emotional states.
I would not describe myself as someone who is hungry. But I was hungry last Tuesday around 5PM. That was a temporary state. I made a short term decision to eat something to deal with the temporary state. I didn’t make any life altering decisions because I was hungry at that moment in time.
Loving successfully requires commitment to loving. It requires energy. The feeling of Love, now we’re talking about the noun is one of those basic human needs like Oxygen, water and food. Without food you can starve. Without oxygen you can suffocate. Without love, you will die. The short term replacements for love like lust are just not the same. They’re hollow and empty.
Love can’t persist without commitment.
On today’s episode we are asking a very simple but important question. It’s a question that I believe rarely gets asked when considering a property.
The question is, “Who would choose to live in this property and are they someone who I want to have as a client?”
If I improve the property, will that change change enough about the property to attract my ideal client?
If the property is a single family home on a nice street with mature trees and all the surrounding properties are well kept with new cars in the driveway, who will choose to live here?
If the property is a 1960’s 4-Plex and the paint on the trim is peeling and there are two broken cars in the driveway that clearly haven’t moved in a long time, who will choose to live here? Is that client my ideal target client?
If the property is a 2 BR condo in a luxury building with amazing amenities and gorgeous views of the Rocky Mountains and is a short walking distance to Main Street shops and restaurants, who will be my target client?
You don’t need to choose a property where only you would choose to live. That might rule out too many good opportunities. But you do need to identify the client who will choose to live here and insert yourself into the narrative of their life, even for a few minutes. When you do that, it’s time to ask a few important questions.
- If I choose to live here, is it perfect for my lifestyle?
- Can I afford it?
- Can I see myself here for a long time?
- When I invite my friends and family to visit, would they be proud of me for living here?
These are very simple but powerful questions that may give you additional insight into the property that you are about to buy.
This is what in marketing is often called the customer avatar. It’s a specific individual who exists in real life. They are your ideal client. You know them well. You know what they like. You know their values.
Colliers recently completed a market report on the state of office space. It contains some startling revelations. Yes flexible office co-working space segment of the market accounted for 1/3 of all new leases signed last year. While still a small percentage of the overall market, its the fastest growing segment.
Last week, NY State Senate Deputy Leader Michael Gianaris announced he will introduce legislation to eliminate tax breaks for capital gains when investing in federal Qualified Opportunity Zones. “The Opportunity Zone program was intended to help economically distressed areas but is being abused to grant tax breaks to already overdeveloped neighborhoods,” said Senator Michael Gianaris. “The state should not be made to suffer due to the misuse of this program.”
This live Q&A session was part of a keynote address in Lancaster, Pennsylvania. Some great questions that were very specific to the local geography, but universally applicable to almost any geography.
Chuck has developed all types of properties in his extensive career in real estate investing. But he's a self storage specialist. This will be obvious from our conversation.
Chuck can be reached at creativerealestatenetwork.com/podcast
He has written a book on creative financing and it's a free download for our listeners.
This episode was recorded live at a conference in Lancaster, Pennsylvania. The question came from a member of the audience. In my estimation, the one thing that distinguishes success is "resilience". I give an example of our neighbors who tried every trick under the sun to block the existence of our project.
The economic indicators of recession are starting to trickle in. We are seeing ballooning inventories in multiple sectors of the economy. When times are good, suppliers increase production to meet the rising demand. But as always, they get a little ahead of themselves.
The auto industry sold 17.3 million vehicles last year. Frankly, some of that consumption was the result of major storm damage from settling insurance claims from late 2017 and from 2018, as opposed to true economic demand for new cars. Demand peaked 3 years ago at 17.55 million cars and trucks. Today, inventories on dealers’ lots total 3.95M vehicles. That’s nearly 11 weeks of inventory. The industry considers 30 days of inventory to be healthy. However, if you consider that the current forecast for 2019 is for less than 17M cars to be sold in the US. If we see a drop in demand, then we’re really sitting on close to three months of inventory. General Motors already announced the closure of 5 plants across North America and Ford is also reporting a 27% drop in operating income for 2018.
Part of the driver for new vehicles last year was a change in tax rules that permit businesses to expense the entire vehicle in the fiscal year compared with the previous requirement to depreciate the capital expense over several years. The stimulus resulting from the rule change is unlikely to repeat in 2019 to the same degree.
Other sectors of the economy are also showing signs of slowdown. As we’ve previously reported, the residential housing sector is seeing inventories increase in several markets. Inventories are up 116% in Seattle Washington, up 131% in San Jose California.
Britain is in a full blown contraction, but that’s driven by the Brexit uncertainty. The cloud of what will happen looks like it will take considerably more time to resolve. Prime Minister May has survived a non-confidence vote and has indicated that she will renegotiate the terms of Brexit with the European union after the original deal was resoundingly defeated in the British parliament. The EU has said they’re not willing to renegotiate. The calls for a second referendum is getting increasingly louder.
Italy reported economic numbers for the 4th quarter. They reported the second full quarter of economic contraction putting them technically into recession territory.
France showed contraction in Q4, and December retail sales in Europe overall had their largest one month drop since 2011.
For many people it was a boring game. Well into the third quarter the game was tied at one field goal each. No team had managed an offensive run of more than five possessions of the ball. It was a game dominated by defence. Games that involve lots of scoring, passes and receptions that defy physics make for an exciting game. Watching a game that is dominated by offence is so much fun. As real estate investors, those are the days of acquiring new properties, and of growing the portfolio. They’re exciting times. Everything is appreciating in value. The game of offence in real estate is fun too. Tom Brady was in his 9th Superbowl. He’s by no means a rookie to the championship game. Anyone who watched the game would acknowledge that Tom Brady didn’t play his best game. He had some weak passes. He looked slow and tired in the first quarter. Offensively, the New England Patriots didn’t look like the tight disciplined dominant machine we’re accustomed to seeing. He won his 6th Super Bowl on Sunday night, tying the record for most number of championships in Super Bowl history. Playing defence is boring. But playing defence won the Super Bowl. There’s no doubt that we are in a phase of the market cycle that shows lots of signs of weakness. This is not the time to play offence. It’s a time to play defence. Prices are high. That means that we will likely see lower prices in our future. The days of playing offence will return. But you need to survive this next down cycle and be positioned to take advantage of the next wave of market growth when it returns. As real estate investors, the time to buy is when the market is falling, when investor sentiment is negative. We may not want a repeat of 2008, but we do want to see good buying opportunities in our future.
On today’s show we’re talking about the main areas that owners run into trouble with contractors. There are 5 areas that I see over and over again. In some cases, these learning have been the result of first hand experience. There’s nothing more humbling than making a mistake when you really know better.
I believe it's really important to get references when selecting a contractor. My favourite source of references come from architects. They get to experience a wide range of contractors over an extended period of time. Over time, they figure out who is good and who isn’t. So here we go the top 5 problem areas when developing contracts.
1) Scope
2) Payment
3) Purchasing
4) Termination
5) Liens
Today's episode shatters the law of reciprocity. It's a myth, it doesn't exist. There' another mechanism at play that we actually have more control over. When we understand that, the results are more powerful.
Abhi Golhar is the host of the nationally syndicated Think Realty radio show. He's a multi-family investor, a syndicator, and he specializes in tax liens. Join me for a fun conversation with Abhi. You can learn more about him at https://www.abhigolhar.com/
Leslie Smith is with Commercial Direct, an online based commercial lender who specializes in unusual commercial opportunities. Her take on commercial lending is a little non-traditional. But they've been in business for 20 years. A fascinating and refreshing approach.
Today's bonus episode was recorded live on the beach. It's also available as a video on Youtube. I describe how the show is recorded and edited.
On today’s episode we are reviewing the book of the month. In order to be considered for book of the month, the book must meet a very simple criteria. It has to capable of changing you life, or your perspective on the world. Of course, whether it changes your life is up to you. You can consume the content, remark on how good it is and then continue your life without making any changes. In fact, that’s what most people do. If that’s what you do, you’re missing the point. This month’s book is “Building a Storybrand” by Donald Miller.
Today's episode is part 2 to Adam's question on Corporate Debt. On today's show we dig deeper into corporate debt and what are some of the issues surrounding it. What can cause corporate debt to become toxic? After studying is more deeply, I believe that we have a lower risk of another credit crisis resulting from corporate debt. The real threats to our economy and our banking system come from government debt that is a runaway train.
Today's episode is based on a question from Adam in Riverside California. He asks about how much of a risk corporate debt represents to our economy.
This is a great question, and it's a complex one to answer. So it will take a couple of episodes to answer this question. Today we're going to explain one of the widely accepted debt rating systems, and on tomorrow's show we will go deeper into answering Adam's question.
The global debt of all forms grew from about 100T ten years ago, to about 170T today. The debt to GDP ratio has grown as well and has grown by 25% in that same 10 year period. Globally we are carrying a lot more debt. In that same time, corporate debt has grown from 37T to 66T, a growth of 29T in that same time period. We will dig deeper into what all this means on tomorrow's show.
In the meantime, how much has your personal and business debt grown in the past decade?
Today's episode in another AMA episode - Ask Me Anything. Robin asks...
In one of the previous episodes, you had mentioned about the advantages of using mini-splits in terms of cost savings. I had spoken to an HVAC specialist about this concept, and he mentioned some drawbacks.
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Any kind of serious maintenance/replacement down the line would require tearing down walls which can be quite expensive.
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Tenants cooking something greasy and clogging up the outlets.
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Operational efficiency: In the case of a furnace, tenants are familiar with changing the furnace filters which are quite simple.
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In Canada, the weather can be quite extreme like what he had experienced in January and even using some resistive elements may not generate enough heat inside the units.
Just wondering what are your thoughts regarding these concerns.
Thanks,
Robin
Today's show is about another example of government overreach. In January 2017 Canadian federal government instituted a mortgage stress test rule. This required banks to subject borrowers to a financial stress test when applying for a residential mortgage loan. The stress test was designed to protect the marketplace and the banks from the risk of rising interest rates in the future. Borrowers would need to qualify for an interest-rate two points higher than the actual prevailing interest-rate in the market. So if interest rates were at, say, 3%, the borrower would need to qualify as if the rates were 5%.
In the latest twist the Canadian federal government is now examining whether the same rules should also be applied to private lenders. This information was reported by the Globe and Mail who cited three sources directly familiar with the talks taking place behind closed doors.
Since the rule change in 2017, fewer borrowers have qualified for bank financing. Borrowers have responded by turning to alternative lenders to complete their financings. In the wake of the rule change last year there has been considerable growth in the market share for private lenders. Private lenders have different underwriting rules than banks, and they generally charge a premium compared with banks for an equivalent loan. So these loans are more expensive for borrowers. But they are a last resort for many borrowers.
Today private lenders represent about 10% of the residential mortgage market. That represents a significant increase compared with a year earlier.
Some banks have expressed a concern that private lenders could eventually represent 15% of the overall market.
The banks have been quietly lobbying the federal mortgage insurer and the federal bank regulator over the loss of market share.
So exactly what is the rationale for imposing more rules on private lenders? The regulators are concerned about the risk being transferred from Banks to private lenders. So here we have a government that has created a side effect from a new rule that they didn’t anticipate. Their idea of a solution is to layer another rule on top of the new rule instead of eliminating the rule that caused the problem.
Wait a minute. Since when has the government been concerned about protecting accredited investors from taking financial risks?
In my opinion this has nothing to do with protecting wealthy investors. The federal government does not want the banks to lose market share. In fact I would argue that the banks have lobbied the federal government and convince them that they should protect the banks market share.
I’m not hearing complaints from private investors that they government to step in, to help them with new rules on how they should under-write their loans. They’re not asking government to compensate them for losses that haven’t even happened, or that might happen at some point in the future.
Golf popularity is declining. It's a combination of cost, demographics, and the number of new golfers entering the sport. Many golf courses are being targeted for redevelopment. On today's show we have the story of an 18 hole course in Ottawa where the community opposition to redevelopment is extremely high. I'm talking with community leaders Jenna Sudds, and Neil Thompson to get their perspective on the redevelopment proposal. We also have George Ross, former Executive Vice President of the Trump Organization on the show talking about his experience helping acquire golf assets for the Trump Organization, and his perspective on redeveloping land that was once a golf course.
Ty Crandal runs an organization called Credit Suite. They specialize in all forms of business credit, separate and distinct from personal credit. They assist companies in establishing credit scores for their business that will enable them to qualify for revolving credit facilities based strictly on the business, and not necessarily a fixed asset as collateral.
Earlier this week the Wall Street Journal published a story criticizing the return of stated income loans. Many of the loans that precipitated the 2008 financial crisis were also stated income loans. It was one of those “here we go again” stories.
It tells the story of a 30 year old nursing student who managed to get a $610,000 loan with no tax returns and only 12 months of bank statements and letters from clients. How Outrageous!
How irresponsible for the banks to be taking these types of risks again.
The rest of the story is stated somewhat factually, but not really analyzed in depth. Here are the facts. The lender made the loan at 65% loan to value. That’s a pretty conservative ratio. Even if the borrower defaults, the lender stands a very good chance of getting back 100% of their principal.
Stated income loans are not a problem in and of themselves. In the world of residential underwriting, the fundamental assumption is that the path to repayment of the loan is from someone’s employment income.
If you’re not repaying the loan from your employment income, then there must be something wrong with the borrower.
The problem with the stated income loans back in 2005-2007 is that they were high ratio loans. They were offering loans with very low downpayment, and no verification of documentation. That’s not the case here. If a homeowner doesn’t have 3 years of income history, it doesn’t mean they’re a bad risk. Bank accounts give a more complete view of spending history than a tax return which provides a snapshot at a single point in time.
I think there’s nothing wrong with stated income loans.
When a lender lends you money, they’re asking only one question. “If I lend you money, how am I going to get it back?” How will I get it back if things go well? How will I get it back if things don’t go well.
The safety of a loan is the combination of security and risk. These variables together define safety.
The security of a loan is based on the lender’s recourse. If the loan ratio is at 90% equity, and 10% loan. I don’t care what the borrowers income is. If I have to foreclose on that property, it will be the best day ever.
On the other hand, if the loan is at 10% equity and 90% loan, my exposure as a lender is much higher.
The risk of the borrower defaulting becomes much more important to the lender in the second scenario.
If I’m a lender at 10% loan to value, I don’t care what the risk of default is. I’m always going to make my money back no matter what the borrower does. There is virtually zero risk as long as I’m secured on title in first lien position. My protection in that instance is the security and the low loan to value ratio.
On today’s show we examine what it means to be an investor. An investor is very distinct from a business operator, and distinct from a business owner, different than a broker, and different than a trader. An investor is truly passive. They don’t work for their money. They put their money to work for them.
An investor isn’t a gambler, nor are they a speculator. Those folks are called gamblers and speculators.
The return on investment for an investor is based on the creation of value. That happens when you invest in a business, that business generates profit, and returns value to investors in the form of cash flow and increased valuation. In a liquid market, some of the value can be realized in the form of an exit, that is a sale.
Trading isn’t investing. Trading shares is the same as trading tomatoes at a farmers market, or trading baseball cards at a baseball card convention. You’re buying assets at a lower price and selling at a higher price. The profit is made in the arbitrage.
Imagine if you went into the farmers market and decided you were going to invest in tomatoes. Sounds like a strange thing to say and it is. There’s no way you could be investing in tomatoes in that environment. You could be trading tomatoes. That is not Investing.
Let me be clear there’s nothing wrong with trading. Trading is perfectly fine. Only problem arises when you confuse trading and investing. If you think you’re investing and you’re really trading, you might be surprised by the outcome.
On today show we are talking about functional obsolescence. So what exactly is functional obsolescence?
Those old 1950’s houses with the small kitchen that you can touch both walls when you stretch your arms out fully. You can put in new cupboards and appliances, but you will still have a tiny 1950’s kitchen. The functional flow of the home won’t match the needs of today’s modern family where the kitchen is the hub of virtually any home.
Economic obsolescence is when the functional obsolescence is curable, but not practically curable due to the cost of making the changes compared with the cost of outright replacement.
Incurable obsolescence is when there is something about a property that simply cannot be fixed without a complete reconstruction. These are things like ceiling height. A modern office building simply won’t do well with an 8 foot ceiling height.
The US is building the most expensive wall in history. But it's not the one on the front page of every newspaper.
The proposed wall along the US Mexico border an expensive undertaking. The proposed budget allocation is a little under $6B. That’s a lot of money. In context, it represents less than 0.1% of total federal government spending. Spread over two years, it’s less than 0.05% of total federal government spending. It is a rounding error on a rounding error. When you consider the nearly 3.7M government contractors who haven’t been paid for nearly a month, the government has saved more than 21 billion by not paying those contractors in the past month.
Clearly the fight isn’t about money. Whether the wall gets built or not is largely immaterial.
The real wall that has already been built is inside the country. It’s the wall of political division, of hardened ideological positions. It’s the wall that exists when it becomes impossible to separate the message from the messenger.
If you represent my ideological adversary, my response to you will not be conditioned by what you say, but who you represent in the narrative that’s going on in my head.
In that world you might say something that I actually agree with, I’m going to disagree with you simply because you said it. In a world like that, there is no dialog, there is no listening. There is only confirmation bias, and distortion
There is really only one way to destroy that wall. It involves listening. But before you can listen, you need to know all of the different forms of listening. You might think there is really only one form of listening. You’re either listening or you’re not. But in fact there are 8 forms of listening.
1. Ignoring listening
You can talk all you want but nothing gets in. I am not interested in your problems, your requests, or your pleas. Don't talk to me I'm a cold brick wall.
2. Partial listening
I'm listening as I do another task. I'm distracted. I may mumble a reply or absently nod my head.
3. Selective listening
Selective listening involves listening for particular things and ignoring other parts of the conversation. We hear what we want to hear and pay little attention to or ignore parts of the conversation which we don't want to hear
4. Know it all listening
As you try to tell me your story, I'm already filling in the blanks or offering your solutions. I know what the problem is and I have the solution. Stop talking already so you can go fix your problem and I can get on with the rest of my day. I've stopped listening and I'm thinking about what I'm going to say back to you.
5. Pretend listening
I pretend to listen but have not intention of actually doing anything you say. I do not actually take in anything that you say. Are you finished yet?
6. Active listening
I am engaged on our conversation. I paraphrase your words back to you and ask relevant questions. Some people think that active listening is the highest form of listening. It’s actually not.
7. Empathic listening
I listen to go beyond sympathy for the speaker. I'm trying to truly understand how you are feeling, how you experience the world and events that unfold around you. Empathic listening means I’m willing to take a few steps in your shoes. It helps people feel heard and can be a corner stone to positive relationships.
8. Focused listening
I'm listening to you and I want to make sure you are being understood. I want you to feel understood by me. I truly internalize and understand your words. I'm not offering any advice or solutions just fully listening.
On today’s show we’re talking about the news. I’m finding that in many cases the news isn’t really news. It’s not new enough to be news and it’s not old enough to be history. So what is it? It’s almost stuck in no-mans land.
A lot of people, including investors rely on the news media to figure out what is going on in the marketplace. There’s no doubt that there is a lot of good content out there in the news. But there are a few problems with that process.
As I’ve been working on the podcast for about a year now, I’ve noticed a few things:
1) The major news outlets can’t afford to focus on local. The audience is too small. The business side of journalism has changed so much that increasingly news outlets need to focus on a much larger audience. The best example of that is Jeff Bezos purchase of the Washington Post. He has used his knowledge of the internet to transform that newspaper from a local Washington print publication to a national online publication with over 12,000 pieces of new content per day. But the problem with appealing to a wide audience is that you end up quoting national statistics. As you know, real estate isn’t a national business. Its a local business. In fact its a hyper-local business. What’s happening in Pocatello Idaho is irrelevant in Chicago or Nashville. These outlets resort to reporting things that frankly is so diluted that it adds very little value. A story about interest rates which affects everyone nationally is about all they can truly report on that is of broad interest. I’ve now come to understand why the Wall Street Journal has such a dismal real estate section. But here’s the key. When I notice something specific in a local market, I’ll report it. While rent control in NY may not apply in Phoenix Arizona, there are political voices all over the country that agree with what is happening in New York. It’s local and specific, but it’s also universal. But you the listener have to connect the dots and determine if it applies.
2) In the process of creating the content, I have my finger on the pulse of what is going on in the marketplace. It doesn’t work for me to simply quote USA Today or the Globe and Mail on the podcast. I would not adding much real value if I did that. I’ve discovered that I’m seeing real trends by talking to other investors. I’m able to figure out what is happening in the market before it gets reported in the news.
This was illustrated very clearly with two episodes in the recent past.
On January 4th I put out an episode on the impact that student debt is having on delaying home buying for the current generation of university graduates. This week, the Federal Reserve came out with a statement that also reported the same phenomenon.
In the past month I reported that one title agency in silicon valley had seen an 80% drop in closings in a month. That’s a huge shift in transaction volume in a very short time period.
On Friday, the Wall Street Journal published a story that homes for sale inventories have risen dramatically in a number of markets across the country. In San Jose California, for sale inventories increased 131% in a month.
My reaction to that story was “Of course. I saw that coming a full 4 weeks before it appeared in the news." I saw the student debt issue long before the Federal reserve came out with their report which was widely covered in the news.
The reason I’m telling you all this is because I’m not doing anything special except paying attention. If you’re a serious investor and you are in the flow of what’s happening in the marketplace, you don’t need to rely on the news to draw conclusions. You can rely on your own senses.
You will see things more clearly and sooner if you just trust your own eye sight and your own ears. More importantly, you will see with greater clarity than any news outlet can give you.
Deann O'Donovan is the CEO of AHP Servicing, a Chicago based company that specializes in rescuing distressed loans. The company is crowd funded and combines a unique business model and an innovative funding model. You're going to love this episode.
This episode was recorded live as part of a keynote address to a real estate investment club in Lancaster, PA. An audience member asked a great question on how to become a developer, and a followup question on how to create the track record to attract investment capital whether it is debt or equity.
Two great questions. Check it out.
On today’s show we’re talking about some of the excellent global research performed by accounting firm Price Waterhouse Coopers.
Two days ago we talk about the worst asset class in the PWC survey, that is retail. Yesterday we talked about Warehousing and Fulfillment which are at the top of the PWC survey.
Today we’re talking about senior housing. This is an area where my company is making major investments this year. The senior housing and care sector is still generating buzz, and frankly has been for several years.
Who is investing in senior housing?
PWC reported that debt providers set aside generous annual allocations. This is consistent with my findings as well. Virtually every lender I speak with mentions that they have a strong interest in senior housing. Nearly 60 percent of the three largest health care REITs’ investments are in senior housing.
This year has seen a lot of new capacity.
A wide 16-percentage-point difference exists between occupancy rates for the most occupied senior housing market (San Jose at 95 percent) and the least occupied (San Antonio at 78.6 percent). Much of the excess capacity has been built in Sun Belt cities like Phoenix, and parts of Florida. But this over supply is mostly in primary markets. Some secondary markets and tertiary markets have been largely ignored and are facing acute shortages.
We talk about senior housing as if it is a real estate play. It’s actually a service business with a real estate component. From an expense standpoint, the number one expense is staffing. In that sense senior housing looks more like a hotel than, say, an apartment building.
The second major challenge in senior housing is labor. Increasingly, operators are reporting labor shortages in all occupations, ranging from care managers to executive directors. In the last year, average hourly earnings rose 2.7 percent—up from 2.5 percent on average in 2017.
The key in senior housing in senior housing is attracting and retaining talent. Wages are part of the equation, but even more important are working conditions. That’s where we believe our senior housing model is superior not only for residents, but also for staff.
There’s no question that many of the major players have built new capacity ahead of the demand. Much of this new capacity has been in primary markets.
Taken in its entirety, it is a time for a cautious near-term approach in the senior housing sector. Currently, some operators face challenging market conditions since supply has outpaced demand. Operators and investors who underwrote deals with 90 percent or 95 percent stabilized occupancy rates a few years ago are facing pressures as they open into markets with 85 percent or lower occupancy rates. In a time of rising expense pressures, where average hourly earnings for assisted living operators are increasing at a 5 percent annual clip, achieving NOI expectations may be difficult. In fact, there was recently a highly visible bankruptcy of an operator in the San Antonio market. Many in the industry were surprised. Frankly I was not. Some of these new complexes are taking years to fill.
You’ve heard me beating the drum of the supply and demand, supply and demand. It’s crazy to me the number of people that only seem to analyze the demand side of the equation when making investment decisions. That’s very dangerous.
On the other hand, investors who have partnered with solid operators located in strong markets are seeing outsized investment returns. Take a look at senior housing, but do so cautiously.
On today’s show we’re talking about some of the excellent global research performed by accounting firm Price Waterhouse Coopers. They recently published their latest prediction reports for a number of geographies around the world.
Yesterday we talked about the worst asset class in the PWC survey, that is retail. Today we’re going to the opposite end of the spectrum. It’s really a story about changes in the retail environment. Where there are changes, there are winners and losers. Retail’s loss is a win for warehousing and fulfilment.
On today’s show we’re talking about some of the excellent global research performed by accounting firm Price Waterhouse Coopers. They recently published their latest prediction reports for a number of geographies around the world.
The data reflects the views of individuals who completed surveys or were interviewed as a part of the research process. The data comes from 1630 people who responded to the survey or were interviewed individually.
Over the next several days we’re going to pull out a few significant items that are worth noting from this 108 page report.
The top areas for investment according to the PWC report are:
- Warehousing
- Fulfillment
- Workforce housing
- Senior Housing
- Midscale hotels
- Medical office
I find it comforting that my company is currently investing in 4 out of the 6 areas listed as the top asset classes for 2019.
We will talk more about these other asset classes on future episodes. Today we’re going to zero in on the worst asset class on the list.
Heading up the worst asset classes are virtually all forms of retail, with suburban malls and big box stores at the worst end of the list.
The buzzword in retail is Experiential retail.
“You will see a lot more experiential retail. You need to give people a reason to go to a retail location.” So what is experiential retail? It combines an element of retail and entertainment.
A great example of that is "House of Vans" in London. It certainly lives up to the company motto of being “off the wall”. Vans is a maker of athletic shoes that target the skateboarder market. House of Vans is a location where art, music, BMX, street culture and fashion converge, you can find almost everything you can imagine across the 30,000 square feet building. There’s a cinema, café, live music venue and art gallery, the bottom floor holds the most unique feature of the building; the concrete skateboarding bowl, mini ramp and street course.
While some retail experts are claiming that experiential retail is the future, I don’t buy it. There’s no question that a few retailers will transform the buyer experience through innovations. That will no doubt help that specific retailer. It will do almost nothing to help The owner of retail real estate. The price per square foot you can get in rent as a retail landlord is a function of supply and demand. it’s very simple. If there is too much supply and not enough demand, prices will fall. Many businesses that have traditionally used a large format to carry local inventory are shrinking their foot prints.
When you extract the direct holding cost of the inventory, the cost of the real estate to house the real estate is a significant cost. By using warehouse space instead of retail space to store that inventory, retailers can experience the compounded savings of the higher storage density and the lower cost per square foot. Together the real estate component can be 50 x cheaper. That’s why e-commerce companies like Amazon can beat retailers with even higher shipping costs. They’re real estate costs are a fraction of the retailers.
That’s why I believe there will be a surplus of retail real estate for decades to come. When you obey the laws of supply and demand, the market will tell you what’s going to happen.
I personally don’t have a political affiliation. Politics in both Canada and the US have become increasingly polarized in recent years. If you’re like me, where I’m fiscally conservative, and socially liberal on some items, but not all, there’s no political party that speaks directly to me. In fact, I would propose that most people don’t agree 100% with either of the political extremes.
One topic I’m particularly passionate about and you’ve heard me speak repeatedly is the topic of rent control. It’s not because I’m a landlord. It’s because history has proven time and again that rent controls don’t work. They don’t produce the desired results. Rent controls treat the symptom, not the root cause.
If properties are not affordable, it’s because the free market balance of supply and demand has pushed prices up.
Gov. Cuomo in New York delivered a blow to both landlords and tenants on last week by pledging an end to vacancy decontrol, a 24-year-old policy that has removed 150,000 apartments from rent regulations in NY state. Tenants will be celebrating, but only for a short time. The problem is that governments can’t compel investors to make investments where they will lose money.
But the entire state government — including the Senate and governor’s office — are now in Democratic hands, with newly elected progressives pushing for much stronger tenant protections.
Cuomo responded “yes” when asked on WNYC radio whether he would sign a law to abolish vacancy decontrol if it passes the Legislature. He said “One of the big pieces in an affordable-housing program is going to be a reform of the rent regulations. It doesn’t provide additional units of affordability to the extent we need. I still believe in production and supply. But reforming the rent-regulation system, especially vacancy decontrol, can make a major difference.”
Vacancy decontrol was implemented under GOP then-Gov. George Pataki. At the time, Republicans sympathetic to landlords had leverage by threatening not to renew the entire rent-stabilization law, which was expiring.
Here is the story of a property located in mid-town Manhattan. It’s a 6-plex in the Murray Hill neighborhood on the east side. I took a close look at this property last week. This neighborhood is one of the more expensive areas in Manhattan. Here are the particulars on the property. It’s a 6 unit building. The building is fully occupied and the apartments rent at $1,136 per unit per month. This is an area where apartments routinely rent for over $4,000 per month. The asking price for the property was $4.5M. There is no way to justify the purchase of the property as an income property. The numbers don’t make any sense.
The listing was being promoted as a development site with significant air rights above it. That means that someone could theoretically go vertical, or buy one of the neighbouring properties and combine it with this property. That might create a large enough floor plate to build an actual apartment building with some scale. On its own, it made no sense as an income property, and it barely made sense as a development site. If that property sells for anywhere near the $4.5M asking price, it will be redeveloped into a condo building, and those affordable units will disappear from the market forever.
I was in New York last week speaking with lenders and hedge fund managers. I heard about several rental property transactions scheduled to close in the next 60 days were cancelled by the lender. The lenders are not willing to put money at risk when the math doesn’t work. We know that under rent control, assets degrade in value. The lenders I spoke with don’t want any part of that.
Government can’t mandate banks to approve a loan that is too risky. If there isn’t financing for these income properties, they will get redeveloped. There is really no choice for a property owner.
On today’s show we’re examining the price volatility of a critical building material and the impact that it can have on the cost of both construction and renovation projects.
In March of 2018, the White House imposed tariffs on Canadian softwood lumber. Overnight, prices jumped nearly 25%-30%. The impact on the construction industry was felt immediately.
Softwood lumber makes up about 16% of the cost of new home construction historically. So the overall impact of that price increase was about 4% on the total cost of building a new home. It’s a significant increase in less than 30 days.
After that, regular market forces continued to play a role throughout the year. There is an annual pricing cycle that is tied to demand. Demand for construction materials is lower in the 4th quarter and the 1st quarter of each year. Every year, prices fall in November and December, and they pick up again in the second quarter when construction activity heats up the next spring.
Today, prices for softwood lumber are at their lowest level in more than a year. The assertion that low pricing from Canada was the reason why softwood prices were so low is, in retrospect a bit of a red herring.
The real story starts back in the 1980’s, when there were millions of acres of timber land planted in the southeastern US. The managed forests were planted as investments by companies that promoted forestry as a great long term investment. So much forest was planted at once, that many of these trees are now of harvesting age at the same time. The surplus has crushed timber prices in Mississippi, Alabama and several other states in the southeast.
At the depths of the 1980s farm crisis, when prices for agricultural commodities plunged, the Reagan administration launched the Conservation Reserve Program. Starting in 1986, it promised farmers annual payments of about $30 to $50 for each acre they planted with trees or grasses. By 1994, more than 2.2 million acres of farmland in the South had been converted to pine forest. Other federal programs added about 2.5 million acres more to the supply.
It has been a big loser for some financial investors, among them the country’s largest pension fund. Calpers spent more than $2 billion on Southern timberland, and harvested trees at depressed prices to pay interest on money borrowed to buy. Calpers sold much of its land this summer at a loss.
The 2008 crisis worsened the situation. We went through years with little new home construction in many markets. That depressed demand prompted many owners to postpone harvests. Numerous sawmills closed. Even with new demand from the housing recovery, there remains about 25 years worth of supply in the Southeast. Adjusted for inflation, the price of Southern pine is down about 45% since 2007, Saw timber used for making lumber, is at a 50-year low.
To put this in perspective, today tree growers are getting about $20 per ton of wood headed for the mill. The finished product you buy at Home Depot in the form of kiln dried 2x4’s is being sold at $2.69 per 8’ board. That comes to a price of $489 per ton. That’s a huge markup.
Most land owners are stuck with whatever the nearest mill is paying. Hauling logs cross-country chasing better prices isn’t an option. Waiting for better prices has its own risks, because after a certain age, trees become more susceptible to disease.
The constraint in lumber supply for construction is not the supply of raw material. The saw mills are the bottleneck in the supply chain. Georgia Pacific and Canfor have both announced billions of dollars of new saw mills and plant expansions.
If you’re looking to undertake a new construction project, it definitely pays to shop around. It’s clear that the lumber industry is filled with inefficiencies. It also pays to shop at the right time of year. You can definitely get some good deals right now
Mark Roscioli is the CEO of 17 Mile, LLC. His company specializes in buying and selling assets that have cellular towers as part of their makeup. This is one of the most fascinating ways to invest in real estate. It's highly specialized, but also one of the few truly passive businesses in the world. This brief conversation with expand your mind in ways you're not expecting.
Nick got his start in development with student housing. His very first project generated enough cash flow to enable him to transition from an employment situation to full-time investor in less than one year. Nick's story is not typical, but is a powerful example of what is possible with focus and drive.
You can connect with Nick directly at buildinginvestments.ca.
On today’s show we are talking about how a more expensive product can often be the least expensive solution. There’s so many examples when people try to save money they actually don’t succeed in the end. This is one of those counterintuitive situation.
On today’s show I’m going to challenge some loosely help beliefs. When I challenge loosely held assumptions, you’re probably going to say, “Wow I didn’t know that”. Most people feel energized and enlightened by challenging a loosely held belief. But if I challenge a closely held belief, the reaction is likely to be the opposite. Most will flatly reject a challenge to a closely held belief. It’s too threatening to have some core ideas turned upside down.
Today’s episode starts with a story about the fireplace in my parent’s home.
In my parents house when I was growing up, we had a wood burning fireplace I love the smell of the burning spoke. I loved the radiant heat sitting only a few feet from the fireplace and I love opening the steel curtain and pokey at the fire with the steel poker. From 1985 on words, it was almost impossible to find a newly built home that had a wood burning fireplace. They were all natural gas fireplace. It seems strange to me that a more expensive product, that is the gas fireplace would win out over a wood fireplace which in many ways is more desirable.
You would think that any home builder who is building a new home would be looking to save money. If they are going to provide a fireplace as a feature, the least expensive solution that meets that requirement is what I would expect most volume home builders to supply. Why would they use a more expensive gas fireplace. It needs a gas supply, a controller, decorative fake ceramic logs, and of course a fire box. A wood fireplace is just a metal box with a brick liner. It’s gotta be less expensive. All of that is true. But here’s the problem. When you have a wood burning fireplace, you need to build an entire chimney. Whereas the a natural gas fireplace can be direct vented to the exterior. There is no chimney required. When you take into account the additional cost of the chimney, it turns out that the gas fireplace start to look less expensive overall, even though the fireplace insert is much more expensive.
Here’s another one. The conventional heat of an apartment is done with a furnace. The cooling is done with a centralized air conditioner.
There is a lot of framing and ducting required to distribute the heat and cool air from the furnace heat exchanger throughout an apartment.
In recent years, we have started to build using the European style mini-split systems. These are both a heat pump and an air-conditioner in one. The downside to these units traditionally has been that they are not traditional. Some don’t like the look of the panel on the wall. These systems are more expensive than the traditional furnace and air conditioner. But when you take into account the fact that you eliminate all the extra framing and duct work, these systems can in fact be less expensive. Not only that, these systems give you individual temperature control in each room. You don’t need to spend money heating or cooling rooms that you’re not using. So while they’re more expensive, in reality they’re much cheaper.
What do all of these examples have in common? The local optimization of cost gives way to a bigger picture optimization. If you elect a more expensive solution locally, but can eliminate another cost element entirely, the result can be a significant savings. But it requires a change in context. Finding the cheapest material is based linear small thinking. Finding the cheapest solution requires bigger thinking.
As you’re thinking about that, where could you realize huge saving by spending a little more?
Today’s episode is the story of how you may consider collecting rent each new month.
Rental income is much like the income a grocery store receives from its clients. Client goes to the grocery store and buys fruits and vegetables, maybe some bread and butter. It is recurring income. The customer is hungry on Monday when they go shopping. By Tuesday, they’re hungry again, and again on Wednesday. Each time you go to the grocery, the store does what it can to earn your business. They make sure the fruits and vegetables are in good condition, displayed in an attractive manner, kept from spoiling by being chilled to a lower temperature.
If the bananas look terrible and beat up, you probably won’t buy bananas today.
Imagine if the grocery store experience was conducted the way some landlords collect rent on the first of each month.
The grocery store isn’t entitled to the tenants money. The grocery has to deliver value each and every day to earn your business. If they fail to do so, you will shop elsewhere.
What if, you asked yourself, what could I do as a landlord that would allow my tenant to clearly remember the value they’re getting each time they the rent?
What if each month’s rent was treated as a new sale. No sense of entitlement. What would be different?
On today’s show we’re talking about the challenges that governments face in creating rules that are appropriate and fair. One view of the world is that rules should be uniform. One set of rules for everyone. That way, nobody can claim they were unfairly harmed by a rule that’s the same for everyone. Fairness should be at the core of our legal system. If you look at what most local governments deal with, overwhelmingly it’s real estate. If you read the city council meeting minutes for virtually any city in North America, you’ll find that the overwhelming majority of the business for city council has to do with land use. There’s the occasional item dealing with parking, business licensing, or keeping pets on leashes. But overwhelmingly, cities deal with real estate. Here’s where it gets tricky. You often get rules created at different levels of government that can be in direct conflict with each other. You can also get rules that are NOT fair to everyone because the circumstances locally on the ground are different. If policy changes are brought into place to cool off the economy, or cool off a real estate market, that could be very appropriate for a city like Vancouver or Toronto. At the same time when Toronto experienced an 11.5% increase in prices, Calgary’s prices were essentially flat. Applying the same medicine to both markets might not be appropriate. Housing affordability issues in Toronto and Calgary are not the same. A set of rules that limit development in a dense urban situation might not be appropriate in an area of declining population. You may want the opposite to stimulate the growth of jobs and population. OK. So we get that rules should not be uniform. You can consider rules to be a set of constraints that are being placed upon you, attempting to limit what you can and cannot do. Another way to look at government rules, is as a set of incentives. Government in essence is showing you the path to make investments.
We typically think of rent controls being imposed for residential leases. Housing affordability is a real issue. Access to housing is considered by many to be a basic human right. Landlord tenant laws all over North America have been enacted to protect both the rights of landlords and tenants.
The latest twist being pushed in City Council in NYC is a proposal for commercial rent control. This would give small business tenants the right to demand a 10 year lease.
Commercial rent control ended in NYC in1963 when a state law mandating it expired.
Councilman Ydanis Rodriguez, who is sponsoring the new version of the Small Business Jobs Survival Act, claimed his bill is “not commercial rent control,” adding it “is about immigrant rights … and improving the small business climate in New York City.”
The Mayor is opposed to the bill. But Mayor de Blasio suggested a few months ago that the city is considering a “storefront registry” and a “vacancy tax” that would penalize landlords who leave stores empty for lengthy periods.
Customer perceptions about a rental property are formed in the first few seconds of viewing a property. Increasingly, today’s customer looks online before committing to drive to a location and view a model suite.
Everyone has walked into an apartment with an old looking front door, entry flooring that testifies to the thousands of footsteps that have worn a path into the finish. The old white appliances, are just yuck.
The savvy property owner will make investments that show the potential tenant they are maintaining their property, and keeping the property up to date.
That means making surgical investments in keeping a property up to date. That doesn’t have to mean spending a ton of money. Some of the most visible items are not expensive to replace and update.
Curb appeal can be improved by simple things that draw the attention. I like shiny stainless steel mailboxes. They’re a bit more expensive than the plastic composite mailboxes. But wow, they really stand out. They last for decades and they look amazing.
Kitchen counters can be replaced every few years for a few hundred dollars. If you use natural stone, granite has come down dramatically in price in recent years. You can routinely buy granite for $25 per square foot, about 1/3 of what it cost less than a decade ago. These small investments go a long way toward creating a desirable product.
Today show is about a magical market that doesn't exist in reality. It’s the real estate market in the Town of Springfield. Springfield much like in the TV show The Simpsons is virtually any town, but nowhere at the same time.
This imaginary town of Springfield is an amazing town. It is one of the hottest real estate markets in the world. Investors flocked to Springfield from all over the world. There are so many buyers and sellers. The rules in Springfield make it very quick and easy to buy and sell real estate. There is full transparency in the land title system in Springfield. So title insurance isn’t needed. Trades happen in seconds.
On today's show I'm talking with two investors who live in a suburb of Chicago, but on the Indiana side of the border. They're built incredibly strong systems to manage thousands of transactions. These folks have a strong set of core values that enable them to make great decisions.
I predict that this current generation of home buyers will be significantly delayed buying homes compared with previous generations. Many will be so late into the home buying cycle that they will become lifelong renters. In fact, the traditional early home buyers have consisted of the most educated in our population. After all, those with post secondary education make up the upper echelon of income earners.
If we go back to the 1980’s when I bought my first house, I came out of university with a good paying job and zero student debt. I was 23 years old. I was able to secure a high ratio insured loan to purchase my first house and only put 5% downpayment. I purchased a brand new home in 1987 and put down under $10,000 in cash. Within a couple of years, that home had appreciated sufficiently that I was able to sell it and move into a larger home. My downpayment had mushroomed from a mere $10,000 to about $40,000 for my second home. I was solidly on the ladder of home ownership.
My first home and my second home were easily affordable within my salary. But I had no other debts. I didn’t have car payments, or student loans to deal with. If I had other debts, my home affordability would have been far less.
The circumstances today are far different. The average student graduating from university with a bachelors degree has just under $40,000 in student debt. US Federal guidelines put borrowers on a 10 year track to repay their debt. But history has shown that the average bachelor's degree holder takes 21 years to pay off his or her loans.
Think about it. There are 44 million borrowers who collectively owe about $1.5 trillion dollars of student debt. Will people buy a home before they've paid off their student loans? The math doesn't add up.
On today’s show we’re talking about automating systems in your business so that you the business owner can start to reap the benefits of the business.
We’re also going to explore the differences between earned income, passive income and residual income. These are words that sound remarkably similar. But their meanings are very different.
Businesses are all active businesses. There is no such thing as a passive business. Even though your local tax authority might classify income from an apartment building as a passive income, there is nothing passive about owning investment property. In an active business, the cash produced by that business is paid out to cover expenses, debt service, any preferred equity holders, and then finally the business owners. That final piece is called the residual cash, or the cash flow from the business.
When we’re talking about passive versus active, we need to distinguish the amount of involvement in time required to earn that cash. Too much effort, it starts to look like an earned income situation.
If there is too much owner intervention required in running a business, then it ceases to be a true business.
A business must meet one very important criteria in order to be worthy of that name. You have to be able to remove the business owner from the business and for a period of time, the business can run autonomously without their involvement.
On today’s episode we’re talking about making sure your spouse or partner is on board with your business goals.
One of the greatest sources of stress in a relationship is when business goals are at odds with family goals.
How do I know about this? My wife is a marriage counselor and encounters situations like this on a regular basis.
I’ve seen several people make the transition from employee to real estate entrepreneur and lose their marriage in the process.
The greatest cause of this discord is the failure to align values between life partners.
The trailing spouse in business can translate into the trailing spouse in life. A trailing spouse in life can split a relationship apart.
That doesn’t mean that you need to go into business with your spouse. But you do need to take the time and make sure your spouse is sharing at least part of your journey of personal and professional growth.
In my case, My wife and I attend several conferences each year. That has been a great source of alignment between us.
Every year my wife and I plan which events we are going to attend together. The entrepreneurial life is a journey. Experiencing that journey together is so important. We’re strongly connected in other ways. By experiencing part of the business journey together keeps us connected in the one dimension that in reality is quite separate.
In order to be considered for book of the month, the book must meet a very simple criteria. It has to capable of changing you life, or your perspective on the world. Of course, whether it changes your life is up to you. You can consume the content, remark on how good it is and then continue your life without making any changes. In fact, that’s what most people do. If that’s what you do, you’re missing the point. In fact, it’s entirely possible that many of you have read it. At the same time, I’ve received enough questions lately that tell me this book will make a difference for you. Even if you’ve read it before, this book is so fundamental, that it’s worth a refresh. The book is the E-Myth Revisited by Michael Gerber. The E in the title stands for Entrepreneurship. The book is written as a narrative, as a fable. It’s the story of Sarah, a young lady who loves to bake pies. So much so that she decides she’s going to open a bakery. This is so common a story. We’re told to pursue our passion and to turn our passion into a business. There are two main characters in the story. There is Sarah, and there is the author of the book, who in this case is cast as a business consultant. What I like about E-Myth is the clarity and simplicity of Michael Gerber’s model. It’s easy to identify when one of the players in your business is out of position. It’s easy to see when the business owner is wearing to many hats. It’s also easy to see where the structure is missing.
2018 saw a large number of unpredictable events. Many of them were politically originated, whether it’s a steel tariff, a partial government shutdown, a regulatory change. Any time there is a change, there are winners and losers. Some are positively affected and others are negatively affected by that change. I predict that 2019 will see an expansion of uncertainty. We will have more surprises to deal with than ever before.
I predict that once the economy shows signs of shakiness, central bankers the world over will return to the practice of stimulating the economy via printing money and lowering interest rates. I predict that Interest rates will peak in the first half of the year and then start to moderate in the second half of the year.
At the same time, there are boundless opportunities. The business world is an all-you-can-eat buffet of opportunity. That doesn’t mean that any strategy will work in any location. Effective business plans a highly specific. Specific to a location and specific to a point in time.
I predict that the new US opportunity zones will attract a lot of attention in the first half of the year as the investment world becomes educated on the rules and benefits of opportunity zone investment.
Jack's company has added 400 properties under management and renovated over 100 homes in the past year. Doing this successfully requires a strong team and a disciplined approach to management. I loved this conversation about how to scale your business in a short time period.
This episode was recorded live at the Family Office Summit in Miami with Adam Adams. Adam has hosted nearly 300 events in the past two years and is a huge believer in live events. This is an approach that has attracted a large following and a significant amount of capital for multi-family apartments. In this casual conversation Adam and I compare notes on investment strategy, due diligence, and live events.
Today’s episode is about the resilience of real estate. This is the real life story of a vacant lot in what was once a bad area. I’m telling the story of a single property, but quite frankly this story has repeated itself numerous times, and I could give half a dozen examples. This story is a story about resilience, about what can happen if you know your market, and how you can recover a project that has run into trouble and ultimately profit from it.
Today’s book is “The 12 week year” by Brian Moran and Micheal Lennington.
The 12 week year is a planning book on a new method for setting and achieving goals. The 12 week year redefines a year as being 12 weeks long and with each year you get a a fresh start. That’s very different from a quarter. Quarterly planning and execution operates within the context of a 12 month year and fosters the false belief that there is plenty of time to get things done.
The 12 week year establishes a framework for getting things done in 12 weeks or less. Much like I’ve been advocating, in 12 weeks you’re not going to get a dozen objectives completed. You’re only going to achieve one or two. So their tools are geared towards setting and accomplishing one or two goals, not more.
On today’s show we’re talking about what to do during this holiday period. If you’re like most people, you are hitting the shops to take advantage of the post Christmas sales. But you’re not like most people, that’s why you listen to this podcast. You know that saving $2 on wrapping paper for next year isn’t your path to wealth. That’s small minded thinking.
For many, this time is sometimes used to catch up on reading. Taking the time to invest in yourself.
Some people use it to set goals for the coming year. I definitely do this. I take the time to reflect on the past year. There are numerous goals that I had set for this year that were not achieved. I could feel bad about it. But that’s not the purpose of the retrospective.
The idea here is to learn, to improve. The first step is to check if you actually had written goals for 2018. Dig them out. Take the time to write the actual results. There will almost certainly be a gap between the goals you set and the actual results.
What were the themes that ran through the year? Did you suffer a setback, or were you overly optimistic? Did you procrastinate or did you fail to plan? Whatever the root cause, that’s what you want to extract from this exercise. That’s where the gold is hidden, in understanding the reasons behind why things fell short.
If you didn’t set goals, the question is “Why not?” Many people don’t set goals because they can’t handle the emotional upset of falling short. They’re going to fail anyway, so what’s the point of setting goals that you won’t achieve?
There are two types of goals. The first type of goal is an attainment goal. This is where you set a big goal like “I’m going to climb Mount Kilimanjaro this year”. That’s an attainment goal. The second type of goal is a habit goal. This is something that becomes a daily practice.
In my experience, it’s the second type of goal that is actually more powerful. For example, I set a goal in 2018 to create a new piece of quality content each day. You’re experiencing that with this podcast. If I had set a goal of launching a podcast and achieving, say, 100,000 downloads, I don’t believe the result would have been anywhere near as good.
By making the focus of the goal the creation of quality content, I believe that I’ve accomplished far more than if I had set a big attainment goal. The feedback from the listeners has been awesome, and quite frankly, it was the commitment to a daily practice that caused the greatest improvement. If I had set a weekly goal, or a monthly goal, the result would not have been nearly as good.
I want you to think about the 6 roles in your life. In each of those roles you may have goals.
- Self
- Family
- Business
- Community
- Spirituality
- Friends
One of the biggest and most frequent mistakes I see people make is setting too many goals. The key to achieving is focus.
When we talk about goal setting, people often think we’re talking solely about business. In my experience, creating a goal and achieving it in one area has a cascade effect on other areas of your life.
Only a small percentage of people set goals. Of those, an even smaller percentage even look at them throughout the year. By the end of January, the vast majority of people have fallen off the wagon and abandoned their goals.
But here’s the beauty. When you set a habit goal, you have hundreds, thousands even, of opportunities to get on track. You can recommit to your goal on a daily basis.
Choose one or two goals, not more. Choose to commit to the practice of working on a daily goal.
My wife is amazing. Apart from that, she's a therapist, a marriage counsellor, a frequent guest on radio and TV on all things personal. Today's show is about managing holiday stress and establishing the mindset to have a great holiday. Have a blessed day.
Today’s episode is focused on four items in the investment world that have been either naughty or nice. The naughty or nice list is pretty long this year, and even a small fraction would not fit in your morning espresso cup. So we’re only going to talk about 4 today.
Top of the nice list. The increases in real estate prices have been nice indeed. I’m not that keen to buy at those prices, but hey, selling at high prices is very acceptable. We had several asset sales that helped strengthen the cash line on the balance sheet. Selling assets is always a hard decision. You put in all the work and the future appreciation is cut short in exchange for taking the money now. The market has peaked in many areas, and despite this, there is still tons of money on the sidelines in search of opportunities.
I’m going to declare anything real as nice and anything that’s abstracted from real as naughty. That’s a timeless fundamental, that frankly was forgotten by many in 2018. In the second half of the year, more and more people became face to face with this fundamental either by choice, or whether if was forced upon them by the marketplace.
There were a few particularly bad offenders, most of them fuelled by hype rather than substance.
2018 was the Year of the crypto fraud. There were 1,227 Initial coin offerings in 2018, having raised over $7.5B dollars. Last year Initial coin offerings raised $5B largely using crowdfunding. In 2018 more than 1,000 coins failed outright.
The irrational exuberance of the stock market was definitely naughty this year. It caught some institutional investors in its cross-hairs. The Swiss central bank was one of the king pins.
Rounding out the list, the strong economy has been pretty nice. It's meant stronger than expected rents, a high occupancies acros the portfolio.
Jeff Schechter runs a large scale turnkey investment business in Indianapolis. He defies some of the conventional "wisdom" regarding the benefits of multi-family over single family investing. In the dynamics of his market, his approach is the most successful and the lowest risk. There is no one way to invest in real estate. Have a listen to this conversation. You'll probably learn something. I did.
Keith Baker is the host of the Private Lending Podcast. He's based in Houston Texas where he invests, lends, and works with multiple borrowers to redevelop properties. Private lending is a semi-passive business that relies upon strong systems for loan origination, and loan servicing. If done well, private lending can leverage money to generate healthy returns while keeping the active aspect of the business down to a manageable level.
On today’s show we’re talking about a new report that was issued in the past week by Spectrum Location Solutions that examined the departure of more than 13,000 companies from California over the past decade.
Many real estate investors look at data from U-haul to see where people are moving. But that only talks about population migration. People who use U-Haul are not the captains of industry. Of far greater importance is the migration of capital, and head offices. After all, where the head office is located ultimately determines which jurisdiction will get the bulk of the tax revenue.
During the study period, $76.7 billion in capital funds were diverted out of California along with 275,000 jobs – and companies acquired at least 133 million sq. ft. elsewhere – all of which are greatly understated because such information often went unreported.
Today we're talking about the latest interest rate increase announced by the US federal reserve. Fed chairman Jerome Powell announced a quarter point increase in the benchmark rate. This is despite the fact that the economic data could just have easily supported no rate increase. The forward looking guidance is about as murky as ever. They are pointing toward 2 rate increases in 2019 versus a previous forecast of 3 increases in 2019.
It is widely assumed that this interest rate increase means that all interest rates are going up.
But that is not necessarily the case. As real estate investors, the cost of capital is perhaps our single largest expense.
Some loans are indexed to the Fed short term rate. Others are indexed to the six month LIBOR rate. Most importantly, long term loans are indexed to the 10 year US treasury bill. The rate for the 10 year treasury bill has actually fallen since September.
On today’s show we are talking about the use of the 911 database.
When a new property is developed, a municipal address is registered with the city or the county. Usually, that address is generated when the building permit is issued. Somehow, through a magical process this information trickles through layers of government bureaucracy and eventually makes its way into the 911 database.
The 911 database serves a critical function for public safety. It is used by emergency first responders to locate people in distress when they dial 911 from any terrestrial phone connection.
Today, the legacy phone network is a relic that maintained a geographic relationship between a phone number and a physical location. Much of the phone network’s traffic is now being carried over the Internet which has no such physical constraints. You can relocate an Internet address to almost anywhere in the world. In North America this year 80% of calls to 911 were made on cellular phones. Determining physical location with cell phones is done using radio triangulation from multiple radio towers and GPS time stamps.
Nevertheless, the legacy carriers use the 911 database as part of the foundation of their physical network planning.
We have a project nearing completion where the physical address has been in existence for over a year. Somehow, the entry in the 911 database has not been propagated to where it needs to be. The carrier is not willing to provision an optical fiber data connection without it. Even though it’s impossible to use an optical fiber to make a 911 call, the carrier requires it to provision the service.
It has taken us months of conversations with the carrier to try and resolve the issue. We have pushed from all sides. We have talked to the city, to the office that issued the building permit, to the carrier. Nobody can seem to take ownership of solving the problem.
We can all agree that not everything in life is predictable. Life is full of surprises, some of the pleasant, and some of them not.
It’s been said that a confused mind doesn’t buy. That’s particularly true in the world of investing. Investors seek clarity. Things that are too complicated, have too many variables, or have large unknowns are off the table.
Investors are a special breed. Professional investors are relying upon their money working for them. Professional investors truly attempt to quantify what their money will do.
Investors hate uncertainty. Anywhere you see uncertainty, you see falling prices. What will happen in the UK with Brexit is uncertain. Businesses don’t know if they will fall under UK rules, or European Union rules. They don’t know whether they will need to relocate in order to do business in Europe. They don’t know whether the movement of goods between Ireland and Northern Ireland will require customs and excise control. The movement of people and goods in Ireland was free, and now it could become a divided island once more. This is reflected in the falling price of the Pound sterling. It’s reflected in the falling price of real estate in London.
There are so many examples. How can you bring certainty, or at least a boundary to the uncertainty?
Another offshoot from David’s question on crowdfunding is whether the relationship based approach is going to be replaced with the faceless characteristics of the public equity markets?
Are we shifting from a country club style investing where relationship is a key factor to something closer to the stock market? How should investors and fundraisers adapt in this rapidly changing technology landscapes?
It’s a great question. There’s nothing intrinsic about real estate that requires a deeper relationship in order to invest. What we’re really talking about is the difference between private placement investing versus investing in the public markets.
There is a fundamental difference between a public and a private offering. In a public offering, you have analysts at the major brokerage houses who perform due diligence on the financial analysis. But most investors don’t even read the analysis. They look at the consensus of a group of analysts who say things like “Buy” or "Sell", or "Hold". Sometimes they say "Overweight", or "Underweight". What on earth does that mean?
There is a subtle but important difference between public offerings and private offerings. Public offerings are primarily targeted at unsophisticated investors. The additional accounting oversight, and audited financials simply tell you that the accounting is accurate. The emphasis is on the sponsors of the venture. Are they keeping the books accurately, and are they managing the funds in a manner that complies with the law. That covers one of the elements of due diligence. But what gets left behind are two of the most important aspects of due diligence.
1) Is the plan a good plan? Does it meet your criteria? What is the structure of the investment and are the assets leveraged safely with the right terms? 2) Will the market actually deliver the results that are predicted in the financial forecast?
We used the restaurant analogy last week. What we’re talking about is the difference between eating at McDonalds versus the exclusive restaurant with 10 tables and a 3 month waiting list for reservations.
You can’t organically scale the exclusive restaurant into a business like McDonalds. They’re fundamentally different businesses.
Eddie Lorin has been investing in workforce housing for most of his career and has developed close to 40,000 units so far. One of the newest innovations in the tax code, creates significant incentive for investing in areas that have been neglected. Eddie gives a really high quality education on opportunity zones and the different classifications of affordable housing. I'm going to listen to this interview more than once.
On today's show, I'm speaking with the executive director of an affordable housing and tenants rights advocacy group. She is someone who was invited by CBC News to be my "adversary" on a news story regarding rent control. Surprisingly, the host of the news show didn't quite know what to do when we were in agreement on most items.
David from Pittsburgh asks, "We see that online investment platforms such as YieldStreet, RealtyShares, PeerStreet, to name a few, are gaining momentum. For example, despite giving somewhat modest return on investment, YieldStreet has successfully raised over 500M since the company was founded in 2015 (per their newsletter in Oct, 2018). Technology such as Uber and Airbnb can have the amazing ability to create trust between strangers in transactions, mostly with the irresistible lure of convenience. Do you think these online investment platforms, by offering the convenience of investing with a few mouse clicks, will minimize the need of some elements of capital raising mentioned in your book Magnetic Capital, such as pre-existing relationship?"
David, That is a great question. In my book Magnetic Capital, I talk about 5 elements that need to met in order to successfully raise money. They are
1) Relationship 2) Trust 3) Results 4) Compelling Opportunity 5) Alignment
If you start to peel back some of these elements, notably relationship and track record, they’re really sub-elements of trust. The psychological contract of trust is a complex one with a lot of layers.
If you need $1M for your project, do you want one investor with a million dollars, or do you want a million investors each with $1? Mathematically, both will get you to the same result. But the approach needed for those two capital raises are dramatically different.
You need to establish a lot more trust to attract $1M than just $1, even if you are raising $1 one million times.
Today and tomorrow are a two for one AMA episode. That is Ask me anything.
I love to answer your questions, if you have a question, send it in, I’ll answer it live on the air.
David from Pittsburgh has a great two-part question. His question is about the number of crowd funding startups that have launched in recent years. On tomorrow’s show, I’ll answer David’s main question. On today’s show we’re going to take a look at Crowdfunding startup RealtyShare, which announced that they were shutting down due to lack of funding.
Founded in 2013, the California-based company claims to have raised more than $870 million for more than 1,160 real estate projects. Here is my take on why they went bankrupt. If they needed more funding after 5 years of operation, then they were not running a profitable business.
There is no reason for a company to burn through 63 million dollars in the process of raising $870M dollars. They clearly did not have a profitable business model. I believe the reason they didn’t attract funding is because investors were unimpressed with their inability to turn a profit. You can’t run a business that just burns through investor cash and hope that investors would come back for more.
The company reported that they needed the extra funding to grow. But in truth, they needed the funding to stay alive, irrespective of any growth.
That tells me that the company wasn’t even close. If they could not be profitable having raised $870M, why would they be profitable in the future when they were larger? Something in the math didn’t add up. When a company loses that much money over 5 years, it’s because they decided to do so. It’s not like they intended to be profitable in year 1 and missed the target.
I’m coming to you live from Miami Florida. This week I’m at The Family Office Club Super Summit, which attracts some of the most accomplished private wealth managers in the industry. We spent several days in a large conference setting and in one on one conversation with people who manage the investments for some of the world’s most affluent.
These folks have the task of making sure the money of the ultra-wealthy is put to work in a safe and responsible way.
Attendees at this conference include both new money and old. Old money is the multi-generational wealth that has been passed down through several generations. New money is wealth that was created in the current generation, usually through the hard work involving the growth of an active business. In some cases, the business has been sold and a pile of cash remains where there once was a business.
Once wealth has been created, the focus shifts from wealth creation to wealth preservation. The ultra-wealthy have the same problems that all investors have, only on a larger scale. If you are wondering where is a safe place to invest your retirement funds, the same can be said of the ultra-wealthy.
Wealth is simultaneously patient and impatient. People of wealth are not in a hurry to make a quick buck. They don’t need to maximize their rate of return. If they make an extra 5% on their money, it’s not going to change their life. They don’t like to lose money, so its far more important to protect its than maximize the growth in all circumstances. They are willing to be patient for their money to grow.
But they’re simultaneously highly impatient. They understand that time is their most precious commodity. They have thousands of details and opportunities vying for their attention. They need to be judicious about what to pay attention to. There is so much noise in the world, that they make fast decisions about what to pay attention to.
On today’s show I’m offering a perspective on the protests that we’re seeing playing out every weekend for the last several weeks in France. I managed a team of 110 employees in France for several years. In that time, I developed an understanding of French culture.
Generally speaking, the idea of protesting is deeply ingrained in the French culture. In an environment where it is very expensive to fire employees, the side effect is that it is very difficult to get hired. While the French are highly critical of the state of affairs in their country, they're even more fearful of change. Maintaining the status quo is safer than any improvement. The protests are not just about a few cents per liter of higher gasoline prices. They're protesting other changes that haven't been announced yet that could affect the security of their employment.
Recorded on location in New York City. The latest market statistics from NYC indicate a market that has peaked about a year ago and is now firmly in a downturn. We’ve gone through several years of high demand and short supply. Developers have responded with the introduction of new product, aimed largely at the upper end of the market. There is ample evidence that developers having mis-read the market demand. There has been a ton of new construction in recent years in NY. Many of those new units are priced at 30%-50% above the average sales prices in the area. They are having a difficult time selling.
If you’re an average tech worker in NY, maybe at Google or soon at Amazon, earning $120,000 a year, you can probably afford a property just about $800,000 in purchase price. That’s well below the median purchase price anywhere in Manhattan.
Several of the brokers that I’m tracking in the NY area are reporting that luxury properties are having a hard time selling. While the median price is high, we have seen huge price reductions for properties that have sat on the market for 12-18 months. Several luxury properties reported by the Corcoran Group have seen prices reductions of 30% or more.
Even in the mid-market, we have seen a 4.5% price decrease in the past year and inventory is up 23% compared with last year. Much of that increase in inventory is in the new property market. Sales are at their lowest level since 2011. 2011 is seen by many as the bottom of the market in the last downturn.
It’s hard to look at a 1BR condo priced in the millions as a bargain. But relatively speaking there may be some better pricing emerging in the market in the months to come.
Keith Weinhold is a repeat guest on the show. He's the host of the Get Rich Education podcast, and is a contributor on the Forbes Council for Real Estate. On today's show, he's giving a personal first hand account of the magnitude 7.0 earthquake that hit his home town of Anchorage, Alaska.
Whitney Sewell is the host of the Real Estate Syndication Show. He's a multi-family real estate investor who specializes in repositioning existing assets. Based in Northern Virginia, Whitney is part of a rare breed of folks who host a daily show. In this conversation we're talking about the opportunities that exist in the Dallas - Fort Worth market, as long as you have the right team.
Today is our monthly book of the month book review. Our book this month is Second Chance by Robert Kiyosaki. In order to be considered for book of the month, the book must meet a very simple criteria.
It has to capable of changing you life, or your perspective on the world. Of course, whether it changes your life is up to you. You can consume the content, remark on how good it is and then continue your life without making any changes. In fact, that’s what most people do. If that’s what you do, you’re missing the point.
A few weeks ago I spoke with Robert Kiyosaki about his book “Second Chance”. If you missed that episode, it’s episode 303 back on November 17. In that conversation, Robert talked about the book being a prophecy of sorts that was written several years ago. He also went on to say that circumstances have changed a lot since the book was written, and that many of the things that were predicted in that book have come true.
Here’s the number one reason I selected Second Chance as the book to review this month. It’s a book about resilience.
Amazon.com deal for a second headquarters in Long Island City, N.Y., has prompted NY State senator Michael Gianaris to draft legislation that would prohibit the buying or selling of real estate based on any nonpublic government action.
The idea behind the legislation is the that the law would be similar to federal securities law that bars an individual from trading stock in a public company based on nonpublic information. Senator Michael Gianaris, a Democrat who represents Long Island City and Astoria in Queens, is drafting the proposed law. It would make such real-estate transactions a felony punishable by up to four years in prison.
The implications of this are far reaching. Pay attention to what your local government is proposing.
Partnerships can be difficult. Today's episode tells the story of a very public breakup of two very experienced business people that culminated in a $700 million dollar lawsuit after four years of work, but before the project broke ground.
Some governments think that they can just increase taxes and more money will come flowing in. But when you have a situation where certain states and provinces have the need to raise more revenue, high net worth people can very easily relocate into a lower tax jurisdiction. This is particularly dangerous in places like California where the majority of the state income tax revenues are paid by only the top few percent income earners.
Today's episode is a story of overcoming adversity when your neighbors try to block your project from coming to fruition. These types of things happen in the real world and are difficult to anticipate. They're even more difficult to overcome at times and can result in costly delays. The key is in developing the relationships within the community to help you develop creative solutions.
Today's conversation with Kathy Fettke is a first hand account of the evacuations from the wild fires in California. In this personal conversation, Kathy shares her perspective on what to do in an emergency.
The Raising Money Summit held each year in Denver is one of the premier capital conferences in the nation. We had 22 speakers from all over the country speaking on various aspects of syndication. My talk focuses on the 5 fundamental principles of raising money.
On Today’s show we’re talking about a new type of nomadic worker. When we talk about nomadic workers, it conjures up an image of a hipster twenty something in shorts and a T-shirt drinking a cappuccino from an Internet café in Fiji.
They are living the lifestyle.
I am not talking about these people.
There's entirely another type of nomadic worker focused on the construction industry. These people travel around the country and work on major construction projects.
Some of them specialize in heavy earth moving equipment. Some are welders, pipefitters, electricians, and truck drivers. In addition to having a high paying job, they also get a daily housing allowance. The construction companies understand that they are coming for only a temporary assignment.
In areas where there are large industrial mega projects under construction, Hotels can be surprisingly expensive and in short supply. The daily housing allowance is not usually sufficient to cover the cost of the hotel or even a short-term furnished rental.
These nomadic workers prefer to purchase an RV and use their daily allowance towards a monthly payment on an RV. It is a good deal for the construction workers because the housing allowance will cover more than the daily cost of an RV site and their monthly payment.
If you’ve been a long-time listener to the show, you’ll know that I’m a big believer in the law of supply and demand. It’s one of those fundamental rules that you ignore at your peril.
Like any market, hotel room prices, and short term rental revenue comes down to supply and demand. In markets where there is nothing to constrain supply, the incentive exists for more and more property owners to remove properties from long term rental inventory and maximize revenue through higher nightly short term rates.
That business only works if you can achieve high enough nightly revenue, and high enough occupancy. If there is no constraint on the supply, this market will become a race to the bottom like many other markets in the sharing economy. We’ve seen it in ride sharing with companies like Uber and Lyft. As more and more cars come onto the road, you have a surplus of drivers competing for not enough riders. When that happens, prices fall to the level of tolerable pain, but nobody’s making any money. Who are the winners in all this?
The owners of the sharing platform make money on each transaction, and the end consumer gets the best possible price. The asset owners get left with all the risk and marginal profit.
So how do you protect yourself from these downward spiralling market dynamics? Have a listen.
The residential market slowdown is here, and the signs are everywhere.
Nowhere is this more evident than in the hottest markets in the country. We’re seeing the slowdown at the top end of the market, where the days on market have grown significantly, and price concessions are the new normal.
What a difference a few months and a slightly higher interest rate can make.
So many investors I know have focused on flipping houses.
Let’s look at what the data is showing. When you look at the market averages, you can’t see a problem. There has been a slowdown compared with earlier in the year, but average prices are continuing to increase, and days on market are still respectable. Nothing to worry about right?
Remember, real estate is hyper local. That means location, and market segment. For example, starter homes focused on first time buyers will have a different market dynamic compared with luxury homes, even in the same area. It’s dangerous to look at the market averages. But if you look closely, the signs are there.
One leading indicator of the slowdown is the market inventory. In San Francisco, inventory is up 42% compared with a year earlier. Seattle inventory Is up 37%. Denver is up 35%.
In Nashville, the median sales price has dropped 6% since the peak in July of this year. Inventory has grown by 32% in that time.
On today’s show, we’re talking about the notion of value. The market definition is that value is what people are willing to pay. But that’s too simplistic. As investors we seek to make investment decisions that are on the right side of history. Buy low, sell high is at the foundation. So then the right question is what is the intrinsic value of an asset?
In a world of falling asset values, it’s hard to make sense of any investment strategy, if you adopt short term thinking. But if you step back a little, the problem is actually remarkably simple.
We know that global gold production peaked a few years ago and is falling as the world runs out of gold reserves. Other precious metals are in similar shape. So why have commodity prices for gold, silver and platinum remained so low? We know the world is running out of oil, so why are oil prices falling so rapidly? Bitcoin has lost 80% of its value this year. It lost a third of its value in just the last 7 days.
If you went back through history and walked into a village and asked the towns people who is the wealthiest person in town. They would almost all point to the person who had the most land, the most livestock, or the largest number of trees. These are all forms of primary wealth. Secondary value is derived from primary value. This includes things like cash in the bank. Tertiary value is the paper that is derived from secondary value. This includes all the stocks and bonds associated with secondary value. Tertiary value doesn’t exist without secondary and secondary doesn’t exist without primary.
Problems get created when the primary, secondary and tertiary derivatives of value get separated from each other.
Hasbro has introduced a new Monopoly game this year "Monopoly for Millennials". In this game, instead of collecting cash, the winner who collects the most experiences wins the game. Whether it's a night on a friend's couch, the hottest restaurant or the weeklong meditation retreat, experiences are valued more than assets.
The idea is to instead of getting out of the rate race, take a break from the rat race and pretend it doesn't exist for a while. That's one of the most dangerous ideas of our time. We have a responsibility to engage our young adults in a conversation that mirrors real life and shape their thinking so that they achieve true freedom. In both versions of the game, the winner achieves something that is a proxy for freedom. After all, having the complete freedom to do what you want, when you want is the ultimate expression of freedom.
George Ross was executive Vice President of the Trump Organization where he was Donald’s right hand man for 37 years. To be clear, I'm not a Donald Trump supporter. I value the wisdom and insight from George who has been at the top of the industry for 60 years. He taught at the law school at NYU for 20 years. The author of two best selling books on real estate and negotiation. George Ross is a frequent guest on the show. Earlier this week we reported on the Amazon announcements in Washington DC and in New York City. Today we’re going to get George’s take on the announcement. George lives on Long Island, not far from JFK airport, in a beautiful home overlooking the water and a golf course. He’s no stranger to the traffic jams on the Long Island Expressway. Even though he lives only 22 miles from the Trump Tower, NY traffic could easily make the trip take in excess of 90 minutes each way. He lives only a short distance from the new Amazon location. Listen to what he has to say about the Amazon announcement.
Chris is a former corporate executive who uncovered a number of inconvenient truths about our economy, our energy policy, and our exploitation of the environment. This was the genesis of Peak Prosperity and a new way of life, based on a deeper understanding of the science behind the systems that power our society. Chris is not a fringe futurist, despite the fact that his message is unpopular with mainstream economists. Once you've understood the mathematical relationships between elements of our society, you can't un-see it.
On today’s show we’re talking about the top 3 employee retention mistakes that I see employers make. It’s been said that people are the key to your business. That’s true of any business and Real estate is a business just like any other business.
Employee turnover is incredibly expensive for any business for multiple reasons. Before someone leaves, they’ve already taken their foot off the gas and are coasting You will experience a period of time when the organization is short-handed You need to spend the time and money to train someone new after you’ve already spent that money once before, or perhaps more.
So what are the three top employee retention mistakes that I see?
Failing to train your staff and set expectations Failing to give employees a professional growth path Failing to trust employees
We go into them in more detail. Have a listen.
Happy Thanks giving to our listeners in the US. Whether you’ve traveled to celebrate thanksgiving with family, or if you’re taking a it easy at home. It’s a time to reflect upon the year to date, and recharge your personal batteries.
Take the time to revisit your goals from the start of the year. If you’re like most people, there are still a few that have yet to be completed. Perhaps there are a lot. Who knows?
If you’re Canadian, you celebrated Thanksgiving back in October. What I’m talking about today is every bit as much for you as it is for people south of the border.
The period between US Thanksgiving and the end of the year is one where many people’s priorities shift. Some people are thinking a lot less about work. They may be planning time with family over the holidays in December.
Take some quiet time this weekend to write down a few vitally important things. These are so important that I don’t consider them optional for anyone who is serious about achieving their goals. Listen to find out what they are....
This past weekend, I was in Denver speaking at an investment conference. I received the same question repeatedly from several attendees at the conference. Since this question comes up so frequently, I thought I would share the answer with our listeners.
Many investors who invest in multi-family apartments are looking for cash flow. How can you deliver cash flow to investors on a new construction project when the property isn’t generating income yet? Several of you indicated that you didn’t undertake new construction because your investors would want to see a rate of return from the point of investment and would not be willing to wait 2 years to see income coming back from the investment.
The answer I’m going to give you here is a game changer. We’ve been using some variation of this approach for close to 8 years now, on virtually all of our projects.
When you undertake a new construction project you put together a budget for everything to complete the project. That includes all of the elements of the physical construction, often called the hard costs. You also need to budget for all of the soft costs.
The soft costs include your architectural design, your holding costs such as property taxes, insurance, loan interest, and any fees such as building permits.
If you’re borrowing funds from a bank, you’re going to have a line item in your budget for those interest reserves.
If your investors need to see cashflow during the construction period, you can construct your budget to include a payout during the construction period. You will include a second interest reserve line item in your budget to pay your investors. Before you run out and copy what I’m proposing here, you will want to seek professional advice from an attorney who specializes in securities law to make sure whatever you offer is fully in compliance with the law. You will probably also want to get accounting advice to make sure you are not creating an offer that has adverse or unexpected tax consequences. If you plan to use retirement funds, you’ll also want to double check with your advisor who specializes in self directed retirement accounts to make sure there are no issues with using retirement funds for such an investment.
We humans have an incredible inability to see bubbles when we’re in the middle of one. They seem to make rational sense in a strange sort of way. At least some highly educated people can speak at length about why the value should be so high. They can explain the science behind it.
It’s hard to believe that people thought tulip bulbs would be the path to riches. But in 1636, valuations went into the stratosphere, only to come crashing down in 1637. At the peak, some tulips were worth 10 times the annual wage of a single worker.
After a long period of real estate prices increasing, of rents increasing, and of prices increasing, it’s easy to become conditioned into thinking that prices only go up. Rents only go up. Salaries only go up.
But they don’t. We’ve seen periods of time when rents went down. We’ve seen prices fall. We’ve seen incomes fall. In each of those cases, there was an explanation as to why that happened.
It’s too easy to look back at history and explain away what happened. That will never happen again.
Active residential listings (that’s condos, townhouses and single-family homes) finished October with 8,539 total units—a 35-percent increase over the same period in 2017.
Anecdotal data from realtors I spoke to this weekend suggests that the average days on market is now getting longer at 35 days, but still favours sellers. That’s typical of a balanced market. Something Denver hasn’t seen for some time.
Bob Burr is the President and CEO of Panther Exploration, and oil exploration firm based in Bowling Green Kentucky. Bob explains many of the facets of the oil industry from a real estate perspective. In many ways, you can participate in the oil industry from a real estate play, not with the risks of oil production
Robert Kiyosaki is the best selling business author of all time. This conversation with him was recorded in person at the New Orleans Investment Conference. It's surprising how much we see the investment world similarly.
Yesterday the new Ontario conservative government issued their first fiscal update. Of interest to real estate investors, The government is also eliminating rent control on new rental units to increase housing supply across the province, but says rent control will remain in place for current tenants. The new policy will be a reversal of sorts from an initiative the previous Liberal government put in place, which imposed rent control on all buildings constructed after 1991. Under rent controls, landlords are limited to rent increases of 1.8% this year. Electricity rates went up an average of 14.8% per year from 2008 to 2017 for a total of 133% over that 9 year period. Interest rates are landlords largest expense. Interest rates have nearly doubled in the past two years and will go up again in the next year. Yet landlords are limited to increases of 1.8% per year.
There is a solution to the root cause. Listen for a creative solution.
On today's show we are continuing our series on Amazon and the implications of the company's seemingly unstoppable growth. Yesterday we looked at Long Island city, an area of the Queens borough of NYC. Today, we talking about how Amazon also announced that Northern Virginia would be the site of their technology hub expansion. Specifically, Crystal City, a small compact development sandwiched between Reagan National Airport and Highway US 1 is the chosen site. This area has seen major tenants including the department of defence leave the area in the past decade. But employees will not live in Crystal City. The surrounding areas of Arlington, Reston, will be the beneficiaries of this new growth.
On today’s episode we are examining the larger implications of Amazons Second headquarters or HQ2 to the company's expansion plans. Last week Amazon announced that they plan to split their planned Technology hub expansion between two cities instead of one. Key to Amazon growth is access to talent.
The 50,000 jobs that Amazon points to create over the next several years are technology jobs. They’re looking to hire software developers, mobile content developers. This isn’t just about hiring. Let’s think ahead. If Amazon is doubling their core technology workforce which makes up the backbone of the company, they are forecasting at least a doubling of the size of the company as well. Imagine a world where Amazon has twice the market footprint compared with today. This week New York City, and Washington DC are celebrating the coming influx of 50,000 high paying technology jobs. Where there is a big winner in this game, there are numerous small losers spread all over the country.
A team of New York City law-enforcement officers swarmed a Manhattan condominium last month, issuing 27 notices of violations for illegal hotel use in one of the largest single crackdowns on short-term rentals.
The raid was at the Atelier, a 46-story Midtown luxury tower located on 42nd street near Times Square. This may be a sign of what’s to come. New York and other cities are seeking to limit short-term rentals that can run afoul of local laws designed to limit hotel-style stays in residential buildings.
The latest twist in the war on short term rentals is a new bill, which becomes effective in February requiring online rental services, like Airbnb, to disclose the addresses of its listings and the identities of its hosts to the city’s Office of Special Enforcement on a monthly basis. Failure to do so is subject to a $25,000 fine per listing not disclosed.
How can you influence your local politicians to implement sensible controls? Listen for some ideas.
Today is another AMA episode "Ask Me Anything". Adam from Riverside asks “You mentioned on previous shows that you are vegan. You seem passionate about it. Would you help us understand your rationale?”
That's a great question Adam. In truth, it wasn't a single decision. It was a series of small decisions made over several years. The net result of which I feel better. I have more energy. But there's a resource component to this question that is pretty compelling. Check it out.
Darren Doyle is the General Manager at Agronosotros, the parent company of International Coffee Farms. They specialize in agricultural real estate development where they own a total of 16 farms between Panama and Belize. In this wide ranging conversation, Darren educated me on both coffee and chocolate production. This was a fun and fascinating interview. Enjoy.
If you want to learn more, check them out at https://agronosotros.com
Keith Weinhold is the host of the Get Rich Education Podcast and is a contributor to the Forbes Council on Real Estate. His new book is "7 Money Myths That Are Killing Your Wealth Potential". On today's show, we discuss two of the seven myths. Check it out.
On today’s show we’re going to look at the Cannabis industry.
Before we jump in, many of my friends outside Canada have asked me if I’ve gone out and bought some weed yet. Sorry to disappoint you. The answer is no. It’s just something I’m not that interested in. In spite of that, the investment community is very interested in cannabis and On today’s show we’re going to look at the industry from a real estate and investment perspective. Whether you are pro or against the cannabis industry, you may feel the economic impact regardless. There is going to be demand for agricultural land and for industrial space as a result of the cannabis industry. If you have any exposure to either of those segments, you will feel the impact.
Today is another "Ask Me Anything" episode. Karla asks "Many syndicators require investors to be “accredited “ . Can you share a few ways to become accredited using real estate investments? I.e . Buying SFH, etc."
That's a great question, and has a legal component to it. I'm not an attorney and can't give legal advice. So please consult an attorney who specializes in securities law. But I can offer a perspective that hopefully is helpful. Have a listen.
Last month RealPage paid a $3.3M settlement with the Federal Trade Commission over allegedly failing to take adequate care during criminal background checks for potential tenants. Earlier this year, Ascenda paid $1.1M in a class action lawsuit for failing to get proper consent during employment background checks. Property owners and property managers in Illinois have received judgements against them in the thousands for failing to pay interest on security deposits usually amounting to under $10.00. All of these systems are being managed by the experts that you have hired, often blindly assuming they're doing things properly. What should you do?
On today's show we're showcasing a different way of developing through private public partnerships. Some transportation authorities have control over land without requiring the usual public consultation and zoning process for entitlements. If you have a dream of building a waterfront marquis property, you'd be amazed at what might be possible.
We all face choices. The decision to accept a problem is made in an instant. It’s an instinctive reflexive reaction usually made on the basis of an emotional response rather than a rational response. If you’ve chosen to downplay the problem, then chances are you won’t deal with it until it mushrooms to the point where the problem is large enough you can no longer ignore it. Let's say you accept the problem exists and you undertake to fix it. But you're only fixing that single instance of the problem. In truth, creating a band-aid solution. But in truth there is a third type of solution that requires a different way of thinking. It requires systems thinking In systems thinking, you don’t solve a discrete problem. You create a solution that solves the immediate problem and prevents the problem from ever occurring again.
Kyle Wilson was the founder of Jim Rohn International and was Jim Rohn's business partner for 18 years. In this casual conversation, we're talking about the birth of an entire industry and some of the marketing fundamentals that today's technologies often short-circuit. Kyle is a kindred spirit and we share a lot of the same values. I think that becomes readily apparent in the conversation. Enjoy. Feel free to connect with Kyle at kylewilson.com
Dr. Bryant took a departure from dentistry after selling his multi-location practice and ventured into the world of real estate investing and wealth management. The High Speed Alliance is a group of Doctors and Dentists who come together several times a year in exotic locations to mastermind on investment. Listen to this great conversation on the beach on location in Sandestin Florida.
Generally speaking people are willing to be educated. They don’t want to be sold. They’re willing if its an area they’re interested in. If they’re not interested, it’s spam. In the movie star wars, Luke Skywalker is the hero of the story. But he needs a guide, in this case Yoda who will team him. Yoda isn’t the star of the movie. He’s in a supporting role.
The problem arises when the ethics of the guide are compromised. They call it education, but they’re really training you to buy their stuff. It’s a version of bait and switch. In my mind there is a fundamental conflict of interest when you sell your product under the veil of education.
We are delighted to announce that Ravi Ghanta is the winner of the 100,000 download contest and has won an autographed copy of Robert Kiyosaki’s book “Second Chance”. On today’s episode we review Benjamin Hardy’s book “Willpower Doesn’t Work”. Benjamin Hardy is a PhD student in psychology at Clemson University. His groundbreaking book shows conclusively that everything you’ve tried and failed using willpower could never succeed. It’s not your fault.
Recent reports from numerous data sources are showing that homeowners in the US are living longer in the same place between moves. In fact, the average time in the same home has more than doubled in the last decade. In particular, the coastal areas have experienced the lowest inventories, the worst affordability and the lowest mobility.
John from Huntsville Alabama asks "I'm contemplating a large new multifamily development. What questions should I be asking the city to determine if my project is viable?"
I’ve been talking to a number of investors who are interested in getting into development. Today’s episode is an advisory talk on what you may want to consider before jumping into the world of development.
The first thing is that you should avoid development if at all possible. If you can get the equivalent product in the market by buying and repositioning an existing asset, then that’s what you should do. An existing asset is the fast and lowest risk path. In many cases, you can buy an existing asset below replacement cost. My recommendation is a 3 step process to evolve from your first simple development project to full green-field development where you have to build everything from raw land including the infrastructure.
This week I spoke with George on a wide range of topics, starting with the stock market volatility. George was Executive Vice President in the Trump organization for over 30 years and he brings a unique perspective. He's been in business for over 60 years, taught negotiation at the law school at NYU for over 20 years, and is the author of two best selling books on real estate and negotiation.
Two weeks ago hurricane Michael tore a swath of destruction through this coastal community. We toured the area and spoke first hand with local residents.
This week, The Bank of Canada increased its benchmark interest rate 0.25% to 1.75%. They also signaled increases in the future might be necessary. So Why do interest rates rise?
Fair Isaac Corporation, the creator of the FICO score will introduce the Ultra-FICO score early in 2019. It's designed to make it possible for millions of borrowers who marginally don't qualify for loans today to have access to credit. The idea is that it will make more credit available without increasing risk to lenders. Is this a good idea? Listen and find out.
Could there be a situation where prices increase, but asset values decrease?
On today’s episode we will examine this very question. In an inflationary environment, the cost of construction goes up. In fact we’ve seen very real increases in the cost of construction over the past several years. In 2014, you could routinely build new B class apartments for $88 per square foot. That’s exactly what I was building for in 2014. Today, prices are closer to $120 per square foot. It amounts to an average 9% increase per year over the past 4 years. This is during a time when government is telling us that inflation is running close to 2.5% over that same time period.
The price of any item is not determined exclusively by the intrinsic cost, but in fact by people’s ability to pay. We've seen real estate prices fall all over Europe. Could this happen in North America?
In celebration of 100,000 downloads, we're going to be giving away an autographed copy of Robert Kiyosaki's latest book "Second Chance". If you would like to enter to win, send an email to victor@victorjm.com and put 100,000 in the subject line. Today is another AMA episode - Ask Me Anything. David from Pittsburgh asks "How much passion do you need to consider moving from a passive investor to a full-time active investor?" Such a great question.
The broad economy seems to be performing strongly, but we are also seeing weakness in new home construction at the same time. At the root of this is money. On today’s episode we’re going to follow the trail of the money and see some of the factors that are influencing the housing market. We will eventually see this slowdown reflected in the macro economic numbers.
Tammy Mitchell is an expert in relational capital. If you're not familiar with that term, we break it down in detail and describe the power of developing deep and meaning relationships with people of significance.
Russell Westcott is a Canadian from Western Canada who has built a reputation as an investor, an educator, and a specialist at raising capital. In today's episode we're talking about exploiting new zoning rules to attain higher density and lower the cost of development.
The question of rent control centers around the broader issue of affordable housing.. The rates for housing have increased faster than wages have grown in the same time period. This is particularly true in major markets we're we have seen dramatic increases and real estate prices. Governments cannot force investors to make investments that lose money. When rent controls are in place, existing buildings experience deferred maintenance and new rental stock doesn’t get built. The economics don’t support new investment. Rent control is a well intentioned, but misguided solution to the the affordability problem by treating the symptom and not the root cause. Listen for some new ideas.
Back in the day, items you could not find in a local department store could be ordered from the Sears Catalog. They owned the market. The Sears brands became synonymous with quality. The Sears Kenmore appliances were a rebranding of other appliances from Maytag and Amana. Sears Craftsman tools were as good as any tools on the market. They were well positioned as as retailer and in the culture of a generation. Sears problems go beyond money. The problem is that they stopped being relevant to shoppers a long time ago. An injection of cash won’t fix that. They kept looking at the retail business as a numbers game and not as a customer experience. It’s a sad story of missed opportunities. They sat on the sidelines and watched as Internet commerce devoured their catalog business. Even Walmart, late to the party has recognized that the Internet is key to their survival.
In the past couple of months I’ve seen a dramatic uptick in the number of deals that are coming into my email. I’m getting an average of 10 deals a day being offered to me. Most of these are not a fit. On today's episode we do a deep dive on two deals that we passed on and explain why.
On today's show we are talking about making the transition from full time employee to full-time real estate investor.
This is one of the most difficult pathways to navigate. Some people think that they will wait to accumulate enough real estate to replace their employment income and then they will quit their job. After all, real estate brings passive income, doesn't it?
In two days last week, the stock market lost 5% of its value, and then rebounded partly on Friday. There's no question that over 100m, a sprinter is faster than a distance runner. But life isn't a sprint, and you can't sprint a marathon.
Michael is the host of the very popular Apartment Building Investing Podcast and he's just written a new book called "Financial Freedom With Real Estate Investing". Michael and I have developed a friendship over the past several years and it's great to have him finally on the show.
MC Laubscher is a South African transplant, real estate investor, and host of the popular Cash Flow Ninja podcast. He has a great story. Check it out.
David from Pittsburgh asks a great question, challenging what is often considered conventional wisdom in the world of real estate education. Traditional real estate educators recommend starting in single family homes. I know why they do it. It creates an early success. It's relatively easy. But is it truly helpful?
WeWork has grown from a single location in NYC 8 years ago to now being the largest single occupant of office space in New York with over 5.3 million square feet of office space. They have a massive enterprise valuation at $20B and they have yet to turn a profit. Even though they're big, the same math rules apply that would apply to a small business. On today's episode, we dig into one area that I believe is a fatal flaw in their business model.
Today we’re talking about whether higher US interest rates cause other countries to have financial trouble, and ultimately trigger the next global financial crisis. Italy's yield on 10 year debt reached a new 4 year high this week. Pakistan has raised interest rates and signaled to the IMF that it will seek a bailout. China raised short term interest rates 5% yesterday. That's right, 5% in one day. What does all this mean?
Last week another podcast was advocating an approach that I consider to be truly dangerous. I'm not one to openly criticize others. But in this case, I felt strongly enough that novice investors should hear an alternate point of view.
News headlines grab attention, they shape public opinion, and they bias the reader who only reads the first paragraph of a story. The Wall Street Journal had a front page headline "U.S. Unemployment Rate Falls to Lowest Level Since 1969". But is that really the whole story? Listen and find out.
Todd Sulzinger is a corporate finance executive in Silicon Valley and part-time developer. He has an intriguing project near Carson City Nevada that shows just how diversified the real estate industry can be.
Marco Santarelli operates a turn-key investment business that spans 21 markets across the US. The focus is single family homes that provide both cash flow and growth. Check out this fascinating interview with my good friend Marco.
What? Really? That sounds like a tenuous link at best. Stay with me on this. I promise to bring these two together. Have a listen.
I’m continually bombarded with offers to participate in deals. The vast majority make no sense. What’s more difficult is learning to say no when something is attractive enough to meet our criteria.
It’s a little like the chipmunk with an acorn in each hand, an acorn stuffed in each cheek, and there’s an acorn on the ground in front of them. In order to pick it up, the chipmunk needs to put one acorn down.
Construction projects rarely complete in linear fashion. Sometimes, 2% of the effort can take more than 10% of the time. Modeling and predicting this project characteristic is difficult. The delays don't follow normal planning rules. On today's show we dig into a few examples of non-linear schedule impacts.
The latest revision of the North American Free Trade Agreement strengthen's the local motor industry. It's an industrial win for North American content in cars.
We're starting a new feature on the podcast where on the first of each month we'll review a new book that will transform your life of your business. This month we're reviewing "Who" by Geoff Smart and Randy Street.
Coming to you live from Northern France today where we've been attending the sailing expo in La Rochelle. Today, I share who some of my coaches are and the reasons why you might want a coach to accelerate your business.
The regularly schedule interview this weekend isn't available due to a technical problem. Instead, today we're talking about the I Gap. This is the gap that exists between where you are now and becoming an effective real estate investor.
All of the hype around blockchain technology is centered around crypto-currencies. But in truth blockchain is even more useful to solve real world problems. We explore these on today's show.
On today's episode we discuss the impact of higher short term rates on several different aspects of the economy. There is not only a higher cost, but a real destruction of wealth.
Last year we saw the first test of Europe's new bank bailout system in which Santander acquired Banco Popular for just 1 Euro. Last week, The Royal Bank of Canada announced the first of a new security called a "Bail-In Bond". This bond can be converted in shareholder equity if the bank runs into trouble. What does this all mean?
How is it that McDonalds took 17 minutes to deliver an order for two salads that required no preparation? Listen to find out.
I discovered that my book Magnetic Capital is missing a chapter. In discussion with several investors and syndicators over recent months, many are having trouble connecting with high net worth individuals who could eventually develop into meaningful funding relationships. In today's episode I discuss the most critical first impression and what's important to have happen in the first 15 seconds.
George Ross wrote the textbook on negotiation. His book "Trump Style Negotiation" was the result of 37 years experience at the Trump Organization as a senior executive where he was responsible for major negotiations. Today he shares his perspective on the global trade negotiation.
Damion Lupo is the author of "The Qualified Retirement Plan" for Syndicators. He wrote the book to help educate the marketplace on what is possible for qualified retirement investments.
Sadly, digital marketing techniques become so over-used that they very quickly fall into the spam category. Most newsletters have crossed the road and are now firmly in the spam category. How do you communicate with your customers in an effective way? How do you remain present in peoples minds? Have a listen.
Today's episode is a continuation of yesterday. So if you missed yesterday’s show, I suggest you stop today’s episode and go listen to that one first. Today’s show will make so much more sense if you do. I outline a simple 3 step process for getting an invitation from your funding partner to send the executive summary of a project. You don't want to push it on them. They should ask you for it.
This past weekend I was at a syndication conference in Dallas. I met one syndicator after another who were having trouble raising funds. After digging into it, I realized what the problem was. Far too many people have taken internet marketing courses. The approach you would use to sell baseball caps online are not appropriate for a $5M capital raise.
The impact of Hurricane Florence on homeowners in the Carolinas is immense with over 250,000 homes suffering damage or flooding. Flooding is widespread as some areas experienced more than 30 inches of rain. Sadly, about 10% of homes were insured near the coast, and about 1-3% in inland areas. The insurance industry will come out of this storm with little in the way of claims compared with the actual damage.
The City of West Hollywood has stopped one of the world's most iconic and revered real estate firms from operating medium term corporate housing in a new apartment building that they just acquired for $188M. The city's ruling stands in stark contrast to their own publicly stated regulations.
Ryan Wright is the founder and CEO of dohardmoney.com. They specialize in commercial asset based lending for real estate investors. In today's episode he is discussing their lending criteria, and how they decide which projects they undertake.
Our guest today specializes in designing and building secondary suites. These apartments can really make the difference between a home owner affording a home in an expensive area or not.
Adam from California asks a great question. What is your guidance for storing purchases of gold, silver and other precious metals?
On today's show we talk about the different forms of precious metals investment and the benefits of one over the other.
Most people know that Lehman brothers collapsed very quickly. But they don't really know why. Today, we unravel the sorted mystery and look for other places where similar conditions might exist in the banking world.
Nela from California asks a great question. "Famous entrepreneurs like Donald Trump and Elon Musk are said to sleep less than the recommended 8 hours per night. How many hours do you sleep each night?" A discussion about sleep is really a discussion about how to manage your life when you're awake.
Traditionally, central bankers have used higher interest rates as a tool to cool an economy when it becomes overheated. They're trying to engineer the so-called soft landing and prevent the deep recessions that are reactions to oversupply. But these are not the only tools at their disposal. Central Bankers can also use regulation to provide finer control over the economy. While I'm not a fan of regulation, the impacts can be more surgical than the broadly based sledgehammer of higher interest rates.
On today's show we're talking about how to assess whether you're out of step with the market cycle. If you are, there's a right way and a wrong way to adjust and correct for the mistake. This is a very important episode. Don't miss it.
Charlie Cichetti is a world leading specialist in energy efficient building design. His consulting firm based in Atlanta Georgia works on some of the most notable marquis properties in the US. Our conversation today went deep into some of the reasons why designing energy efficient buildings is important, and in particular how to create buildings that take human health into account.
Richard Wilson is the founder and CEO of the Family Office Club. They have 20 events each year and specialize in everything having to do with family offices. Listen to this very informative conversation about high net worth money management.
Adam asks a great question My grandmother taught me about the “pay yourself first” philosophy. What are your thoughts on this approach to allotting money for investment purposes? This is such a great question. In truth, it doesn't really mean "pay yourself first". It means establishing your values and priorities and using that framework to make monetary decisions.
The US Federal Reserve met in Jackson Hole Wyoming last week. At that meeting Fed chairman Powell said that they were going to keep rates low as long as possible. They were looking beyond inflation for signs of excess, and so far they can't find any. The Bank of Canada also announced yesterday that they were keeping their rate fixed at 1.5% while they wait to see how the renewed North American Free Trade Agreement talks play out. The result of the negotiation could impact inflation and the balance of trade between the two nations.
Adam asks whether Wholesaling can be a sustainable business, or whether it is simply a tool in the toolbox?
Today's episode dives deep into why family offices exist and what problems they can solve for families with wealth. It may seem like the family is simply being lazy and they would rather enjoy their money than manage it. But that's not necessarily the case. Family offices serve a very important function in preserving intergenerational wealth.
On today's show we're talking about how to get advice. There is no shortage of opinions. But are those opinions actually worth anything? What are those opinions based on?
Scott Smith is an asset protection attorney based in Austin Texas. He is a real estate investor and he also works with his clients to educate them on the types of structures that minimize risk from frivolous law suits. You can learn more from Scott at www.royallegalsolutions.com/espresso where he has put together a special offer for Real Estate Espresso podcast listeners.
John Lee Dumas and his partner Kate Erickson launched the Entrepreneurs on Fire Podcast 5 years ago. More than 2,000 episodes later, and over 65 million downloads, he has one of the most successful business podcasts in existence. Today's episode is a glimpse of a mastermind call I had with John and Kate a few weeks ago. I believe it's vitally important to surround yourself with the very best people on the planet and learn from them. Enjoy....
Sometimes the best clean tech involves using less energy. On today's episode we examine 3 things that can save major expense in an office building.
Adam asks a great question. He asks if clean energy is worth investing in? It's a complex question which requires an understanding of the linkage between energy consumption and economic output. It also requires and understanding of energy density. The short answer is yes, it is worth investing in, but which one specifically?
Big data refers to the mining of gazillions of unstructured data looking for trends and in some cases specific information that can give a business advantage. It's simultaneously an opportunity for business and a massive invasion of privacy for private citizens. What does it mean for you?
Today is another AMA (Ask Me Anything) episode. Michael asks about a specific building that appears to be at a discount to the market when compared with similar properties that have sold in the area. This is a very common situation, and requires a structured way of analyzing in order to make a decision.
On today's show we're talking about how a 1% increase in total investment can create a true market differentiator that will keep clients engaged. The fact is, most real estate investors don't know how to design a world class Internet distribution network. Let's keep it a secret. Shhh!
Matthew Mesick and Ricardo Rodriguez are the principals at Park Place Property Group in Chicago where they perform full gut renovations of homes in high value neighborhoods in the city. It's an aggressive strategy that is paying off for the young company.
NFL Legend Keith Elias is my guest today. He was a star running back for the NY Giants and the Indianapolis Colts. After the NFL he went into real estate working with developers to raise capital for development projects. Today, he's back in the NFL coaching players transitioning in and out of the league. His life lessons are extremely powerful. Don't miss this episode.
Prices are so high today that you might conclude there are no good markets. Some markets like Seattle are overbuilt. Are there any good opportunities left? We think so. But it requires a very structured thought process to select a market that meets investment criteria.
Today there are 8 million vacant homes in Japan. How did this happen? Who should be held accountable for such a major mistake? Could it have been predicted?
Its estimated that only one in thirteen businesses owned by baby boomers will sell when the owner retires. The rest will shut down. 72% of business owners have no succession plan even though they plan to retire. This has to be the opportunity of the century for enterprising millennials who can buy a revenue stream under very favorable terms.
We're continuing our look at demographics as a predictor of real estate markets. On today's show, we examine the fortunes of Harley Davidson and what it can tell us about the future of the housing market.
On today’s show we will be focusing on demographics as a predictor of the housing market demand. Baby Boomers inhabit 32 million owner-occupied homes in the US, accounting for two out of five homeowners in the United States. These folks are due to retire and will exit home ownership faster than any generation in history. Will this create a glut of old, badly maintained homes on the market?
David and Gina Fabry invest in recreational camp grounds. This is a different take on investing, and one that you probably have not heard about before. Enjoy this conversation and learn about a new asset class.
On today's show I'm talking with George Ross about making sense of the conflicting market data that is out there. Supply surplus in some areas, and major shortages across the nation. George sets me straight.
A lot about the economy can be predicted by human behavior. Demographics predicts behavior. Yet few economists look at this. They look to government as the driver for the economy. In truth, they're missing one of the biggest sources of economic activity.
On today's show we do a deep dive on a strategy for getting site plan approval. We examine a specific case study whereby we got a zoning variance with a separate variance application instead of requesting the variance up front. as part of the initial site plan application.
On today's show we're examining the impact of the currency and financial crisis in Turkey. It has the potential to create a ripple effect through-out the European banking system. Eventually, the impact could be felt here in North America.
Today's show is a rare rant about the insanity I'm seeing in the stock market. Bubbles are formed when expectations deviate too far from the fundamentals of making money. Our case study is one of my favourite companies, Tesla.
Folks, I’m here to report that the next real estate downturn is already upon us. It’s not 18 months away or 24 months away like many have predicted. It’s here now. I’m going to show this conclusively with the example of Seattle.
A few days ago I took a tour with Robert Helms, one of the developers of Mahogany Bay Village and host of the Real Estate Guys Radio Show. This ambitious project is impressive in its own right. Even more impressive is how it was built in an environment of virtually no infrastructure.
On today's show I'm speaking with special guest Russ Gray, co-host of The Real Estate Guys radio show. We're talking about the market cycle and how we prepare.
Market analysis should examine all the potential choices a new resident could make. They could buy or rent, and they could consider more than one type of property. A complete market analysis should show you clearly all sources of competition. Otherwise you risk making flawed investment decisions based on incomplete information.
David from Pittsburg asks, Since you came from tech background, how did you decide to go into real estate development instead of other options?
Today a listener from Pittsburg asks how we can establish a rule of thumb to guide investment decisions. It's a great question. Check it out.
On today's show we're examining a recent report from Colliers International on different asset classes across several Canadian cities. We are seeing significantly high prices. I can't seem to make sense of how investors are willing to pay these high prices. They make no sense to me.
On today's episode, a listener in Raleigh North Carolina ask about developing a small residential subdivision. There are a number of considerations that need to be deeply examined to determine if the project is viable.
How resilient are your projects to increases in interest rates, or construction costs, or perhaps changes in international exchange rates? There are so many variables that have increased in volatility this year that planning has become much more difficult. Performing sensitivity analysis to each of these variables is of paramount importance.
Kevin Day is one of the most distinguished and knowledgeable asset protection attorney's in the world today. You will learn a great deal from Kevin as I have from just spending time with him and hearing him teach the principles and tactics of asset protection.
Hilton Group of Hotels were recently sold from the Blackstone Group through an IPO process. They booked a $14.5 billion dollar profit on the sale.
Having a separate deed for each room in a hotel is the latest twist on the condo concept. The question is, does the model make sense? We dive into that in today's episode.
There are more changes coming in the hotel industry as providers become more specialized in their product offers to target the specific needs of clients. There are a number of new entrants in the hotel market with a new class of product offer, specifically addressing the need for medium term stays with fully equipped kitchens. This is a new segment worth paying attention to.
Most people know that if you don't pay your taxes, the city will put a lien on your property. But there are 4 ways the city can extract money from property owners that may surprise you. Buckle up.... Here we go.
A listener in Pennsylvania asks which type of development do I prefer, infill or greenfield?
Fortunes are changing in the market, just like at the casino. The key is to recognize the difference between investing and gambling. Sales are slowing and the days on market are extending to more normal levels.
Today's episode is full of surprises. In truth, this is a small sampling of the myriad of surprises we routinely in experience in the world of development projects.
I was reminded today why I invest in real estate. Analysts downgraded their estimate for Facebook's earnings, and the stock took a 24% hit overnight. As a small investor in the stock market you have no control. But as a real estate investor, one who focuses on value-added opportunities, I feel a tremendous level of control. The fundamentals of profitability seem to be missing when it comes to valuation of many companies listed on the NYSE. Real estate isn't perfect, but I have much more control.
In June, Chinese investors sold more US real estate than they purchased for the first time in 10 years. This reversal marks a huge shift in a growing trend of Chinese money buying marquis assets across the country over the past 5 years.
Today's episode was recorded in front of a live studio audience at Podcast Movement 2018 conference in Philadelphia. In today's talk I outline the deliberate thinking that is behind the design of the podcast, and the daily commitment to value that most precious commodity, your time as a listener of the show.
Recessions occur when producers expand in anticipation of continued growth in demand. They over estimate the true demand and by the time they realize their mistake, it's too late and they're sitting on excess inventory. How many places in the economy do you see this happening?
Today I'm taking you on a walking tour of several landmark properties in Manhattan and sharing some of the history behind those buildings. My mother was an architect on two of those projects and I give you a behind the scenes look (via audio) at what those buildings entailed.
Yes, this time the Province of British Columbia is giving condominium corporations the power to ban short term rentals in their bilaws and fine owners or residents up to $1,000 per day. The City of Los Angeles just passed a new motion that limits owners from renting their property for more than 120 days a year, and New York City increased their budget for enforcement and will hire 50 more employees to crack down on illegal short term rentals.
Earlier this week I spoke with George Ross about the current news cycle which is very focused on the outcome of the Helsinki Summit between Donald Trump and Vladimir Putin. George has a very clear way of looking at a situation and separating what actually happened from interpretation.
This is one of the most complex areas of property ownership, and one where common sense doesn't apply. There are so many special cases that the same water will change ownership depending on what happens to it along its journey from the sky into the ground.
In the wake of last year's Hurricanes and tropical storms, very little has changed in terms of insurance coverage nationwide. In today's episode we discuss different types of insurance coverage and the merits of each one.
Is Wind part of your property? Does it have value? Can you own it? Can you harvest it? Can you sell it, or rent it? All these questions and more on today's episode of the Real Estate Espresso Podcast.
As more and more people install solar panels, does a neighbor have the right to cast a shadow on your property? Today we're discussing the conflict between development rights and solar rights, a key due diligence item that most developers are not paying attention to.
The National Investment Center for Seniors Housing & Care reported this week that the Nationwide, senior housing occupancy has reached its lowest level in over eight years. Data for the 31 primary markets shows that assisted living occupancy fell to 85.2% this quarter. New supply isn't being absorbed as fast as it's being built. So what does it mean?
Meagan Duhamel is an Olympic gold and bronze medalist in figure skating, two time world champion, and seven time Canadian champion. She's just a great person to hang out with and learn from. Meagan and I spent a day together this week. Some of it was recorded and I'm happy to share it with you here.
Today's guest is a CPA who believes that being a strategic consultant is far more important than simply a commodity number cruncher. His thoughts on tax reform confirm that philosophy
We are experiencing a new wave of protectionism, but this is really about addressing the balance of trade and minimizing the risk of a global default on sovereign debt.
The Bank of Canada has been slower to raise interest rates compared with the US. Rates are currently at 1.5%, the result of the second increase this year, and the 4th in the past 12 months. What does this mean for you as a real estate investor?
Beau in Toronto asks about a specific market opportunity to buy a townhouse as a Joint Venture partnership. He provided detailed information about the deal and I analyzed the deal live on air after doing no more than about 5 minutes of market research.
As business owners we need the right people in our core team. Whether they are partners, or members of the executive team, each of those people are key. How do you forge a successful partnership? There are certain characteristics that make a partnership work. If they're absent, you're in for a tough time.
As real estate investors we often focus on the real estate aspects of our work. After all, we're real estate people, not marketers. Today, I'd like to challenge that way of thinking. I'd like you to consider why you might stage furniture in a rental apartment. It's probably not the reason your thinking.
Volume Flipper Paul Kazanofski is my guest today. His no-nonsense approach is very refreshing. If you are wondering how to scale your business beyond a couple of projects, listen to how paul is scaling his business.
Loe Hornbuckle is the founder and principal at The Sage Oak, specializing in residential senior assisted living. I love this conversation with Loe, where he takes a very refreshing common sense approach to how senior housing should be operated.
Sustainable businesses require 7 key functions. You may be trying to operate a small business and can't afford to hire the staff, hoping someday to grow organically into a more sustainable business. You'll almost never achieve that kind of growth. There's a much simpler way, but it requires a leap.
Today's episode compares two different construction loans on two projects that are only a few blocks apart. One had a much more attractive interest rate, but ultimately was the more expensive loan. Yes, the devil is in the details. But in this case the details were buried a little deeper than usual.
Fallacies are mistaken beliefs. Today and every day this week we are talking about fallacies. On today's episode, we are talking about where you can find money.
Deals are very hard to find these days. The market is so competitive. Projects are selling for stupid prices. You could easily come to the conclusion that there are no deals. Yet, that would be a mistaken belief.
A Fallacy is a mistaken belief. We all have them. They're supported by evidence that confirms our belief. Today and all week we're talking about fallacies.
Billy Brown is a professional lender based in Nashville, Tennessee. Our conversation centers around how to scale your team to create a sustainable business.
Brien Lundin runs the New Orleans Investment Conference, the longest running investment conference in the world. He's an investor in gold, precious metals, and real estate. He has a fascinating perspective on real assets. Don't skip this episode.
San Francisco median home prices are now $1.6M, the highest in the country. In fact, a family earning less than $117,000 is considered low income according to HUD. What's going on, and what's driving these prices?
Most real estate has a business tied to it. Separating the business from the real estate can be very dangerous if you can't practically operate the business. You become dependent on the business for the financial health of your property.
AMA - Ask Me Anything. Frank from Portugal asks about waterfall payments. What are they and what are some of the most common uses in syndications?
Holding some gold in your portfolio is just a smart thing to do. How do you buy gold if you don't have the cash? What if gold later drops in value? Gold doesn't generate cash flow. Objection, objection, objection. On today's show, we discuss how to buy a large amount of gold using existing assets as leverage.
Coming to you live from the Loire Valley in NW France. We're looking at what a second home in France might mean for a foreigner. Big changes in the market that make purchase prices attractive, and cost of ownership unattractive.
Tom Laune is a financial planner, unlike any other financial planner. He fundamentally disagrees with the way the financial planning industry uses clients money to maximize their commissions. This conversation is a breath of fresh air in an otherwise mirky segment of money management.
Doris is a very successful real estate investor. She lost her husband to illness and was left with $400,000 in debt. She used real estate to extract herself and her family from this predicament. She has an amazing story to tell and is a real educator. You won't want to miss this episode.
Jason asked how I changed career from corporate life to real estate investor. It's a great question and I share my journey and mistakes that I made in my early years during my transition to full time real estate investor.
The Dallas industrial space market is expected to add another 20 million square feet of new space this year. What is driving the demand for all that space, and will it be absorbed?
Do you have a key team member who is so vital that a resignation would severely damage your business? Today we're talking about how to create resilience in your business to single points of failure.
Frank from Portugal asks about how to do a thorough job of market research on the Tampa Bay market. This is a great question and one that I get all the time.
Federal Reserve Chairman Powell announced last Wednesday a 0.25% increase in interest rates. What does this mean for you as a real estate investor?
Today's episode is extra special. These two gentlemen are among the smartest dudes I know. They have performed some of the deepest thinking around how our world and economy functions. They've seen things that most economists have totally missed. Don't miss this episode.
Mike Ayala is one of the principals at 4 Peaks Capital Partners. They specialize in portfolio investing in mobile home parks. They've scaled their business to a high level in a short time by bringing in the right team and a strong capital base.
Today's episode is based on a real life situation of a fire that resulted in loss of life. To make matters worse, the owner of the property had made upgrades to the fire safety equipment in the home but still didn't meet code. They were fined and found to be liable for damages. It's such a simple fix, and one you can't ignore.
Secondary dwellings can be a way of increasing density without changing the zoning of residential properties. Some of the most expensive neighborhoods in the core of a city often have deep lots that have enough space for a separate building. Many cities have started to allow carriage houses as a form of legal secondary dwelling. They're a much more desirable alternative to the basement apartment.
Sometimes a seller seems to take an arrogant position. It can almost seem like they aren't interested in selling the property. When you're dealing with a seller, it's important to understand both sides and how to negotiate assignment of responsibility for any uncertainty that may exist during the pre-phase of the purchase contract.
The City of Philadelphia is talking about doing away with a 10 year property tax abatement and imposing a 1% tax on new construction projects across the city. The move is designed to raise funds for affordable housing. What are the consequences of such a tax? Will it work?
AMA (Ask Me Anything). A listener from California asks about whether it's safe to hold debt in an inflationary environment. We measure inflation as an increase in prices. In truth, it's a devaluation of the currency. Savings become worth less. Debt goes down in value as well. Hard assets appear to go up in price because the money is worth less. In today's episode I show you the new rules of the game.
I had the privilege of spending several days with Robert Kiyosaki on the Investor Summit at Sea. There is nothing quite as intense as an early morning article study with Robert. In this episode we talk about being a life-long student, and the true meaning of team.
Seth Mosley is a Grammy Award winning musician, song writer, producer, and real estate investor. Seth and I spent a day together in Nashville at the Music and Money investment group. Our conversation centered around the interplay between his main gig in the music industry and a profitable side hustle in real estate.
Today we are examining distortions in the market. These distortions result in many sellers putting a property on the market and asking too much for it. But you can’t blame the seller. They are simply trying to maximize their profit. Distortions in the market are everywhere. One of the biggest contributors is lack of knowledge. There is a fallacy that if a single property sold in your immediate area for $100,000 more, your property is now worth $100,000 more. That's not the case. You need sustained averages. The problem arises when you're dealing with a small number of transactions. There isn't enough data to create a statistically valid average. What do you do?
A listener in NYC asked whether they should attend an upcoming family office conference. What are the chances of closing a deal at that conference? Is it a waste of time?
Such a great question. I answer it in the context of the 5 principles of raising capital. Straight out of my book Magnetic Capital.
Short term rentals are under assault by many local governments. It's crazy to make long term loan commitments in an uncertain regulatory environment. Today we show how you can determine whether the short term rental market in your city is a good bet.
I’m talking about what assets can you buy when we are at the top of the market. When the recession has already hit, and prices have fallen, there will be bargains in multiple asset classes. That market bottom discussion will be for another day. What we're looking for are assets we can buy today that will continue to hold their value and perform well when a recession hits?
On today's episode we examine what is counter party risk and how even a stress test of your own balance sheet or your bank's balance sheet doesn't tell the full story.
We're in front of a live studio audience, interviewing Mary Brauner who lives in a condo complex that handed each unit owner a $30,000 surprise special assessment, on top of condo fees that were already $800 per month. This situation is becoming increasingly common in older condo buildings, and we talk about the conditions that conspire to make this ugly surprise a reality.
Last week we spoke about Puerto Rico. When I was there I had the chance to meet face to face with John Lee Dumas, host of the Entrepreneurs on Fire Podcast. He just completed over 2,000 episodes and 65 million podcast downloads. Definitely at the top of his game. Love this conversation with JLD!
The recent election in Italy has thrown Europe into turmoil. The result has been a flight of capital from the Euro in US Treasuries, lower the yield on 10 year T-Bills. Since many commercial loans have their rate linked to the 10 year Treasury rate, a fall in T-Bill rates directly helps US Real Estate Investors. See how you can capitalize on this temporary situation.
We continue our look into student housing. The US Department of Education publishes reports on university enrollment. We do a deeper dive into their numbers are look at some specific opportunities for investment.
University enrolment fell by over 200,000 in the past year, marking the 6th straight year of decline. Overall, student enrolment in universities has fallen by 2.6 million students compared with 2011. That's a huge decline. If enrolment is falling, it stands to reason that demand for student housing will also decline. How to make sense of the numbers and decide where to invest?
Today we're talking about student housing. This is one of my favorite asset types. But not everyone feels that way. I share why I like it and what it takes to run a successful student housing portfolio.
CTV News reported that a large parcel in the East end of Ottawa will be site of a new 1M square foot warehouse. Sources close the project have confirmed off the record that the occupant will be Amazon. This is part of a growing strategy across North America for local fulfillment centers as Amazon strives to reduce their delivery times for Amazon Prime customers. The question is, how can you capitalize on this as a real estate investor? What opportunities does it create?
George was Mr. Trump's advisor and right hand man for many years. In today's episode he's sharing his perspective on what we're seeing in the news media. I’m sharing this with you to underscore how difficult it is to make sense of what is being reported in the news. I believe it’s important for everyone, including you to consume content critically. Ask yourself the question, why is the producer of the show sharing this content with me? I don’t know if George is correct in his perspective. I really have no idea. I just know that he has a different vantage point than I do. Enjoy...
Dave is the CEO of The Real Asset Investor. He's a real estate guy, but as the name implies, he also invests in multiple types of real assets. On today's show, we're talking about how he invests in ATM machines and why it made sense for him and his investors.
Warren Buffett famously said that he would go out and purchase a few hundred thousand single family homes if he had the ability to manage them. One company that took his advice was the Blackstone Group private equity firm. They aggressively went on a buying spree across the nation.
The problem with buying is that you also need to sell in order to get your money out. Imagine the impact of dumping thousands of single family homes on the real estate market. But that's not what they did. Check it out.
Today’s episode is focused on property taxes. This is the principal method that cities use to collect revenue to fund the operation of the city for everything from police, fire department, road repairs, and community housing. But the assessed value is key to determining the revenue to city will received. The city can hide a tax increase by arbitrarily determining that your property is now worth more. If you feel that your property taxes have been unfairly assessed, there is a process for appealing the assessment.
Last month I visited Puerto Rico. We did a real estate investment tour as part of our visit. I’d like to share some of my observations from that visit.
While the cleanup from hurricane Maria was largely complete in some areas, there was still plenty of evidence of storm damage. You didn’t need to look very far to find broken trees, broken fences, damaged roofs and smashed lamp posts. In 2012, Puerto Rico enacted several new tax incentives. The most famous are Act 20 and Act 22. I know several people who relocated to PR in search of tropical weather and the tax friendly environment. There certainly are properties that can be purchased at fire-sale prices. But that doesn't mean they're a bargain. Listen to find out the bottom line.
When you get a quote from a contractor, how do you know if it's a good price? Is it too high, too low? How do you even evaluate it? Today's episode is a specific case study on how to answer that specific question.
You've all seen them, the free evening seminar with a TV celebrity. They invite you to attend a 3 day bootcamp for a modest price. After that, they invite you to an advanced course or a coaching program that is priced in the thousands of dollars. These professional educators are in the education business, not the real estate investing business. If you really want to learn, who will you learn from?
Today's guest has automatic his business to a very high level. He has completed over 5,300 transactions. His strategy is brilliant. Check it out.
David Sewell is the owner of International Coffee Farms, a specialty grower of coffee. He has 9 coffee farms in Panama, and a Cocoa operation in Belize. Agricultural real estate investing is one of many potential strategies you can employ. Both these products are easy to transport and have a long shelf life, reducing the risk of spoilage on the way to market. Listen for a fascinating way to invest.
Today, the Wall Street Journal reported on the front page that Wells Fargo was cited for altering client information on business client accounts. They just can't do things right. A month ago, they were fined $1B dollars for improper practices in the car insurance and mortgage businesses. Then there is the famous account opening scandal where Wells Fargo opened millions of accounts without client's knowledge. So how do you choose your bank? Is it for the free calculator, or the free toaster?
I'm hosting a mixer for listeners of the podcast and for other podcast hosts at the Philadelphia office of my development partner on July 22. Those attending the Podcast Movement Conference will be in town that week for what aims to be a landmark event. You can register at https://mailchi.mp/victorjm/real-estate-podcast-mixer
Allen Texas is one of the fastest growing communities in the North Dallas market. The Monarch City development consists of 240 acres and will span nearly 8 million square feet of new construction when completed. Nearly 4 million square feet of office space will form part of the project. What does this mean for you as a real estate investor and developer?
Today's episode is a story about two of our new projects that were approved last night at the zoning board. These types of wins aren't accidental. They're the result of months of hard work by many members of the team. In particular, designing a project that is embraced by the local community requires a design sensibility that is in keeping with the local architecture, and feels inviting to local residents. Finally, making sure that local community input is heard is another key element.
I'd like you to think of the credit cycle as a leading indicator of the economic cycle. In fact, some would say that we actually have a credit cycle and not and economic cycle at all. What is the cause of the credit cycle, and what does it mean for the overall economy, and for real estate in particular?
I caught up with Kathy Fettke and her husband Rick on the Investor Summit at Sea. Our conversation over breakfast was wide ranging and focused on financial education, the stock market, running a startup company, and how the Fed is giving us a signal that more are choosing to ignore. Check it out.
Inaky is a very impressive young man. I really wanted you to meet him to get a sense for what can be accomplished with no resources, and only a bit of ambition and a positive attitude. Check it out.
Today we're tackling rooming houses. Philadelphia's Licenses and Inspections Commissioner is proposing an overhaul to the zoning code that would bring legal rooming houses into residential neighborhoods. This controversial idea has both pros and cons. Listen to today's episode to find out about why rooming houses might be desirable in your city.
On today's episode, we're talking about a real world scenario where two separate neighbors tried to block us from building a fully permitted project. How did they do it? Have a listen.
I missed an opportunity to complete a land assembly located less than 4 blocks from my house. It's hard to fathom that I wan't paying attention. In today's episode we discuss why that project would have made so much sense.
You don't need molten lava to experience natural disasters. Many municipal governments are becoming much more savvy when it comes to handling zoning rules to protect properties from disasters in higher risk areas. In some cases, areas that were previously built are no longer permitted for habitation. Having insurance isn't enough to protect you in those cases.
In today's episode we cover all the different ways you can put your rental property in front of potential tenants. Lots of creative off the wall ideas that most people don't think of.
Brad has been investing in multi-family apartments and educating others on how to invest for several years. He's active in 14 markets and his students are active in over 30 markets. This wide ranging conversation on apartment investing is packed with value bombs. Check it out.
Short term rentals are the rage now, and platforms like AirBnB and VRBO have made it easier than ever to maximize your income through a higher nightly rate compared with long term rentals. But it's not that easy. Shanna is the President of the Momentum Property Group and Founder of the Edmonton Short Term Rentals Association. In today's episode she shares some of the secrets to running a successful short term rental business.
The biggest concern with a new building is how long it will take to get it fully leased. What strategies should you employ to get it leased quickly and only attract quality tenants? Today's episode give several strategies that we've used effectively in our business.
I've recently seen an operating budget that used averages per apartment. The problem is that there is no average apartment. It's a dangerous way to create a budget. In today's episode, I recommend a method for creating a repair and maintenance budget that is much more accurate. Check it out.
In today's episode we compare three land sales that vary in price by a factor of 17. How much is too much to pay? How do you even determine how much you can afford to pay for land? All is revealed in today's episode.
This week, Subway announced it was closing 500 locations after closing 800 locations in 2017. We have numerous stores closing including locations at Sams Club, Toys R Us, Walgreens, Kmart, Best Buy, Sears, just to name a few. What does this mean as a real estate investor? Listen to find out.
The shared collaboration office model is a growing trend that complements the home office environment. This translates into higher rents for shared space, but falling demand for office space overall. What does this mean for you if you own office space?
George is a mentor and I cherish the relationship that's been formed over the past several years. We have a regular phone call where we talk about a wide range of subjects from leadership, to real estate, to negotiation, and philanthropy. George is a frequent guest on the show, because frankly there is nobody else quite like him. Enjoy...
Ed Griffin is the author of the seminal book, "The Creature From Jekyll Island". The book is a detailed history of the creation of the Federal Reserve system. It explains how our system of money that makes up the world reserve currency was created and is hidden from public view. Join me for this wonderful conversation with Ed Griffin.
Case-Shiller announced their latest housing index numbers for 20 cities across the United States. They're reporting that numbers are reaching peak levels not seen since 2006. However, the numbers paint an picture that is accurate but irrelevant. Listen to find out why.
Newly updated from original April 12 publication date to fix a file corruption issue for some listeners. I hear from many investors that they're uncomfortable asking for money. It feels like begging. Of course, begging for money doesn't seem very attractive. So how is it that some people appear to be able to raise money almost effortlessly? Listen to find out.
We've seen a significant slowdown in real estate sales in NYC in Q1. The hardest impacted segment is the luxury segment. We're seeing signs that Class A properties are overbuilt in several markets. What does this mean, and how does this happen?
Last year the City of Vancouver imposed a vacancy tax as a way of addressing the extreme shortage of housing in the city. It was designed to discourage people from buying properties and keeping them vacant. After one year, the results are in, and they've very surprising. Have a listen.
Yesterday the Ontario Government announced new rules governing the installation for electric vehicle charging stations in condominiums. These new rules make it easier for force the installation of charging stations without the vote of condominium owners. It's anticipated that since most don't own electric vehicles, most would object to the additional monthly cost. The new rules are effective May 1. If you own a condo unit, a condo building, or even a multi-family complex, you may want to start thinking about adding electric charging stations to the capital budget for your property.
Retail design galleries can charge upwards of $40,000 or more for a kitchen renovation. On today's episode we provide a detailed budget breakdown of how to completely remodel a kitchen for under $15,000 without cutting any corners. In fact, it can easily be done for even less.
In this brief interview with Kim Kiyosaki in the Port of Puerto Rico, I got a surprise lesson. The conversation connected the dots on what I can only describe as a blind spot. A very valuable lesson indeed.
Real Estate investors are passionate about real assets. However, apart from property, there are other real assets that are also of paramount importance. Once you sell a property, do you want to keep the proceeds in cash? Perhaps gold is a better place to keep your wealth sheltered from devaluation. Dana Samuelson is the CEO of American Gold Exchange, and he speaks to us about the merits of gold in all its forms. Check it out.
Yesterday the Bank of Canada decided to hold the line on interest rates, despite some signs of inflation in the market. Sounds like a non-event, right? Not so fast. In today's episode we examine what this means in a larger context.
In today's episode we examine what happens when a major employer comes into a market. For example, Foxconn is opening a new US operation in Wisconsin. What will be the impact in terms of jobs and influx of population?
Today we examine a less known way to raise money for your ventures, the investor visa. These funds are placed by foreigners looking to gain fast-track residency into a qualified investment. We look at the pros and cons of this vehicle.
In today's episode, we're talking about what happens when you pave over your land, or build a building. Where does the water go when it can't be absorbed into the ground?
In today's episode we're shining the spotlight on a zoning change that took place on a building already under construction. You might be asking yourself, "How can that happen?" It seems to violate any principle of fairness. Of course, not everything in life is fair. We will definitely follow this story over the coming weeks and months as it unfolds.
In today's weekend edition, George is giving some of the history of the Commodore hotel, which was rebuilt in the form of the Grand Hyatt. It's a fascinating story of resilience and persistence.
A few weeks ago, Fannie Mae published their latest economic forecast for the housing market. In this conversation, we dig behind the scenes and get a deeper insight into what's happening in the housing market.
How do I qualify a potential investor? How do I know if they are really going to invest with me? How do I determine if the investment is even a good fit for them? How do I know if I even want their money in my project?
I have thousands of friends on social media. But a couple of times a year, I get to meet a few hundred, live, in person. How do you create the environment that enables magic to happen?
Today we are talking about the 5 F's of real estate investing. These are the 5 phases of virtually any real estate transaction. But there is one phase that is so important that if you make a mistake here, there is nothing that will save you.
Today's episode was inspired by a dinner conversation with a broker who operates in Broward County, Florida. Think about how you are positioning yourself in the marketplace and how that translates into repeat business.
Gene is a real expert in real estate and passionate about delivering a high quality product for assisted living. He's a great educator and you'll definitely learn something from today's show.
The weekend edition of the podcast features interview with notable people from the world of real estate investing. This conversation with George Ross was a casual conversation. I asked him to stop so I could start the recording. He shares some of his wisdom on negotiation. After listening to George, see if you can guess what strategies are being employed by the White House?
Imagine if all the real estate in the State of California or the State of Florida was deemed surplus. Sound far fetched? You definitely want to pay attention to today's episode.
How do you hire? Imagine if you hired people the way you hunt for properties. Would you hire quality people? Today we examine the hiring process and look for parallels between how to get a great hire, and how to find a great property.
In today's episode, we're grappling with a real dilemma. Where to put your money to work? There are so many asset classes that seem risky. Bond prices are expected to fall as interest rates rise, the stock market is over-valued, cash is a losing proposition due to inflation, and many real estate markets seem over-valued.
In today's episode, we're talking about how to navigate the maze of zoning boards, and city council politics. Local politics is overwhelmingly concerned with land use. In fact it makes up over 80% of the time City Councils spend on city business.
This is a rant. A rare thing for me to do. But seriously, how can a market that is measured in the trillions have almost nothing written in the mainstream media.
The weekend edition of the Real Estate Espresso Podcast includes interviews with notable people in the world of Real Estate investment, education, and development. I hope you enjoy today's episode as much as I did.
How do you raise interest rates without actually raising interest rates? Canada is leading the way in instituting a mortgage stress test that forces borrowers to qualify at a higher rate than the actual rate in the market. A full 2% higher than the actual rate. What is the effect of this approach? Find out today on the Real Estate Espresso podcast.
This week we're talking about hidden assets. In today's episode we're diving in easements, right of ways, deed restrictions, air rights, mineral rights and covenants.
Today and all week we are talking about hidden assets. Last night I was speaking with George Ross about hidden assets. George is famous for his role as Mr. Trump's right hand man for most of the past 40 years. Politics aside, George is one of the wisest men I know. He had a little gem to share. Check it out.
On today's episode we're talking about another form of hidden asset, the entitlements. These are the zoning and site plan permits that are associated with a given property. They determine what can ultimately be built on that land.
Today and all week we're talking about finding hidden assets in your portfolio and using those assets to accelerate your growth. This is the second strategy you could employ to access hidden equity and enable further growth.
Today and all this week we're going to be talking about hidden assets. These are things in your portfolio that you can use to grow your portfolio and accelerate your growth. Today's episode focuses on combining assets.
On the weekend edition of the podcast, I'm speaking with guest Michael Reimer about managing a construction project.
I was speaking with George Ross recently in Dallas. George was Mr. Trump's right hand man for nearly 40 years, and was featured as one of the judges on The Apprentice TV show. In today's episode, George shares some of his behind the scenes perspective of the show, and what it was like to be part of the show.
Two days ago, the new Federal Reserve Chair Jerome Powell announced a 0.25% rate increase. What does this mean for real estate investors, and the value of the US dollar?
In today's episode, there are two economic reports that appear to be conflicting with each other. I'm looking forward to speaking with Doug Duncan, chief economist for Fannie Mae in two weeks to get a deeper dive into the numbers. Simon Black's latest Sovereign Man article hi-lighted the $1 Trillion growth in the US Federal debt in the past 6 months, $215 Billion in the past month alone. How do we reconcile these seemingly conflicting perspectives?
I'm often asked by other investors what I consider a reasonable expense ratio for a multi-family property. The answer is "It depends." I'm not dodging the question. There are 5 principal factors that affect the expense ratio, and that's what I cover in today's episode.
Finally, banks may be offering higher deposit interest rates. They've been dismally low for so long. How do they get away with it? What will that mean for us as real estate investors?
Today's episode is based on a real life situation where I was facing a business dilemma. I was facing a difficult business problem on a short deadline, with large complex elements in play. It's easier to see the solution from the outside, and not as easy when you are immersed in the problem. I'd love to hear about your dilemmas and how you solved them.
Lane Kawaoka is a young real estate investor, and started only a few years ago in his 20's. In a short period of time he has grown an investment portfolio of several hundred units through syndication. Don't let his modesty fool you. What he has done is impressive. You can definitely learn from it.
The weekend edition of the Real Estate Espresso podcast contains interviews with notable people in the world of real estate investing and development. I'm talking with Rich Danby about what to do when a funding partner fails to deliver on their commitment.
Today's episode is a reflection on a mistake that happened in a site plan design. I had communicated the requirements very clearly, and somehow the message didn't get through. My first inclination was to blame the architect. After all, the zoning code is perfectly clear. They're a professional. How could they get it wrong?
This isn't Class warfare. It's deciding which class of property you want to invest in, and matching that to the market demand. In today's episode I'm focusing primarily on A and B class properties. It's very hard to fund the maintenance and repairs for lower income properties. The rent often isn't high enough to cover those expenses.
What's the difference between these two types of software and why would you use one versus the other. Under what circumstances would you use both?
In today's episode we're talking about how to create realistic budgets for your rental properties. The most commonly omitted expenses are those associated with unit turns. This is when a tenant vacates a property, and there is real work required to make the apartment rent ready.
Last weekend we got to spend time with George Ross, co-star of the Apprentice TV show. During part of the conversation, we didn't have the recording running. George answered a great question with a brilliant answer. It was worth dedicating an entire episode the question. How do you value the contribution of collateral to a project? Check it out.
In today's episode we're looking at a specific negotiation case study. The Seller was asking about 50% above the fair market value. This happens remarkably often that the seller has unrealistic expectations about the value of their property. How do you hold the conversation when the parties are that far apart?
The weekend edition of Real Estate Espresso is slightly longer than during the weekday. Today I'm talking with international developer Beth Clifford. She has an amazing and inspirational story. So many lessons buried in our conversation. Check it out.
Today we're talking about inflation. Before we can talk about it's impact on your real estate cash flow, we need to define inflation. We also need to understand how the consumer price index is calculated. Listen to today's episode. It will shock you.
Today we're talking about the 25% increase in lumber prices since January and how you need to interact with your contractors to make sure you don't get a huge surprise. I read you a response from one of my contractors on the impact and their stance on their contractual commitment.
In today's episode we're talking about ensuring you have an exit strategy for all of your investments. An investment with no exit is called a prison for your money.
In today's episode, we're talking about the extra steps you need to take when initiating a wire transfer. Clients and investors often send wire transfer information by email. That information is vulnerable to being modified by hackers. The result can be the irrecoverable theft of millions of dollars.
In today's episode I'm speaking with The Real Estate Guys Radio hosts Robert Helms and Russell Gary about the Future of Money and Wealth. This two day conference in April has some of the best and brightest people in the world of investing. With no exaggeration, these two days could change your life.
In today's episode we're talking about the steps you need to take as a developer to ensure you prevent storm water pollution.
In today's episode we have a special guest. George Ross worked with Mr. Trump as his advisor and right hand man for much of the past 40 years. George's unique perspective comes from the people he speaks with. These are different from the people that I routinely speak with. Whether I agree or not, his perspective his valuable because he is seeing things from a different vantage point. It causes me to ask "How do I know I'm right?".
In today's episode, we're talking about how to think like a lender so you can negotiate better loan terms. It's one of the key strategies we use to ensure the success of our projects.
As real estate investors we often require a bucket load of reports, permits, certifications, and most important Espresso. The environmental study is one of the most common and least understood of all. In today's episode, I'm going deep (4 minutes deep) into the entire environmental process for a commercial property.
In today's episode we're talking about the arbitrary reasons people give to justify their negotiating position. We have a concrete real world example. Unless you're violating a law of nature, stop being Reasonable!
In today's episode, we analyze how we evaluated an offer we received this past week. Far more important than the price are the terms of the offer, and determining if the buyer is a qualified buyer. Lots of ways to do this, but here's how we did it.
In today's episode, we're talking about how to analyze the merits of selling a property when you get an unsolicited offer from a potential buyer. It happened to me this week. I share the process of evaluating whether to keep or sell the property BEFORE even discussing the offer with the Buyer.
You can get in touch with the host Victor Menasce at victorjm.com. In today's episode we're talking about changes to the zoning code and what can happen even if that change looks really promising.
In today's episode we're interviewing former attorney Monick Halm on her journey from lawyer to apartment investor with 1000 units in about 2 years. It's a great story, and you don't want to miss it.
In today's episode we're talking about risk management. This is something every investor, developer, business person, and project manager needs to contend with. But before we can manage risk, we must understand what a risk is. Most people don't. Do you? Listen to find out.
In today’s episode we’re talking about Senior Assisted Living as an asset class. Are they a good opportunity? If so, where? You can get in touch with Victor at victorjm.com
You can connect with Victor at www.victorjm.com. In today's espresso shot of real estate investing advice we're talking about height restrictions and how to interpret them. It's not straightforward at all, and there is lots of fine print to truly understand what it means.
In today’s episode we’re talking about what a landscape architect can do for you and why you should consider hiring one. Not all projects need one. But if your land has hills and streams, a landscape architect can add tremendous value. Connect with Victor at www.victorjm.com.
You can connect with Victor at www.victorjm.com. In today's episode we're talking about one of the most important consultant reports when you are contemplating new construction.
In today's episode we're talking about how to make sense out of conflicting consultant's reports, even though they all come from highly respected, credible, professional sources. We look at a specific case study.
In today's episode we're talking with attorney And retired VP of the Trump Organization on how to hire an attorney. Check it out.
In today's episode we're talking about construction loans and how they are structured. Working with a bank on construction loans can give you great rates and some of the lowest costs.
In today's episode we're talking about municipal allocations. What the heck are these? The city maintains a budget for how many dwellings a water main, a sewer pipe, a road can support. Just because there is a water supply at the edge of your property doesn't mean you will be allowed to use it. I'm discussing how to find out and how to do your due diligence before you buy the property.
In today's episode I'm talking about the different skills an architect must have and what you need to look for when making a hiring decision.
In today's episode I'm talking about how to create huge value increases by using the local zoning board of appeals to make small changes that have a huge impact on valuation.
In today's episode I'm introducing a high priced report called a market study. This 150 page consultant's report will give you deep insight into the local market and enable you to make high quality decisions.
In today's episode I'm talking about how to respectfully present an opportunity to potential investors so you don't seem like a creep.
In today's episode we're talking with Grammy Award winning musician and Nashville music producer Seth Mosley about real estate investing as a side hustle.
In today's episode we're talking about a real life example of an uncle attempting to sell a business to their nephew and hiding the truth about the business performance in accounting jargon.
In today's episode we're talking about the four factors that affect the price you might pay for a given property. These factors are different from the considerations an appraiser would use in determining value. You probably have not heard it expressed this way before.
In today's episode we're talking about the stock market sell off and the price volatility that comes with it. Was this expected?
We're continuing our discussion on raising capital. In today's episode we're talking about predatory lenders, how to spot them, and why they would want you to fail. This is a very important episode for any business owner to listen to.
We're talking about raising capital, this week and all week. In today's episode we're talking about how to recognize a potential funding partner.
In today's episode we're talking with Mr. George Ross. George was executive Vice President at the Trump Organization and was instrumental in helping Donald Trump secure his first deal at 27 years of age. This special Super Bowl Sunday edition is a little longer, but wow what a great story from George.
In today's episode we're talking about the fifth principle of raising capital, alignment. When you meet all five of these, raising capital is remarkably easy.
In today’s episode we’re talking about raising capital and the 5 principles. We’re taking a deeper dive on what it means to have a compelling opportunity.
In today’s episode we’re talking about raising capital and how a track record is vital to raising funds. What to do if you don’t have a track record?
In today’s episode we’re talking about the five principles of raising capital and doing a deeper dive on how trust (#2) is necessary to raise funds.
In today’s episode we are talking all about the importance of relationship in the process of raising capital. It is one of the five principles that you must satisfy in order to successfully raise funds.
In today’s episode we are talking about the five principles for raising money effortlessly and consistently. When one or more are missing, raising money is incredibly hard.
In today’s episode we’re talking about unlocking the money constraint that many investors experience.
Talking about how funding partners can fail to meet their commitments and what you can do about it.