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 [email protected] -------------------- Host: Victor Menasce email: [email protected]

Sandhya Seshadri 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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected] 

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected] 

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 [email protected].  -------------------- Host: Victor Menasce email: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected] 

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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: [email protected]

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.