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 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 [email protected]

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 [email protected]

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?