On today’s show, we’re going to dissect a word where you probably think you understand the meaning. That word is used often. It makes headlines. In fact it’s a highly abused word, especially in the news. That word is “Economy”. You’ve probably attended a talk on the state of the economy. I’m going to emphasize, “the economy” as if there is only one economy. Some economic indicators you’ve heard are things like gross domestic product, unemployment, workforce participation, consumer price index. All of these metrics are used to describe the state of the economy. Let’s run a little retrospective on the past 12 months. The past year has been among the most tumultuous in economic terms in recent memory. In the United States the economy experienced a loss of 22.36M jobs over an 8 week period from February to April. That amounts to 14.7% of the workforce lost their jobs. But these job losses were not uniform at all. The worst states were Michigan, Vermont, Nevada and Hawaii all having job losses exceeding 20% in a matter of weeks. Michigan was the worst at 23.8% of all jobs lost. At the other end of the spectrum Oklahoma, Wyoming, Nebraska and the District of Columbia all had job losses less than 10%. Oklahoma lost the feast jobs at 8.5% of jobs lost from February to the trough in April. Let’s look at the recovery from April to December. How many of the lost jobs were recovered? Well the results vary widely. Some states like New Mexico only recovered 31% of the lost jobs during the pandemic. Texas recovered 64.4% of the lost jobs and Idaho and Utah recovered 102 and 103.6% of the lost jobs respectively. In Utah and Idaho, the economic downturn has been erase like it never happened. So for the year ending December 31, 2020 Hawaii is down 13.8% for the year, and Utah and Idaho are up 0.6% for the year. There is no one single economy. For those who have lost their jobs, and exhausted their unemployment benefits, they’ve burned through their savings, maxed out their credit cards and probably dipped into their retirement savings in order to make ends meet. For them, the current conditions are among the hardest they’ve experienced in their life. For the vast majority, those who have jobs, who kept their jobs, they kept their incom e. They didn’t have much to spend it on. The personal savings rate across the US went from an average of 7% before the pandemic to a peak of 35% during the middle of the pandemic before settling out to an average savings rate of 18% for the year. Not surprisingly, with all that extra cash in the system, few places to spend it, credit card debt reduced by about 12% across the nation. You see there is not one single economy. There are a number of macro economic forces that are at play. They will disrupt the current situation. Imagine taking a chess board, throwing all the pieces up in the air and seeing where they land. Some of the chess pieces will land in a vulnerable spot. Others will land in a winning spot. That’s called luck. If we look to the random nature of that jump ball situation, we will be either winners or losers. But all of that neglects that we have agency, we have the power to change our own personal direction to adapt to the market conditions as they are on the ground. That agency means we can make conscious decisions to play defence and wait it out, or play offence and capitalize on the market conditions. So what does that mean? Business is nothing more than a sport of solving problems that people are willing to spend money to solve. If you can be seen in the market as a credible solution to a given problem, you can do good business. It’s not the market’s job to come to you. It’s your job to solve a business problem that people are willing to pay money to have solved. When you look at the world through that lens, the economy is irrelevant. In fact, there is no economy.

On today’s show we’re talking about the link between online and offline and the world of real estate in particular. When I look to see where real estate is going, I look to online innovators. That seems counter-intuitive. After all, we live in an offline world. When we think of the online world, your first thoughts might go to Facebook, or Instagram, or TikTok or ClubHouse. How could those technologies possibly disrupt the world of real estate? It makes no sense. In my view, the disruption to the physical world is going to come from the online world. The catalyst for disruption in real estate won’t come from a new building technology per se. Although there are a number of innovations in technology that are changing the way buildings are designed and constructed. I look to those companies that are upending business using technology. We’re talking about how Travis Kalanick, the founder of Uber, and most recently of Ghost Kitchen startup called Cloud Kitchens. This was merely an idea a year ago. Today, some top chefs in NYC have abandoned their expensive real estate and are serving the take-out market out of commercial kitchens located in less expensive industrial space, rather than the prime location kitchen with the fancy ground floor restaurant dining room attached. I attend a daily meeting with Glenn Sanford, CEO of EXP Realty. You might be wondering what I’m doing hanging out with the CEO of a real estate brokerage. I’m not a real estate agent and don’t want to be. Apart from the word of real estate, there’s no real connection. What sets Glenn apart from others in the space is that he speaks like a software designer. He uses language, terms and metaphors that came out of the world of software development. It’s not an act. He simply exudes it. As we’ve talked about recently, When I look at the systems he has used to build his business, there’s no doubt in my mind that he is thinking scalability, the kind of scalability that can only be matched in an online world. His company has experienced the kind of growth that only a software company can achieve. It would have been near impossible in a bricks and mortar business. It used to be the case that an impressive office with a sprawling lobby and layers of assistants made an impressive first impression for a prospective client, or an aspiring employment candidate. Today, that’s a distant memory. I’ve been using zoom for meetings for several years now. But my use of zoom has expanded dramatically. Even in the past week, I have spent no less than 6 hours a day in zoom meetings on some days. In December of 2019, zoom had about 10 million daily active participants. By March this had grown to 200 million and by April, over 300 million. How did zoom scale their enterprise by a factor of 30 in the span of months? The ease of use of zoom and the excellent performance made this possible. It turns out that Zoom uses Amazon’s web services data center. They’re one of the largest suppliers of third party data services. Amazon’s server farm was easily able to scale the service offering to meet the needs of zoom’s growth. None of these shifts individually represent a major change. But cumulatively, the compound effect of all these changes on the design of real estate is significant. I don’t need to dedicate as much wall space for book cases anymore. How many people used to have a video studio in their homes 20 years ago? Hardly any. Today, I know of dozens. If I was designing a home for this coming decade, I would be designing it differently compared with only a few years ago. Back in the day, homes and apartments used to have a built -in cabinet for the delivery of fresh milk. Today, nobody would even think of that. But a secure e-commerce locker makes a lot of sense. We know that technology is changing rapidly. We have no idea what building technologies will look like in 30 years from now.

On today’s show we’re talking about what happens when your local bureaucrats make a mistake. I’ve encountered the odd time when a plans examiner makes a mistake. These are relatively rare, but in retrospect they happen far more often than I care to think. We’ve experienced these problems from time to time. But I also keep hearing about problems like this. In fact, I’d go so far as to say this happens with alarming regularity. In the case of one of my consulting clients, the fire Marshall stamped a set of drawings and returned them as having been approved when in fact, the plans had never been examined at all. The property owner was under the impression that they had fire Marshall approval. About a month later, the building department admitted that the fire Marshall had indeed made a mistake and stamped the wrong drawings. These plans had never been looked at. Not only that, the fire marshall demanded a number of changes would be required to the plans in order to comply with the building code. Upon review of the requested changes, in the opinion of the architect, the fire Marshall had erred in their interpretation of the building code and that the installation of a complete fire suppression system was not required. This second story involves a problem with one of our projects currently under construction. The plumbing connection to the city was approved. However, the plans examiner who was supposed to review the plumbing design retired in the middle of the permit approval. The plumbing drawing was given a rubber stamp but never actually reviewed. The chosen water meter was inappropriate for the size of project and would not have given an accurate reading. Naturally the plans department was very apologetic. It was a mistake that never should have happened. Nevertheless, the problem needed to be fixed. As a result, the metering had to be redesigned with an added onsite cost of $18,000. The problem was only discovered in the field by the building inspector during the plumbing inspection. In another case, we had a plans examiner on a project who had trouble interpreting the rules for a property situated on the corner. The property was fronting on one street and had its side yard on the second street. This is normal on most corner lots. But the plans examiner was having a hard time figuring out where the front of the property was located. So they applied the rules for the front of the building at both the front and the side. They argued that the property essentially had two fronts, and therefore had to comply with the front yard setbacks for both. The plans examiner argued that the design did not comply with the zoning, even though the zoning department had approved the design. In another case, we had a building nearing completion and the on site building inspector argued that the plans examiner who approved the design did not allow sufficient sprinkler capacity on the top floor of the building. The inspector demanded that we run a 5” sprinkler pipe up the exterior of the building to supply additional water pressure to the top floor. Now, for those of you who have been following the news lately, you’ll know that water pipes should not be allowed to freeze. Running a sprinkler pipe up the exterior of a building means that no water will reach the top floor for about 4-5 months of the year. As you’re undertaking your projects, expect some surprises from your local building officials.

On today's show, we're back with Mitzi Perdue. Mitzi is known for being part of the founding family of Sheraton Hotels. Her husband was Frank Perdue of Perdue Farms. Today, Mitzi has dedicated her energy to combatting human trafficking. On today's show you will hear about how some leading technology could be effective in bringing an end to modern day human slavery. To learn more, connect with Mitzi at winthisfight.org.

Henry Daas is a serial entrepreneur and business coach from the NY area. On today's show we're talking about managing risk. To learn more, feel free to connect with Henry at henrydaas.com. 

During the period from 1914-1918, the first world war gripped Europe. It was the war to end all wars. Wars are inflationary. The first world war was no exception. The US entered the War in 1917. The consumer price index was first developed in 1919, to track to the big inflation of the previous several years, an artifact of wartime, under which the prices of ordinary things available in 1913 had more than doubled. In the 1920s, prices settled a little, to about 170% of the pre-Great War 1913 level. The permanent erosion of the dollar, the reality of which first became clear in the 1920s, forced savers to find some instrument that would pay them back in the old way, in money that held its value. The choice was made to capture, via stocks, the forthcoming profits of businesses. During the 1920s, the booming stock market roped in millions of new investors, many of whom bought stock on margin. If a new offering came into the market, investors would pile into the stock causing it to shoot up in value. At the height of the 1920’s, there were so many initial public offerings that some of the companies didn’t even have an operating business underneath them. Nevertheless, investors piled in and their newfound paper wealth was cause for celebration. Those company founders who initiated the offering got to cash in on the wave of capital being thrown at the company. Of course we all know from the history books how this turned out. On October 29, 1929 it all came crashing down. At the time, only about 1/3 of the banks were part of the Federal Reserve system. Thousands of banks that were not part of the Fed became insolvent. Investors who had margin accounts had to cough up the cash to cover their margin calls. Most didn’t have the liquidity to do so. Banks and brokerage houses called in loans on a massive scale. We know that investing in companies that don’t have any income, nor any underlying operations is craziness. We know that high rates of leverage to purchase items that have high price volatility makes no sense. So here we are in the year 2021. There have been a number of high pinitial public offerings this past year, despite the pandemic. Some of these IPO’s have been different than the traditional IPO. A special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an IPO for the purpose of acquiring an existing company. In 2020, as of the beginning of August, more than 50 SPACs have been formed in the U.S. which have raised some $21.5 billion. So investors are being told to put up their cash to invest in a business that will complete acquisitions of come unknown companies in the future. You won’t know if the underlying company is a good buy at the time you make the investment. Just trust that the folks making these acquisitions know what they’re doing. The securities and exchange commission created the securities act of 1933 for the purpose of protecting the investing public. There are stricter rules around how offerings can be made than existed in 1929. At the start of the 1920’s there was a global pandemic that killed more people than the preceding war. Am I the only one who is seeing a parallel between the environment today versus the 1920’s? I realize that a blank check company isn’t exactly the same thing as a shell company with no business, but it sure looks the same from a distance. History may not repeat itself exactly, but perhaps it rhymes.

Today's show is a reading of an article written by Simon Black on his Sovereign Man newsletter. It was so well written that I just had to share it with you. To learn more about Simon, visit sovereignman.com. 

This question comes from Meg in New Canaan NY. Hi Victor Hope all is well with you and your family.  I have a question with regard to sustainable building practices in real estate investment projects. We have been designing our homes using more sustainable building practices for the past several years. Here in NY, the requirements for clean energy are set to get even stricter and, on top of that, we have a moratorium on new natural gas lines in our area that I don’t envision the state lifting in full. For residential, natural gas is not supplied  to a development unless there is already gas on site and upgrades to the existing meter are not allowed. For commercial projects it is similar although I don’t know all the specifics. I was wondering how you are handling the call for clean energy, energy reduction, and sustainability in your projects.  As well, are you seeing any appreciation from the buyers/renters/investors for your efforts to provide cleaner energy and more sustainable, energy efficient buildings?  Are people willing to pay more rent in these types of projects or willing to purchase for more of a premium?  Do you have more or less investors interested in these types of projects? Thank you for your time.   I always appreciate your perspective. Meg, This is a great question. There are two ways to answer this question. Don’t develop in NY State. There are so many easier places to develop with less overhead, less bureaucracy, lower taxes, stronger demand, better profit margins, and on and on. But that’s not a very good answer to your question. 2) If natural gas is no longer permitted for new installations, you could comply by putting in an electric system and simply pushing the environmental problem onto the electric utility. The old resistive systems are very inefficient and among the most costly to operate. Still, NY has access to relatively cheap power. New York State gets 44% of its electricity from burning natural gas. 30% comes from nuclear, and tt buys 18% of its electricity from the James Bay hydroelectric project in Northern Quebec and Labrador. This environmentally friendly alternative to burning fossil fuels flooded 4,500 square miles of forest causing incalculable ecological damage to this ancient boreal forest. But since there were only about 5,000 native indigenous people living in the area, the impact was deemed acceptable and the project got pushed through and built with no environmental assessment. NY state still has four coal fired electric power plants in operation. Natural gas is among the cleanest burning fuels in existence. It’s a bit hypocritical that they’re converting coal fired plants to natural gas at the same time as they’re telling homeowners they can’t use it. We have not found a meaningful metric that would make the benefit of a low emissions system attractive to tenants. We have found that achieving energy efficiency requires a number of changes to the design. In fact, it has more to do with choice of materials than anything else. This includes more expensive, more highly insulated windows. Naturally, each of these choices increases the cost. Closed cell foam insulation is more effective than other forms of insulation. But again, it costs more. By far the most effective and cost effect method of providing heat to a property is by using a geothermal system. This is like a heat pump, except that the heat source is the thermal mass of the ground rather than trying to extract heat from the winter air that is potentially very cold. These systems require a fair bit of land or a deep well in order to gain access to a meaningful heat source.

On today’s show we are taking a closer look at the macro economy. A trifecta of forces are amplifying the trade deficit which will ultimately cause price inflation in the West. A critical shortage of containers is driving up shipping costs and delays for goods purchased from China. The pandemic and uneven global economic recovery has led to this problem cropping up in Asia, although other parts of the world have also been hit. Many desperate companies wait weeks for containers and pay premium rates to get them, causing shipping costs to skyrocket. This affects everyone who needs to ship goods from China, but particularly e-commerce companies and consumers, who may bear the brunt of higher costs. Containers from Asia would normally be returned full with exports from the US or Canada or Europe. But there is such a shortage of containers that the owners of these containers are not willing to keep them in the west for even a few days. These containers are being turned around empty. We already are facing a massive trade deficit with China that is now being amplified by the container shortage. But it begs the question, if the world had enough containers in the past, why is there a shortage now? Where did all the containers go? Many of the containers are stranded in the west. Oddly enough, I’ve seen prices for used shipping containers in Canada drop to about $1,400. They still exist, but they are in the wrong place and somehow they don’t know how to get them back to Asia. Manufacturing of new containers slowed during the pandemic, which has further amplified the problem. So shipping costs have tripled in a very short time. We have oil prices now up at nearly $60 per barrel. US oil production is down by 1/3 compared with this time last year, making the US far more dependent on imports of expensive foreign oil. This will widen the already large trade deficit even further. I predict that oil prices are heading even higher this year. $80 is easily within sight and $90-$100 a barrel is not out of the question. The rising price of oil will widen the trade deficit once again. There can only be one outcome from such a large trade deficit, and that is a fall in the value of the US dollar against the other currencies including the Canadian dollar, the Euro and the Japanese Yen. When that happens, the direct impact to consumers is an increase in price for all these imported goods. I’m not talking about one or two percentage points. I’m expecting a 10-15% drop in the value of the dollar compared with the major trading currencies of the US. Eventually the supply chain returns to normal and the extra inventory is going to be reduced. When it’s time to reduce inventory, the orders drop to zero for a period of time. This is the natural cyclical nature of many supply chains. In the meantime, the government is busy claiming victory on the economic recovery that has been artificially created through the printing of Monopoly money. As soon as the stimulus stops, so too does the illusion. The economy is like a hardcore drug addict, completely dependent on the next hit. Expect higher prices for just about everything this year. What a mess.

On today’s show we’re talking about how easy it is to purchase and configure a remote security camera system that can be monitored from anywhere in the world for the cost of not much more than an internet connection and a couple of hundred dollars per camera. Security is one of those expenses that will rarely make you money. It can only cost you money, and on the rare occasion, save you from experiencing financial loss. The most expensive form of security involves having a live person on site, either on a continual, or rotating basis. The problem with live patrols is that you can’t be everywhere all the time. You never know when an incident will occur. Traditionally, security systems have been proprietary and costly. But the technology has improved significantly and it’s now possible to design systems that deliver campus wide coverage for a reasonable cost. The traditional criticism of security cameras is that they don’t capture enough detail to clearly identify the people involved in an incident, especially in low light conditions. The technology has advanced in several ways that have made security cameras a compelling choice for security. One of the other criticisms is that crooks will intentionally disable cameras if they’re about to commit a crime. But here too, there are advances in technology that can make these tactics easier to catch. Cameras are offering much higher resolution these days. This is critical when it comes to zeroing in on details in an image. Today, the images are incredibly clear. More importantly, the software that controls the cameras is becoming smarter. Some software systems will use motion detection to zoom into the area of an image that is changing from one frame to the next. The static portions of an image rarely contain the relevant information about a crime in progress. The software can trigger alarms based on a variety of events. The newest systems can detect the loss of signal at a camera and signal an alarm based on this. If you design your system so that a given area is covered by more than one camera, then it becomes difficult for a crook to disable a camera without being detected. The latest software systems incorporate license plate recognition that is as good as the systems used by law enforcement. When a crime is committed, unless you happened to be observing the cameras at that instant in time, you don’t know what video footage to review. The longer time has passed from the time of the crime to the notification, the harder and more time consuming it is to review the camera footage to deduce what happened. Motion detection allows all those times when nothing is happening, which is the vast majority of the time to virtually disappear from your review process. The amount of time saved by eliminating the dead time is huge. Many real estate investors live at a distance from their properties. These systems can remotely monitored over the internet. They have apps for both iPhone and Android that make remote surveillance easy. We sometimes encounter situations involving employees that require investigation. It might be an employee claiming overtime when in fact they were not on site. It might be a harassment claim by an employee, or perhaps a resident. These camera systems also record audio. If an assertion is made about an employee or a resident, the audio recording can often resolve the dispute. Finally, some residents make false claims about a property manager. If there is a recording of everything that happens in the leasing office, the audio and video evidence can often be useful in arguing a claim in front of the landlord tenant board.

I’d like to introduce Mitzi Perdue (Perdue Chicken fame). Her husband was Frank Perdue. We start with the story of her romance with Frank, fitting for the Valentine's Day edition.  Mitzi’s maiden name was Henderson and her father was the founder of Sheraton Hotels. I’ve spent considerable time getting to know Mitzi in recent months. So many powerful lessons in the creation and growth of the Sheraton brand. Mitzi is a member of the NSA. She’s a Methodist. She’s a philanthropist. She’s a teacher of life skills. The Henderson family is a fifth-generation family business. She’s a steward of priceless artifacts with the singular purpose of stopping human trafficking. Today's episode is filled with powerful lessons.  Enjoy...

Denver Colorado based NineDotArts.com is a curator of art for installations of all kinds. Our guest Martha Weidmann is the CEO of the company. They access a network of over 10,000 artists to design the art experience for all kinds of projects ranging from hotels, multi-family residential properties, and offices to large-scale, mixed use developments and interactive public art installations. On today's show we're talking about how thoughtful art selection can create a unique user experience that bare walls cannot by themselves. To learn more, reach out to Martha at NineDotArts.com

On today’s show we’re talking about migration. Migration happens within the country for a variety of reasons. People have been slowly leaving the rust belt in favor of the sun belt. The trend has been alive and well for a couple of decades now. Today we’re going to take a deep look at Florida and what migration can tell us about real estate demand. There are a lot of NY accents in the state of Florida and former New Yorkers make up 7.5% of Florida residents, more than any other state. Florida has a very low proportion of native born residents, making up only 35% of the population. About 22.3% of Florida’s residents were born outside the US.  This makes sense. Florida has long been a favored destination for people coming from Latin America. Spanish is widely spoken and I’ve had more than one Uber driver who only spoke Spanish and no English. Over the past decade, Florida has averaged a net influx of population totaling 297,000 people a year. 2016 was a banner year for migration with nearly 2% population growth in a single year. That year 408,000 people moved into the state. It’s projected that migration is going to average 305,000 a year over the next five years, a little above the average for the past decade. That amounts to 835 people a day moving into the state. That translates into significant demand for new housing. We’re talking about adding a city the equivalent size of Orlando each year. That’s a big number. In contrast, NY State lost 123,000 people in the past year. Illinois experienced a loss of 79,000 residents in the past year. The fastest losing state is California which lost nearly 200,000 to migration last year. Michigan lost 18,000 in the same time period. So where are people moving in Florida? Where are they going? The top growth market in Florida over the past decade has been the southwest cities of Fort Myers and Cape Coral. Jacksonville, Miami, and Port St. Lucie round out the top 5 cities in terms of growth. The two largest home builders in Florida are Lennar and DR Horton. They consistently lead with the largest number of new building permits across all 5 of the major regions in the state. In the realm of multi-family, South Florida lead the way with 12,000 units of new supply added to the market. The largest growth markets were Fort Lauderdale with 2,634 units of new capacity added to the market, and Downtown Miami and South Beach with 2,000 units and South Miami / Coral Gables with 1,700 units. The greater Miami area picked up the lion’s share of the new growth. But as always, real estate is hyper local. Northeast Miami has earned a reputation of being a bit of a rough area. NE Miami experienced a net absorption loss of 683 units at the same time that south Miami absorbed 762 units. Some investors, particularly out of state investors tend to get into trouble by simply looking at the macro migration numbers. I’ve noticed that the number one factor influencing local population growth is the quality of air service. The further you get from a major airport in Florida, the lower the property values, and the lower the percentage of population growth. You have two major airports along the Gulf Coast. You have Tampa, and Fort Myers. Property values are at their lowest in Englewood which is about the midway point between the two airports. There are still waterfront properties In Englewood and Venice that can be purchased a surprisingly affordable prices. But with 800 people a day moving into the state, low cost of borrowing, low cost of living compared with the major NE cities, there’s continual upward pressure on prices.

The discussion of housing affordability is at the forefront of many community meetings. Three things stand in the way of affordable housing. 1) High cost of land 2) High cost of construction 3) Cost of servicing the land with the infrastructure Unless you can dramatically reduce the cost of these three items, the cost of housing will continue to be high for those who are on fixed incomes and those who are lower on the income ladder. It doesn’t matter who builds the house. It’s not the fault of the builder. If materials and labor dictate that new construction costs $130 per SF in many areas of the US, and if land contributes another $50 per SF of finished floor area, someone buying a 1500 SF house is going to need an income of $36,000 minimum in order to afford such a really small house. If a household is close to that income level, housing affordability is going to be a challenge. Two people in a household earning minimum wage will roughly afford to live in a mobile home and not much else. At $10 an hour, you’re looking at $18,000 a year in income per person. Very hard to make ends meet at such a low income level. We’re not talking about a teenager living at home, working at McDonalds part-time for a bit of pocket change. When you have independent adults in minimum wage jobs, they will quickly become the working poor. On today’s show we’re taking a look a mobile home parks. Today about 10% of US households live in mobile home parks. They represent about 20 million home sites. Most of these parks started out as mom and pop owned projects. Today, they’re a corporate affair with big business and family offices investing in them. Mobile homes provide the largest inventory of unsubsidized, affordable housing in the nation, but many began as RV parks in the 1960s and 1970s and are now old, with rundown water and electric systems and trailers that have been long past “mobile” for decades. As a park owner, the profit is in the lot rent, not the structures. Their prevalence varies widely by state. Some states like Colorado have a lot of them. More than 100,000 people live in more than 900 parks across Colorado. Many started as RV parks and then were converted to mobile home parks. But the infrastructure requirements for RV’s and mobile homes are different. Rv’s require 30A and 50A electrical service. But the building code treats a mobile home the same as a detached home and requires 200A service. The reality is that a mobile home will draw almost the same amount of electricity as an RV. The biggest demand for electricity comes from heating or air conditioning. Lights and kitchen appliances are insignificant consumers of energy by comparison. Nevertheless you will need to completely redesign the electrical system for a park in order to handle mobile homes if the park was not designed for it. The next major areas that can be costly to upgrade for the long term are the water and sewer infrastructure. Most of these parks are outside the dense urban environment and rely on well water and septic systems rather than municipal services. So why are these types of assets attractive to institutional investors? The largest cost of operating a park like this is the staff. If the park is small at say 50 units, there is not enough income from the park to pay for the staff required to operate it. These only work as owner operated parks. The cap rates for a well run, large sized park can be easily 14-15%, provided they are purchased at a good price. The specialists in operating these parks have developed strong systems for owning and operating them.

On today’s show we’re going to be talking about a proverb that you’ve probably heard you parents, or maybe your grandparents say. There are several different versions of it. But it goes something like this. They will only help you if you don’t need it. Strangely, banks have more cash on hand than ever. Consumers have been using stimulus checks to pay down credit card balances. The new loans from the SBA disappear from bank balance sheets once they’re forgiven. The residential mortgages that have been written in the past year, a record year for originations and refinance activity are usually securitized and sold into the secondary bond market. Businesses are not borrowing to expand. They’re accessing lines of credit to hang on, but they’re not really investing. As many as 8% of homeowners in the United States have accessed some form of forbearance agreement with their lender on their residential property. A forbearance agreement is when the lender says, OK. I can see you’re having temporary financial trouble. Let’s postpone a portion of your loan payments. Maybe let’s have you pay only the interest payment, you can defer the principal portion of the loan payment for six months and we’ll extend the loan by six months. That would be an example of a forbearance agreement. Today, less than 5% of the homes in the country are still in a forbearance agreement. Many have managed to exit the forbearance. The banks were encouraged to extend these types of terms to borrowers and at the same time, the Federal government issued a moratorium on foreclosures, in addition to the moratorium on evictions that protect tenants from eviction during the pandemic. Those forbearance agreements have a term of 12 months. Over the coming 90 days, many of those forbearance agreements are going to be coming to a an end. So the question is, what happens at the end of the 12 month term? There is still a moratorium on foreclosures. The foreclosure process is not fast at all. But still it’s not clear what will happen to these millions of homes? Will the lender extend the forbearance agreement? Will the lender modify the loan and extend the term of the loan, or lower the interest rate? Or will the lender move to put these loans in default? It turns out that in order for the lender to approve the modification, they will need to re-underwrite the loan. If you don’t have a steady income stream you won’t qualify. If you are receiving an unemployment check and you’re going to have trouble making payments on your home loan, you won’t qualify for a loan modification. You have to not need the help in order to qualify for the help. Now the contradiction in terms should not be lost on you. About a quarter of the forbearance agreements in existence will expire in the next 6 weeks. I can tell you know from first hand experience that the permanent economic damage is starting to appear in a big way. I’m seeing first hand businesses closing down, and I’m seeing these business assets being sold. I’m now seeing asset sales from businesses that are closing cross my desk about once a week. My team is conducting due diligence on multiple businesses right now as we speak. I speak regularly with a specialist in asset disposal. These are the folks that will come into a business or a restaurant that is closing and remove all the equipment and cart it away to a warehouse to be sold at auction. They’re running out of warehouse space. They’re busier than they’ve ever been. So the impending housing crisis of foreclosures on the scale of 2008 seems to be a distance away. Governments are trying hard to prevent the carnage in the housing market that was experienced following the 2008 financial crisis. All we can say right now is that government will continue to shovel cash into the system. Where this cash will ultimately end up nobody knows.

We have a great listener question today.  What are your Key Performance Indicators for underwriting a rental building (100m+) on Park Avenue NY in the current market conditions (decrease in occupancy and increase in concessions). There is also few sales comps in the last decade. Thanks in advance This is a great question. This is an area of NYC that I know well. My father had his dental practice on the corner of Park Avenue and 73rd Street. My mother was an architect on the Pan Am building, now called the Met Life building on Park Avenue and 43rd Street. Park Avenue luxury rentals are complex buildings to own. Most of the land underneath those buildings, North of Grande Central Station is owned by the Pennsylvania Railway and leased to the buildings.  Those ground leases are expensive which is part of what contributes to the high rent needed to merely break even on those assets. Eventually those buildings could be turned into condo buildings, or rebuilt to even higher density. You are correct that these buildings don’t change hands very often. Most of the luxury apartment buildings that are rentals along Park Avenue have not experienced a large increase in vacancy. Many of these older buildings date back to the early 1900’s. These buildings along Park Avenue are not a commodity. Those who are renting in those buildings are paying $5,000-$7,000 per month. They’re paying that because they want to be in that location. At the purchase price of several million dollars, even a rent of $7,000 a month is a relative bargain. So these tenants are not moving out in search of something cheaper. The turnover in these buildings is extremely low. Some have been updated and converted into condominiums in the process. Those that have been converted to condo are pricing around $6,000 per square foot. However, given the excess of supply that has opened up in Manhattan in the past two years, it’s going to take several years for this market to recover. I don’t believe we’re anywhere near the bottom of the market in NYC. Even before the pandemic hit, there was a lot of new supply having entered the market. There was an estimated inventory of about 9,000 vacant brand new construction condos in the market. That represents about 7 years of inventory at 2019 absorption rates. So who would be buying buildings like this at such inflated prices? Buildings like this are considered to be trophy assets. The buyer of such a building is someone with a lot of cash to put to work. They’re looking for an asset where it’s more important to tie up a large amount of cash to protect it for the long term, rather than simply maximizing the rate of return. Some international wealthy families have their money in places like Brazil or Argentina where they face considerable ongoing currency risk. More important than earning a high rate of return, is protection from 10-15% annual foreign exchange loss. These families sometimes like to park cash in a stable asset that is safe by virtue of being in a high demand location in a global gateway city like NY. Some of these buildings are being valued at cap rates in the mid 3’s. That means the cash on cash return would be approximately 3.5%, with zero leverage. At that price the property won’t generate enough free cash flow to service any debt. It all comes down to being clear on your investment criteria. We would not buy a building at a 3.5% cap rate. That’s not for us. We prefer to build new construction at a 6.5-7% cap rate and then refinance the property at a lower cap rate that is consistent with the market valuations around 5%. Remember, the difference in price between 3.5% cap rate and 7% cap rate is double the price. One of the key metrics is price and the ability to use debt to finance these buildings. But we’re comfortable building new construction. That’s not for everyone.

What is old is new again. On today’s show, we’re taking a deeper look at digital marketing. Why? Because every successful business needs to be known by its customers and real estate businesses are no different. Some of you may be wondering why there is not a lot of advertising on the real estate espresso podcast. We have had advertisements in the past on the show. At most they were 30 seconds long. These days, the show is free of advertising. Back in the good old days, marketers would spend money on advertising. They would run an ad on Television. We just finished watching the latest crop of advertisements during the Super Bowl broadcast. The ads that make their debut at the Super Bowl are aimed at a broad audience. The advertisement for Doritos corn chips can’t directly be measured. We don’t know who will go out and buy corn chips as a result of the commercial. Google had a very simple business model when it got into the paid search business. It charged $0.05 for the opportunity to be placed above the organic search results. Then some businesses realized that their competitors were buying that ad space. Every time someone searched for Home Depot, an ad for Lowes would appear. So Home Depot would offer to pay a higher price for that same ad. Eventually it became an auction environment. The advertising auction price would rise to the point where the equilibrium would be reached. Google rose to becoming one of the most valuable companies on the planet with zero sales force. Think about it. They had zero sales force to achieve that market position. Yet, they managed to siphon almost all of the marketing value out of the system with zero sales force. Business is changing. It used to be that commerce was sold through platforms. If you wanted your product to get to the consumer, you needed a platform. In some cases, you needed a company like Walmart to choose you. Or maybe a national supermarket chain needed to choose you. The business model was rarely direct to consumer. Google enabled companies to cut out the middle man and made it possible for smaller companies to go direct to consumer. But there was still a large percentage of commerce that was not using search in order to reach the end customer. Nobody uses google to search for Coca Cola, or Pepsi. With pay per click, the ROI is easily measured. The advertising is direct to consumer. There is no middle layer obscuring your view of the transaction. But some businesses are starting to experience a loss of return on these platforms. Competitors are hiring services to covertly click on your ads to waste your ad budget. Some behind the scenes I’m hearing that Google plans to change the emphasis on new forms of advertising that are tailor made for the kinds of businesses that today are advertising on television, or on billboards. The world of television has not changed its format in 50 years. They still subject the viewer to 5 minutes of advertising every hour. Google on the other hand has figured out that viewer attention span is much shorter than 5 minutes. Most viewers will not tolerate 5 minutes of advertising without changing channel. Google ads on the other hand are no longer than 15 seconds. Many are under 10 seconds. What does this mean for you, as a business owner? It means that the already saturated online world is about to get even noisier. In my view, the world of interruption marketing is becoming less and less effective. Those who master the art of building a relationship with their customers and with their audience are those who ultimately win.

Wes Hill hails from Chico, California (about 100 miles North of Sacramento). Wes and his partners own about 1,400 apartment units across several states. On today's show we're trying to gain insight on rent collection statistics across multiple geographic areas. Today's discussion highlights the plight of landlords across the country.  You can connect with Wes at MultiFamilyAssetAdvisors.com.

Today's show is not a real estate show. Our guest is Joseph Fung, founder of a technology startup company. We're talking about an innovative technology company that is training people how to become expert sales people involved in the sale of complex products. All companies require sales. As legendary investor and RichDad advisor Ken McElroy says, "Sales solves all problems".  To learn more, reach out to Joseph at uvaro.com.

Today’s question comes from Chris in Long Island. He asks, You’ve talked about many different asset classes on the show, but I haven’t heard you talk about crypto currency? Why haven’t you talked about it, and what are your thoughts on crypto-currency. Chris this is a great question. In order to answer the question, we need to go back to the very definition of what is money. I don’t know if this is strictly a dictionary definition, but in my mind in order for something to be money it has to have three characteristics. It has to be a means of exchange It has to be a store of value It has to be easily divisible into different sizes so that you can use it to exchange for a wide spectrum of goods, services and commerce. Let’s look at a crypto currency like Bitcoin, or Etherium, or any of a host of others and measure them against those three criteria. As a means of exchange, it’s not great. There are more methods coming into play. But you can’t just go out and buy groceries with a crypto-currency As a store of value, it definitely fails. The value of crypto currencies have been extremely volatile, both up and down. The value seems to be linked to the number of coins in existence and demand for coins. The notion of value is based on the promise that supply of coins won’t be inflated and debased the way the dollars are being printed. Most of the coin exchanges like coinbase allow for fractional purchase of coins. So maybe the third is satisfied. But against the measures of the definition of what money needs to look like, I can’t see how anyone thinks that crypto-currency is money. A bank  has a centralized database where they keep track of how much is owed to you. That centralized database is not 100% perfect, but is pretty trustworthy. I assert that it’s trustworthy because I can virtually guarantee that all the listeners of this show have a certain amount of their liquid cash on deposit at the bank where it is being tracked in a central database. The argument for crypto currency is that there is no bank that is keeping track of your funds. The database technology that sits underneath the crypto-currency is based on a technology called block-chain. The blockchain is a database that is distributed across thousands if not millions of computers and so there are literally thousands or millions of copies of your transaction being recorded across all those computers. The argument is that if someone attempted to tamper with the records in the database, it would be virtually impossible for them to tamper with all of those copies of your records. The inconsistency would show up instantly and the fraud would be exposed. A single computer updating a single entry in a database can complete that operation in a few microseconds. But if you have to make the same change and recalculate the signature 1,000 times across 1,000 computers, or 10,000 computers, it’s clearly going to take a lot longer. So blockchain technology is essentially a slow distributed database. So crypto has some security features that are interesting and compelling. On the flip side, the inherent security doesn’t come for free. There is a technical problem associated with a distributed database and that is scalability.  Have people experienced huge capital gains in crypto-currency? Clearly the answer is yes. Have people lost money? Absolutely. In my world investing has the notion of value at the foundation. Speculation on the future price is not investing in my world. That’s gambling. I believe there is risk in everything we do. But when it comes to investing I want to take calculated risks, not play in a game of chance.

In a mastermind, you will often meet new people who each take a few minutes to introduce themselves. On today's show you're hearing a recording of my introduction to a mastermind group. If you're not part of a mastermind, I strongly urge you to make that investment in time and relationship building. 

On today’s show we’re talking about the shift in housing supply during the pandemic and what it means for new builders. Housing starts were up 12% for the year according to data just published by the research team at Fannie Mae. Multi-family starts are down 13.6% compared with a year ago. Total housing starts of all types were up 5.8%. Now through the year we had supply chain disruptions which meant that some items were difficult to source. Those hard to find items naturally went up in price. Lumber is priced as a commodity and lumber futures trade on the commodities markets like many other commodities including copper, pork bellies, wheat, and energy. Softwood lumber is priced per 1,000 board feet. The math is pretty easy to work out. If lumber prices are at $1,000 per 1,000 board feet, you’re basically paying $1 per foot. The simple test is how much would an 8 foot long stud cost you to purchase? You might expect it to cost about $8-10, and that’s exactly what we see. We’ve seen lumber prices fluctuate wildly throughout the year. Prices dropped to $264 at the end of March, and were up to $367 by the end of May. Once summer hit and we had a succession of hurricanes make landfall all over the country. Lumber prices hit $970 in mid September before dropping into the $500’s for most of the fall. Through Q4, prices rose into the $800’s and have remained around $850-$880 for most of January. The impact of these high lumber prices, along with all the other supply chain shortages is that overall construction cost has increased about 10-12% in less than a year. The price increase by itself would have made it difficult to start any new construction. The saving grace has been that the falling inventory has pushed prices up to the point where higher sale prices have made new housing starts viable. If prices hadn’t jumped an average of 11% across the nation for existing home sales, the market conditions would not support new construction. Fortunately for builders, prices do support the higher cost of construction. But there is also an opportunity. It turns out that steel framing is less expensive than wood. Steel framing has commonly been used in commercial construction. It has the advantage that it doesn’t warp or shrink, or swell with humidity. It’s also very strong in compression when properly installed with drywall. Some might be tempted to switch materials from wood framing to steel in certain applications. Sadly it’s not that simple. The carpenters who frame out of wood are not necessarily experts on how to frame out of steel. In addition, your architect would need to design the building to have the proper lineup of materials and cross sections. What you might save in materials, you could easily lose in labor, complexity and rework if things are not done properly. But if you’re looking to build cost effective housing, this could be an area to explore with your architectural team. Unless you’ve been able to secure your materials or your subcontractors are willing to reconfirm and guarantee pricing, you might face a situation where a subcontractor walks off the job and refuses to honour their contract. You could sue them, but at the end of the day, you have a project to complete and a law suit won’t get the building finished on time and on budget. 2021 is turning out to be a year of value engineering, where the owner, the architect, and the general contractor will need to get creative about adapting to material shortages, price jumps, and optimizing your negotiations with subcontractors.

On today’s show we’re going to pick up on a story that we covered several months ago. The headlines these days are about Covid-19, it’s impact, and the slow vaccine rollout. The papers are headlining updated economic stimulus plans, the surging price of silver, surging AMC stock prices and the military coup in Myanmar. Frankly, these are all important, but there’s something far more important to pay attention to, and it’s not making headlines. I’m talking about the handling of the situation in Hong Kong. Depending on how the world responds to the Hong Kong situation, will likely determine how China acts when it comes to Taiwan. Hong Kong is the dress rehearsal for Taiwan in my opinion. You might be wondering what all of this has to do with real estate investing. Stay with me and I’ll make the link in just a minute. One of the things that can dramatically affect local real estate is migration. When people pick up and leave due to political situations, we can see large scale migration. Two weeks ago the Hong Kong government told UK citizens that they will need to choose between the having British status or Chinese status. The new policy was in reaction to the British Government’s decision to allow people with BNO status, which is British Nationality Overseas status to apply for a visa and have a path to citizenship where they would eventually get a British passport. China stated that as of Jan 2021, the BNO status will no longer be recognized. The British government estimates 5.4 million Hong Kong residents are eligible for the scheme, that's about 72% of its 7.5 million population in Hong Kong. These include: 2.9 million BNOs 2.3 million dependents of BNOs 187,000 18-23-year-olds with at least one BNO parent It is difficult to say how many eligible people will actually come to the UK. The latest estimate from the UK government puts the number expected to take up the offer at 300,000. There are about 80,000 people in Hong Kong who hold US passports, and 300,000 in Hong Kong who hold Canadian passports. The unofficial number suggests that as many as 500,000 Canadians may reside in Hong Kong. So the question is, how many people may choose to leave Hong Kong in favour of their second passport. It’s hard to believe that things will get better for foreigners living in Hong Kong. It’s not like the climate will get more business friendly, or that individual citizens’ rights and freedoms will improve in the coming years. So the question is, how many will leave and how soon? So what does this mean for real estate investors? We could see a significant influx of residents from Hong Kong in the coming months. It’s most likely that they will move to a coastal city that already has a large Cantonese community. Remember, people in Hong Kong don’t speak Mandarin. They speak Cantonese. This is a different language. The culture is different. We can expect people to favor cities like Vancouver, Toronto, San Francisco, Seattle, and a few others. If 300,000 Canadians were to land in Toronto, or Vancouver, where would they go? Yes, there is some vacancy, but not enough to absorb 300,000 people. If 80,000 Americans were to land in San Francisco, Los Angeles or Seattle, where would they go? I believe there is a window of opportunity for investors that are paying attention, who can clearly identify the needs of Hong Kong residents looking to relocate in North America, to deliver a product ideally suited to the needs of someone coming to the US or Canada in a hurry. Maybe they’ll send the kids across first and then follow later in 6 months when personal and financial affairs are in order.

On today’s show we’re talking about a book that has changed numerous lives of friends of mine, and quite frankly I’m embarrassed to say that I waited a long time to read it. I waited even longer to recommend it. But we’re here to correct that this month. This weekend I had the privilege to spend an hour with the author of this month’s book on a zoom call. The author’s name is Bob Burg and he was coming to us from his home in Jupiter Floria. Bob is the author of 8 books and has sold over 2M copies. Some of his books have been translated into 29 languages. Bob has been named one of the 200 most influential authors in the World by Richtopia. The book is “The Go Giver; A Little Story About a Powerful Business Idea” I’ve long been a believer in abundance mentality. If you’re a listener to this show, chances are good that you’ve been certainly exposed to it, if you’re not a full convert to the mindset of abundance. The opposite of abundance mentality is scarcity mentality. That’s the mindset that says “The pie is only so big. If I’m going to get my fair share, I have to take it from someone else.” The abundance mindset says that, rather than taking from someone else, focus instead on making the pie bigger. But the book the Go Giver is much deeper. You are probably thinking that you understand the abundance mindset. But there are many other factors that go into the true giver mentality, rather than focusing on abundance. Bob Burg breaks it down into 5 principles, as if they’re almost laws of nature. The book is written as a narrative, as a fable with Joe, the super aggressive salesman trying to meet his sales quota for the quarter. He keeps losing deal after deal. He’s focused on the prize. He’s focused on meeting his sales quota. There’s a week remaining in the quarter and he’s getting desperate. In the course of the week, our salesman Joe meets a mentor who takes him through a series of five lessons, each with daily homework. The power of this book is in its simplicity. Bob Burg doesn’t just give you the information. He wraps it in a story. We learn through stories. We are taken through a narrative that transforms the main character in the story, bit by bit. Each lesson results in a shift. But still pieces of the puzzle are missing and the picture isn’t clear. You see some businesses are focused on just giving enough value to make the trade a fair trade. If you get a decent cup of coffee for $2, that’s a fair trade. But you’re not going to become a global leader with that. You have to deliver a coffee experience so great, that the customer feels like they’re getting a massive bargain at $2. But even if you deliver incredible value, it will still be a small business unless you truly aim to serve a lot of people, and serve them really well. That’s why a rock star gets paid so much more than a great musician who plays on Friday night’s in a bar band. The rock star has focused on impacting many more people. I’m not going to give the entire book away. What I discovered is that those people who are takers show up as plain as can be. Spending time with the author Bob Burg was very special. It was clear that even though the book has a few simple ideas, it doesn’t mean they’re all easy to implement. Social conditioning can run deep for many. The ideas in this book can challenge core beliefs for some. The discussion took us much deeper than the book itself. Bob started quoting Benjamin Franklin and other great thinkers that came before. The ideas in the book are really designed to be timeless. Even though this book was first published in 2007, and then later updated in 2015, this book is destined to become a timeless classic.

Martin Saenz is a specialist in buying distressed notes in the secondary market. These loans can be the source of huge profits when they are modified and restored to performing status. This is another incredible conversation about investing strategy. To learn more, you can connect with Martin at bqfunds.com

Sam Bates is undertaking a value-add multi-family apartment investment project. The usual tactics of adding value through improvements form part of the forced appreciation. But the addition of a captive high speed internet service is bringing an additional high margin revenue stream which adds nearly $1M to the value of the property while being minimally invasive to the operation of the property. This story contains a powerful lesson on how to improve the property with minimal impact.  

Some people think that putting money in the stock market is investing. But in the past week we’ve seen the power of social networks to mobilize large numbers of people to undertake an otherwise un-natural transaction en mass, all at once. The nearly dead company GameStop has been making headlines in recent days. A number of people are probably wondering why Gamestop’s stock has been surging. It doesn’t quite make sense. So before I explain what happened to Gamestop, you need to understand short sales in the stock market. So imagine you think that a company’s stock is going to fall. Pick a company, any company. You might choose Boeing. Boeing is trading around $197 per share. Let’s say that you want to short Boeing, you borrow a share from a broker and sell it immediately at its current price. You then hope that the stock’s price is going to fall so that you can buy it back at a lower price and return the shares you borrowed to your broker. You make money on the difference. So if Boeing shares fall to $190, then you could buy the stock for less than you sold it and and profit on the difference. You decide to cover your short position by purchasing the stock and $190 and now you’re in a safe position with a profit of $7. But if instead of the $197, the stock shoots up to $205, you still need to return your borrowed share to the broker, except now it’s going to cost you $8 to buy back the stock at the new higher price. You would be facing a loss of $8. Since the stock could continue to rise indefinitely, the losses for a short seller can continue to increase indefinitely. You have to replace the borrowed share and the more the price rises, the bigger the loss. For Gamestop, a few weeks ago someone on reddit on the wallstreetbets page noticed that a hedge fund had taken a massive amount of short trades against Gamestop. The one reader convinced everyone on the thread to join forces to buy as much of the Gamestop stock as possible. This pushed the price up in the short term. The short seller was immediately exposed to billions in potential losses. Eventually the losses grew beyond the $13.1 billion that the hedge fund was worth. Eventually the hedge fund was forced to declare bankruptcy. Now we have the reddit thread combing through other hedge fund positions with massive short exposures so they can short squeeze them into bankruptcy as well. We’re now seeing similar assaults on share of AMC Entertainment which nearly tripled in value on Wednesday. Now folks, this isn’t investing. This is called gaming the market. But it’s pitting massive distributed liquidity against concentrated liquidity in the brokerage houses. Today, 90% of the trading volume in the market is based on large computer based trades that are aiming to squeeze out small profits. The initiative for these trades are software programs written by quantitative analysts. These guys and gals are mathematicians who analyze the performance of the markets and they try to develop algorithms that give a brokerage house, a hedge fund, or an investment bank a quantitative edge in the market. So as a simple example, a computer program that looks at the price of Boeing on the London stock exchange might notice that the stock is trading a few pennies higher in London than on New York. The software would then exploit the price difference by purchasing the stock in New York and immediately selling in London and making a few cents profit on the trade with very little risk. You don’t make a lot of money on each trade unless you through huge volumes at it. Throw too much money at the trade and now you risk eating your own lunch and negating the very price difference you were aiming to exploit. There are dozens and dozens of algorithms that have been created to try and outsmart the market. The folks who do this are affectionately called quants. To the untrained eye, this is strange. Now you know why. 

On today’s show we’re talking about the work from home trend that the pandemic seems to have amplified. Long before the pandemic, the warning signs were there in many industries. On today’s show we’re going to take a closer look at one company that was formed purely with the assumption of zero bricks and mortar locations for the entire company. This company was newly formed EXP Realty, now a public company that has nearly 40,000 agents in the company. The company was formed in 2009 and has been slowly quietly building to create a breakout transformation of the industry. If you consider that each employee in a traditional company would allocate anywhere between 200-300 square feet per employee, the annual cost of office space at $30 per square foot gross is about $6,000 per employee. For the company with 40,000 employees that amounts to a cost saving of 240 million dollars a year. That’s a real saving of hard cash that can better be put toward creating a more competitive company. The fact is, almost every real estate broker or agent has a home office, or at times a mobile office. What they need are strong systems. They need to be in the field with their clients. The incredible part of their story is that they have been able to scale much more quickly than most other companies. The effort to onboard a single employee is much greater when they need to have a physical space, a physical desk. The company is growing fast. Last year, the company grew from 500M in 2018, to 980M in 2019, and 1.46B in 2020. Imagine if the company had a bricks and mortar footprint, would they have achieved the growth in 2020 in the middle of a pandemic? The point of this episode is to highlight a business that is all about real estate, that has zero real estate. Think about it. That’s a pretty strong contradiction in terms for some. It might be ironic for others. But they own no real estate. This is not something that just happens. In order for a company to grow to 40,000 strong requires strong systems. It’s a little like the McDonalds philosophy. When Ray Kroc bought the original McDonalds locations from the McDonalds brothers, he didn’t focus on making a better hamburger. He focused on the systems and processes that would allow the business to scale. The systems would have to be strong enough to allow a Big Mac to taste the same in Tokyo or Tasmania, in Santiago or San Francisco. That means an emphasis on training and onboarding of new staff, on having systems for routine transactions, and more importantly for having systems for managing exceptions. After all, why do we need physical offices? Some would say that physical proximity is needed for training. Well, that’s not strictly true. Some would say that you need to be able to walk down the hall and ask the boss a question when you have a problem. That’s not true either. You need a place to store all your physical files for security. Well, yes you do, but nothing says the file storage has to be centralized. If you have a system of electronic records storage, that data center is going to be internet connected anyway. Real Estate as a business is hyper local. Being an agent or a broker in a particular area is hyper local. But operating a brokerage is geography independent. You need to localize certain forms to comply with local regulations, but the steps involved in a transaction are the same. So the question remains, how many other industries can be virtualized? Does a law office need to have a physical office?

On today’s show we’re talking about relationship building in an era of social isolation. We’re social creatures and there’s nothing like speaking with people and having real conversations with people. I see it with kids who are interacting on role playing games where they will be playing the game in teams, connected by headset and conversing with friends across town or sometimes on the other side of the world. Well now the adult version of that is taking the business world by storm. It’s a new social media application called clubhouse. Some of you may have heard of it. Most of you are probably unaware of what it’s all about. So today’s show is dedicated to bringing you into the current decade kicking and screaming. I’m here to tell you that this new way of interacting is going to be as huge as Facebook or LinkedIn. No doubt, Twitter, Facebook and LinkedIn will respond with a competitive offering of their own. Who knows, maybe Google will jump into the fray. But at a time when several social media companies are under federal anti-trust investigations, it would be difficult for any of these entrenched companies to grab a dominant position in an emerging technology especially if they try to do it by acquisition. There is no way the regulators will approve the industry consolidation while there is an anti-trust suit against these companies. OK. So what is clubhouse. Think of a social media app that is somewhat like Facebook, except the only way to communicate is by talking. The only way to talk is by being in a room. There are three types of rooms. Rooms can be created by any member at any time. You can invite people who follow you to join you in a room. You can also schedule the opening time for a room and notify the community that at 8PM, there is going to be a room dedicated to talking about fishing. So all those members who have indicated an interest in fishing will be made aware of the upcoming meeting on fishing. They won’t see notifications about rooms dedicated to travel to Paris unless they’ve listed travel to Paris as one of their interests. Some members who have been consistent room hosts will have the right to apply to create a club. A club is a little like a Facebook group. There might be a club dedicated to, say, commercial real estate, or fundraising. If the room isn’t a club, you’ll only see it as an open room to join if you are connected with people who are in the room. Once you’re in the room, there are two parts to the room. There is a stage and an audience. Only the people on stage can speak. When you’re in the audience, you can be invited on stage by the moderators of the room. Once you’re on stage, you can join the conversation. In many of the clubs, the moderators are there to have a panel discussion and answer audience questions. In many of the rooms I’ve attended the moderators ask audience members to put up their hand and come onto the stage to ask a question or make a comment relevant to the chosen topic of the room. In my experience, some of these rooms are open for hours. Some of the people I spoke with on the weekend said that they came onto Clubhouse intending to stay for an hour, and instead stayed four hours. I’ve engaged in several conversations that have been incredibly powerful in just a few days. Several people I’ve spoken with have managed to already translate the connections they made in Clubhouse into real live offline relationships that have monetary value. The software is in Beta release so far. They just announced a $100 million capital raise at a $1B valuation. Leading the fundraise is Andreessen Horowitz. Let’s put this in perspective. This is for a company that has zero revenue. They reportedly have about 2 million active users on a weekly basis.

Today’s another AMA episode, ask me anything. Nicolas from Washington asks: “If I may ask, how do you move things forward and get things accomplished without causing pain or hardships to those around you (in my case my wife) when they are in a slower lane?” Nicolas, this is a great question. I understand that you’re currently trying to balance a full time job, self-care, family, friends and investing. What you’re describing is a common problem. I can’t say that I do this perfectly. Some days I’ll be recording a show after my wife has gone to sleep. It’s a matter of choosing what to put in your calendar and aligning it with your goals. The first word that comes to mind from your question is the word stress. It feels like you’re experiencing stress. My definition of stress is the gap that exists between expectation and reality. Stress lives in that gap. If there’s no gap, there can be no stress. Since there are only two variables, you’re choices are to focus on aligning expectations, or alter the reality. There’s not much else. In the case of your wife, this is an exercise in determining how to involve your wife in the decision-making process around investing. The points of stress can be many: 1) It might be around the time required to manage an investment 2) It could be whether investing in this particular asset class is a safe investment. 3) Some people simply have no entrepreneurial genes within them. They don’t understand it. They think that business owners are pushy people and they would just rather go to their 9-5 government job and trust that the system will take care of them. 4) Maybe your wife has a belief system that investing is risky and the only safe thing is to keep your money in the bank. I don’t know in your specific case where the disconnect is. But I will say that you need to invest time in gaining alignment with your wife. That is a process. Sometimes a spouse says. I don’t understand all this real estate stuff. You can go ahead and do what you want as long as it doesn’t take time away from the family. Again, I don’t know your specific circumstance. If there’s something that’s important to you, then you may simply want to ask her to make an investment in time to understand it enough so that you can both be aligned. You’re not asking for her to become immersed in it, not to make it her hobby or her passion. Maybe there something she’s into that is not your passion. Maybe she’s interested in lilac trees or quilting. You may want to reciprocate by showing genuine interest in something that’s important to her. Again, it’s not going to become your passion. You commit to understand it enough that you get a deeper understanding of her. There’s no absolute right or wrong way to do this business. Some people are happy owning three vacation rentals that earn as much net income as a 10 unit apartment building. Others want to be active part owners in a portfolio of 100 apartments, and still others want to be passive investors in a portfolio of 1,000 apartments.

On today’s show we’re going to take a short trip through the history books. We’re not going back to Roman times, or ancient Greece. Although there are numerous powerful lessons in history that we could easily apply to today’s environment. No. On today’s show we’re going back to the fall of 2019, and then we’re going to go back to the fall of the year 1999. 2019 seems like a distant memory. The economy seemed to be humming along nicely. Unemployment was at a historic low. Stock market valuations were considered irrationally high in 2019. We were in the 4thquarter of one of the longest albeit slowest  economic expansions on record. Extrapolating continued expansion seemed foolhardy at best. But today’s wounded economy is totally different: only partly recovered, possibly facing a double-dip, probably facing a slowdown, and certainly facing a very high degree of uncertainty. Yet the market is much higher today than it was in 2019 when the economy looked fine and unemployment was at a historic low. Today the P/E ratio of the market is among the highest in history and the economy is fragile to say the least. Let’s go back to 1999. My company Tundra Semiconductor went public on February 8, 1999 on the Toronto Stock Exchange. The Shares priced at $9.25 but were in such demand that they opened at $13.10 and closed their first day of trading at $13.24. We were part of that .com euphoria. We didn’t know it. We were too wrapped up in counting our rising daily net worth. At one point, my stock options were worth millions. By March of 2000, the stock hit a high of $78. We were all on top of the world. We were extrapolating to when our stock might be worth $300 to $400 a share. We were absolutely delusional. It was a very powerful and humbling lesson in greed and the dangers of the echo chamber of groupthink. Everyone in the tech industry was rationalizing the valuations. The idea that people would skip the pet food aisle at the grocery store and order their pet food from a separate specialty retailer online was clearly nuts. But those companies still managed to attract stock valuations in the billions. When the bubble burst, most of that paper wealth, that monopoly money wealth evaporated. I know of some people who exercised their options, triggering a tax obligation, and then didn’t sell the stock. So they were left with stock that was worth far less that when they exercised. The remaining value wasn’t even enough to pay the tax obligation. Some people had to mortgage their house to pay the tax bill on money they never got to put in their bank account. That’s how confident people were in the valuation of these companies. I think about an interview with Scott McNealy, former CEO of Sun Microsystems. He said “What were you thinking?”.  He was asking this of investors paying a “ridiculous” ten times revenues for his stock at the height of the .com mania. If you bought Sun Microsystems stock in 1994, you would have seen a 100x increase in value by the time it hit the peak price of $253. So here we are. Tesla stock is trading at 1600 times trailing 12 month earnings. It has an enterprise value of 802 billion dollars.  The stock is trading at 28 times revenue. Sun Microsystems was a relative bargain at only 10 x revenue. When the world finally woke up and said this is nuts. The stock came back to earth. By 2008, the stock had lost 98% of its value compared with 2000. $1.3T worth of paper value was wiped out in the .com bubble burst. The resulting economic recession was partly caused by the difficulty that many companies faced in raising capital needed to expand their businesses. It forced contraction in thousands of businesses which resulting in economic contraction. So here we are. We are in a major bubble. That is as plain as day.

On today’s show we’re going to be replaying a conversation that I had with Adam Taggart on the Peak Prosperity Youtube Channel. Peak Prosperity is an organization run by my good friends Dr. Chris Martenson and Adam Taggart. The Peak Prosperity movement has over 1 million followers and they’re dedicated to helping people build resilience into their lives. I love speaking with Adam. He’s been a guest a few times on the podcast as has his partner Chris. Dr. Chris Martenson holds a phd in pathology from Duke University and he was one of the first people to sound in the alarm about the Covid-19 outbreak back in January of last year. He’s been consistently weeks or months ahead in his reporting compared with the information coming out of government agencies. Adam, similarly has been active in seeking out analysts in the financial markets to understand what is happening beneath the surface that we see reported in the mainstream financial press. Adam and Chris both continue to make fundamentally life changing contributions to the world of business resilience and human resilience. When we talk about capital, people often just focus on what is in your bank account. Adam and Chris believe that there are 8 forms of capital that make up your life and that if you only focus and cultivate one or two of those forms of capital, you’re not going to make it. Definitely you’re going to want to check them out at peakprosperity.com.

George Ross is well known as former executive vice president in the Trump Organization. He was a judge on the TV show The Apprentice. He taught at the law school at NYU for more than 20 years and is the author of two best selling books on real estate and negotiation. He has represented some of New York's most famous and wealthiest clients. It's almost impossible to drive a couple of blocks in NY without George having a first hand story about a building or landmark. On today's show we're talking about recent events and what it might mean for real estate investors and developers. 

This is part 2, a continuation from yesterday's show. Braxton from New Orleans asks: It feels like we are certainly departing from the status quo of the past 10-20 years. I have taken cash out of some of my small rental properties but struggle to re-deploy in more investment properties because prices continue to be pushed upward. There is a mountain of liquidity and increasing competition for investment at low yield. My personal view is we may see near term inflation, but I am concerned we could also be at the doorstep of another debt crisis like in 2008. It appears as though speculative mania has taken over in many markets. How do you view the inflation vs deflation risk and balance you near term investment decisions? If there is inflation it would make sense to buy assets as the housing rents should keep pace with prices, however if there is deflation retaining cash may make more sense. I would like to know how you are thinking through this scenario as each path will likely have very different outcomes. I think we are going to experience a period of stagflation, a combination of economic stagnation combined with inflation. Stagflation is caused when something artificial causes economic contraction. Efforts to stimulate the economy are held back because the artificial cause is still present. The result is an economy that is flooded with cash, but nowhere to go. The result is inflationary despite the economic contraction. That means prices will fall in some sectors of the economy, but not all.  The artificial event of course is the pandemic this time around. Governments the world over are ordering businesses to close and to not conduct business in order to protect human life and the healthcare system.  Keynsian economists believe that stimulus will  be inflationary and that retrenchment is deflationary. But that’s not necessarily true as we saw in the late 1970’s after the OPEC oil embargo. Any talk of deflation is of short term deflation. Nobody’s talking of a protracted depression like we saw in the 1930’s. I have no doubt that we are in a long term inflationary trend. This has been true since the early 1970’s. So the question is really whether a deflationary interlude would be devastating for you as an investor or not. The key to positioning your portfolio to handle a deflationary period is to make sure you have sufficient covering equity, and that you have sufficient monthly cash flow, or ample cash reserves. Your third question is whether we’re going to experience another debt crisis. A 2008 style residential real estate crash is possible, but not very likely in my view. The banks are much better capitalized and the Fed has basically told their member banks that they will buy up the toxic debt if it appears. It would take a big rise in interest rates in order for loan rates to become unaffordable, which would trigger a drop in real estate prices. For now, the Federal Reserve has issued guidance for the next couple of years that rates would remain low. When you do the math on the excess reserves that the banks have on deposit at the Fed, there’s more than enough cash there to handle a massive default on real estate. As of earlier this week, the new Treasury Secretary Janet Yellen who was previously Chair of the Federal Reserve has been the cheerleader for even more aggressive printing of money. We may be facing a sovereign debt crisis at some point in the future, but not a real estate debt crisis. I believe the US government is going to print money until the population or the rest of the world loses confidence in the dollar. At that point, we will experience rising interest rates in order for the US to sell its bonds.  If the US doesn’t succeed in restoring confidence in the dollar, then the US will lose its position as the global reserve currency and will get reset into some other monetary system.

Braxton here from the Greater New Orleans area. I am a long time listener to your show and I find great value in the breadth of content. I really enjoy the show format and this is the one podcast I can commit to on a daily basis. Thank you for all that you do for the Real Estate community. I know it must take an immense amount of effort to produce this on a consistent basis. My question today is on the topic you hear often these days on the great debate between inflation and deflation. It feels like we are certainly departing from the status quo of the past 10-20 years. I have taken cash out of some of my small rental properties but struggle to re-deploy in more investment properties because prices continue to be pushed upward. There is a mountain of liquidity and increasing competition for investment at low yield. My personal view is we may see near term inflation, but I am concerned we could also be at the doorstep of another debt crisis like in 2008. It appears as though speculative mania has taken over in many markets. How do you view the inflation vs deflation risk and balance you near term investment decisions? If there is inflation it would make sense to buy assets as the housing rents should keep pace with prices, however if there is deflation retaining cash may make more sense. I would like to know how you are thinking through this scenario as each path will likely have very different outcomes. Braxton, This is a great question. In my view, there are three major elements to be considered here separately. The first question is a little like asking, are there any bargains to be found in today’s hyper competitive environment. The second question is related to inflation versus deflation. Your third question relates to whether we’re going to experience another debt crisis in the near future. These are such good questions, that I’m going to answer them over a couple of episodes so that we can do each one justice. Let’s start with #1. There’s no question that we are seeing an auction environment in many segments. The winning bidder in an auction almost always pays more that if there is only one buyer at the table. The key is to focus on a specific stream of investment types. When you are well positioned in the marketplace, you will find lots of special situations that appear without showing up on the market. I’ll give you an example. We have millions of small businesses that are hurting in the current environment. The business owner may be looking to exit the business, but wants to keep any marketing of the business a secret. As soon as the owner markets the business, they damage the business, their employees go looking for another job out of fear for their job security. Often those businesses have real estate associated with them. We’re evaluating one right now as we speak where it might be possible to separate the real estate from the business and lower the cost of acquisition to a fraction of the asking price. Off market deals happen as a result of special situations. It might be a death in the family, or a divorce. Sometimes it’s a medical emergency that precipitates a financial problem. Coming in to save a situation for a family in financial distress can be an opportunity to do well and do good at the same time. You might pick up a property at a fair discount to the market, while preserving a good chunk of the seller’s equity. Finally, we look for opportunities to add value, to transform a property from something that’s not in very high demand into its highest and best use. This way we're not competing based on the existing market. 

On today’s show we’re talking about the need for travel. It sounds strange to say “Need” when we’re talking about travel. According to a report just issued last week by hotel analytics firm STR global for the first week of January. Across the nation occupancy was 37.0% (-28.3%) Average daily rate (ADR)was US$87.97 (-27.1%). Revenue per available room (RevPAR): US$32.59 (-47.7%). These are crushingly bad numbers. They represent an uplift from the low points in Q2 of last year. But these are far below profitable levels for the industry. According to Airbnb CEO Brian Chesky the changes the Covid pandemic has brought to the travel and lodging industries are permanent shifts, not temporary adjustments. According to AirBnB, travel is never going back to what it was before the pandemic, He feels that there are several trends that are worth noting. 1.  Bye-bye to business travel...as we know it: Chesky said the shift to remote work and meetings that Covid-19 accelerated is resulting in "a significant permanent decline in business travel, as we know it." Now I have a dissenting view on this particular point. People used to travel for all kinds of reasons in business. There’s no doubt that there are many meetings that can be held as effectively online as in person. I’m a huge believer in using technology for these types of meetings. When I’ve traveled on business, it’s been for a primary purpose, and that is to build relationships. I believe relationship building is better done in person. Those in the future who are clear as to why they are traveling will have a competitive advantage. Relationship Building Business Travel is going to be a new superpower for those few who embrace it. 2. Not a "rural" exodus, but an "everywhere" one Rather than traditional tourism, people sought out getaways with family or friends or temporary work-from-anywhere relocations, he said. And rather than a dichotomy of urban living to rural destinations, he feels that travel demand has been "redistributed" among smaller and mid-sized communities. 3. From "mass travel" to "meaningful travel": "Mass travel, mass tourism, which he defines as people going to crowded tourist districts, standing in line, getting their selfie in front of a landmark, in lines with other tourists, will be replaced with more meaningful travel.” I actually don’t agree with AirBnB on this point. There are still places I want to visit by air. I can’t wait for air travel to be restored. I can’t wait to get back to Europe. I want to go sailing in Sydney Harbour, and visit the Great Barrier Reef. These destinations are not driving distance. That’s why I believe we will see a rapid resurgence of air travel in the second half of 2021. There is no question that after a year of being isolated from family, people want to travel home and visit relatives. I see this in my own family. For the next year, travel is going to be more about connecting with friends and family than visiting the Louvre or the Eiffel Tower. I agree with him on that point. Mr. Chesky believes this is a semi-permanent shift. This is where we disagree. I believe that the first trip will be to visit friends and family. But what about the second trip and the third? People in Northern climates are addicted to their winter getaway to that beach destination where they can layer on the sun screen and get sand in their toes. Travel is not just about connecting with people. It’s about regeneration. That means getting out of your home environment for a change of scenery. It’s very hard to have an effective vacation at home when there are dozens of unfinished chores calling for your attention. When you board a flight, take a cruise, you can truly disconnect from your day to day life, if you choose to and get a real recharging of your batteries.

On today’s show we’re talking about what is money, and what is economic output? On today’s show I’m going to put forward a monetary theory that might be worth considering in today’s environment of rampant printing of money. In order for something to be considered money, it has to satisfy three criteria. It must be a store of value It must be a means of exchange It must be easily divisible into small units I think we would agree that the dollar and the Euro, and not even the British Pound are a very good store of value. They’re all depreciating assets. It seems like we’re trying to make sense of our monetary system with increasing frequency these days. The global dialog on crypto-currency has certainly brought the discussion front and center. But when we talk about money and go back to the early economists over the past couple of centuries, you will come across the labor theory of value. Two pre-eminent economists at opposite ends of the spectrum both subscribed to the labour theory of value. Adam Smith was a free market capitalist and Karl Marx was decidedly at the socialist end of the spectrum. Since most items in the 1800’s were manufactured using human labor in some way, the idea was that the value of a commodity was determined by and could be measured objectively by the average number of labor hours necessary to produce it. In the labor theory of value, the amount of labor that goes into producing an economic good is the source of that good's value. But today we can easily separate the notion of cost and value. Tying value strictly to labor input clearly misses the notion of value to the end customer. Should a glass of water be free? Or is a bottle of water fairly priced at $1.00? The labor theory of value would suggest that its value should be linked to the amount of time it takes a person to fill the vessel that carries the water. We no longer link the dollar to gold and silver. Starting in 1878, the US dollar was actually a silver certificate redeemable to the bearer on demand for an ounce of silver. In 1963, the US congress passed a bill repealing the silver purchase act. The US was running low on silver bullion and the US dollar was no longer linked to silver reserves. Along the way, the amount of silver backed by a silver certificate also changed as the currency was debased. Today of course the US dollar is no longer an asset. It’s a promissory note, it’s a debt instrument. Almost 1/3 of the US dollars issued since the declaration of Independence, over 200 years were minted in the past year. 2021 appears to be on track to mirror last year in terms of printing of money. We’re not two weeks into the new year and another $1.9T in spending has been proposed. With a new administration in Washington, there is a lot of talk about the need to reduce greenhouse gas emissions, something I entirely support. But here’s another inescapable fact. For every unit of economic output, there is a corresponding consumption of energy. But simply making it difficult or expensive to burn fossil fuels misses the economic value of energy. If you turn off energy output, you’re reducing the economy by that amount. He who controls energy controls the economy. Energy is money. You can’t accomplish anything in today’s economy without energy. So why are we not using units of energy as a means of exchange? Why are dollars not a claim on units of energy? Now I’m not suggesting that we barter with lumps of coal or a cup of gasoline. That’s about as convenient as a bar of silver. We can still have units of currency that are paper money, or even digital money. But what if we tied the dollar to a unit of energy? Energy is the great equalizer. Energy is required to produce food. It’s required to transport goods to market. Energy is required to listen to this podcast.

On today’s show we’re talking about foreign exchange. The question is what does foreign exchange tell us about our investments and our point of reference? You might be sitting in your living room as you listen to this podcast. You think you’re standing still, but in truth the earth is spinning at 1,037 miles per hour at the equator, or roughly 70% of that at the 45th parallel. You’re really travelling quite fast. But wait, the earth is spinning around the sun at a speed of 67,000 miles per hour. You’re not standing still at all. You’re in supersonic flight and you don’t even know it. You get the idea. When talk of money, we tend to use our own currency as the point of reference. Maybe you use the US dollar as the point of reference. Maybe your point of reference is ounces of gold, or perhaps bitcoin. So when the dollar drops in value against the Euro, or the Japanese Yen, you might not notice This week Mark Haefele, Chief Investment Officer at UBS in Zurich said that they’re advising some of their clients to diversify their holdings into Russian Rubles and Indian Rupees. That’s because they’re expecting the US dollar to lose value over the next year against a basket of foreign currencies. Currency markets have traditionally been driven by the most attractive currency. But lately, rather than being attracted to the best currency, traders increasingly a being attracted to the least worst currency. None of them are great. Interest rates in India are much higher than in Europe of the US. Money deposited in an Indian bank will get you somewhere between 4-7%. Mortgage rates are between 8.5%-9%. The Russian central bank has kept interest rates at 4.25% in their latest guidance. The Indian Central bank has set its rate at 4%. So investors in search of yield are placing a bet that neither Russia nor India will default on their debt within the term of the bonds maturity. You know something’s wrong when India and Russia are being put forward as alternatives to the US dollar. So why would UBS be recommending this? Let’s look at the practice of the US issuing government debt for most of my adult lifetime. The Fed would print some cash. The Treasury would issue Treasury bills and sell them on the open market and investors domestically and around the world would buy these up. The largest buyers for these T-Bills have traditionally been the Japanese central bank and the Chinese central bank. Together, Japan and China own about 10% of the US debt. Foreign governments own approximately 30% of the US debt. But since the start of the pandemic, there has been an unprecedented printing of money. Just last week, Joe Biden put forward another 1.9T in proposed pandemic relief spending. For now, all of this newly minted debt is going to be held on the balance sheet of the Federal Reserve. The US issued nearly 5T of new money in the past year. It’s hard to wrap your mind around these numbers. A lower dollar makes the cost of imports go up. The US imports a lot of products from overseas and continues to have a balance of trade deficit with its major trading partners including China. The price of oil will go up. Since oil and many commodities are denominated in USD, we can expect energy costs to go up in response to the drop in the dollar. So what does it mean for real estate investors when the dollar falls in value? It means that the cost of imports go up. It means that we enter a period of higher inflation. It means that the cost of construction goes up, which ultimately affects the affordability of new housing. That in turn affects the cost that new buildings must charge for rent. That too can be inflationary. As we’ve talked about recently on the show, when inflation is the new game, the rules have changed and you need to align your portfolio and your investment strategy accordingly.

Today's show is a conversation with an extraordinary human being. Tom Dreesen has been in show business for 50 years. Along the way, Tom has made over 500 appearances on national television as a standup comedian, including more than 60 appearances on The Tonight Show. He was one of David Letterman's favorite guests and frequently hosted the show in Letterman's absence. He also appeared countless times in Las Vegas, Tahoe, Reno, and Atlantic City with artists like Smokey Robinson, Liza Minnelli, and Sammy Davis, Jr. And, for 13 years, he toured the nation as the opening act for Frank Sinatra. Tom recently released a new book entitled "Still Standing: My Journey from Streets and Saloons to the Stage, and Sinatra".  Listen to this wide-ranging and impactful conversation with Tom Dreesen.

On today’s show we’re talking about water. We’re all attracted to water features on a property. A lake, a pond, a canal, a river. All these water features make a property more interesting than a flat area of grass. In addition to the visual appeal, water brings a positive environmental benefit to a property. It provides a refuge for nature, for birds, fish, frogs, insects, and all kinds of vegetation that you may not otherwise find in an open field. But if you have water on your property, chances are that you don’t own it. The question of ownership of water dates back to riparian water rights. This is an area of law that varies widely from one jurisdiction to another. Generally speaking, the law has been created and interpreted by the courts in response to conflicts between competing legal systems. There are too many cases to cover on today’s show, but I’ll give you an example from the state of Texas. You’re going to need to perform your own research and due diligence in the location you own property. The basic idea when it comes to water is the presumption that mother nature was perfect in how the natural environment was created. When we start putting buildings, paving surfaces we start interfering with how the water flows when it rains, and we start interfering with how water is absorbed into the soil. When we’re talking about water we need to be clear on what kind of water we are talking about, is it ground water or surface water. Generally speaking, Texas groundwater belongs to the landowner. Groundwater is governed by the rule of capture, which grants landowners the right to capture the water beneath their property. The landowners do not own the water but have a right only to pump and capture whatever water is available, regardless of the effects of that pumping on neighbors underground water supply. Surface water on the other hand is much more complex. It depends on how the surface water is situated. If it is flowing, then the water is owned by the state. If that flowing waterway is a named waterway, then the flow of that waterway might be managed by the Army Corps of Engineers. Altering the bank of the waterway or having water flow into or out of that waterway would require approval from the Army Corps of Engineers. Surface water in Texas follows two sets of rules, Riparian rights, or Prior Appropriation. The riparian doctrine is based on English common law. The rules in most states and Canadian provinces follow the English Riparian rights. These court-developed rules are used in deciding cases that involve water use conflicts. The basic concept is that private water rights are tied to the ownership of land bordering a natural river or stream. Water rights are controlled by land ownership. Riparian landowners have a right to use the water, provided that the use is reasonable in relation to the needs of all other riparian owners. Riparian owners retain the right to use water so long as they own the land adjacent to the water. In the days of the wild west, when land was being explored, the much drier states had much less water. People used water whenever they could find it, regardless who owned the land. In the absence of any rules, people simply took water from streams and used it; that is, they appropriated it. When this practice became legalized, it became known as the Doctrine of Prior Appropriation.  In some communities, you are allowed to capture rain water. In others, you are not. Finally, many communities will require you to manage your stormwater runoff so as to not harm your neighbors. They may required you to build a stormwater detention pond to provide more controlled runoff during storm events that bring large amounts of rainfall. This is one area where you can’t simply apply what you believe is common sense.

AMA - Anu from San Diego asks: In the current SF real estate boom (last 6 months), the most growth has happened in the luxury end of the market. A new report from Redfin confirms this trend over the past year. Two questions: 1. I would like to know your opinion on why this has happened. 2. Do you think this is a temporary phenomenon or is it here to stay? Anu this is a great question. The pandemic has hurt the economy in numerous ways. But the pain has not been uniform. Those who have been most impacted by the business shutdowns have been those hourly paid workers. Those at the top of the economic ladder have continued to do well in 2020, even if some of the gains might be argued to be an illusion. The fall in the stock market it Q2 was overtaken by a run up in the market in Q3 and Q4. That has given people more confidence. Some recognized that the profits could evaporate and chose to redeploy the cash into property The low interest rate environment, combined with the forward interest rate guidance for the next three years has created incentive for homeowners to borrow even more money than ever before. It’s clear that the Fed intends to keep interest rates low for at least the next few years. But remember, when we’re talking about the luxury segment of the market, we’re talking about the top 5% of the properties in a market by price. The analysis that Redfin performed in the article you referenced broke down their analysis into 5 segments.. There are three equal-sized tiers based on Redfin Estimates of the market values as of Dec. 15, 2020, as well as tiers for the bottom 5% and top 5% of the market. The top 5% of the market by price is considered “luxury” for the purposes of this report, while the bottom 5% is titled “most affordable. These luxury properties still make up a small percentage of the market, and they’re still taking longer to sell than properties in the middle and lower end of the market. When people make a decision to purchase their homestead property, they’re looking with a longer time horizon. They’re looking past the pandemic. It might have been a purchase that was planned in the future, but merely accelerated. The increase in land costs and the increase in construction cost has caused some builders to focus on the upper end of the market. Those builders found a combination of robust market demand drive by low interest rates, and better profit margins. You see builders make most of their profit on upgrades and custom finishes. These buyers are willing to spend more. Some buyers took the opportunity that the pandemic afforded to invest in personal projects. The lockdown in the spring created extra time while the world figured out how to work from home. Some people took on home renovation projects, perhaps a backyard space like a deck or a pool. Others chose to design a new house. We’re seeing that reflected in the numbers. It’s tempting to look at short term trends in the market and extrapolate those trends into the future. In a stable boring market where nothing changes from one month to the next, you might be able to project into the future a little bit. It’s a little like trying to make sense out of the spike in toilet paper sales in Q2 of 2020. Store shelves were emptied of toilet paper. Did the population start using the bathroom at an accelerated rate? Did the population grow all of a sudden therefore driving demand for more toilet paper? Of course the answer is no. Over the long term, toilet paper consumption will revert to the average consumption, despite short term decisions to buy sooner than needed. I expect the same will be true in the luxury property segment. It appears like a large increase, but in reality, the numbers are small and it doesn’t take a large shift in absolute numbers to materially affect the percentages.

On today’s show we’re talking about one of the traps that the market might be luring investors with. When you make an investment in real property, this is often majority funded by permanent financing, usually amortized over a long time like 20-30 years. But if the market window for your demand is short term, then you’re at risk of making a bad investment. I’m hearing reports that cottages and other similar vacation properties are already fully booked for next summer. Some investors I’ve spoken with have indicated a desire to purchase a vacation property and rent it out when not in use. They point to the strong demand as the rationale for the investment. The fact is we don’t know what the demand will look like in a year or two, or five. We know that global travel is down 90% due to the pandemic. People who are desperate for a getaway are booking accommodations within driving distance of home that allow for them to remain socially isolated. In a pandemic environment, this all makes perfect sense. Even our own short term rental portfolio has continued to experience strong demand well into the coming year. But we expect that the pandemic will eventually come to an end. It won’t be in the next few months. It will take much of 2021 before enough of the population is immunized for these restrictions on social activities to eliminated. Israel stands alone in the world as having the most aggressive roll-out of vaccination of any nation. They have already immunized 20% of the population and expect to complete the entire population over 16 years of age before the end of March. The roll-out in the US, Canada, Europe, is looking like it will be well into the 4th quarter before the majority of the population is immunized. It could be even longer. I’m expecting 2021 to look an awful lot like 2020 in terms of travel and leisure. Cruise ships probably won’t be sailing anytime in 2021. If they do, it will be later in the year. In 2019, the cruise industry had nearly 30 million passengers, the majority of them from North America. There are all these tourists who are looking for a different vacation this year. But eventually, many will return to cruise ships, to beach resorts in the islands, to the bus tour through Asia, to the luxury cottages in the middle of a game reserve in Africa or Australia. All of these experiences are off-limits for many because of the higher risk of infection that comes with international travel. So what happens to all those cottages that are fully booked this year when people return to traveling? What will bookings look like in 2022 and 2023 and beyond? I think back to the lean years at resorts that built excess capacity. Many of those condo units sat empty for much of the year.  In retrospect turned out to be very poor investments. Yes, they look great again in 2020 and perhaps in 2021. But if it took a black swan event like a global pandemic to make your investment viable, is that really a good strategy? If you currently own a vacation property and you want to make a small incremental investment in maximize the revenue for that property, I say go for it. Maybe you want to upgrade the furniture and the interior finishes so you can command a higher price in the market. That’s a good move. But if you’re an investor looking to make a major investment with a 25 or 30 year commitment, how do you know if the demand for your product is going to be there in a year from now, or five? After all, just as quickly as conditions changed this year, they could change again next year. I would go back to the market conditions of 2017 and 2018 as a better indicator of what the market demand might look like in the post covid environment. You want to use market analysis tools like Alltherooms or AirDNA to determine both demand and pricing for your local market before you make an investment.

On today’s show we’re talking about the notion of valuation or what is sometimes called price discovery. I was 13 years old when I got my first taste of price discovery. In Istanbul Turkey there is the largest covered bazaar that comprises over 61 streets and over 4,000 vendors. The vendor was trying to sell me a metal sword and a negotiation ensued. I was a rookie at this, but my father knew the game and by the end of a 5 minute negotiation we settled on a price that was about 1/3 of the original asking price. The seller was grumbling the whole time as he wrapped up my purchase. I left his shop confident that I had just got a great deal. As I reflect back on it now, how much was that souvenir really worth? It’s worth what I paid for it. Did I pay too much? Did I get a great deal? I have truly no idea. There is the story of Honus Wagner played in major league baseball for 21 seasons, most of that for the Pittsburg Pirates. He was one the first five players to be inducted into the National Baseball Hall of Fame in 1936. On October 31 of last year, one of 50 Wagner baseball cards sold for $1.4M dollars. It’s not the most expensive version of that card to ever sell. The most expensive one sold for $3.25M. The scarcity is part of what drives the notion of value. If there were 1,000 of these cards, they would be worth much less. It’s because there are only 50 remaining in existence that drives the notion of value. Maybe the baseball card worth 2.5 cents, the cost of the paper and ink to print it? When you buy shares in a public company, you’re buying a fraction of a company, that presumably has the ability through its active ongoing business to generate a profit for its owners. As a shareholder, you’re an owner. You would think that the value of a business is somehow tied to its ability to generate a profit. A business that generates a lot of profit should be worth more than a business that generates very little profit. Tesla Stock is currently trading at 1,667 times earnings. That means that if Tesla remained at the same level of profitability, it would take 1,667 years to earn your initial investment back, and that’s assuming of course that the company paid out 100% of its earnings in dividends to investors. At that point, I’m starting to wonder which is a better deal, Tesla stock or the baseball card? The notion of value has become distorted. A single family home in an expensive neighborhood is worth $1M because we all agree that it’s worth that much. This is what is called price discovery. If a house on the street sells for $100,000 more, now all of a sudden everyone on the street thinks their house is worth $100,000 more. But the world of real estate investing is different than the world of residential home ownership. It might seem to the uninitiated that they’re similar. But they’re quite different. You see if an apartment rents for $1,500 a month, that rent check clears every month. If you have a 100 unit building, then you have 1,200 transactions that closed over the past 12 months. There is no speculation about what the apartments will rent for. There is hard data. So when it comes to valuation, if rental properties are valuing at a 6% cap rate, then you can easily determine what a property is worth. You have lots of data from hundreds and hundreds actual transactions that settled each and every month. So what is a piece of real estate worth? Is it merely the result of negotiation, or perhaps the real estate business that is wrapped around the property is worth a multiple of its net income, its ability to generate a profit.

Today is another AMA episode (ask me anything). Karla asks: Your book “Magnetic Capital” in my opinion is a quality , easy to follow book. Would you please share your own process to write, market and publish your book? Any highs and lows from lessons learned in the process that you can recommend? Have a successful year. Karla, This is a great question. There are undoubtedly numerous ways to write a book, but I’ll share with you my process. When I say this, I’m confining the discussion to non-fiction books. The process for fiction books is somewhat different. It all starts with intention. Some people write a book as a vanity project. For some it’s a large expensive business card. For some it is a real contribution to the world to advance the art and science in a particular area. You really want to get clear on why you are writing a book. It starts with asking a few simple questions, “Who are you writing the book for?” “Why does the world need this book?” “Why are you the one to write this book?” Do you seek publisher or to self publish? In the case of Magnetic Capital, I saw many people who wanted to grow as real estate investors who were lacking the skill in raising capital. Some were trying to raise money and having terrible results. So the book was written for the investor who was looking to grow beyond their own capital, but most importantly, those who were looking to grow beyond the initial stages of leveraging other people’s money. Some people start out by performing a joint venture or two and then get stuck. Most of the books written on the topic tended to be academic in nature and lacked a practical approach to understanding the psychology of raising capital. It seemed like people were out there trying to violate laws of nature, violate laws of human respect, and certainly violate securities laws. So I saw a gap in the marketplace. So let’s talk about how to outline a book. In my case, I took a stack of blank 8.5x11 sheets of paper and brainstormed the chapter titles. I put one chapter title on each page. Some chapter titles didn’t make sense and I threw those away. I then spread out all of the pages on my dining room table so that I could see the big picture for the structure of the book. I could easily move the sheets around so that the sequence of the chapters made sense. I then took each sheet and wrote down 3-5 major points that would need to be covered in each chapter. I then decided which chapters would need real life examples to support the points being made in the chapters. Some books require a lot of research. I’m thinking of authors like Malcolm Gladwell or Jim Collins. In those cases, you might be facing a couple of years of work prior to writing the book. In my case, the book was already inside me and just needed to come out on paper. The mechanics of writing the book was extremely straightforward. I would write every day. Some days I would sit at the computer and write a few pages each day. In the case of Magnetic Capital, the first draft of the entire book was written in under a month, followed by a few weeks of editing. The publishing process has two choices, working with a publisher or self publishing. If you’re going to work with a publisher, the industry has changed. In fact, the work is pretty much all going to fall to you unless you already have a huge brand name with a massive following. Before you can even engage with a literary agent you’re going to need to prepare a book proposal. What they call a book proposal is really a detailed marketing plan when you look at all the headings. There are several templates out there on the internet from various literary agents. I chose to self-publish my book using Amazon as the platform. It was easy to do and there are lots of good resources out there that can guide you on the particulars.

Bryan Miller is a musician, composer, a musician to the film industry in Hollywood, and a real estate investor. You can learn more about Bryan and his strategies at capitalstackinvestments.com.

Aaron Norris is based in Riverside California, but invests in purpose built rental communities in SW Florida. His company Property Radar provides a level of data analytics that goes above and beyond the usual freely available data on the internet. To learn more check out propertyradar.com. 

Today’s question is a beginner question coming from Gord in Hamilton Ontario. He writes: We’re guiding our kids into adulthood in the context of real estate and investment.  My kids are 20 and 22, one living at home working an HVAC apprenticeship and the other in university for teaching, living in another city and working part time.  They are both very responsible with their money and are saving for their futures.  I want to guide them as to how they should save or invest now so that one day they can own a home (it is looking less and less affordable).  My son (HVAC) wants to buy a two unit and live in one eventually to start out, but I am having difficulty knowing how to guide him correctly. Gord, this is a great question. I’ve often said that if you can’t afford to buy a house you should buy two. The structure of that deal will depend a little on the base income of your kids. But as a first time buyer, they should qualify for a high ratio insured loan. The structure we’re talking about in Canada is a CMHC insured loan. You will pay an insurance premium on the loan which means a higher rate, but you will also get a high ratio loan. Typically these loans max out at 95% loan to cost. The specifics of the program allow for the first $500,000 to have a 5% downpayment and then a 10% downpayment for anything above $500,000 up to a maximum purchase price of $1M. For those listeners in the US, you can do the same thing with an FHA 203B loan. The FHA loan will max out at 97% loan to cost. The max loan amount of the FHA program varies depending on the community. Generally speaking the name of the game here is to get the rental income from the second unit in a duplex to subsidize the cost of ownership of your principal residence. At two units, the lender is going to look at the property in the same way as they would look at a residential property. The high ratio loan program qualifies for a single owner occupied home or a duplex where one half is owner occupied. It would not apply to a triplex or a 4-plex. You would likely want a duplex like this to be self managed by the owner. As a first taste of being a landlord, this is a great way to start. The owner is always onsite and can monitor what is happening at the property. But you don’t want to do all the work yourself without the guidance of someone more experienced looking over their shoulder in an advisory capacity. The biggest mistake that rookie landlords make is in knowing how to qualify the prospective tenants and then knowing the rules under the landlord tenant regulations. The key for properties like this is to choose a property that is going to attract the right quality of tenant. If you choose a property that is at the lower end of the income spectrum, you run the risk of attracting tenants that can’t afford your property. Get yourself a property that is going to attract the kind of tenant that you ultimately want living there for a long time. A Duplex can be a great house hack. The market in Hamilton has become an extension of the Greater Toronto area. The overall Toronto area sports a population of 6.1M people and historically has added about 125,000 residents a year. Your son may not have the income to qualify for a single family home at $720,000, but may qualify for a duplex at $750,000. The addition of the rental income when added to your son’s employment income may be enough to make the project viable. Later down the road, that first investment could act as a stepping stone to bigger and better properties. It is from these modest beginnings buying their first property in their 20’s can grow to having a vibrant portfolio which can provide financial independence later in life. The message here is one of encouragement. Thank you Gord for a great question. For the listeners at home, if you can’t afford to buy a house, perhaps you should buy two.

Some personal reflections on the scenes we all witnessed at the Capitol on January 6.