David in central valley California asks Hi Victor. I'm looking to develop a build to rent community of apartment sized single family homes. This will go from un- entitled vacant land all the way through to the sale of the built homes. My question is at what point are the impact fees paid. Is it while performing the horizontal land improvements and utility hookups? Or is it during vertical construction? Thank you! David, This is a great question. For the listeners at home, let’s take a minute to describe impact fees or what in some places are called development charges. These are fees that are charged to developers for the benefit of having the opportunity to make a profit from the expansion of a community. These fees are only assessed on new units that are added to a community. For example, if you demolish a house and replace the house with a new single family home, you would not pay any impact fee because you are not adding any density to the community. If instead you replace the single family home with a duplex, then you would pay an impact fee on the one additional unit and no fee for the existing unit you are replacing. Impact fees pay for the municipal infrastructure that makes it possible for you to build your property. We’re talking about the roads, water infrastructure, sewers, schools, parks, public transit, community centres, expansion of policing and so on. These fees vary widely from one community to the next, and they can vary widely within a community. Some cities have zero impact fees. Impact fees are extremely common throughout California where you live. I read a recent paper on the state of impact fees in the Central Valley in California where you live. I put a link to the study in the show notes. This 84 page report was authored in 2019 and gives a pretty good overview of the issues surrounding development impact fees in the Central Valley. It specifically studied 10 municipalities in the Central Valley. https://www.hcd.ca.gov/policy-research/plans-reports/docs/impact-fee-study.pdf Only a little over a quarter of the communities actually published the studies that were used to assess the impact fees. This lack of transparency makes it difficult to determine whether the assessment of impact fees is fair. The schedule of fees was also not readily available in many of the communities. When you finally do get hold of the schedule, determining which payment applies to you can be incredibly confusing. Often the preliminary feedback and estimate from the planning department doesn’t match the final assessment of fees. The net result is that many developers have a hard time predicting the correct fee structure for their financial pro forma. In the absence of an accurate number, the only prudent thing to do is to estimate high and hope that the real impact fee comes in below your estimate. But there is also a chance that the project becomes unattractive with a high estimate for the impact fees. You might end up talking yourself out of a project simply because the municipal government is doing a poor job of being transparent about their development charges. This is an excellent question and unfortunately it’s an area that is full of complexity and potential land mines. There is no quick or easy answer to your question. Hopefully this discussion helps you navigate through the maze and ask relevant questions from the decision makers who can answer the specific questions pertaining to a particular property and proposed development.

Today's show is one of the most important shows on investment strategy you'll hear this year. 

On today's show we're talking with my good friend Steff Boldrini from San Francisco about how to structure a construction loan for a new construction project. 

On today’s show we we are taking a deep look at the book called “This is Marketing” by Seth Godin For the longest time there has been confusion between the various words that surround the topic. What is selling? What is advertising? What is marketing? So many of the manipulations that we have accepted as normal we now almost universally reject as ineffective. My friend Kyle Wilson says it well when he says “Don’t use a tactic that violates a principle.” It doesn’t make any sense to make a key and then run around looking for a lock to open. The only productive solution is to find a lock and then fashion a key. It’s easier to make products and services for the customers you seek to serve than it is to find customers for your products and services. Marketing is the generous act of helping someone solve a problem. Their problem. It’s a chance to change the culture for the better. Marketing involves very little in the way of shouting, hustling, or coercion. It’s a chance to serve, instead. So many people think that marketing is about getting the word out. That’s one of the last steps in the process. It starts with creating change that solves a problem. When that change defines the culture, then you have the ingredients for marketing. If you want to make change, begin by making culture. Begin by organizing a tightly knit group. Begin by getting people in sync. Culture beats strategy—so much that culture is strategy. This is marketing by Seth Godin creates a new definition of marketing by turning the industry on its head. You see Seth has tried almost every method known to man. A few have worked, and most have failed. In some cases, the product succeeded despite the money wasted on advertising that nobody saw. He won’t give you a step-by-step step formula. Instead the book is a compass that keeps you grounded in timeless principles that honour the relationship of trust between you and the people who you seek to serve.

It’s hard to believe that 2020 is almost in the history books, the year that seemed to bring one surprise after another. The news media are filled with retrospectives on this most unusual of years, 2020. They’re bringing you stories that got the most air time over the past year. What was it that defined 2020? For some it was the pandemic. For others it was the protests against social injustice that gripped many communities around the world. Some will state with great fervour that the Presidential election combined with the pandemic that was the defining event of 2020. Yes, all of those things happened. There was economic carnage. There were massive job losses on a scale we have not witnessed in history. If your family lost a loved one, or if you lost someone you know to Covid-19, this year 2020 will be forever etched in your memory. As you conduct your retrospective on the year, don’t look to the news media to interpret the year for you. It was your year, nobody else. The only year that counts was your year. The purpose of conducting a retrospective is for you to learn and grow from it. If you spent the year watching youtube videos waiting for the pandemic to be over, then chances are you’re not listening to this podcast. That’s not the culture here, and I suspect not for any of our listeners. I’ve discovered something extremely important in life and I’d like to share it with you. It’s a perspective on living that has almost nothing to do with what actually happens. For some people, 2020 was a year of financial hardship. For others the exact same circumstance was a test of resourcefulness. As I conduct my retrospective on 2020, I’m seeing accomplishments that I’m proud of, and others that didn’t go my way. For many people, 2020 was a year of adjustment. They didn’t have a routine for working from home. They were not accustomed to holding meetings using video conferencing. For us, 2020 was a year of adjustment. It was stressful, simply because there was a wide gap between the expectations we had going into the year, and the reality on the ground. We had to accept the current reality was not going to meet our expectations. We experienced delays on virtually every project. We experienced higher than expected expenses. We experienced drops in revenue in some areas of the business. We experienced two hurricanes only 5 weeks apart. We also experienced new opportunities that were not present at the beginning of the year. We had zoom meetings for family gatherings. We got to experience moments over zoom that would never have happened any other way. Our regular monthly real estate meetups went online as well. While the quality of the relationship building suffered, going online enabled us to bring guests from all over the world would not have travelled all the way to Ottawa Canada for a 45 minute speech. Our regular masterminds went from being a conference call to a zoom meeting and we had much more engagement. Conducting a retrospective is a little like mining for gold. You have to sift through a few tons of rock in order to extract a few ounces of gold. The gold we’re looking for are the lessons that are buried deep within the thousands of memories in 2020. The art is in extracting the gold and letting go of the tons of rock and tailings from the mining process that will only weigh you down. The tailings are those feelings of regret, of shame. You did what you did. You didn’t do what you didn’t do. You can’t change it. You can only learn from it and aim to do better in the future. As I look to 2021, my resolve is to strengthen three habits. This year, my sleep has been thrown off, my morning routine is not where I want it to be, and my exercise has suffered. This is my focus in 2021.

What does it mean when restaurants close? What does it mean when restaurants close for real estate investors? On today’s show we’re going to take a deeper look at the restaurant industry. This year, 76 restaurants closed in Dallas, never to return. It’s common for some restaurants to fail even in a strong economy. But this year was different. Several estimates from earlier this year suggest that 10% of restaurants closed permanently in Q2 of this year. OpenTable is the company that makes it easy for you to book a restaurant table online. So not only are they convenient, they’re a great source of real industry data. They maintain data for each city in which they operate, each state, each country and even globally. So far this year, the number of seated diners in 2020 is down 58.4% on a global basis. Seated diners are down 60.39% so far this year in the USA, and 60.98% in Canada. Diners ate 49.38% fewer seated meals in the UK this year. Some of the business was offset by take-out business for which we don’t have an accurate global statistic. Needless to say, there are few businesses that can survive a 60% decline in business. If people aren’t reserving tables, then servers are not needed. Dishwashers are not needed. Bartenders are not needed. In California, table reservations are down 65.6%. In Illinois, table reservations are down 70%, and in New York  state they’re down a whopping 75%. The data for NYC is down an astonishing 83% for the year. It goes without saying that the PPP assistance that came at the end of March, consisting of 10 weeks of payroll is not sufficient to cover a drop in revenue of 83%. Most of these businesses will have fixed costs that are simply too high for the small amount of government assistance to cover. The restaurant needs to negotiate with the landlord. The landlord in turn needs to negotiate with their creditors. For many businesses, deferring the rent isn’t enough to save the business. If all the money is ultimately owed to the landlord, it might take a restaurant 10 years to make up that back rent out of excess cash flow from the business when dining returns to normal. The owner might simply choose to throw in the towel and determine that they don’t want to spend the next decade working for their landlord and essentially making no money. It might be easier to shut down and start again with something new when the time is right. So when all these properties are vacant, a new restaurant opening has a lot of negotiating leverage to demand rent concessions. The landlord faces the difficult choice of lowering their price to the point of tolerable pain or experiencing prolonged vacancy which incurs even greater financial pain. When a new restaurant faces so much choice in good locations, complete with a modern kitchen already in place, they can negotiate exceptional lease terms. Restaurant statistics over the past week which includes Christmas Day showed a global average of 61% decline in tables reservations for the last week of December compared with the same period in 2019. The US Average was 62.25% down and Canada is 74.5% down compared with the same period last year. In my opinion, we’re not going to see a recovery in the restaurant industry until the Spring. Until that time, I don’t see many people making significant investments in the traditional seated dining food service industry. The big question is how many businesses will be left standing in 3 months time.

Wall Street and Main Street have had different philosophies for a long time when it comes to investing. Wall Street’s focus is securitizing the underlying businesses. They’ve created so many derivative products that create financial leverage. This is a packaging and re-packaging of investment vehicles into increasingly large opaque homogenized pools of assets. What’s insane to me are the valuations being attached to these companies. I’ve long held that wall street valuations are far too high for the underlying assets. If a property is trading at, say, a 6% cap rate. If all the properties being held by that company are trading at a 6% cap rate, and the company is only in the business of holding assets like this, then how could the company be trading at 50x earnings, or the equivalent of a 2% cap rate? Yes, I understand that leverage can increase the yield. But leverage also increases the risk. That risk is already built into the cap rate for the property. How can a company be worth more than its underlying assets? We saw crazy valuations in the early 2000’s with the collateralized debt obligations. These were nothing more than packaging of pools of mortgage loans into a new financial instrument that could be sold. It had the effect of moving the debt off the bank’s balance sheet and allowing banks to loan even more money. The opaque nature of those debt obligations nearly collapsed the global financial system. It all worked fine as long as the default rate on those debt obligations remained low. When things blew up in 2008, the fragile nature of these paper assets became apparent. Wall Street seems to be at it again. The latest is a major push by Goldman Sachs to get into real estate, and the commercial sale leaseback game in particular. A unit of Goldman Sachs just purchased Oak Street Real Estate Capital for an estimated $2B. Sale leasebacks are a way for some companies to strengthen their balance sheets. The buyer purchases the commercial real estate from an active business who in turn take the cash and pay down debt. Instead, the business pays rent rather than servicing the debt. In some cases, it’s a way for companies that have paid down the debt to raise cash without borrowing funds. It’s a game that makes it all seem like a massive shell game where very little of value is being added to the equation. For the buyer of a sale leaseback asset, the key is in understanding the business health of the selling company. If we look at the makeup of the Oak Street portfolio, they’re about 35% retail, 50% industrial and 15% office. That’s not a bad asset mix as long as their exposure on the retail side is not at the higher risk end of the spectrum. Wall Street firms have to be seeing the crazy multiples in the market and are going in search of yield. While so much of Wall Street is focused on arbitrage of paper assets, the underlying fundamentals eventually rule the day. Another player in the sale leaseback space is Realty Income Inc. This REIT has 16.4B of assets in their portfolio. Their largest shareholders include various Vanguard funds and Blackrock. Together, these two own about 22% of the REIT. This REIT is trading at 51 x trailing 12 months earnings. Another REIT in the space is VEREIT. They’re trading at 31.55 x earnings. No doubt you’re going to hear about the risk in real estate investing when you see the prices of these stocks fall. Understand that the value of the underlying real estate is disconnected from the valuation of the companies that own them. This is no different than owning Tesla stock or Netflix stock where the market price is disconnected from the financial performance of the underlying business. I’m glad that I’m firmly grounded on main street and not playing the Wall Street game.

Ravi in Philadelphia asks I am a loyal listener to your podcast and greatly appreciate all the content that you provide. I was given an opportunity to invest in college student housing in Valdosta, Georgia adjacent to the state affiliated University. Numbers looked reasonably good, but as always I look at these things with a skeptical eye. My question to you is what are your feelings regarding student housing as an asset class? I do invest in multifamily apartment buildings but student housing is an area that I have not had much experience with. This particular asset has about 230 units and is mainly for students of that university. My concern is that this asset class may be a bit risky during this time since there has been significant upheaval with regards to the pandemic. Although the parents cosign the leases, this  does not insulate from any risks related to schools being closed and these students not paying. I would love to hear your opinion on this. As always, I value your input as I feel you are very well balanced and provide a very analytical point of view. Thank you as always for your contributions to the community. Ravi, thank you for the kind words. This is a great question. I’ve owned student housing since 2011 and generally speaking I love the asset class. However, in the past three years, my perspective on the long term outlook for student housing has changed. The pandemic and the upheaval of 2020 has merely accelerated a trend that was already underway. The problem with student housing is that it is facing multiple headwinds at the same time. The first is demographic. The number of university age teens is expected to decline over the next decade. This is based on the number of births in the US. Births peaked in the late 1980’s and have declined ever since. This is the so-called echo-boom generation. Not surprisingly, university enrolment peaked in 2011. This was a combination of the economic downturn that happened in the wake of the 2008 financial crisis and the peak number of births that occurred around 1990. This would lead to peak university enrolment about 20 years later. Let’s talk about the shift to online education. Even before the pandemic, a number of universities had increased the percentage of classes being offered online. If you look at many of the major universities, they have all increased the online programs. The University of Texas at Arlington, a campus of 52,000 students held 52% of its classes online in 2019. They were well prepared for the dislocation of 2020 when they were forced to increase that percentage to a much higher number. Generally speaking, we are seeing demand for student housing dropping each year. When supply exceeds demand, you will see prices fall for monthly rent. Let’s look at your specific case in Valdosta. This is a small campus. It grew from about 5,000 students to over 9,000 students at the peak. From 2011 to 2015, student enrolment fell by 17% and the President of the University reduced the number of lecture staff on contract by 35. According to articles I read, many in the community started to question to long term viability of that specific campus. Remember, Valdosta is one of 26 institutions that make up the University System of the State of Georgia. If there were to be shrinkage of enrolment, it stands to reason that the smaller campuses would be eliminated. There would be an effort to consolidate and focus investment on the larger campuses. I’ve not done a complete due diligence on the specifics of your deal. But when I look at the overall market for student housing on a national basis, and then more specifically in the Valdosta location, I’m not seeing the market conditions that would screaming for me to invest. I’m seeing considerable risk on the downside and not much potential on the upside.

Chay Lapin is a specialist in the Delaware Statutory Trust. On today's show we learned that this structure has gained popularity when working with investors looking to shelter capital gains under section 1031.  You can connect with Chay at kpi1031.com where you can learn more about the DST, its limitations, and how it can benefit investors.

Savannah Arroyo is based in Los Angeles, California where she still works full time as a registered nurse. Over the past several years she has developed a multi-family portfolio focused on deep value-add projects. She has been syndicating deals with her husband and has gained a considerable following as the "Net Worth Nurse". You can connect with Savannah at https://thenetworthnurse.com

Welcome to the Christmas Day edition of the podcast. Lawmakers in Washington were hard at work earlier this week passing a whole bucketload of gifts this holiday season. Governments around the world are grappling with the economic impact of the pandemic. The last financial aid spending was passed on March 27, just a couple of weeks into the pandemic. Legislative gridlock resulted in nearly 9 months to the day of time between the two bills. Back in March, the expectation was that the economic impact, while deep would last only a few weeks. Many of those provisions had a horizon of only a few weeks. The PPP program was only designed to provide 8 weeks of financial assistance. Now, nearly 9 months later, the businesses that are still left standing are hoping they’ll survive this next wave. In the latest bill, money is being handed out. But, it’s not a level playing field. Money is being printed and handed out like candy to the myriad of special interest groups. Every time there is an appropriation of funds, the various special interest groups advance their pet project into the legislation. The results are evident in the latest $900 billion spending bill. If you read the 5593 page document, you’ll find that there are all kinds of holiday gifts buried in those pages. Let’s be clear, this bill was sold as a stimulus bill to help a population hemorrhaging from the economic damage of the pandemic. As you might hope, there is $284B allocated to a second phase of the PPP. This second phase will allow you to get 2.5 months of payroll in the form of a forgivable loan as long as 60% of the money is spent on salaries. You need to have a reduction of 25% in revenue compared with the comparable quarter in 2019 in order to qualify. If you are in the food or accommodation business which have been particularly hard hit, then you might be eligible for 3.5 months of payroll in the form of a forgivable loan. This is directly in the line with what we would expect this legislation to be all about. Needless to say, I was surprised to see $85,505,000 earmarked for Cambodia to strengthen regional security and stability, particularly regarding territorial disputes in the South China Sea and the enforcement of international sanctions against North Korea. It’s also to assert its sovereignty against interference by the PRC. It’s also to cease violence and harassment against civil society and political opposition in Cambodia. Under the banner of International Narcotics Control and Law Enforcement, there is a provision for 134,950,000 to four states in Burma. These funds are not actually for International Narcotics Control and law enforcement. They’re available for programs to promote ethnic and religious tolerance and to combat gender based violence in 4 states in Burma. Why they have singled out ethnic and religious tolerance in 4 states, and not all 14 states in Burma, under the banner of Narcotics control in a Covid-19 assistance bill is a little confusing to me. Another $45 million of taxpayer money (page 1,491) will be awarded to key government officials in Central America-- places like El Salvador, Honduras, and Guatemala-- in order to “combat corruption”. You can’t make this stuff up-- they are giving money to corrupt officials to fund anti-corruption programs. It’s brilliant! We have $10 million on page 1,486 going to the government of Pakistan SPECIFICALLY for gender studies programs. The authors of the bill are pretty crafty. By bundling all kinds of unrelated spending under an emergency spending bill, it’s virtually impossible for lawmakers to vote against these provisions that have nothing to do with the main core of the intent for the spending.

On today’s show we’re talking about a technology company that looks to upend the back office work associated with real estate transactions. Real Estate closings haven’t changed very much in the past 20 years. In fact, I can say that a large percentage of real estate transactions don’t close on time. Sometimes it’s the fault of the lender who request additional information at the last minute. But often it’s the result of missing items or mistakes in the preparation of closing documents. I can also tell you that I know of several instances when a corrective deed needed to be recorded because of mistakes in the closing process. In addition to improving productivity, these back office automations also improve quality and compliance with county recorder processes and rules. Real estate transactions are still completed at title companies using a paper process that hasn’t changed much in decades. There are a number of companies looking to disrupt the real estate closing table. In truth, there’s no reason that real estate closings can’t be modernized. The leader in this space is a company called Qualia. As of earlier this week, the company is the latest unicorn. The term unicorn is used to describe a company that has grown from startup to a valuation of $1B. The digital real estate startup, Qualia, raised $65 million in a Series D financing round, increasing its total funding to $160 million and valuing the five-year-old company at over $1 billion. Qualia's aim is to digitize the home buying and selling process so that it is easier for everyone. The company's platform acts as a virtual deal room, allowing consumers to review and sign paperwork remotely from the safety of their own homes or on their phones. The pandemic has been a "tailwind" for Qualia, as all real estate parties involved needed a way to conduct the transactions remotely. The pandemic has been a bit of a forcing function to break past the legislative barriers that have prevented electronic closings up until now. Documents that are recorded are generally required to be notarized. The slow movement has been legislative and at the state level. The United States truly is a union of 50 states each with their own rules as to how real estate closings are to be performed. I would ask your title company if they’ve implemented electronic closing for their closings, and if not, what is preventing them from implementing a fully electronic closing table solution.

On today’s show we’re talking about one of the drivers for new housing. I was speaking with an appraiser this week. That conversation led to an insight that you will rarely stumble across in the news. It seems that 2020 has been a difficult year in more ways than one. We know that it has been difficult for the healthcare sector. We also know that 2020 has been difficult economically. We’ve heard that 2020 has been difficult from a mental health perspective. My wife runs a clinical family therapy practice with a number of practitioners in her office. I can tell you that most of the therapists have a pretty full case load. 2020 has also been difficult on relationships. Contrary to popular urban legends, we’ve seen consumption of alcohol actually decrease by 8% compared with 2019. Many couples are spending extended periods of time together in tight quarters, with no breaks from each other. The appraisers have seen a massive increase in volume for appraisals for homes that are not actually being sold. These are cases where a couple is splitting up and the separation process requires a valuation for the matrimonial home. Some of these houses will end up on the market for sale, and some will not. But division of households for divorce is increasing demand for rental housing. There may not be a large supply of rental housing in some areas. Bedroom communities are often designed around residential subdivisions of single family homes. You don’t typically find rental housing in these same neighborhoods. In some cases, a member of a couple is forced to find housing many miles from the original family home. This is often in a different school district making it complicated for families looking to minimize disruption to children who might be at school. When a family separates, there is often a need for a larger rental property so that each child has a bedroom even though they might occupy that bedroom only part time. If no children are involved, then the person moving out is probably looking for a 1 bedroom apartment. I’ve recently seen new construction rental buildings being built in areas that traditionally I would have considered would not be candidates for rental housing. They’re far from public transit. They’re deep in a residential area. I would have predicted that those buildings would have performed poorly in those locations. Fast forward a year later and those buildings are full and renting at strong rental rates. What’s the reason? You guessed it. Families that have split need a second rental residence nearby. There is a natural seasonal cycle for housing. We know from past history that the busiest moving days of the year are July 1 and August 1. You would not expect people to be moving in February. But some do. It’s often because a couple is splitting apart. If you want to get a unique insight into what’s happening in your local market, have a conversation with an appraiser and ask them about the valuation work they’re doing for properties that are not selling. These properties are not going to be listed for sale anytime soon. We’re going into a second wave of the pandemic right now. There will be healthcare stress, economic stress, and yes marital stress. If you have a product that meets the needs of this segment of the market, you can market to that specific client. The needs of that client might be different than just your average tenant. You could specify in your rental listing, for example,  which school bus routes are near your property.

On today’s show we’re talking about the impact of the next wave of the pandemic. I have to say, this is proving to be an emotional roller coaster. While our business has survived the pandemic surprisingly well, the signs of permanent economic damage are starting to show in the broad economy. As I drive down the street, the number of permanently closed stores is growing by the week. The news of businesses being forced to close again for an extended period of time is heartbreaking. Unless these businesses are given sufficient financial aid, the economic damage will be permanent. When the lockdown occurred in the Spring, it was done as a preemptive measure, long before the numbers of infections, hospitalizations and deaths increased. It took a solid 12 weeks for the curve to begin to flatten and for the numbers to decrease. It’s hard to tell whether the reduction in numbers was a result of the lockdown or if it was a seasonal effect the would have happened regardless. This time it’s different. We are just going into winter. The numbers have already surpassed the highs we experienced in the spring. We have a vaccine rollout that is in process. Despite the early data looking promising, it is still very early data. It will take many months before a sufficient percentage of the population has been inoculated to stop the spread of the disease. Even when someone has received the vaccine, they need to continue to take care and not get infected for a period of up to 30 days before the vaccine provides maximum protection. But we don’t know how much the vaccine will stop the spread of the disease. Until that is know, the physical measures to stop the spread of the disease will still be required. That means that the impact to the economy will continue for a period of time. Governments the world over are telling the population that we can expect a lockdown of 28 days. I don’t personally believe that it’s even possible for governments to have enough data with which to make a decision to ease lockdowns on such a short time span. I reviewed several studies that looked at the average length of stay in hospital. The average length of hospital stay since the start of the pandemic has been very close to 20 days. The average incubation period is 5.8 days. So it would take a minimum of 6 days, plus another 20 days for a decision made today to even begin to affect the outcome 28 days from now. In fact, I would argue that the effect would be so small that it would be virtually impossible to measure. There is no way that anyone could make that decision. There simply isn’t enough data with which to make a decision. The numbers won’t have changed in that time period. So where does 28 days come from? I believe that governments are choosing a time period that is long enough to make a dent, but not so long as to create a revolt in the population. If government came forward and said we need a 4 month lockdown, I have no doubt that we would see protests in the streets. They chose 4 weeks simply to appease the population into compliance. I’m going back to my original prediction in March of 2020 in which I forecast that this disease would take 18 months to work its way through the medical system and the economy. I’m going to stand by that original prediction. We are going into a second wave. The second wave is more serious than the first. That’s all pretty clear. The vaccine won’t be deployed in sufficient numbers to have a lasting impact until late summer or early fall. So as you plan your cash flow, your hiring, your travel, and your revenue, remember that we are in the middle of an extremely fluid situation that is likely to change from one week to the next.

I’m often asked by both friends and listeners to the show how we decide to take on a specific project versus passing on an opportunity. The fact is, there is no exact science. But we are looking for certain characteristics. It starts with the people. Are the right people involved? If not, there is no sense starting on the project. Then we need to look at the market and then finally the specific deal. I want to be in an area of strong demand. We want to see population growth. We want to see a shortage of supply and we want to see resistance to development. That sounds paradoxical. Why would a developer want to work in an area that is pushing back on development? It’s a balance. We don’t want so much resistance that it becomes impossible. Simply buying a property that has no distinguishing features is not interesting to me. I believe that we are on a mission. That mission is to create communities that people feel at home in. They need to feel connected. The community has to exist for a reason, not just cheap housing. Let me give you a an example. Our latest project is the design of a new residential subdivision in the outskirts of Boise Idaho. Boise is a city that seems to be attracting people from higher density communities on the west coast. They’re moving for access to the outdoors, for the lower cost of living. The city is #4 in the country in terms of growth. There is a massive mismatch between demand and supply. A recent survey of the home listings found only 154 homes for sale of any description. The average days on market was 5.5 days. Prices were up on average 13.5% in 2020. When we found 45 acres across the street from a brand new high school, with new infrastructure including roads, a water treatment plant across the street and ample electric supply we saw a lot of potential. We are not fans of auction situations because we always end up paying more in those situations. In some cases we will engage in the auction if the numbers make sense. This was one of those rare cases. The property is located on the edge of the suburb of Middleton. Middleton has grown by nearly 50% in the past few years. Future growth will require the annexation of more land from the county into the city. Even with the tremendous growth, there is nothing for sale. Any development land has sold out very quickly. We saw this project as an opportunity to participate in community building. We had direct talks with the planning department and with the Mayor. We understood what the sentiment was within city council. We felt that we could develop a winning concept for the area, that would truly add value to the community. I know what you’re thinking. How is it that some guy up in Ottawa Canada is having conversations over zoom with the Mayor in Idaho about developing a new neighborhood thousands of miles away? Middleton has another problem. 85% of the people who live in the community, don’t work there. How could we be part of the solution? We are not talking about necessarily building lots of commercial property. The work from home phenomenon is not just a temporary pandemic solution. Even once the pandemic is over, there will be a residual and substantial portion of the population who will want to work from home. When you consider the design of most homes, even recently designed homes, the question of work space has been largely ignored. This particular project represents a unique opportunity to create a live work play community. We held our first community meeting last week with local residents where we shared many of the design concepts. It was an opportunity to hear first hand from local residents how they felt about development in the area. Finally, is this going to be an isolated project or does it form part of an ongoing stream of investment projects?

On today's show we're talking with George Ross about some of the structural changes underway in the world of retail. If you own retail space, or you are looking to acquire a retail property at a bargain, you'll want to listen to George's perspective. I'm not saying he has it 100% right in all cases. It's a perspective worth considering. 

Chris Funk is based in Jacksonville Floria and develops new construction build to rent in multiple markets across the Southern US. You can learn more or connect with Chris at SouthernImpressionHomes.com.

On today’s show we’re talking about the help that comes with many well intentioned government initiatives. Today’s show just makes you go Hmmm. I wonder what they were thinking. Today we’re taking a closer look at a number of pandemic help programs that seem to have veered off their originally advertised objectives. There are so many of these stories, I’m just going to give you a sampling. There’s simply too many to cover in 5 minutes. Back in the Spring, the Federal reserve announced with much fanfare that it would take $75 billion dollars appropriated by Congress and through the magic of its printing press turn it into $600 billion dollars in assistance for mid-sized businesses through its main street lending program. Now 8 months into the program, and the banks have written less than $6B in loans. This is 1% of the funds that were promised under the program. The Fed doesn’t have the ability to give away money, but they can lend it.  The banks would still have to absorb 5% of the loan losses and the fed would absorb 95% of the loan losses. Banks don’t like to lose any money, so they underwrote the loans very conservatively. If a borrower qualified as a good credit risk, then the banks loaned money through their commercial loan desks without help from the Fed. If they didn’t qualify, then the banks generally declined to fund the loans, despite the Fed assurance of backing 95% of the loan losses. The sliver that actually qualified was less than 1% and it wasn’t because the businesses don’t need the help this year.  The pandemic has put enormous burden on healthcare systems around the World. Canada welcomes about 49,000 refugees or asylum seekers into the country each year. While they’re waiting for their refugee claim to be assessed, they have the right to get a job. Many end up working in numerous low paying jobs like call centres, or as personal support workers in long term care facilities and nursing homes. During the peak of the pandemic in the Spring, Canada’s Federal Government announced with much fanfare that it would allow personal support workers to shortcut being accepted as permanent residents in Canada if they commit to continuing to work as personal support workers for a minimum six month period. It took 7 months following the announcement for the government to publish their 60 page guide on how to apply and the 25 page application form. Within a week of the forms and the guide being available, a new guide was published with new qualification regulations. The Small Business Administration department of the US government was tasked with administering two different programs to assist small businesses. The first was the pay check protection program which would provide up to 12 weeks of salary in the form of a loan provided you kept your employees on payroll for a minimum of 8 weeks. But the problem is that 12 weeks of payroll assistance is not enough to support businesses that are now in month 9 of a pandemic. Very few businesses are sitting on enough cash to survive 9 months of economic collapse. The second SBA program was the Economic Injury Disaster Loan. The EIDL is not a grant, although the first $10,000 could be a grant under certain circumstances. It’s a loan at 3.75% for up to 30 years. Governments all over are scrambling to try and figure out how to help save the economy. I don’t envy the job of government. They have a nearly impossible job. Even the assistance that some businesses are receiving will not be enough to save them. So if your business has been impacted by the pandemic, don’t just sit back and wait for government to save you. You have the agency to act and be responsible for your own business success.

Demographics can be used to predict the future of real estate markets. Nowhere is this more true than in the hundreds of small towns and villages all over the world. Younger people have been moving out of the small towns in search of fame and fortune in the big city. Some countries have been experiencing very low birth rates resulting in rapidly aging populations. In the US, birth rates were at 1.77 in 2017 and have fallen another 2% in since 2017. That’s not high enough to sustain the population at a constant level. Demographers will tell you that you need a birth rate of 2.2 in order to hold population constant. Some countries have increased immigration in order to offset the drop in fertility. In Spain, the number of deaths have exceeded the number of births for years and shows no sign of changing. Bulgaria’s population is shrinking faster than any nation on earth. Despite having a growing expat population, Bulgarians are leaving the country in droves looking for more lucrative employment elsewhere in Europe. Combined with a birth rate of 1.46, the country is expected to lose 23% of its population over the next 30 years if current trends continue. A similar trend has been reported in Latvia. In Italy, the birth rate sits a 1.34, one of the lowest in the Europe. Cost of living, low wages, and difficulty in finding steady employment is the #1 factor that most Italians cite in their decision not to have more than one child. Dying towns exist all over the country. Italy has been running an experiment to bring new investment into small towns. The most visible was the small town name Sambuca which started offering abandoned houses for auctions starting at 1E. The houses come with strings attached. They have to be redeveloped and a minimum amount of investment in renovation needs to be made. These auctions have been highly publicized and have attracted thousands of bidders from all over the world. Some of these centuries old houses in historic medieval villages have sold for 1E. But most have been bid up in price. Some sell for $5,000, 10,000, 20,000 euros. Still, that’s a reasonable deal. After renovation, some owners report total investments of around 140,000 USD for a newly rebuilt home in a slice of paradise in the Italian countryside. These are small towns where everyone in town knows your name. The owner needs to commit to spend a certain minimum amount of time there each year. Ultimately, the towns want these residents to start businesses and to bring economic activity back to these smaller centers. Some have been purchased and owner occupied for part of the year, and then put up as short term rentals for a portion of the year. About 16 towns have initially participated in similar projects 1E home projects. These programs give you a house and Italian residency. Now you will need to pay a 5,000E deposit to make sure you don’t walk away from your obligation to complete the purchase and the renovations. If you don’t complete the renovations within the contract term, then you will lose your deposit that might be more than your purchase price for the property. Many of them are in the poorest provinces like Sicily, Puglia, Calabria and Sardinia. But in today’s environment when you can be connected to the rest of the world through the internet, the actual physical location of your home matters less than it might have mattered in the past. There are so many people operating location independent businesses. Their clients are in one location, and they choose where to live based on a lifestyle choice.

Aaron asks, I’ve been listening to your podcast for several months now and really like it. Thank you for all your insight into real estate investing. I was curious do you have an episode where you discuss further about whether or not someone should get their real estate license if they are getting serious about personal real estate investing. If you haven’t answered that question what are your thoughts? Aaron, this is a great question. Real estate agents and brokers have access to a lot of tools that regular folks don’t easily access. If you go back 30 years, before so much of the real estate world became accessible online, it seemed like realtors had a monopoly on access to the information. However, as technology has progressed, we find increasingly that the tools realtors used can also be accessed by the general public, sometimes for a modest fee. Some jurisdictions have stricter privacy policies than others. The other benefit of having a realtor on your team is that you can collect a commission on your transactions if you represent yourself. That can amount to a 2-3% saving on the gross purchase and a 2-3% saving on the sale. That’s significant and can improve your profit margins quite a bit. Not only that, you can often market yourself as an investor friendly broker and many investment colleagues may throw business your way. That steady flow of transactions can smooth out your income stream. The life of a real estate investor can often be pretty inconsistent from a cash flow perspective. That income roller coaster can be great one month and swing to negative the next month. In many real estate boards, new listings go out to the realtor community a few days before being published to the public Multiple Listing Service website. That two day head start in front of the buying public can be a real competitive advantage. On the other side of the coin, there are responsibilities that come with being a realtor that you carry with you everywhere you go. If you are at a cocktail party and you hand someone your business card, your real estate licensing board will probably require that you disclose that you are a licensed realtor at the same time. You will have to hand out two business cards, one for your investment firm, and one for your real estate firm. The biggest issue you have with being a realtor is that you have a duty to fully disclose. You might be selling a property that has a historic problem. It might have been a past water damage that was repaired, or perhaps asbestos that was remediated. It might even be an existing risk item that you would expect the buyer to examine in their own due diligence. As a seller, you can allow the buyer to conduct their own due diligence and you have no duty to disclose. But as a realtor, you have a duty to disclose no matter what. If the buyer finds a problem after closing, your risk of litigation is much much higher. Everyone knows that realtors carry errors and omissions insurance. So even if the realtor has no money, the plaintiff in a lawsuit knows that there is a good chance of collecting from the insurance policy if they sue the realtor. For that reason, realtors attract more than their share of litigation. Failure to disclose is enough to trigger a lawsuit and a sanction by the regulator for your real estate license. The thinking is that when you are in a conflict of interest position, you have a fiduciary duty to protect the public and your clients ahead of your own self interest. When you’re a realtor and a principal in a transaction, you are in a conflict of interest position. I can’t advise you on which way to go on this question. There are pros and cons that you will need to weigh. I know investors that carry a real estate license. I also know many investors that have tight relationships with brokers who are not direct owners in their projects.

On today’s show I’m going to share the final segment in this forecast based on highlights from Dr. Duncan’s presentation that I believe are relevant for all real estate investors. On today’s show we’re focusing on new construction. Here we go. People who are currently homeowners are more fearful of the Corona virus and are not listing their homes for sale. Sellers don’t want strangers come into their house and possibly infect the family. On the other hand, those who are tenants in multi-family apartments are more fearful of the virus in the high density environment than they are of moving. They are taking advantage of the low interest rate environment as an opportunity to buy and lock in an interest rate for a long time. This surge in demand, with a drop in supply is putting a lot of upward pressure on prices. Both Fannie Mae and Freddie Mac are reporting record years for loan originations. Across the nation there are 2.7 months of inventory on the market. That’s the lowest level since data has been collected. New home builders have seen a surge in contracts for new homes. The builders will eventually need to catch up and build those homes. It’s hard to say how they will respond to demand for new sales if they get too far ahead of construction. Availability of skilled labor is the constraint in the construction industry right now. We can anticipate that once the pandemic is under control, whether that is through a an effective therapeutic, or widespread adoption of a vaccine, supply of houses on the market will increase. Depending on the locations for that supply, interest rates for new loans, and the demand at that point in time, we could expect to see a softening in prices. For now, new home builder backlog is at record levels. If we go back to 2005 through 2006, the industry had a capacity to deliver 1.4 million new homes a year and sales peaked in 2006 at that level. In the aftermath of the 2008 downturn the industry delivered about 300,000 new homes a year at the bottom of the market. And has been averaging between 500,000 and 600,000 new homes a year for the past 5 years. It’s fair to say that the industry is sized to deliver that volume of new homes. In October, sales peaked at an annualized rate of 1M homes a year which is well above the capacity of the market at current staffing levels. The question is whether the industry can and will grow to to meet the challenge of the higher sales volumes without becoming overheated and perpetuating a boom and bust cycle yet again. Based on the Fannie Mae data, the outlook for new home construction shows demand for 830k new single family home sales in 2020, a 21% increase over 2019. This is expected to grow a further 6.2% to 881k units in 2021 and remain flat at 881k units in 2022. 2020 has been a banner year for refinance activities, representing a 127% growth over 2019. Next year, refinance activity is expected to contract by 56.5%. Normally a 56.5% contraction would be a huge deal. But it will basically match 2019 refinance volumes and 2019 was a banner year for refinance activity. Based on everything I’m hearing, I going to go out on a limb and predict that single family new construction for rental is going to be a product that is in high demand. In particular, I believe that new construction townhouses which live like a single family home are going to be in high demand because they are more affordable than a detached home. The drive for affordability is going to influence demand for the coming next several years.

Last week I attended a small private presentation hosted by my good friend Tom Wilson at the BACOMM monthly meeting held in Silicon Valley. The guest speaker was Dr. Doug Duncan, Chief Economist for Fannie Mae. Doug has been a guest on the show before. Doug leads a large team of nearly 200 economic analysts and have consistently won awards for having the most accurate economic predictions anywhere in the US. We covered part 1 of Doug’s predictions on Friday’s show. On today’s show I’m going to share a few more highlights from Dr. Duncan’s presentation that I believe are relevant for all real estate investors. This year the Federal Reserve changed their stance on inflation. The Fed doesn’t see moving the overnight funds rate above 0.25% until the end of 2022. This is the part that is significant. They have also changed their stance on inflation. Rather than setting a 2% ceiling on the rate of inflation, the Fed is now saying that they’re going to be fine with an average 2% for inflation. That’s a dramatically different stance. That means that the Fed might not raise interest rates when core CPI creeps up above 2%. They will wait until the average is above 2%. For 2020, they’re estimating inflation below 1.8%. This means that inflation would need to exceed 2.2% next year before they take action to cool inflationary pressures. So as real estate investors we can count on low interest rate policy for some time to come. Dr. Duncan shared data on the office market for a number of cities across the US. He noted that many office markets can expect it to take more than 6 years for local office vacancies to return to pre-Covid levels. Part of the reason has to do with the amount of new office construction in the pipeline. Most cities are experiencing growth in supply that is far in excess of demand over the next three years. That new supply was already committed prior to the pandemic. San Francisco is expecting a 7% growth in office supply over the next 3 years, with a 0% increase in demand. Many of the major markets are experiencing flat demand over the next several years and increasing supply. Doug believes that many businesses will want to return to the higher productivity environment of an office. Nevertheless, office space is one of those areas that is under extreme pressure over the next 5-7 years. The only city that is expected to show a fast rebound in office is Washington DC. That’s largely driven by government. Cap rates in multifamily don’t appear to have changed at all during 2020. Fannie Mae is looking hard at migration. They’re looking at where applications for new loans are being from, and the location of the loans for the subject properties. From this data, they can clearly see that migration is underway from more dense zip codes to less dense zip codes. They have the actual data from real transactions. This isn’t a survey or a statistical poll. It’s based on boots on the ground activity. Whether that is sustainable remains to be seen. Job prospects for millennials over the past 5 years have been in the urban core. Not surprisingly, they have moved close to their jobs. Do they want single family homes? Yes, but those don’t exist in the downtown core. Now that they aren’t tied to being in the core, millennial are migrating to the suburbs. When it comes to rental properties, Fannie Mae is seeing much more tenant rotation in the A class properties than in the B and C properties. Those who are upwardly mobile and can afford a house are buying a house and moving out of a high density property to low density.

On today's show I'm talking with Mike Wolf about strategies for the coming quarter. Mike has been in the business for 31 years and is wintering in Puerto Vallarta Mexico. To connect with Mike, visit MikeWolfMastery.com

Joel Block hails from Los Angeles California where he has been a fund manager for many years, specializing in hedge funds, real estate syndications, and all kinds of businesses. On today's show we're talking about the latest impacts of the pandemic on real estate assets.  You can reach Joel at bullseyecap.com.

Last week I attended a small private presentation hosted by my good friend Tom Wilson at the BACOMM monthly meeting held in Silicon Valley. The guest speaker was Dr. Doug Duncan, Chief Economist for Fannie Mae. Doug has been a guest on the show before. Doug leads a large team of nearly 200 economic analysts and have consistently won awards for having the most accurate economic predictions anywhere in the US. When I speak with Doug, he’s not just reciting data. He has layers upon layers of evidence to support the conclusions drawn. This one hour talk was packed with market insights that I have not seen anywhere else and I want to share these with you. If Dr. Duncan’s observations are correct, they will serve as a guide for what’s to come in 2021 and beyond. On today’s show I’m going to share a few highlights from Dr. Duncan’s presentation that I believe are relevant for all real estate investors. What we’re dealing with in 2020 is a pandemic and not an economic variable. We simply don’t have economic models that have a pandemic built in as an economic variable. The Fannie Mae forecast is based on data over the past 4 quarters and is making reasonable assumptions about the trajectory of the disease in the first half of 2021. There are a number of conclusions that can be drawn from the data that Dr. Doug Duncan presented. What they found is that the highest percentage of renters are in the food and beverage, retail and hospitality sectors of the economy. These are the very sectors that have been most impacted by the pandemic. Therefore, they conclude that the impact to home owners has been proportionately much less. The folks at Fannie Mae looked at the loans that are in forbearance. Again, the lenders are in direct communication with their customers. Fully 25% of those who took the option of a forbearance agreement did so out of an abundance of caution. They did not experience job loss, nor a reduction in income. They took the forbearance just in case. Another 25% of those who took the forbearance option did experience a partial loss of income, but still had sufficient cash flow to make their mortgage payments. Strictly speaking, they didn’t need to take the forbearance agreement. When those forbearance agreements expired, those home owners were in fact able to resume mortgage payments and have not gone into default. Based on this, we can conclude that the state of financial distress for home owners is about half of what the total numbers would suggest. That’s a good sign. So let’s see what’s going to happen to the remaining 50% of the homes that are in distress. Dr. Duncan believes that loan modification agreements will be signed with the borrowers that the banks believe are good credit risks. If a borrower is 6 months behind on their payments, they may extend the loan by a year, add the outstanding payments to the loan, spread over the remainder of the loan and bring the loan into good standing. Those properties will not go into foreclosure. That leaves a much smaller number that will actually go into foreclosure. Dr. Duncan also shared that several large institutional players who are sitting on large sums of cash are prepared to step in and purchase portfolios of distressed properties in bulk. Therefore the impact to the lenders can be reduced with a few large transactions, rather than the waves of auctions on the court house steps that were daily occurrences in 2009 and beyond. On this basis, I’m going back on what I’ve reported previously. Will there be distress in the coming months? Yes there will. But I believe that distress is going to be confined to specific sectors of commercial real estate. Specifically, I’m referring to retail, office and hospitality. I’m concluding that we will not see a repeat of 2008 with millions of homes appearing on the market at deep discounts.

There is a growing movement aiming to address the perception of racial bias when it comes to housing. The US has a history of racial division dating back to the days of segregation. Those practices were outlawed in 1917 when the US Supreme Court deemed those practices as contravening the law. The law was further strengthened in 1964 with the Civil Rights bill was signed into law by Lyndon Johnson. The practice of designating certain neighborhoods as white only, or black only clearly violates every moral and ethical and legal principle in a free and modern society. To be clear, our society has made huge strides since those days. At the same time, it’s also clear that racial inequality still exists on multiple levels. The question remains whether certain newer regulations have the unintended consequence of discriminating against racial groups. The City of Minneapolis has tackled this question with respect to the zoning code. The argument is that a high proportion of dark skinned people are tenants in Minneapolis, and a high proportion of light skinned people are home owners. Therefore, it could be argued that the zoning code that limits certain zones to single family homes that are predominantly owner occupied has the same effect as racial segregation, even if that was not the intent of the regulation. In response, the city has decided to eliminate the single family home designation in the zoning code. In fact, a number of states and the department of housing and urban development (HUD) have started to tackle the question as to whether zoning is exclusionary. They added provisions for higher density in transit oriented areas. This approach seems both balanced and positive. As a developer, the creation of more opportunity for higher density development within the core of the city is a positive step. This could be one of those rare moments when there is consensus on what might be a politically charged, or perhaps racially charged topic. Developers welcome a more relaxed regulatory environment. Home owners and tenants grappling with affordability would welcome the move as well. Curiously, some cities like Philadelphia have gone in the opposite direction. The city has moved to reduce the areas in the city which are zoned for multi-family development. I’ve personally owned property in the city that has had the zoning arbitrarily changed from residential multifamily to residential single family. Those properties that are zoned multi-family are arguably more valuable because you can build higher density. If you look at cities like Houston, which has no zoning code whatsoever, the city functions without a problem. Market forces and practical considerations like traffic and utilities provide the only broad constraints. Unless a property has a deed restriction specific to the property, you can build a warehouse next to a single family  home, next to a school, next to an office building. The city has assumed that common sense will prevail and the free market will determine whether a project will succeed in a specific location or not. When you look at the work of almost any municipal government, if you take the time to read the minutes of the city council meeting, or watch the video replay of the meetings, you’ll find that more than 90% of the work of local government is tied up in land use. The amount of resource that is frankly wasted in bureaucratic red tape is astounding. Some residents will argue that maintaining the historic nature of some areas can only be done with the protection of strict regulation. No doubt, cities all over will be looking at what Minneapolis has done to help guide their own future land use policy. A change in zoning regulations has the potential to change the supply demand balance dynamics within a city. This one factor can do more to determine the long term viability of a new multi-family project than most people recognize.

On today’s show we’re talking about the dangers of stock market manipulation and why every investor who has exposure to the stock market needs to pay attention . The performance of the stock market is a phrase that makes no sense. What we’re describing is the aggregate performance of the underlying companies that make up the stock index.  There are a few things that determine company value. First there are the fundamentals. Is the company generating a profit? Is it growing both revenue and profit? Is it gaining market share? Then there are technical factors that are influenced by market sentiment? These are the headwinds and tailwinds that have more to do with the buyers and sellers of shares than the underlying companies. We’ll come back to that in a minute. Finally, there is the financial engineering that manipulates the price per share of a company without changing the fundamental value of the business. In fact, sometimes the management can goose the price of a stock artificially for short term gain while harming the long term health of the business. This is the part that is the most troublesome and we’ve seen happen on a large scale in recent years. A buyback occurs when a company uses some of its cash to repurchase its own shares. Other choices include investing for growth, acquisitions, paying down debt or paying dividends. Legalized in 1982 by the Reagan administration, buybacks took off after a 1992 tax bill created incentive for more stock compensation. Now stocks and options making up about two-thirds of executive pay. In the current low-interest-rate environment, many companies have taken on more debt, whose interest cost can be tax-deductible, to buy back shares whose dividends may be more costly. Imagine if you have a preferred share that has an interest coupon at 7%, and you can borrow funds at say 5%. You can buy back equity which reduces the number of outstanding shares, and reduce your interest expense. That would be an obvious move for any company to undertake. Where it gets dangerous is when a company retires common shares that do not pay a dividend and increase the company’s interest expense in order to reduce the number of shares outstanding. Reducing a company’s float of outstanding shares through a buy-back program increases the earnings per share, creating the illusion that the company is performing better than it really is. The increase in earnings per share can drive bonuses for company executives. Imagine for a moment that executive compensation is tied to earnings per share. In some cases the compensation might be a cash payment, or as increasingly the case, stock options. On the surface that seems like a fair and reasonable method. Let’s create a fictional example. We’re going to use the company from the Road Runner and Wiley Coyote cartoon. Our company is Acme. The company has an enterprise value of $1B with virtually no debt and the stock is trading at $10. The company is earning $1 per share in earnings. The company executives are given a stock option grant at $10. The company had a hiccup in the past year and isn’t growing. It’s revenue is flat, and earnings are flat. So the executives decide to go borrow $100 million dollars to buy back 10% of the shares of the company. The interest cost has gone up a bit, so they decide to lay off a few employees to reduce expenses. The impact of the layoffs is on projects that would deliver revenue in 3-4 years, so the immediate impact to revenue is zero. It’s merely a cost saving. With fewer shares in circulation, the earnings per share has increased by 10%. All other things being equal, the shares are now worth $11. The company executives are now sitting on $1 worth of profit on their stock options.

Natalia says, “I have a property that is my personal residence that I’m looking to rent out as an entire property on a short-term basis. I also have several condos that I own that would do better as a short-term rental than as a long-term rental. How do I decide on pricing a nightly rate?” Natalia this is a great question. It’s also a huge question and I’m going to try and condense about an entire day worth of content into about 5 minutes. Your question is more about marketing and digital marketing in particular. The whole process starts with understanding who your target client is. Let’s imagine you’re buying chocolate. You could go to the grocery and purchase a giant bag of Hershey’s kisses. You can buy the 4-pound bag for about $23. You could also go out and buy a specialty hand-made box of three unique truffles for about $20. These are vastly different products. They’re targeted at different customers. The difference in price on a per pound basis is more than 20:1. The same is true for a short-term rental. If your property is a commodity, then you’re going to be positioned in the market as a commodity. You’re going to be one of those Hershey’s kisses in the bottom of the bag, indistinguishable from the next hoping that you’re the one who is going to get picked today. But if your property has distinguishing features, then you’re set apart from the rest. If your property is a ski-in ski-out property, 300 feet from the base of the gondola that takes you to the top of the mountain, that’s a unique product. There might be 500 short term rentals available at the ski resort. In that case you’re chance of being picked is 1 in 500. But if your product is that unique ski-in ski-out chalet, then your chances of being picked improve to 1 in 3 or 1 in 5. I like those odds a lot better. If you’re serious about being in the short term rental business, then you want to think about dynamic pricing. This is similar to what the airlines do. It’s no secret that it’s less expensive to fly on Wednesday than on Monday or Friday. Likewise, you may price weekends higher than weekdays. There are tools that help that process of determining the best pricing. One that I recommend is a company called Airdna. The have over 25 performance metrics for over 80,000 cities worldwide. They examine thinks like market occupancy, number of active listings, average daily rate, revenue per available room, booking lead times and so on. You can also get customized competitive data sets which allows you to get a much more accurate perspective on your specific segment of the market. Some properties are seasonal with a peak season, a low season and two shoulder seasons. Your pricing strategy is going to vary depending on which season you’re in. I own a portfolio of short term rentals in a seasonal market. We know that the highest nightly rate is in the 16-20 weeks during the summer. Demand is good during ski season, but a fraction of what it is during the summer, hence the lower nightly rate. This is where the importance of product positioning comes back into play. I want my properties to have the best positioning in the market. I want the vacancy to go to the junk in the market. I want more than my fair share of the market during those periods of softer demand. Key to that is the reviews. So we will spend extra on a few items of furnishing. We will buy the most comfortable king sized mattress that money can buy. I don’t mind spending extra on that. I want you to get those guest reviews that say “Wow, this was the most comfortable bed ever.” If you have those reviews for your property, then you will get more than your share of the market. Finally, I want you to make sure that you show up as a superhost in AirBnB. All these little things separate you from the rest of the properties that are just commodities in the market.

Sharon Restrepo is based in West Palm Beach, Florida. On today's show we're talking about market cycles and how to recognize the four phases of the market cycle. You can Sharon at takingthelandinvestors.com.

Danielle asks: "I am considering purchasing a 4 unit apartment building that is approved for higher density to six apartments. How do I know what is a fair price to pay for the property?" Danielle, this is a great question. When we buy real estate for a long term hold, or a quick sale we use a very similar approach that is pretty standard in the industry. The method is called “Residual Land Value Analysis “. Click HERE for a copy of the spreadsheet It’s a fancy term that basically means you need to work backwards from the answer to the question, or work backwards from the value of the finished product to the raw material that you are starting with. On yesterday’s show we looked at the case of a simple new construction project or a flip. We did a bunch of math to explain how the residual land value analysis works. For those of you that want to follow along with a spreadsheet, there is an example you can link to in the show notes for this episode. Just go to the show notes, click on the link and you’ll get a copy of the example. The same spreadsheet that we used for yesterday’s show has a second sheet embedded in it with the buy and hold analysis. On today’s show we are going to look at the case of a 4 unit apartment building in a hot area. The first thing you need to assess is the as is value. That’s based on the current rent. For your specific property, the rents are quite low at about $1,050 a month. The taxes are high and the expenses will probably run near 50% based on a building of that age. If we valued the property aggressively at a 5% cap rate which would be high for that quality of asset, you would find that the property is worth no more than $500,000. That is a long way from their asking price. So now we are going to look at the residual land value analysis assuming you redevelop the property into a six unit apartment. The property you found is in a great area that is in high demand. Rents for new product in the area are running at about $2.30 per square foot. We are going to build 4 apartments at 900 SF each with an additional overhead of 20% for the common area. We only charge rent on the rentable area of 3,600 square feet. Gross rent will be $100,000. I’m going to cut a few corners here in the rental analysis like accounting for vacancy. The point is not how to model a rental, but the residual land value analysis. The expense ratio is going to be much lower than the previous case because the rents are higher and you have a new building. We will assume a 35% expense ratio. We will use the same 5% cap rate as before. Once built, the building should be worth 1.4M Your business is going run as a healthy business and I recommend that you set the profit margin for your business somewhere between 25-30%. I would start at 30% and as you get more experienced with strong and predictable systems you can lower your margin requirement. Except in this case the notion of margin is different. We’re not selling the property. Instead we are going to refinance. We want to target a refinance at 70% loan to value so that you can recover 100% of the initial investment in the refinance. If we take 70% of the value, then our maximum investment is $980k. Our loan closing cost is going to be about 3% of the loan amount or $35,000. We are now down to 935,000. We are facing a year of holding cost, so we can budget $60,000 for that. We are now at 835k. Just like the case yesterday, we need design engineering and permit for $30k. We can build a good quality B+ product these days for about $126 per square foot in many markets. We subtract the hard construction, foundation, and site servicing costs and that leaves a residual land value of $331,400. This exact same calculation that applies to a flip or a new construction project for sale . Go to the show notes with this episode to download the spreadsheet example.

Today is another AMA episode - Ask Me Anything Danielle asks: "I am considering purchasing a 4 unit apartment building that is approved for higher density to six apartments. How do I know what is a fair price to pay for the property?" When we buy real estate for a long term hold, or a quick sale we use a very similar approach that is pretty standard in the industry. The method is called “Residual Land Value Analysis “. Click HERE to download the Excel example for today's episode. It’s a fancy term that basically means you need to work backwards from the answer to the question, or work backwards from the value of the finished product to the raw material that you are starting with. So let’s construct a simple example of how to conduct residual land value analysis. For those of you that want to follow along with a spreadsheet, there is an example you can link to in the show notes for this episode. Just go to the show notes, click on the link and you’ll get a copy of the example. We are going to run through the example twice. On today’s show we are going to examine the simpler case of a sale of the finished product, and on tomorrow’s show we look at the second case which has a couple of additional calculations when you are doing a long term hold project. Imagine you found a property that is in a great area that is in high demand. You know that houses in the area are selling for $1,000,000 for a 2,000 SF home. How do you know what you can offer for the property in order to have a profitable project? Let’s say that you have completed the comp analysis and you have a high degree of confidence in your ability to sell a quality product at that $1,000,000 price tag. Your business is going run as a healthy business and I recommend that you set the profit margin for your business somewhere between 25-30%. I would start at 30% and as you get more experienced with strong and predictable systems you can lower your margin requirement. So now you know the sale price is 1,000,000. If your margin is 30%, then your total investment should be no more than $700,000. That’s going to get you a profit of $300,000. You need to subtract your transaction costs associated with selling the property like the realtor commission, the land transfer tax, the legal fees and so on. Let’s put all of that together and estimate it at 8% of your sale cost or $80,000. We are now down to $620,000. You expect to hold the property for a year and you are going to be paying interest on that money, as well as paying for property taxes and insurance. Let’s estimate that at $60,000. Now we’re down $560,000. You will need to pay an architect and engineers for the plans and permits. Let’s estimate that at $30,000. We’re down to $530,000. We said the house is going to be 2,000 square feet plus a foundation and a garage. Our hard construction cost might be $150 per square foot for a product with somewhat better finishes and the foundation may cost an additional $50,000 to dig and pour. When we add all that up we are looking at $350,000 for the construction. There is additional site work to bring utilities from the edge of the property line to the foundation. We estimate that at $20,000. So now our total construction cost is at $370,000. We subtract $370 from our earlier subtotal of $530,000 and we get $160,000. So the maximum price we would be willing to pay for the land in that instance is $160,000. This exact same calculation applies to a flip. Your starting point might be a older home that needs a major renovation instead of a brand new construction. But the analysis is exactly the same. On tomorrow’s show we are going to be going through a similar analysis for the case of a property that is a long term hold instead of a quick sale.

On today’s show we’re talking about whether diplomats from a foreign country are immune from complying with landlord tenant rules. When a foreign diplomat approaches your property manager seeking to rent a house or apartment from you, several thoughts might cross your mind: What do I do if this person defaults on the lease? Will I ever be able to get them out of the property? Do I have to rent to them? What should I do? If you refuse to rent to them because they’re a diplomat, then are you contravening laws against discrimination due to profession? After all, being a diplomat is a valid profession. When faced with this situation, you have three options available: Enter into a lease with the individual Enter into a lease with the embassy or diplomatic mission directly Don't rent to them at all.  Each option has different benefits and drawbacks, and you should carefully weigh all factors before making a decision. You might be thinking I don’t live in a capital city therefore I don’t have to worry about this. But remember, the laws around diplomatic immunity don’t just apply to a employees of an embassy. There are diplomatic missions all over the country. Major cities contain consulates in order to provide consular services for foreign nationals all over the world. Embassies and consulates can be great tenants. They are generally willing for high quality properties in great locations and are willing to pay top rental rates. In a case back in 2018, an Ottawa based landlord upgraded the security for a tenant who was an employee of the US embassy in Ottawa to include bomb-proof windows and double bolt locks on the doors. The tenant was repeatedly causing a disturbance for other occupants in the building. The tenant stayed past the agreed date to vacate the unit, and then skipped out without returning keys and still owed two months rent. Attempts to collect through the standard means were met with a letter from the tenants lawyer claiming diplomatic immunity. About a month after receiving this response and the threat of a counter-suit, the matter was taken up in Ontario Superior Court. The Judge in the case sided with the landlord and said that diplomatic immunity didn’t apply when it came to rent. The court ultimately issued an order to garnish wages from the employee of the embassy. Today’s there’s a new story is about a home located in Ottawa Canada. This time the roles are reversed. The property is owned by Saudi Arabia’s top diplomat in Canada.  The tenant in question is An Ottawa military. They allege that their former landlord — Saudi Arabia’s top diplomat — acted in bad faith when he gave them a notice of eviction, claiming he intended to move into the home with his own family. Under Ontario’s landlord tenant laws, owner occupancy is one of the few legitimate reasons for eviction under the law. The tenant was surprised to see the property listed for rent a few weeks later for $500 more per month. When confronted, the landlord offered for the tenant to remain in the property for an extra $500 per month, clearly in violation of the law around both evictions and rental increases. The tenant filed a suit in the landlord tenant tribunal seeking damages of one year worth of rent. So the question is whether the landlord will claim diplomatic immunity. The question is whether diplomatic immunity applies to cases involving real estate law and in particular landlord tenant laws. If you’re going to be doing business with a foreign diplomat, you want to get legal advice from someone who is knowledgeable in the field. The considerations are a little different from your average tenant. The possibility of claiming diplomatic immunity significantly weakens your recourse with any contract that is signed.

Our Book of the month is “To Do List Formula: A Stress Free Guide To Creating To-Do Lists That Work “ by Damon Zahariades. This is one of 11 books by the author. All of his books are centred around the topic of personal productivity, a topic that he clearly has studied deeply. We’ve all experienced the frustration that comes from having that 15 minute task that ultimately took 2 weeks to complete. If you are like many people, you have probably tried many different management systems for organizing your daily life. There are so many and quite frankly almost all of them have pitfalls and break down in some way. Our book this month takes a deep look at 10 of these systems and provides insight as to why a particular approach doesn’t work in a sustainable way. It starts with the simplest to-do lists and examines the more capable approaches to the more sophisticated systems like “Getting Things Done” by David Allen. Todo lists suffer from a basic problem. They are often mixing tasks of differing sizes, differing importance, and rarely are they scheduled on the calendar in the way a meeting or a dental appointment would appear on the calendar. If you’ve been listening to this show for a while you will remember that the book “Getting Things Done” by David Allen was the book of the month back in... Todo lists either capture too little, or they create overwhelm. There doesn’t seem to be a happy middle ground. The problem with many of the to-do systems out there is that they don’t help you establish a meaningful context. Years ago, Stephen Covey built a todo system around the concept of first things first. That’s based on the idea that items can be categorized in terms of both urgency and importance. That defines a 2x2 matrix of items that are urgent and important, important but not urgent, urgent but not important, and neither urgent nor important. While maybe academically useful, there is no connection to projects, Effective Task management requires gaining clarity between what is a project, a wish, a trivial task, an outcome and a task. Sometimes I see resolutions on a todo list. Resolutions are different than todo items since they usually involve a change in habit versus a normal todo item. Outcomes that have multiple steps are not tasks, but projects and only tasks should make it on your daily todo list. Projects should have a project plan and a todo list is a poor substitute for a project plan. I’ve personally experienced the many pitfalls that various todo list management systems have intrinsic to their design. They have left me feeling like I can’t keep up.  The book doesn’t prescribe a single specific one size fits all solution. Rather, it takes you through the thinking process that enables you to gain clarity on how to define a task for your todo list. If you have multiple projects that are competing for your attention on a daily basis, you will inherently experience conflicting priorities. Many todo lists capture trivial tasks lasting 2 minutes in duration. The satisfaction of crossing something off the list creates a false sense of accomplishment when that big important task gets procrastinated. Standard todo lists don’t distinguish between items that require input from others compared with items that can be completed in isolation. David Allen proposes a separate waiting-for list. But this additional list adds another layer of task management. Systems that are overly complex ultimately don’t get used because they are too cumbersome. If you have a well-oiled system in place, your lists will help you to get important work done faster and with more efficiency. If your system is faulty, your lists can actually hurt your workflow, sabotage your time management, and demolish your productivity.

On today’s show we’re talking about Radon, but there are a number of examples of things that  that cost far less to build into the design of a new project when compared with adding them after the fact. Radon is a colorless odorless radioactive gas that exists in the ground, almost everywhere. It poses a health risk to humans because in today’s highly insulated homes, you can get a buildup or radon gas inside the home over time. Long-term exposure to radon is the 2nd leading cause of lung cancer after smoking and the leading cause of lung cancer for people who have never smoked. If you’ve heard of someone getting lung cancer, who never smoked in their life. You might be wondering how it happened. It could be that Radon is the culprit. As radon breaks down it forms radioactive particles that can get lodged into your lung tissue as you breathe. The radon particles then release energy that can damage your lung cells. When lung cells are damaged, they have the potential to result in cancer. Not everyone exposed to radon will develop lung cancer, and the time between exposure and the onset of the disease can take many years. Radon occurs naturally. It forms when uranium, thorium, or radium, (radioactive metals) that are present in the earth breaks down in rocks, soil and groundwater. People can be exposed to radon primarily from breathing radon in air that comes through cracks and gaps in buildings and homes. Because radon comes naturally from the earth, people are always exposed to it. The CDC published a paper in January of this year in which they note that Radon is so pervasive, the CDC recommends that all houses get tested for it. That’s right, they recommend that every single house in the nation gets tested. Radon gets into the indoor air primarily through pores and cracks in the foundation under homes and other buildings.  Usually, the air pressure in homes and buildings is lower than the pressure outside in the soil around or underneath the foundation.  The pressure difference will create suction.  Radon will come into the house through cracks in the foundation due to that suction. There are numerous paths. The most common and effective method for reducing the risk of Radon poisoning is the installation of an active soil depressurization system. This method involves installing a pipe through the foundation floor slab and attaching a fan that runs continuously to draw the radon gas from below the home and release it into the outdoors where it is quickly diluted. This system also reverses the air pressure difference between the house and soil, reducing the amount of radon that is drawn into the home through the foundation. One, or sometimes multiple, suction points are inserted through the floor slab into the crushed rock or soil underneath to effectively reduce the radon level in the home. I recently saw a quote for the retrofit of such a system in a single family home for $4,600. We’re talking about the installation of a PVC pipe through the concrete slab of the foundation with an active blower type fan that runs continuously. The fan costs about $250 to buy and has a 5 year warranty. We’re talking about 16 feet of PVC pipe which costs about $1 per foot. The installation of the entire system during the time of construction is almost zero. A vapor barrier across the crushed stone is also inexpensive and costs no more than a hundred dollars for an entire foundation slab.  If a property fails a Radon test, the rules in most real estate boards say that the realtor must disclose the result to a prospective buyer. The impact of a radon problem on resale value and marketability of the property should be clear. The simple addition of these inexpensive remediations before you even know you have a problem can be a cheap insurance policy for maintaining the future value of the property.

On today's show our guest Christian Szpilfogel is talking about how some of the newest innovations in automation can make the life of a property owner so much easier. We're talking about smart connected devices like thermostats, cameras, water meters, and a large variety of alarms. You can connect with Christian at [email protected].

On today’s show we’re talking about what happens when there are multiple levels of government involved in the purchase of a property. It’s common these days to find properties that are outside the boundary of a municipality. In that case, the rules are set by the county in which the property resides. But there are so many cases where multiple levels of governing bodies are involved and it’s incredibly easy to make assumptions about whose rules you need to meet. Let me give you a few examples because I want you to be sensitized to the web of complexity the exists in reality. Imagine you had a property that was legally in the county, but a city street needed to access the property was located in the city. The zoning and construction in that case would be approved by county as you would expect. But there could be an extra layer of city approval required since the property would rely upon a city service in order to access the property. The city may require you to conduct a traffic study in order to approve the extra traffic that would be in the future be loading the city owned street. But the city may overload its traffic approval by imposing additional requirements that have nothing to do with traffic whatsoever. This may seem unfair at first. After all, the city has no jurisdiction over the property. But cities have a tendency to grow. When that happens, they want lands that are annexed into the city to follow city guidelines. So often these rules are imposed by contemplating the future possibility of annexation by the city. I’ve seen cases where the property in the county may require you to drill a well and septic. City services for water and sewer may be close by. In order to use those services, you might be required to meet the city’s zoning rules for a property that is not in the city. These examples of government over-reach exist all over the place. Earlier this week I had a conversation with the Mayor of a town. He acknowledged that the property was in the county. But the services were provided by the city, and the road is owned by the state. In order to gain access to the services, the property would need to be annexed into the city, and the state would need to approve access to the road. So if you wanted to put in an extra driveway, approval from a third level of government would be required. We had another conversation with the planning department of a city in Texas. They acknowledged that the property was in the county. Subdividing the property would fall within the approvals of the county. Zoning would be approved by the county. But the property falls within the extraterritorial jurisdiction of the city. That’s an important term that you need to become familiar with. Extraterritorial jurisdictions are the legal ability of a government to exercise authority beyond its normal boundaries. Any authority can claim ETJ over any external territory they wish. For this particular 9 acre property in question, the county would happily approve the subdivision of the land into two parcels. The back parcel would gain access to the road with the granting of an access easement, a 40 foot wide strip of land for a nice wide driveway. So far so good. Everything seemed to check all the boxes. But then the city planner notified us that the property fell under site plan control of the extra-territorial jurisdiction. In order to build on the property, it would require a minimum of 130 feet of frontage on the road. Anything less and the building permit would not be approved. As you think about that, pay very close attention to all the different government and regulatory bodies that could control what you build on your property.

Happy Thanksgiving to our US listeners. Canada has its Thanksgiving about 6 weeks earlier. That’s because our growing season is shorter than the US with our more northern climate. The concept of Thanksgiving exists in most cultures around the world. The Harvest Festival of Thanksgiving does not have an official date in the United Kingdom; however, it is traditionally held on or near the Sunday of the harvest moon that occurs closest to the autumnal equinox. Japanese Thanksgiving is called Kinrou Kansha no Hi and this year it fell on November 23 earlier this week. Traditionally, the concept of thanksgiving is rooted in thanking for the bountiful harvest. Some people are grumbling that they can’t get together with family during this time due to the pandemic. Some are grumbling that they can’t travel. If that’s your experience, it’s because you have an expectation that differs from the current reality. I am present to that which I’m enormously thankful for. I take the time each day to pause and reflect on what I’m grateful for. I’m grateful for my health, for my family. I’m grateful for waking up next to my loving wife every morning. She is a source of love, support, inspiration, sage advice, and the occasional poke when I’ve got it wrong. I’m grateful for the opportunity to contribute to this world in a meaningful and positive way. I’m grateful for the journey that this life has given me so far. Has it been perfect? No. I’m grateful for the support of my team members who are genuinely working to pick up the slack for the benefit of moving the projects forward. I’m grateful for their skill when we’re working with outside clients as well. I’m grateful for our investors who have put their trust in us. We’re working tirelessly to protect their investments. I’m grateful to you the listener for dedicating a few minutes so we can spend time together every day. I’m grateful to those of you who have reached out to me for help with your projects. I’m grateful for the opportunity to contribute. In several cases we’ve saved families from financial ruin. Those opportunities are particularly gratifying. We actually get approached on a regular basis is to provide consulting for investors and sponsors who are having trouble with their projects. These requests have been so regular that we’ve decided to expand our business so that we’re properly equipped to provide excellent service, rather than just casually helping out on an exception basis.  We have formalized our Consulting Division. It turns out that the needs of our consulting clients are often the same as for our own business. Frankly when we find and fix a problem that the client didn’t even know they had, that makes for a very good day. I’m grateful for the opportunity to help aspiring developers get to the next level. We’re not making any formal announcements at this point about the launch of the consulting division. That will come before the end of the year.  Have a wonderful thanksgiving

Today is another AMA episode (Ask Me Anything). Ryan in Los Angeles asks: “I'm astounded by your prolific podcasting and breadth of knowledge. You seem to be inside my head in that whenever I think of a question to ask, I usually find the answer by listening to earlier episodes of your podcast. Please keep up the amazing work. Where do you go to or what do you use to curate your summary of daily or weekly news sources you read to stay abreast of your real estate and related economic news?  I find myself being overwhelmed by having to pick certain sites (e.g., REIS, NMHC, John Burns Consulting, Marcus & Millichap, etc.) to read each week.” This is a great question. Developing content for the show is an intentional process that consists of a balance of topics of different types. As much as possible, I would like the content to be evergreen, that is to say, timeless. Some episodes are precisely that, a timeless piece of content on a particular topic. For example, if you search back through the archives. There is an episode on water rights. That’s an example of evergreen content. Some topics are tie into something that is trending in the news. For example, there will usually be an updated economic outlook once a quarter, or an interest rate adjustment. But this year, things have been changing so rapidly, that once a quarter isn’t enough. The impacts are being felt fast and furious. I try to cycle through the major segments in the industry including residential, multi-family apartments, retail, hospitality, office and industrial. To answer your question specifically,  I have a number of sources that I refer to regularly to when I’m researching topics. The major brokerage houses have research departments. I read those reports and often use them as a launch pad for deeper research. I also look at the reports from the research wings of Fannie Mae and Freddie Mac. The folks at Fannie Mae under chief economist Dr. Doug Duncan do some of the best research in the business. I pay attention to what some of the most tenant friendly politicians are saying. For example I regularly receive press releases from certain elected officials at the Federal and State level. They often put out a press release when they table draft legislation. I follow the work of Dr. Chris Martenson, Dr. John Campbell, Simon Black, David Stockman, Jim Grant the author of Grant’s Interest Rate Observer. I follow John Mauldin. He’s an economist who is one of the best connected guys in the business. He has central bankers on speed dial on his phone. I speak with other investors. I speak with Robert Kiyosaki, Russell Gray, Robert Helms, Brien Lundin, folks who are specialists in their specific area. I also mine Business Insider, the Wall Street Journal, Apartments.com, the Financial Times, the Globe and Mail, the National Association of Realtors. What I’ve shared is a subset of a long list of regular sources. But when I find a story that I think will be interesting, I’m not merely retelling the story from a newspaper. I will go to the original sources and construct a completely new perspective on the story based on my own observation. For example, the story on yesterday’s show was about a landlord defending a discrimination complaint in New Jersey. It was reported in a local Northern New Jersey publication. I went to the 10 page transcript of the settlement ruling from the New Jersey Attorney General’s office in order to make sense of the story. If the source of the story is in a fringe publication, I will look and see if the story has made it into some of the more mainstream publications. I don’t want to be seen as part of the lunatic fringe. There are some days when I’ve completed the research and the summary for an episode and I decide against publication. Those are difficult decisions.  Thank you Ryan for a great question. 

From time to time we come across the weird and wonky news story. Today’s show is precisely one of those. It’s one of those stories that seems to defy logic. But then again, in the litigious good ol USA, even the most seemingly benign things can be cause for a lawsuit. The owner of Ivy Lane Apartments in Bergenfield New Jersey settled a discrimination complaint and agreed to pay $30,000 to a man who applied to live in the apartments. The fact is, he didn’t actually apply. He called the leasing office and asked about living in the apartment complex. According to the story, Ricardo Moran visited Ivy Lane Apartments to ask about renting a one-bedroom unit and alleged that the management company, Tower Management said he needed to meet a $33,000 minimum yearly income requirement. which didn't take into account public assistance. Mr. Moran, who has a disability, planned to pay at most $386 out of pocket to cover the monthly rent of $995, paying the rest with Section 8 vouchers. He left Ivy Lane without filling out a rental application, according to the details in the 10 page court filing. He also never mentioned that he would be using a section 8 voucher to make up for his income shortfall. He simply left and assumed that he would not qualify. According to New Jersey law, it is unlawful for any person to refuse to rent property to a prospective tenant because of source of lawful income, including a Section 8 housing voucher, to be used for rent. But the tenant was never refused because they never actually applied. They made an assumption based on an incomplete conversation. Somehow, the property management company was alleged to have discriminated against the prospective tenant. The motion was started in April of 2010 and was finally settled more than a decade later in October of 2020. Some property management companies have a practice of looking up the records of the landlord tenant tribunal for cases having been brought against a prospective tenant. Unless the tenant was evicted, the fact that they appeared before the tribunal can’t be held against the tenant.  Even if there are a dozen such cases against the same tenant, unless one of those cases resulted in a judgement against the tenant or an eviction, that information can’t be used in making a tenant qualification decision. The New Jersey Attorney General’s office has held up the case a setting a precedent in the State for how discrimination cases should be handled. I’ll be the first to say that anti-discrimination laws are vital and important to maintaining a just society. I can’t stand it when I see examples of injustice because someone has been discriminated against for their gender, their religious beliefs, their cultural background, sexual orientation or any lengthy list of possible discrimination. In this particular instance, the tenant was not turned down because they never actually applied. Holding the landlord responsible in this instance seems to cross a line in my view. But then again, I’m not a human rights lawyer and perhaps I’m missing something. So why am I telling you this? As a landlord, as this case demonstrates, you might be held liable for something that you said, or more importantly didn’t say when it comes to human rights complaints. If the tenant has simply asked whether a Section 8 voucher could be used in place of the income qualification, the whole decade long legal case could have been averted. The case puts the responsibility on the landlord to communicate the rental policy fully and completely in writing. So Tower Management wrote Mr. Moran a check for $30,000 and updated their policy and provided training for their property managers on the policy.

On today's show, I’m making a prediction on the economic outlook for Q4 and the broad impact I project it to have on real estate markets. The economy in Q4 is going to take a hit. We saw a resurgence of employment, a modest increase in consumption and a return to limited travel in Q2 and Q3. But new unemployment claims remain historically high. Prior to the pandemic, the US economy registered an average of about 250,000 new unemployment claims in a normal week. Since the pandemic, new jobless claims have been above 700,000 every week. The first 6 weeks of the pandemic registered 32 million job losses. We are still in a very troubled economy from a labor standpoint. The other major driver of the economy is consumption. The law of averages tends to apply. If the population hasn’t increased, and people are still eating three meals a day, the amount of food consumed on average won’t fundamentally change when averaged over the course of a year. Toilet paper sales surged in Q2 when it looked like there might be shortages. Those who were in the business of selling toilet paper might have felt like they won the lottery. But on average, if toilet paper sales surged in Q2, it makes sense that they might fall below average in Q3 or Q4. On average, toilet paper consumption at the final point of use, next to the toilet over the longer term isn’t going to increase just because there was a lockdown. There is a business cycle in retail that has historically held true. Many retail businesses generate 50% of their annual profit in Q4 during the period between Thanksgiving and the end of the year. But this year could be different. We have many areas going into a new wave of Covid-19 outbreaks. This will mean a reduction in business activity, a reduction in social interaction, a slowdown of commerce. If family members are not traveling for the holidays in large numbers, what will that mean for retail sales? If family gatherings are going to be scaled back this year, it makes sense that gift giving will also be scaled back. Some gifts will be sent by mail or delivery service. But it makes sense that fewer gifts will be bought this year. The big question is whether people will treat themselves to a gift on a larger scale to make up for it? It’s clear to me that retail sales in North America in Q4 will be down from last year. It doesn’t take a huge crystal ball to predict that outcome. So what does this mean for you as a real estate investor? It means that some tenants will struggle to pay rent. I know of several landlords who are now getting eviction judgements against tenants who have stopped paying, depending on the jurisdiction. Those property owners whose cash reserves are depleted may face a more dire situation. Lenders will face the difficult decision whether to extend forbearance terms or declare the loans to be in default. In my opinion, you need to be hunkering down for another economic winter, amassing cash reserves in order to weather another storm of unknown duration.

Dax Mitchell is based in Fort Worth Texas where he specializes in industrial assets. On today's show we're talking about the various segments of the industrial market and the market outlook that has emerged in a hot segment. Dax can be reached at Mag Capital Partners. His website is magcp.com and he can be reached by email at [email protected].

I had a conversation with George Ross earlier this week where we talked about the outcome of the election. George offered his perspective on the election outcome and what it might mean for real estate investors. 

On today’s show we’re talking about the tax changes that could affect real estate investors following the US election. The 2017 changes to the tax code brought a number of new initiatives that were very beneficial to real estate investors. Top of the list were three changes. 1) Bonus Depreciation 2) Opportunity Zones 3) Step up in basis Robert Kiyosaki’s Rich Dad advisor on accounting is Tom Wheelright. Tom has is the author of the best selling book called Tax Free Wealth. It’s newly updated and current to the tax code changes as of 2018. Tom has taken the time to read through the proposals from the Biden campaign to understand what they could mean for real estate investors. Tom’s analysis is that each of these moves would be bad for real estate investors. We should be moving to take advantage of them in 2020 while we still can. Of course we don’t know for sure what the new administration will do. What was promised during the election campaign may or may not be implemented in practice. The Biden campaign vowed to reverse the Trump tax changes and go a step further by eliminating the sheltering of capital gains under section 1031 of the tax code, the so-called 1031 tax deferred exchange. But even if bonus depreciation gets cancelled, 1031 gets cancelled, and step up in basis gets cancelled, there is a good chance that opportunity zones would survive. According to a new report in the industry magazine called “Accounting Today”, there is an article that sheds some light on the creation of the opportunity zone concept. One of Biden’s top economic advisers co-wrote the white paper that led to their creation. Vice President elect, Kamala Harris, has pointed to Opportunity zones as a way to spur entrepreneurship. And their campaign website listed ways of reforming, rather than repealing, the policy. Steve Glickman, is a former Obama administration official who pushed for the incentives.  He now runs a consulting firm called Develop Advisors, specifically for investors looking to create opportunity zone funds. Steve used to be the leader of the Economic Innovation Group, a bipartisan Washington based research and policy organization. When he was at EIG, he was the architect and EIG conceptualized the program and drafted the underlying legislation. It was cosponsored by Tim Scott from South Carolina and Cory Booker, a Democratic Senator from New Jersey. Last month, the Government accountability office issued a 28 page report on Opportunity zones. In that paper GAO is identifying two matters for congressional consideration, including that Congress consider providing Treasury with authority and responsibility to collect data and report on OZ’s performance, in collaboration with other agencies. As part of that deliberation, Congress should also consider identifying questions about OZ’s effects that it wants Treasury to address in order to help guide data collection and reporting of performance, including outcomes. enator Scott has said his top priority is adding reporting requirements. A bill he introduced in December would direct the Treasury to post data annually on investment funds claiming the breaks, and to track job growth, poverty reduction and other economic indicators at five-year intervals. Oregon Senator Ron Wyden, the top Democrat on the Senate Finance Committee, proposed a reporting bill with lots of other restrictions attached. It’s possible that we may see a re-assignment of opportunity zones. Critics have taken issue with the selection of certain zones, such as a trendy arts district in Los Angeles and swaths of Brooklyn. And some have suggested replacing those that don’t meet traditional ideas of struggling neighborhoods with zones that do.

Today is another AMA Episode. Ramon from Los Angeles asks, I have several investment properties with reasonably low debt, <50% LTV, >1.6x DCR. With interest rates so low and the potential for inflation caused by central bank currency printing, I am considering refinancing a few properties to increase their debt, 70% LTV, 1.2x DCR.  In addition to letting this potential inflation help wipe away the debt over time, I will get the added benefit of pulling cash out to take advantage of opportunities which may become available if distressed sellers start to sell and foreclosures begin to hit the market. On the other hand, by doing this I would be adding risk by increasing my debt service at a time when there is downward pressure on rents and increased rent collection risk. What is your perspective on responsibly loading up on as much low interest debt as possible? Money comes to you in one of three ways. 1) Earned income 2) Residual Income 3) Capital Gains The choice of how much debt to take on is a function of several factors. If you take on more debt, the residual income from the business will go down. A lower debt service and a higher debt coverage ratio means higher cash flow for you at the end of each month. If your goal is cash flow, then taking on more debt is going against your residual income or cash flow objective. But if you’re willing to defer a portion of the residual income in order to grow the portfolio and increase your total portfolio, that could be a winning strategy. I’m going to make up some numbers following your example. Let’s say that you have a portfolio of $10M and you’re going to refinance the portfolio to increase the loan to value ratio from 50% to 70%. So you’re going to take on an additional two million in debt. The debt coverage ratio will fall from 1.6 to 1.2. You’re quite right in pointing out that the lower debt coverage ratio has more risk associated with it. The risk is that the portfolio might experience negative cash flow if you have something unexpected happen. You’re going to borrow an extra $2M within that $10M portfolio in our example. This will give you the ability to put down up to $2M on a new property which could significantly expand your portfolio. But as you rightly pointed out, you would be taking on more risk. What if instead of sinking all $2M of new money into a new project, instead you invested $1.8M. You could put the extra $200,000 in a reserve account to protect the portfolio from any short term cash crunch, if the need arises. It will require a lot of discipline not to spend that money. To summarize, borrowing additional funds to buy another project, and increase your war chest cash reserve on your balance sheet could be the best of both worlds. You can improve the safety of the entire portfolio and at the same time, acquire another project.

The world is filled with news articles that don’t make sense. I get bent out of shape when I read an article that is downright ignorant. When I say ignorant, I mean lacking in basic education. The worst part is that these articles are getting wide circulation and feeding mis-information on a large scale. On today’s show we’re talking about one such article about the condo market published earlier this week in the Huffington Post. There have been numerous articles that are similar speaking about the fall in rents in New York, San Francisco, and other expensive coastal markets. The article is entitled, “Canada’s Condo Markets Face Perfect Storm As Rental Rates Tank, Costs Jump” The story goes on to say, “Add yet another to the many imbalances in Canada’s pandemic economy: Renters are catching big breaks as rental rates drop, while condo owners ― particularly investors ― are looking at potentially rough times ahead. In fact, for condo owners, just about everything that could go wrong ― from bad construction and rising insurance costs, to rental rates that can’t cover mortgage payments ― is going wrong.” Stories like this are just so ridiculous. They imply that the pandemic is to blame for the plight of these condo investors. The implication is that these were good investments to begin with, and the pandemic turned them into bad investments. The fact is, these investments would have never met my criteria. Let’s look at some specific examples. In Toronto right now there are about 30,000 condo’s for rent in the core of the city. That’s a lot of inventory. No surprise that rental rates have fallen.  The city of Toronto attracts about 125,000 new residents a year and in a traditional year, there are about 35,000 units of new construction. The imbalance between demand and supply is one of the main reasons that prices have been continually rising. But immigration is down this year because of the pandemic. So fewer people are moving into the city and a lot of that new supply coming into the market is competing with existing inventory. For those of you on this podcast, nobody is going to be shocked to hear that $1,600 a month in rent on a $500,000 investment is not going to pencil. You don’t need to pull your calculator out to know that those ratios don’t work. But here’s the crazy thing. Realtors all over are selling these types of properties to unsuspecting amateur investors. They won’t cash flow, but appreciation has meant that all you needed to do was sit on them and time would take care of everything. The memory of down years is a distant memory.  When you invest in shares of Tesla, you look at the last few years and the stock has consistently gone up. Maybe you decide to buy shares of General Electric. You tell yourself that General Electric is now a bargain after having fallen 75% from it’s highs a few years ago. All of these plays are pure speculation of the same type that wall street investors use every day. These investments are not professional investments. They’re speculations, and are not based on fundamentals. When I make an investment in a property or a new construction project, I’m very clear on where the profit is going to be generated. That doesn’t mean that you won’t encounter surprises or changes in market conditions. But at least I’m clear on the day to day cash flow. I’m not speculating that prices will go up, simply because they’ve always gone up. When I underwrite projects, there is no speculation on the value going up. The investment has to make sense today, in today’s dollars with today’s market conditions.

On today’s show we’re going to take a brief detour from the world of real estate investing to unpack one of the largest technology announcements to come out this year. Unless you are involved deeply in the guts of the high tech industry, you may have a hard time understanding the significance of the latest Apple announcement. Prior to moving into the world of real estate investing, I was a microprocessor designer and I used to manage microprocessor development teams. I have processors designed into all kinds of applications all over the world. This is a world that I know deeply, so I thought that taking 5 minutes to share a perspective on the latest announcement by Apple would be a good use of 5 minutes. So here we go. Last week Apple announced that they were moving away from the Intel architecture of chips to the ARM architecture. The question is, “What does this really mean for you as a user of these devices?” A few years ago, they upgraded the operating system on the iPhone to include many of the elements from MacOS. There are three primary operating systems in use in computers today. Windows which has majority share of the desktop computer market, Android which has majority share of the mobile devices, and Unix with all of the various linux variants that make up the majority of the server world. The Mac Operating System was based on Unix technology. It's the most robust industrial strength operating system out there, and is the least prone to security breaches. So when Apple introduced many of these elements to the iPhone, the iPhone really became a robust computer. Apple is trying to find a way to blur the lines between the desktop computing platform that you find on their desktop computers and notebooks, and the mobile computing platform that you experience on the iPhone and iPad family of devices. Mac applications don’t work on the iPhone and iPhone applications don’t work on the Mac, up until know. The second major difference comes in the realm of battery life and overall performance. The way to think of the difference between the Intel chips and the newly designed Apple chips is like comparing the difference between a Ferrari and a Volkswagen. The Ferrari is much more expensive. It’s a much faster car under perfect conditions like a race track. But in real world rush hour traffic conditions in Los Angeles or Dallas, a Ferrari and a Volkswagen will perform remarkably the same. The Ferrari might beat the Volkswagen through a few traffic lights, but the real difference will be small. Most importantly, the Ferrari will use a lot more fuel to get the same job done. So which car is truly better? The answer is it depends. The Intel chips are more like the Ferrari and the Apple M1 chip is more like the Volkswagen. The Volkswagen will use a lot less fuel. The Apple M1 chip will consume less power than the Intel chip and therefore will have longer battery life. Apple is claiming up to 18 hours of video streaming on a Macbook. No other device on the market comes close to that kind of battery life. 

On today’s show we’re talking about a single word. The problem with this single word is that it’s ambiguous. We often think that we know the language and what it means. But the truth is unless you’re really clear on exactly what you mean, very simple words can lead you down a dead end path. Today’s show is focused on a simple word that has four letters. When projects run into difficulty, the culprit is often a failure in the plan. This year, in the year 2020 with all of the global dislocations that have  befallen our economies most business leaders would bristle at the notion that the plan was to blame for the difficulties being experienced. We’ve had a global pandemic. We’ve had government mandated shutdowns. We’ve been ordered by our governments not to conduct business. How can you sit on you high horse and say that the plan was to blame? I heard a business leader tell me in the past week, he said “We had a plan, and the plan couldn’t be executed.” The Project Management Institute is the globally recognized leader in project management certification. If you’re going to be a professional project manager, you’re going to take a bunch of courses and at the end take a lengthy exam. Finally you’re a professional project manager. The PMI has a lengthy publication called the Project Management Body of Knowledge. This document breaks down project management into 5 distinct process groups, 10 knowledge areas, and 49 distinct processes. The project plan itself has an outline of 10 chapters. According to PMI, a plan is a formal, approved document used to guide both project execution and project control.  A plan is a deliverable. It’s a document which you can point to. It’s a noun. Therein lies the problem. When you have a plan, then the work to produce the plan is done. When you think that the plan is a noun, you completely miss the fact that the word plan is also a verb. A verb is an action word in most languages. You can conjugate the verb. When you think of the plan as a noun, it often has a finite end-point. The plan is complete, it’s done. We now have a plan. We obviously don’t want to do an incomplete job of planning, no more than we want to do an incomplete job of anything. In order to achieve excellence, things need to be taken to completion. But plans are different. Plans, despite our ideals are never done. They’re continually being pushed off track by forces. I may have a plan to sail the ship from New York to Gibraltar. I plot the course based on the direction I need to go. But there’s wind, there is current, there are local waves that can instantaneously turn the ship so that from one second to the next it’s not facing the intended direction. You have to always be adjusting course. In fact, you are almost always off course.  There are a few miniscule instants in time when the ship is actually on course. The rest of the time it’s off course, trying to get back on course.  Once you get out on the water, the weather you thought was going to be part of your journey changes. You may have to take a detour of 1,000 miles in order to avoid that hurricane that changed direction. You see, in order to be useful in the real world, the word plan is a verb first and a noun second. The folks at PMI are great. But they’re academic. They’ve studied project management about as deeply as it is possible to do so. We see a verb being more empowering than the noun.

On today's show we're talking about goal setting for 2021. This is an exercise that needs to start now, not on December 31. Marc and Nicky are repeat guests on the show. They're having a one day virtual business goal setting workshop on November 28.  You can connect with them at ecircleacademy.com/appointment