Today is another AMA episode (Ask Me Anything). Kara asks, I’ve been approached by a borrower to lend funds to purchase a property. I’m not interested in taking risks, so I figure if I limit the loan amount to 80% of the property value, and secure the loan in first lien position I’m going to be safe. I don’t have the time or systems to fully qualify the borrower. The property is a fixer upper which will require the borrower to bring additional funds to repair the property. He intends to hold the property as a long term rental and eventually refinance with bank financing in order to repay the initial loan. Apart from mortgage security, what else should I be concerned with? This is a great question. My recommendation is that you work with a licensed mortgage professional. That’s their business. For the listeners to this show, I don’t want you taking what you hear on today’s episode and making loan decisions directly. I’m not a mortgage professional and I don’t profess to be. I’m merely giving you ideas for you to discuss with your mortgage professional that might give you additional protection. A lender is only ever asking one question. If I lend you money, how will I get it back. The more sophisticated the lender, the more ways they have of asking that same question. How will I get my money back if things go well? How will I get my money back if things don’t go well? Whether you write one loan or 100, you’re in the lending business. In order for you to have a robust and safe lending business, you need systems and processes. That means being very clear on your lending criteria. I’m going to touch on a few, but there are many more to be considered. These are for example purposes only. Again, consult your real estate lawyer and your mortgage professional. Let’s talk about the things that can go wrong and how you need to protect yourself in the lending criteria and in the loan agreements. You can learn an awful lot about this business by reading commercial loan documents to see what terms a lender has embedded in the loan documents. Every single one of those terms are there for a reason. They’re there to protect the lender. You’re correct in saying that by securing your loan on title with a mortgage does provide some protection. But it’s not absolute protection. Only by understanding the weaknesses that a mortgage can have, can you plug those holes that exist. Let’s start with the loan amount. You mentioned that you were willing to loan up to 80% loan to value. In my mind, the notion of value can be highly subjective. There have been documented cases of appraisals coming in above the true market value. In that case, the unsuspecting lender can be taking on much more risk without even knowing it. My recommendation is that you write your loan terms at a lower percentage. But not only that, you may consider limiting the loan amount to the lower of, say 70% loan to purchase price, or 70% loan to value. Whichever of those two numbers is lower, that would be the maximum loan amount. You mentioned that the property is a fixer upper. Every time you have someone working on the property, there is risk of a mechanics lien being recorded on title. Your mortgage might be in first position, but a mechanics lien would come ahead of a mortgage in the hierarchy of payment. You need systems and process to control the payment of contractors and subcontractors. Even with asset based lending there is a certain amount of due diligence that needs to be performed on the borrower. The lending business has a lot of moving parts. These are just a few of about a dozen things that can go wrong even in the world of secured loans. Again, I’m not a lawyer, nor a mortgage professional. If you’re going to write a loan then you probably want to get into the lending business with all of the systems, processes and protections that come from being in the lending business.

On today’s show we’re taking a fresh look at the impact of the pandemic on business activity. Conditions on the ground are evolving rapidly and it’s been some time since we’ve looked at the implications. We have major parts of Europe back in a full lockdown situation. I have two cousins in Milan who both contracted the disease in the past 10 days. One is doing well, the other one is struggling. Since the start of November, Covid-19 cases in the US have increase by more than 25%. We have hit record rates of infection in the US even though we’re not yet into the cooler weather across much of the country. The largest outbreaks are in Texas, California and Florida all of them southern states. According to the data reported by John Hopkins, new daily records were hit in Maine, Pennsylvania, Colorado, New Mexico and Tennessee. Through the month of September and much of October we saw infection rates increasing dramatically. But there wasn’t a corresponding increase in the number of people in hospital or in Covid related deaths. That gave rise to a sense of complacency. We’ve been hearing that Covid has been not that big a deal. Well now we have a record number of people in hospital in the US as a result of Covid-19. The headlines have been promoting the promising results from the latest vaccine trials. But as you know, vaccines only work for a single strain of a disease. Denmark is home to 5.8M people and 17M mink. It turns out that the Corona Virus has made the leap from humans to mink. Now in order to make the jump from humans to mink, the virus needs to mutate. The Danish government has confirmed that the new mutation of the disease has made the jump from mink to people and there are 12 confirmed cases. The Danish government has imposed strict lockdowns on those people, including contact tracing. The impact of a new large scale outbreak of this mutation has not received wide news coverage. The potential for this mutation to render a vaccine useless cannot be overstated. The Danish government are taking steps to cull all of the mink on 207 farms out of 1,000 farms where the disease has been detected. We are talking about killing millions of animals. There has been debate on whether to cull all 17M mink on all of the farms in Denmark. In this day and age, I have no idea why there is a need for mink to be raised in such large quantities on farms. The fact that they’re considering this step tells me that the Danish government recognize the seriousness of the situation. All I can tell you is that this is a rapidly evolving situation. I know that I’m continuing to take regular doses of vitamin D, and continue to take precautions to limit social contact. The research shows statistically much better outcomes for those with high levels of Vitamin D. Hopefully that’s enough to protect my family. But we also need to be concerned with the global picture from a virus that knows no borders. So what does this mean for you as a real estate investor, or a business owner? It means that the uncertainty we’ve experienced in 2020 is likely to continue for a while longer. You might have been planning for a period of increasing economic recovery starting now. I’m here to tell you that may not happen. It’s entirely possible we will see more severe lockdowns and outbreaks of the disease in the coming weeks and months. We have already established that Covid-19 was not just a blizzard that would melt away in a matter of days. It has already proven to be an entire winter. You should be preparing your business for the possibility of a long economic winter.

On today’s show we’re talking about the dilemma of choosing suppliers and choosing specific products. There is a world of choice and prices vary widely. It comes down to making a value determination whenever you’re choosing a particular product. The importance of that choice depends on who you are and what you’re going to do with it. If I’m going to play a game of basketball, I’m going to make a difference choice on which ball to buy compared with Lebron James. To me a basketball is worth an hour of recreation. To Lebron, the basketball is worth millions. On today’s show we’re going to be looking at dishes. You might be wondering why we’re looking at dishes. Well, our team is in the planning phases on a hospitality project. This will require investment in many different aspects. Everything from kitchen equipment to seating and tables for the dining room, to glasses, dishes, cutlery and napkins. There are hundreds of details to be planned in this project. Even though we’re going to be talking about dishes, as you’re listening to this, I don’t want you to focus on dishes per se. What I want to emphasize is the process that will be used in the final product selection for the dining room. We believe that everything in the dining room needs to form part of the experience. The design of the menu, the training of the staff, the décor, the room temperature, the comfort of the seating, the manner and speed with which the diner receives their bill. All these details matter. So too does the choice of dinner ware. The dining room will have a certain theme that is a combination of casual and upscale. So we don’t want a classic white dish. We don’t want an overly formal plate. We found a supplier in Vermont that had the look we were after. The reviews of the product were excellent, and the quality looks top notch. But prices were high. A single dinner plate varied in price between $25 to $29 dollars. A serving platter was priced at $82. We would need to spend over $15,000 just in dishes alone. Research showed that we could order products from China online where prices were $1-$2 per plate. But the minimum order quantity was 1,000. Even if we ordered a quantity of 1,000 and only used 200, we’re still talking about a price of $10 per plate compared with $25. We found a supplier in China that had a product we liked. The look seemed in keeping with the brand and theme of the dining room. If we host a large event and need more dishes, we would have them on hand and would not need to rent any dishes. But of course you don’t want to make the decision based on price alone. We have to consider the weight of the dishes. If the dishes are too heavy, that could be a workplace safety issue for our serving staff. If the dishes are too heavy they might need to be heated before serving the meal, otherwise the meal will get cold quickly. If the dishes are too light, then they will appear cheap and give the diner the impression that they’re getting less value for their dining experience. The dishes have to be dishwasher safe and not leach any toxic chemicals. They need to be able to withstand the repeated temperature changes that come from the dishwasher. Those thermal cycles are the #1 thing that shorten the lifespan of a dish. They will eventually get small cracks in the glaze and break. The glaze needs to be robust enough that the plates won’t chip with regular everyday handling clearing the table. The color of the plate needs to complement the food so that when you have a meal on plate, the plate frames the meal and complements the colors of the meal without stealing attention away from the meal. All of these details are about designing an end user experience. You see, design doesn’t have to cost extra. It just requires you to pay attention to the details and think through the experience from the perspective of the end user. It’s not complicated, it’s just rarely done.

On today’s show we’re talking about the morning after. We have a nation where nearly half the population is elated, and nearly half the nation is disappointed and maybe downright angry. If you’re a real estate investor, or a real estate developer, you’re probably wondering what the future holds. You might be wondering if Joe Biden will make good on his election promise to increase taxes on business, and whether he will make good on his promise to eliminate the capital gains tax deferral that has been available in the US under section 1031 of the tax code. You might be wondering if the push to improve the energy efficiency of housing will bring new incentives to build new housing to replace some of the nation’s oldest and least efficient buildings. If you’re happy or if you’re saddened by the outcome of the election, both those reactions are linked to your hopes and expectations. I said your hopes and expectations. Those hopes and expectations have only one origin. They were the product of your own mind. Neither candidate can influence the election at this stage. It’s simply a matter of counting. The election outcome is reality. If you’re feeling any stress around the election, it’s because there may be a gap between your expectation and reality. Stress cannot exist without that gap. When that gap exists most people feel pressure to close that gap. Since there are only two variables, expectation and reality, there are only a few possible choices on how to close the gap. 1) You can change the reality. This is possible in some instances, but it’s rare. It usually involves breaking the laws of physics. 2) You can lie to yourself and others that the reality has indeed changed. 3) You can alter your expectation. Your expectation is rooted in your belief about the way things should be. Maybe you believe that our political leaders should behave themselves a certain way. Maybe you believe that the laws should be written a certain way so as to make them more fair. Maybe you believe that there is an injustice that needs to be corrected. Some people are so wrapped up in their belief about the way things should be that when they don’t match, something’s wrong. We’re here in the middle of November, the weather was sunny this past weekend and the temperatures were in the 70’s Fahrenheit, above 20 degrees centigrade. Earlier in the week it snowed. I heard some people in the neighborhood say how it was too hot this past weekend, or that it was too cold earlier in the week. Do you realize how silly that statement is? Does mother nature care what you think about the weather? Are you going to tell mother nature that you’re right and she got it wrong? There is no good weather or bad weather. There is only weather. The term good weather is rooted in your expectation and has nothing to do with the weather. Sometimes you can wait a bit and the weather might change. It’s raining today, so I’ll wait for a sunny day before going to the beach. That strategy is called wait and see. But sometimes you could be waiting for a long time. If you’re waiting to go to the beach, you might be waiting another 7 or 8 months. My good friend Robert Helms has a great quote. He says ,”Think and Act is better than wait and see”. If you apply that thinking to going to the beach, then you might board a flight to a Caribbean Island and get to the beach right away . Given the current reality, what is the best move that I can make for my business, for myself, for my family and for my stakeholders? Your current circumstances don’t define your destination. They merely define your starting point. The obstacles don’t define your destination either. They’re simply something to be overcome. You decide your direction, and if you’re truly committed to it nothing will ultimately stand in your way.

All the way from Kansas City, Bob Fraser has taken the entrepreneurial journey through several industries. Over the past 8 years he has specialized in real estate Notes as a business. On today's show we're talking about the strategies that are working in today's market.  You can connect with Bob at aspenfunds.us.

Gray Robinson is a recovering lawyer (or perhaps a relapsing lawyer). On today's show we're talking about burnout and how to manage the stress of a demanding role. This is a must-listen episode for any professional, entrepreneur, or business owner. Gray can be reached at lawyerlifeline.net.

Yesterday Zillow announced their Q3 financial results. This is a company that has been one of the few that benefited from the market conditions in 2020. The company has grown to 5,000+ employees. They had a record quarter in Q3. On their earnings call the company shared a perspective on the overall balance of supply / demand that many investors don’t often pay attention to. The pandemic has turned the market on its head and it’s difficult to make sense of what we’re seeing in the market. The abrupt changes are the result of many contradictory forces, both headwinds and tailwinds as we’ve talked about on recent shows. The folks at Zillow pointed out on their investor call that there are 5 million more people in their prime home buying age in the market than there were in 2010. Demographics suggests that the low number of home buyers over the past decade in the wake of the financial crisis has created a wave of pent up demand which is only now starting to get satisfied. Zillow offers is a service the gives a seller cash offer without having to open their house to showings. Zillow closing services is providing closing services for 98% of their transactions of their zillow offers business. Sellers to Zillow make up 0.2% of their total transaction volume. On today's show we're talking about what can happen when you compete with your customers. This is a business lesson that many companies learn the hard way. Last month Zillow announced that they were getting into the brokerage business. Back in 2014, Greg Schwartz, Zillow's then-chief revenue officer, stated Zillow was "a media company that helps people find homes." How does Zillow make its money? They don't collect real estate commissions. They sell the leads collected on their website to licensed realtors who pay a fee to Zillow for those leads. It’s up to the real estate agents on the ground to do the heavy lifting, to drive the buyers to showings of the properties. But the marketing fee for the leads is small compared with the real estate commission earned by the real estate agents who actually transact the deals. In a buyer’s market, the majority of the work is performed by the buyer agent. For now Zillow is only using in-house agents on the properties is buys directly. Zillow is only interested in buying specific types of homes. They look for homes that are relatively new, in good condition, and that are within what they consider to be “high opportunity” markets where the chance of a quick re-sale is possible. Dominance in a segment doesn’t mean absolute power. Remember, platforms rely on all their stakeholders in order to be successful. The company has three main lines of business. Entering into the brokerage business means that Zillow is now competing with their customers. Real Estate Agents who have benefited from getting leads from Zillow in the past have recognized that zillow has become too powerful in the market and will eventually replace their partner agents with salaried in-house employees who carry a real estate license. So the question is will the agents allow their newest and largest competitor continue to be their partner? Some will rationalize that Zillow doesn’t really compete directly with agents. But as they learn, grow and mature as a brokerage, they can shift their focus quickly. History has shown competing with your customers to be an unstable practice.

On today’s show we’re talking about the impact of the election. Let’s ask a simple question. As a landlord, do you screen your tenants based on political party affiliation? I already know the answer. Of course you don’t. That would be just as illegal as discriminating on the basis of gender, or skin color or religious beliefs. You can’t paint an entire state a single color. California has a reputation of being staunchly liberal. But they passed a politically conservative proposition 22 that would exempt Uber and Lyft drivers from be classified as employees. This is sure to create a new legal minefield in the years to come as more businesses seek exemptions from the law enacted last year that classified contract workers in the gig economy as full-time employees with all of the rights and obligations of full-time employment. With 64% of the polls reporting as of the morning after the election, Joe Biden had received 65.2% of the popular vote in California. That leaves 1/3 of the California population having voted for Donald Trump. 65.2% of voters in Oklahoma voted for Donald Trump and 1/3 having voted for Joe Biden. The rhetoric about civil war is ridiculous. There is no enemy. They’re your neighbor, or your son, your cousin, maybe your spouse or mother or father. The tragedy is that whoever wins, there will be roughly half the country disappointed in the outcome. You may not agree with their opinion, but you must defend their right to have their opinion no matter what. That’s the essence of a free society. But even a free society needs to have limits. Remove all the rules and you risk chaos and anarchy. The state of Oregon became the first state in the nation to decriminalize the possession of all illegal drugs. Oregon’s Measure 110 makes possession of any controlled substance, including heroin, cocaine or methamphetamines, a violation punishable by a maximum fine of $100 or a completed health assessment. The emphasis in the election coverage seems to focus on the executive branch. But the true governance of the country is the result of all three branches of government. It requires the Congress, the Senate and the White House. As of this writing, the Democrats have retained control of the Congress, the Senate votes are not fully counted yet, and the White House is leaning heavily in Joe Biden’s favor, but still not counted. The Senate race has not fully been decided. It looks likely that the Senate be retained by the Republicans, which means four more years of legislative gridlock. Colorado voted on whether to allow the release of thousands of wolves into the wild. The wolves were native to the area until hunting brought them to the brink of extinction. It’s looking like my pre-election prediction is going to be pretty accurate. There will be more printing of money. There will be more legislative gridlock. The early signs are that legal challenges are underway in two states and a recount is going to happen in at least one state. This could be another election where the outcome is decided by the courts. The silver lining is that there has not been election violence so far.

The Securities and Exchange Commission issued new regulations today that affect real estate investors and exempt offerings. The full news release can be found at https://www.sec.gov/news/press-release/2020-276

On today's show, I'm going on record to predict the outcome of the US election. Check it out. 

Today’s question comes from Richard in Ottawa, Canada. Rich asks, With materials costing more and labour being harder to get, wouldn’t it make sense that high end/newer homes property values will go up over the next 12-18 months? Doesn’t less supply = higher demand? Rich this is a great question. Supply and demand are independent variables. Less supply doesn’t actually mean higher demand. We’re concerned with the balance of these two independent variables. More supply than demand and prices will fall. More demand than supply and prices will increase. You are correct in pointing out that construction costs have increased. There are two reasons for that. We have experienced supply chain disruptions which have affected materials prices. There is a shortage of labor Paradoxically, the labor shortage exists at a time when we also have millions of people unemployed. When the pandemic hit we actually saw labor prices drop to more historic levels as people in construction saw projects being put on hold. If you peel back your question to the most fundamental, it seems like you’re really asking whether making an investment in a particular segment will be a safe investment in the newt 18 months. It’s a little like asking to predict the future. None of us really know. Economists try to understand the current market conditions and construct a model for how the economy functions. If that model is accurate it can be useful for predicting the near future as long as the major variables don’t change. Therein lies the difficulty. We have a lot of variables that could be easily described as headwinds or tailwinds. The direction of the economy and the local market conditions will be the sum of all those headwinds and tailwinds to see what the net result will be. 1) Because of the pandemic, most people who might consider moving have put those plans on hold. They’re staying put. That has taken supply of homes for sale and for rent off the market. 2) The low interest rate environment has definitely been a tailwind. 3) We have seen prices increase across many markets in North America. The national average is 11%. But this isn’t uniform at all. Some cities like Nashville and Austin continue to experience population growth. Let’s look at the headwinds. We have millions of people unemployed. We have political gridlock in Washington and we have a minority government in Canada where the threat of the government falling is increasingly likely. We have businesses failing all over the place. We have oil prices falling which means billions of dollars in write downs in the energy sector of the economy. We have between 8-9% of the residential mortgages in the US in some form of distress. We have millions of tenants who are behind on their rent payments. In our own province of Ontario, we have a backlog of over 80,000 eviction motions in front of the landlord tenant tribunal. These properties have not hit the market yet. They represent a shadow inventory of sorts that will eventually appear on the market in distressed condition. Travel is restricted due to the pandemic, and therefore immigration is well below historic levels. That too is a headwind. People are dying in large numbers as a result of Covid-19. The US has seen nearly 0.25M deaths. When people die, that brings more inventory into the market increasing supply. That’s another headwind, albeit a small one compared to the others. Finally, the US Federal election is likely to bring an environment that will not favour the housing market. So we’re trying to make sense out of all these variables and predicted how they will all play out.  There are a lot of variables and the outcome is highly uncertain. Remember, back in 1929, the economy was booming. Everything looked rosy and optimistic, until it didn’t.

Our book this month is called “Leaders Eat Last” by Simon Sinek. Simon shot to fame in the wake of his first TED Talk in 2010 entitled “How Great Leaders Inspire Action”. His second TED Talk in 2014 was called “Why Good Leaders Make You Feel Safe”. It’s no surprise this our book this month is also on leadership. The foreword was written by Lieutenant General George Flynn of the US Marine Corps. The opening paragraph of the Foreword says "I know of no case study in history that describes an organization that has been managed out of a crisis. Every single one was led. Yet a good number of our educational institutions and training programs today are focused not on developing great leaders but on training effective managers." This one opening paragraphs sums up the essence of the book. In the book, Simon emphasizes the humanity of relations as being essential to leadership. In the book, Simon emphasizes the humanity of relations as being essential to leadership. Every single employee is someone’s son or someone’s daughter. “It is we, the companies, who are now responsible for these precious lives,” To see money as subordinate to people and not the other way around is fundamental to creating a culture in which the people naturally pull together to advance the business. If they don't feel safe in the organization, they turn their energy inwards to fighting internal battles instead of focusing on the threats to the business from the outside.  As organizations scale, we start to abstract and no longer see people as human.  We are now customers, shareholders, employees, avatars, online profiles, screen names, e-mail addresses and expenses to be tracked. The human being really has gone virtual. Now more than ever, we are trying to work and live, be productive and happy, in a world in which we are strangers to those around us. The problem is, abstraction can be more than bad for our economy . . . it can be quite deadly. The more abstract people become, the more capable we are of doing them harm. The Titanic carried as many lifeboats as was required by the law, which was sixteen. The problem was, the Titanic was four times larger than the largest legal classification of ships of the day. The Oceanic Steam Navigation Company, the Titanic’s owner, adhered to the outdated regulation (in fact, they actually added four more inflatable rafts). Unfortunately, as we all know, on April 14, 1912, just four days after leaving port on its maiden voyage, the Titanic struck an iceberg far from any shoreline. There were not enough lifeboats for everyone and more than 1,500 of the 2,224 passengers and crew on board died as a result. A ship four times bigger than the largest classification carried only a quarter of the lifeboats they actually needed. In fact, additional space was added aboard the deck of the Titanic in expectation of a “lifeboats for all” requirement. But lifeboats were expensive. They require maintenance and could affect a ship’s stability, so executives at the Oceanic Steam Navigation Company decided not to add the lifeboats until the regulation said they had to. Though there were not enough lifeboats for all the passengers on board the Titanic, the company was in full compliance with applicable rules.

Adrian Panozzo has scaled his business over the span of ten years using the BRRR (Buy, Renovate, Rent, Refinance, Repeat) strategy by concentrating on a smaller multi-family properties. During this time he was a full time police officer in Toronto.  His investment market of Hamilton Ontario has a history as an industrial city with steel production, transportation and logistics at the core of the city's economy. This strategy could be transported to virtually any market in North America. To connect with Adrian, you can email him at  [email protected]

Risk Management is one of those topics that seems dry and esoteric to some. It’s a subset of project management. But risk is one of those things that is ever-present, depending on how you plan your projects. On today’s show we’re going to look at a deep dive on one specific risk that actually came true. But before we talk about that specific story, let’s define what we mean by a risk. A risk is something that could happen that is outside your plan. If you’ve already planned for it, then by definition it can’t be a risk. When we talk about risk we divide risk into likelihood and impact, and then we categorize the impact according to the type of risk that it represents. It might be a cost risk, or a time risk, or perhaps it could impact the quality of the finished product. There are a number of categories that could apply to any given risk. Again if you want to learn more about this, send me an email to [email protected] and I’ll send you a link to the webinar on risk management. So here is the story. My partners and I are building a campus of residential assisted living and memory care homes in Lake Charles Louisiana. If you’ve been following the news over the past couple of months, you’ll know that this market has been hammered not by one, but by two major hurricanes in the span of 6 weeks. This market sustained an incredible amount of damage. Fortunately, our construction project suffered virtually zero damage from both hurricanes. We did suffer delays from the storms. With the extreme amount of rain, the site drained well. But the community was without electricity for 36 days and we could not find housing for the construction crews to actually come back into the local market to work on the construction of the buildings. In the end, the workers brought RV’s and are staying at an RV Park that we own in order to make progress on the construction. The demand for roofing materials and roofing labor meant that our roofing contractor refused to honor their contract. Our assessment is that they would rather get a higher rate for emergency roof repair work compared with the price they had quoted us for the new construction roofing. The impact of the hurricanes was twofold. The first was in a delay in the project. The delay was caused by lack of labor to do the work. The second is the lack of materials which could cause more delay and an increase in project cost. When the demand for roofing materials shot up, you simply could not source the desired product at any price, and the pricing for inferior product jumped locally as demand far exceeded the available supply. That meant looking further afield for both labor and materials. Just because roofing materials are expensive and in short supply along the gulf coast. As you are listening to this, Southeast Louisiana and Mississippi just got hammered by yet another hurricane, Hurricane Zeta on Wednesday of this week. While New Orleans is three hours away from Lake Charles, we now have a category 2 hurricane that ripped a lot of roofs in the New Orleans and Biloxi Mississippi markets, putting even more pressure on demand for roofing labor and materials. There is very little we can do to recover the six weeks that were lost. But we can prevent even more delay due to the shortage of roofing labor and the shortage of roofing materials. We can also protect the project from a cost increase by sourcing the materials from another location. All of this can be mitigated by replanning this part of the project and by taking all these new factors into account. We can limit the impact of these storms in both cost and time based on replanning this aspect of the project to treat the risks not as a risk, but as a certainty of having occurred. Once the risk is embedded in the plan, it’s no longer a risk by definition.

On today’s show we are talking about the fall in prices. There is a wide range of opinion on where real estate prices are heading in the next 12 months. Prices have continued to rise during the pandemic despite massive job losses, economic contraction, and falling revenues. The long predicted fall in prices is now just starting to become visible. My family lived in NYC for about 25 years. My aunt and uncle lived on fifth avenue and 72nd street overlooking Central Park. That part of fifth avenue is residential because it’s overlooking Central Park. So the shopping street is one block east on Madison Avenue. A group of three properties recently came on the market back in August. They’re located on Madison Avenue and 70th street. But before we talk about those properties, let me complete the picture of this neighborhood. Manhattan has many different areas. This is one of the most expensive areas, but not the most expensive area. It’s not Billionaires row which can be found about 12 blocks south on 59 th street. This is maybe the second or third most expensive areas in the city. After my aunt and uncle died, their apartment was sold to Keith Richards from the Rolling Stones. Prices in this area have averaged over $6,000 per SF for much of the past decade. In the last couple of years, prices have risen to over $7,000 per square foot and in some cases even flirted with $8,000 per square foot. Not surprisingly, prices for retail space one block away have tracked these sky high prices. Prices in the area for commercial space peaked about six years ago when another building six blocks away sold for a massive $7,589 per SF. Now this most recent sale on Madison and 70th was at a price of $1,340 per SF. This is a drop of over 83% compared with prices 6 years ago. Now I know what you are thinking, $1,340 per SF is still a very big number. Some of you are having a hard time considering that to be a bargain. When I saw the story of this property cross my desk, I saw something in the story that most people probably missed. Most are shocked by the drop in price. I saw the fact that there were 20 offers on the property. This was an auction environment. To the other 19 buyers, this property was worth even less, probably much less. When you have 20 offers, you are still in that auction environment. In an auction, the buyer almost always ends up paying too much. I regularly speak with investors who keep telling me that they are having a hard time finding deals. My message to them is consistent. The smart money is being patient. The smart money didn’t win the bidding war for this distressed property on Madison Avenue, even with a deep discount to the local market. These distressed properties are not appearing because of the freeze that governments have tried to impose on the markets. The industry has used the term shadow inventory in the past to describe properties that have not appeared on the market. But we don’t quite have a shadow inventory yet. I’m going to define a new term which I’m calling the invisible inventory. That invisible inventory will first transition to the shadow inventory before it transitions to the the real market inventory of distressed properties. So be patient folks, the wave is coming. We are seeing just the tip of the iceberg.

The day of reckoning for residential tenants is coming and it’s just around the corner. Governments all over are left scrambling trying to handle the expiration of the moratorium on evictions. But just as the day of reckoning is looming for tenants who are behind on their rent, some politicians are working behind the scenes to protect tenants who have been impacted by the pandemic. Still others are using the pandemic as a pretext to over-reach and actively penalize landlords. In my home city of Ottawa Canada one City Councilor put a motion in front of city council’s  Community and Protective Services Committee. Motions recommended by the committee eventually go in front of city council for a vote. The wording of the motion called on the province to ban all residential rental evictions, except in case of threats to public safety, until the COVID-19 pandemic is effectively contained. At the end of a long meeting, the committee carried that motion. If this motion were in fact to be approved by city council, this means: · If there is an agreement to terminate the lease, the tenant doesn’t actually need to leave and can stay as long as they like with no fear of eviction. · If a tenant sends the landlord a notice to terminate the lease, they don’t actually need to leave when they said they were going to, and they would have no fear of eviction. · If a tenant exercises bad behaviour and is disturbing the peace, they can’t be evicted. · If a tenant simply refuses to pay rent with no demonstrable financial hardship, they can’t be evicted. Since none of those reasons have anything to do with the pandemic and the economic impact resulting from the pandemic, why would government have the right to eliminate one of the few remedies at a landlords disposal? One of the lawyers who represents the landlord community called that city councilor and convinced them to change the wording of the motion to make it better balanced for landlords. The original wording was so broad and encompassing that it went far beyond protecting tenants from the pandemic. But here’s where the story took a turn. The city councilor agreed that the suggested wording changes were an improvement. But then later in the day changed their mind and reversed their support for the revised wording changes. Here is where I started to lose faith in at least one person who was elected to a position of power to make decisions. The argument is that housing is a basic human right. In a city where the winter temperatures drop to -40 degrees, I agree with that notion completely. Housing is a basic human right. But there is a difference between saying housing is a human right, and specifically targeting business owners to guarantee that human right. Food is a human right too. I don’t see government stepping in and telling the grocery store owner that they have to allow anyone who comes into the store to steal as much as they like with no consequence. I don’t see governments telling the car manufacturers that basic transportation is essential to life in our society and therefore they must let anyone who walks in and needs a car to help themselves to a car they like on the lot. I don’t see governments telling the lawyers that since justice is a human right, lawyers must allow their clients not to pay their legal bills. This distorted motion is going to be voted at City Council within the next day. I have no idea which way the vote is going to go.  I hope that the remainder of city council will know how dangerous this motion is and defeat it. So why am I telling you this? I can guarantee that similar discussions are underway at virtually every city council and town council in the world. It’s your job to get in contact with your local politicians and educate them on the alternative solutions

On today’s show we’re talking about hunting versus farming. Hunters go out in the morning, they catch their prey. They cook a big meal and they eat for a day, maybe longer. But the work of producing the food magically happened somewhere else. The same is true for fishermen. They catch their prey, but they don’t nurture it or do any of the hard work over a longer period of time to actually produce the food. They simply go out and catch it. They might lure it in and trap it. They might happen across it and tackle it to the ground. Hunters are transactional. They are opportunists. Farmers on the other hand work in harmony with nature. They know that you can’t grow anything anywhere. There are certain locations that are better suited to one type of crop versus another. You’re not going to grow rice in the rain forest. You’re not going to get Maple Syrup in the desert. If you want to make great tomatoes, you’re looking for a unique combination of soil composition, rainfall, sunshine.  There is a season for planting. There is a season for weeding. There is a season for harvesting. You wouldn’t dream of planting seeds as the weather gets colder in the fall. You wouldn’t dream of harvesting in May in the Northern hemisphere. There is a season for everything. By now, you’re probably wondering what this has to do with real estate investing. There are hunters and farmers in real estate investing as well. You know the hunters. They’re the ones who have the business cards that say “We Buy Houses”. They’re looking for deals below market value. They’re going to flip the contract to another buyer for an assignment fee. They’re very transactional. They eat for a day, or maybe a week. But then they have to go do it all over again. There’s nothing wrong with being a hunter. Just understand that hunting is an earned income. It requires you to get up off the sofa and go out into the wild and hunt your prey. If you don’t hunt, you don’t eat. There are farmers in real estate investing as well. They might be involved in new construction. Farmers are long term landlords.  Farmers focus on value creation over a long period of time. Farmers invest in properties years before they expect to harvest. Well, real estate investing has seasons as well. There are seasons for planting, and there are seasons for harvesting. That doesn’t mean that you need to sit idle when the seasons are changing. Right now I believe we are in a season for harvesting. You could also be looking past the current season and be planting for harvest in 5-7 years from now. But if your goal is to work the earth like crazy, slam the seeds into the ground, water every hour and hope to harvest in a few weeks, you’re probably going to be disappointed. Farming doesn’t work that way. We know that better opportunities are just around the corner. Waiting can be incredibly frustrating. It seems like inaction. Waiting feels like analysis paralysis. You would never tell a farmer to get off their butt and get out into the field and start planting new seeds in the autumn. It doesn’t make any sense. The seasons are clear. When I speak with established investors and developers who understand the economic cycle, they’re very clear on the seasons as well. You can start a project that will complete in another two years or even five years. But a project that is projected to complete in the next 6 months is incredibly risky. You stand the chance of being caught out of step with the seasons. Even hunters need to pay attention to the seasons. There is a hunting season. You don’t hunt for deer in March. There is a season for hunting as well. You can still undertake projects in today’s environment. You just need to be mindful of being in harmony with the season.

Video conference fatigue has definitely set in. I found myself NOT participating in three conferences this past week that I really wanted to attend.  I regularly attend the New Orleans Investment Conference each year in New Orleans. It’s the longest running investment conference in the US. The conference organizer Brien Lundin is a friend. Spending time with the attendees is one the highlights of the year. Conferences always have two components: The speakers and the attendees. I love spending time with the attendees. I find that conferences compress timeframes when it comes to relationship building. I love spending time with Chris Martenson and Adam Taggart of Peak Prosperity. They had their conference this past weekend. The Podcast Movement conference is underway and there are some amazing speakers. The content looks fantastic. Instead I attended two masterminds this past week. One is with Kyle Wilson. Kyle used to be business partners with Jim Rohn before he died. Kyle has attracted some of the most amazing people into the mastermind. Kyle has been a past guest on the show on Nov 4 of 2018.  I find the time we spend together to be uplifting, grounding, nourishing of the mind and spirit. There were so many profound things said during the mastermind. It got me thinking about folks who regularly post quotes on social media. Quotes are fun and thought provoking. But they rarely have lasting impact by themselves. I found that quotes DO have lasting impact when you know the author of the quote, but most importantly the context in which the statement was made. This week, during the two day mastermind there were so many quotable moments. I’m going to share three quotes with you from this past weekend. But all of them have a context. So here we go. The quote first is by Robert Helms. We were talking about the uncertainty that is present in everyday projects. This could be a project delay introduced by the city. It could be the result of a regulation change, a hurricane, or perhaps a pandemic. The reason doesn’t actually matter. These surprises are like a bend in the road. Robert said “A bend in the road is not the end of the road, unless you fail to make the turn.” So here we are in 2020, with a bend in the road. So the question for you is, “Are you prepared to make the turn?” Later in the session we were talking with Dr. Tom Burns. Tom Burns was a guest on the show about a week ago and he has a new book “Why Doctors Don’t Get Rich” launching on October 27. We were talking about how Tom always seems so calm and never in a hurry. Tom is a real estate developer and also an orthopaedic surgeon. I asked Tom how he doesn’t allow the pressure of deadlines to affect his day to day life. He said very simply. “My Time is not defined by other people’s priorities.” He went on to explain that he rarely feels time conflicts. When his children were young, he would reschedule patient surgeries if it was his day to read stories to the first grade class. He would forego income, and inconvenience his patients because he was clear on what his priorities were. The third quote is from Mitzi Perdue. Mitzi was married to Frank Perdue from the Perdue Chicken fame. When her husband was in his early 80’s Mitzi and her husband Frank worked together on preparing an ethical will. Now an ethical will is all about legacy. Frank was a wealthy man and no doubt he left a sizeable inheritance to his children.  But there’s a difference between inheritance and legacy. Inheritance is what you leave your children, whereas legacy is what you leave within your children. So the ethical will was all about legacy. I’m going to share one of the items from his ethical will. If you want to be happy, think about what you can do for others. If you want to be miserable, think about what is owed to you.

Our guest today is a repeat guest. George Ross is 92 years of age and has seen more in his business life than virtually anyone I know. On today's show we're talking about how to communicate any semblance of certainty to investors.

Ted Thomas is a nationwide expert on tax lien certificates and tax deeds. To connect with Ted or to learn more you can find him at tedthomas.com

On today’s show we’re trying to make sense of some of the latest statistics that are being reported in terms of national home sales. A new report yesterday in the Wall Street Journal reported that home sales rose to a new 14-year high in September, bolstered by robust demand and a shortage of homes for sale that is making the housing market one of the brightest spots for the U.S. economy. Existing-home sales are up 9.4% in September from August to a seasonally adjusted annual rate of 6.54 million, the highest rate since May 2006, according to the National Association of Realtors. The September sales represent a 20.9% increase from a year earlier. The numbers of August sales were similarly glowing. The August existing home sales were up 9.1% compared with 2019. All of this points to a booming housing market, one of the brightest spots in the economy. But here’s the problem. Depending on how you slice and dice the data you can construct a different narrative, a different explanation of what it happening. We all know that we went through an artificial downturn in housing sales in the Spring. This was the result of widespread shutdowns of the economy and the shelter in place orders that were in effect for close to 90 days across major parts of the nation. If you compare sales in the first 9 months of 2019, to the first 9 months of 2020, we have not yet matched the sales volume of 2020. In fact, in the year to date we have only sold 97.9% as many houses compared with 2019, a reduction of 2.1% compared with this time last year. Are we having a booming market? Are we just catching up from the shutdown in the spring? The number of home sales in 2018 were higher, 2017 were higher, 2016 were higher. You would have to go back to 2015 to find a rate of home sales that are on par with the year to date numbers for 2020. Yes, we’ve had a strong recovery in home sales. But comparing the September 2020 statistics to the same period last year makes no sense. It’s not a reasonable comparison. It’s a little bit like putting a dam in a river that flows continuously. You then open the dam and say “Wow look at how much water there is.” No kidding Sherlock. It may be amazing how much water is flowing, but not surprising. The pundits that are used to reporting statistics a certain way, are continuing to do so. Why? Because that’s how they’ve always done it. There’s nothing normal about 2020 in any way. So if you’re going to quote statistics, you need to look at the big picture. I’m tired of seeing the weekly unemployment numbers being reported by the bureau of labor and statistics. Fewer people filed for unemployment this week, so they conclude the economy is on the mend. These types of reports are ridiculous to be quite frank. It’s not just the National Association of Realtors who do this. Virtually every real estate board is quoting statistics the same way. Why? Because that’s how they’ve always done it. Even in my home city of Ottawa Canada, the same thing is happening. Last week, the September numbers were published for my home town. The numbers are amazing. Sales volumes are up 35.1% compared with the same month in 2019. Hurray. But if you zoom out and look at the big picture, sales volume is down 4.9% compared with the comparable first 9 months of 2019. Look folks, I have no problem with taking a look at statistics. They can be very helpful in determining what is happening in the market. But when statistics are published, I urge you to apply your own thinking and analysis to what the numbers mean. Don’t get me wrong, I don’t think anyone is out to mislead you about what is happening in the market. Don’t just accept a journalists interpretation as the truth because it may not be the entire picture.

On today’s show we’re talking about the role social media may be playing in our world becoming increasingly polarized. The extreme viewpoints that are making headlines in the US have been shocking to say the least. I never thought we would see the day when armed citizens were lined up outside polling stations. This is the United States of America, not some third world banana republic. Some think that extreme views are strictly a US phenomenon. But I can tell you that the same trends are happening in Canada and the UK. These TV shows are being carved up into segments anywhere from 2 minutes in length to about 15 minutes in length. That’s about the attention span of the person scrolling through social media feeds. So now let’s talk about what you and I get to see on social media. The social media algorithms are designed to maximize your time on the platform. Their goal is to hang on to your eyeballs for as long as possible. The longer you are staring at the screen, the more ads can be presented to you, and the more ad revenue the social media platform will get. When you’re looking at social media, the content being presented to you is not the product. This is a backwards economic model. It’s modeled after the free TV model. You see when you go to the department store and buy a toaster for $30, the toaster is the product. You are the customer and there is an exchange of value, money for product. That’s how commerce works. But when you attend a free seminar, or watch a TV show with advertising, or spend time on social media with advertising, YOU are the product. That’s right, you are the product. The customer is the advertiser, and your attention span is the product that is for sale. So the algorithms are designed to maximize your attention span. If your interest is in model trains, the algorithms will show you more model trains. If your interest is in gardening, you will eventually see more gardening posts. That feeds what is called confirmation bias. If you believe the earth is flat, then you’re going to see more posts that confirm the earth is flat. You won’t tend to see those posts that confirm the earth is round. In your world, the earth is flat. Social media algorithms have tried to become socially responsible in the presentation of news content in particular. So lately, you’ve been presented with some of the opposing viewpoints, in an effort to try and balance things out. But there’s a problem. Rather than opening your mind to the opposing point of view, many of these differing viewpoints are some of the most extreme. When you see the extreme viewpoint, it generally isn’t convincing. It has the effect of being repulsive. When the opposing opinion is repulsive, it has the effect of hardening the original viewpoint even further. Finally, we are seeing a lot of controversy surrounding both Facebook and Twitter for having censored content. Many of these decisions are being made by people, and not a software algorithm. The question of political bias cannot be swept under the rug. This further erodes trust in what is being published, which creates the pretext for rejecting what is being served up on social media as fake news. That only serves to harden positions even more. I don’t have the answers here. I come from the tech world and I can imagine being in the software design meetings where algorithms are discussed. Social media is not to blame per se. I feel like we’re witnessing a train wreck on a social level in slow motion. Perhaps the only antidote is for each of us to seek out the opposing view point, but the moderate centrist viewpoint, not the extremes.

The hospitality industry has been decimated by the Covid-19 pandemic perhaps more than any other industry. This spans everything from the major hotel brands to the individually owned short term vacation rentals. There is no doubt that we are entering a second wave of infection across many countries. We’re all tired of this and want it to be over and for life to return to normal. On today’s show we’re talking about a major change at AirBnB. They have introduced a new cleaning protocol that all hosts must agree to implement and certify in order to retain their listing as an active host. All hosts are required to agree to these COVID-19 safety practices by November 20, 2020. Hosts who don’t complete this requirement before the deadline may be unable to accept new reservations. The AirBnB cleaning process is a 5 step process. Airbnb developed their cleaning protocol based on CDC guidance and in consultation with experts in the fields of sanitization and medicine, such as Ecolab and Dr. Vivek Murthy, former US Surgeon General. They have two handbooks, one for regular AirBnB listings. This one is 36 pages in length and a second one for hotels that is 41 pages in length. The difference between the two handbooks has mostly to do with the common areas and the hotel check-in process. Where possible, hotels should implement contactless checkin, using electronic lock codes with a smartphone, checkin using an app, and tap for payments. Make sure that guests know which services are available such as room service, the gym or the pool which might be closed for protection of guests. There are helpful videos, and detailed checklists for hosts to use every step of the way. I read through both handbooks and I have to tell you, I was pretty impressed by the thoroughness of the protocols they have recommended. I particularly like the checklists. One of the biggest mistakes that people make is sanitizing before cleaning. That does nothing to stop the spread of viruses and bacteria. A surface needs to be clean first before it can be sanitized. This is a basic principle. I know this from my days when I used to brew beer and make wine. If the bottles were not sanitized, you would end up with a bad bottle of beer or a bad bottle of wine. But before the bottle could be sanitized, it needed to be 100% clean. There could be no mold residue in the bottle, no bits of food or organic matter. Using a sanitizer like a chlorine or a sulphate solution would not do its job unless the bottle was 100% clean first. These early lab experiments gave me an appreciation for what clean really means. If I cut corners, I would have a bad bottle. The microbes didn’t care if I was in a rush. You see there are just some processes that are pretty unforgiving when it comes to contamination. If you’ve ever had a bad bottle of wine, it’s because something wasn’t clean before the wine got into the bottle, or the cork didn’t seal the bottle and something got into the bottle. They don’t care what brand of wine, if it’s a $10 bottle or a $1,000 bottle. They don’t care if it’s a French wine or a California wine. Here we are in the middle of a pandemic and those microbes don’t care either. We are in a war on clean, at least for the foreseeable future. The choice of November 20 as the cutoff date for AirBnB hosts to comply with the new protocol is not an accident in my opinion. November is traditionally a slow month in short term rentals, especially in the vacation short term rentals. But we’re coming up on the busy US Thanksgiving weekend when people travel to visit family. Poorly cleaned short term rentals could turn Thanksgiving into the super spreader holiday of the year.

Hi Victor- Your podcast is fantastic - a perfect balance of brevity, and information without any noise or fluff. My question is: I have a multifamily renovation in progress which I want to refinance upon completion with 10 year fixed rate debt. As you mentioned, interest rates will likely increase post-election. Since my future rate will be based on the 10 year treasury, what investment could I make today that would earn money if rates when up, to off-set my future increased interest costs? Almost like interest rate insurance... Thanks again for everything you do for the RE community. Tom, This is a great question. To be clear, my goal in answering the question is not to offer advice. That’s the job of a licensed commercial mortgage broker professional in your local market. I’m merely offering my experience and observations on what I’ve found to be effective in the past. I don’t know the specifics of your project, but I’ve secured financing for new construction on numerous occasions. Whether we are financing for value added projects or new construction projects, they can be treated very similarly.  For example, let’s imagine you bought a building for $1M and you brought $300k in cash and borrowed $700k. Your debt would be at a 70% loan to value ratio. You might spend a further $400,000 in improvements. But after improvements, your building might be worth, say $2M in this example. You might be looking to refinance the project at the same 70% loan to value which would give you loan proceeds of $1.4M. At that point, you can repay the initial loan of $700k, and the equity of $700k and replace all of that with a new loan of $1.4M maintaining a 30% equity ratio with no cash tied up. That would be your classic infinite return that most investors are after. The bank is also likely to offer a loan with two thresholds. It might be the lower of 80% loan to cost or 70% loan to value. If we go back to our example of the $1M property with $400k of improvements. In this instance if the total cost is $1.4M, they would only lend $1.12M or 80% of the total investment. The loan would be approved based on today’s interest rates but would be divided into two phases. There would be a construction phase that might be 12-18 months, followed by a permanent financing phase. Here is the trick that I’ve had some success with. Rather than refinance the loan, you can keep the first position loan in place. The loan would be approved based on today’s interest rates but would be divided into two phases. There would be a construction phase of 12-18 months, followed by permanent financing. On hitting your leasing threshold, the loan will convert to the permanent financing and your payment will be the principal and interest payment over the full amortization period. So far so good. But you’ve got a problem. You have a good loan at a good interest rate and for a decent term. If you refinance early, you're facing a large pre-payment penalty. Instead, go back to the same bank after one year of stabilized performance and ask them to increase the loan amount to match the 70% loan to value. But rather than a refinance, the bank is going to record a second mortgage behind their first mortgage. It’s the same lender, so the lender is not really in a subordinate position and therefore no less secure than the senior loan. If all goes well, the property will value at the $2M that you think it will, and the bank will write the loan on the difference between $1.4M and the original loan of $1.12M. That new loan of $280k when added to the first loan will get you to a full cash out refinance without having to refinance. You lock in your interest rate on the first $1.12M, and you accept the risk that you might pay a slightly higher interest rate on the $280k second. But the overall ratio is still only 70% loan to value, so it should still be an aggressive interest rate.

On today’s show we’re taking a look at what’s happened in secondary and post-secondary education. Late last week The National Student Clearinghouse Research Center published data on the enrolment levels at universities and community colleges across United States. In most economic downturns there is a loss of employment and out of work people use the opportunity to retrain. In past downturns, university enrolments have been seen as recession resistant. Enrolments have gone up as out of work mature students decide to focus their efforts on an area of the economy that has higher demand than their previous job. This year has been different. Undergraduate university enrolment is down 4% compared with the same time last year. First time enrolments are down 16.1%. This number is significant because it will trickle through the system for the next four years. Graduate student enrolments grew by 2.7% this year. So perhaps students who might have entered the work force elected to take their education one step further. Graduate students usually make up about 15% of the total university and so the positive contribution of these new graduate students to the overall student population is estimated at 0.4%. Enrolment of international students is down by 7.5%. This makes sense with the global travel restrictions that come with the pandemic. But the percentages mask the economic impact. Tuition levels for international students are traditionally higher than those for local students. So the economic impact is disproportionately high. The profit margin at most universities has historically been estimated to be in the 10% range. In the wake of the 2008 financial crisis, these grew to about 15%. At the end of 2019, profit margins across the industry were at an alarming 3.5%. Today average profits margins are averaging below 4.5%. So if enrolment is down in these bricks and mortar universities that have high fixed costs, many of them will be falling below profitable levels. Universities are real estate anchors in most communities. Neighborhoods and commercial main streets are built around them. The schools at greatest risk are the public schools and the private non-profit schools. But virtually no school is immune. The story of James Madison University, in Virginia is one of many possible case studies. They made the decision to extend spring break and graduation. By the middle of March, they had transitioned all of their classes online. They might be considered one of the most agile schools during this pandemic. They issued refunds for housing, food and parking and no refunds for tuition. The school lost $30M dollars in just 9 weeks. According to credit rating agency Moody’s, 30% of colleges were running deficits before coronavirus. Not only that, 15% of public universities had less than 90 days of cash on hand! This is despite the fact that college tuitions for a four year degree have multiplied by 1600% over the past 40 years. Universities used to rely upon the notion of scarcity. You could only have so many students in a class. For example, the law school at Yale has about 200 students. The classroom was only so big. That scarcity meant that they had to limit enrolment. But now, with the global reach of the internet, there is no real limitation on the number of students that can be reached. The incremental cost of adding a student in a virtual environment is small. There is a prediction that as the internet democratizes knowledge, about 25-30% of universities will close permanently in the next few years. As you are evaluating communities to invest it, you’re probably still assuming that the university is an anchor tenant in the community and more importantly that it will endure past the pandemic. I want you to examine the financial viability of the local college or university as part of your due diligence in any local community in which you invest.

Dr. Tom Burns is founder and partner in Presario Ventures, an Austin Texas based apartment development company specializing in Class-A new construction projects. In the mornings, he is a practicing orthopaedic surgeon. Tom just wrote a book "Why Doctors Don't Get Rich" which illuminates the path for other doctors, dentists, lawyers to replace and displace their professional income so that they can practice their profession for the love of it, and not for the money. This is such an inspirational story. You will hear Tom's humility in this interview.  The book launches on October 27 and you can be one of the first to get a copy at richdoctor.com. 

John Cooke specializes in disaster restoration and hazardous materials situations. His team of over 400 staff get involved in all aspects of property maintenance from commercial cleaning to assisting families during the depth of insurance claims. On today's show John and I are discussing how to clean in a Covid-19 environment. What are some of the right solutions and how to apply them. This was a very insightful conversation and I learned far more than I was expecting to.  You can reach out to John at [email protected] or directly by phone at 613-244-1997 where he can connect you with trained specialists in virtually any market in North America.  

Today’s show is another AMA episode.  Today’s question comes from Saadya in NYC. “I’m looking to conduct my first commercial deal. What is the most important thing to look for in that first project?” Well Saadya, this is a great question. When it comes to having a successful project, there are three main factors to consider. 1) The submarket 2) The people involved 3) The deal specifics You’re based in Brooklyn. The NY area is highly transient. It’s such an expensive market that people tend not to stay for long unless they really have to. It takes a strong consistent income stream to justify the cost of living. I know of so many people that live in NYC for just a short period of time. Real Estate is hyper local. I would recommend you choose a location that is experiencing population growth and job growth behind it. I would stay away from areas that are losing population. I like Philadelphia which is not too far from where you’re located. I would stay away from the expensive bedroom communities North of NY and in Connecticut. The taxes are too high, despite the fact that many people from NYC have moved to those communities this year during the pandemic. I don’t believe the growth in those communities will be sustained. I would choose a community that had strong growth prior to the pandemic, and then that growth continued or accelerated during the pandemic. 2) I’m fond of saying that a good deal badly managed is no deal. So the key is to make sure that you recruit the best quality people into your team. There are a shocking number of poor quality people in this industry, and a few outright crooks. 3) The deal itself. This is where most rookie investors start. They make it all about the deal. Let’s be clear, on your first few deals you will make some mistakes. It’s super important that those first few deals have next to no downside risk and lots of upside. You will need that to act as a cushion against the inevitable mistakes that will happen. So you’re looking for a deal that is off market. Even in today’s environment we have a lot of money chasing deals. It’s still an auction environment. You don’t want to be bidding against other more experienced investors who might be willing to pay more. You almost always end up paying too much in that environment. You want to find those special cases where there is a problem to be solved. It might be an estate sale where the property is physically distressed or financially distressed in a good area with strong fundamentals. It might involve rescuing a property that is in pre-foreclosure. You would have the opportunity to be solving a problem for a family that is in a difficult spot.  The moratorium on evictions and foreclosures is masking the depth of distress that is just beneath the surface. These business and real estate failures will create a re-pricing of assets in the near future. I can’t tell you exactly when that will happen. It could be in the next 90 days if government continues to gridlock on any decision making. It might be longer, perhaps 6-9 months away. But the tidal wave of distress is coming. It might involve a property that must be sold because of a divorce, or a discord between family members. That represents an opportunity to step in a save a family member from financial ruin. A friend of mine calls that doing good, and doing well at the same time.

This year is creating a number of precedent setting situations. The Senior Housing industry is under extreme financial pressure these days. Prior to the pandemic they were experiencing dropping occupancy as more and more new supply entered the market, faster than demographics could support increased demand. Some markets have experienced occupancies in the 80’s and 70’s. The most over-built market in the US right now is San Antonio Texas where occupancies were averaging in the low 80’. Then the covid-19 pandemic hit. The combination of a tight labor pool and falling occupancy are the main pressures senior housing operators currently face, and those pressures are not going away anytime soon. Staff who are concerned about workplace safety and contracting Covid-19 are demanding higher pay. The increase in expenses, combined with falling occupancy and price concessions has hampered providers’ ability to raise rates. That’s resulting in NOI erosion and margin pressure. On today’s show we’re talking about the impact of the moratorium on evictions on senior housing. Senior housing is partly a residential situation, but it’s primarily a service business. To be clear, we’re talking about the private pay, premium end of the market. In those properties, the real estate component represents maybe 20% of the cost of delivering the service in most cases. Labor typically accounts for about 60% of operating expenses, and providers are facing major workforce pressures at the moment. Of course the pandemic itself has increased operating costs for assisted living and skilled nursing operators as additional protocols have come into play. If a resident stops paying, the question is “What is an operator to do?” Does the operator put a claim on the estate of the senior citizen? Do they seek a court order to garnish social security payments? Do they seek a court order for capital encroachment if the senior has any savings? Do they evict? The image of an eviction of an elderly person with multiple infirmities is horrifying to say the least. It may be too early to determine what the law means for residents of senior housing communities across California and similar rules across the nation, but those in private-pay senior housing should be studying its details. We have a situation where there are millions of people unemployed. It’s often the adult children of seniors in assisted living who pay the bill. The seniors themselves are already on fixed incomes. Overall, the California law gives tenants broad protections from evictions, The new law provides eviction protections through January 31, 2025, but in order to be protected you must (1) return the declaration of COVID-19-related financial distress hardship declaration within 15 days after receiving any eviction notice, and (2) pay 25 percent of each month you could not pay from September 1, 2020 through January 31, 2021 by January 31, 2021. This raises a number of legal questions regarding how services are delivered in senior housing. Should there be a residential lease for the accommodation portion, followed by a separate contract for health care services? What is classified as rent perhaps should be brought into alignment with the actual cost allocation between rent and services. Considering that the average stay in assisted living could be in the range of 24-36 months, the idea that residents could choose not to pay their fees for 17 months and then only be required to pay 25% in order to extend the eviction moratorium for another 4 years. It would then require the senior living operator to sue the estate in order to get paid.

We’ve been hearing for months how interest rates are going down and how the Federal Reserve is going to maintain rates at near zero levels until well into 2022. That all sounds like good news for real estate investors who are looking to borrow funds at the lowest possible interest rates. As we’re talked about before, the interest rate charged by the banks is often tied to one of two benchmark rates. Shorter term loans and variable rate loans are usually tied to a short term benchmark like LIBOR which is the London Interbank Overnight Rate. Permanent financing is usually tied to the yield on the 10 year US Treasury Bill. When the Congress enacted legislation back in March to protect the US economy that involved a massive amount of printing of money. The total in new spending was $2.3T dollars. Most of that money was issued in the form of Treasury Notes having a short term of one year or less. As those notes become due, they are being repriced as longer term debt which carries with it a less frequent need for renewal. Over the past 80 days, the yield on the 10 year treasury has gone from 0.52% to 0.79%. That increase in almost 1/3 of a percentage point translates into interest rates for permanent financing that are 1/3 of a percentage point higher. There are three scenarios to consider. 1) A Republican sweep of the White House and both chambers of government 2) A split of the chambers of Government. It may not actually matter as much who wins the White House. 3) A Democratic sweep of the White House and both chambers of government. Let’s look at all three of these scenarios. According to the polls, a Trump victory in the White House is looking less likely. It’s highly unlikely that Republicans would win all three. Whether Joe Biden or Donald Trump is the next President, both will continue printing money. The big question is how much. The second scenario with a split between the House and the Senate will result in legislative gridlock. We’ve seen that in the past 7 months with no new money being pledged to recover from the pandemic. The level of acrimony between the parties has become the new normal in government. The third case, involving a Democratic sweep of the White House and both chambers  of government has the potential to unleash an unprecedented level of spending. It’s that third scenario that has the markets worried. We are already seeing signs of inflation even though it’s being downplayed by politicians. Inflation is the hidden tax that most people can’t isolate. When a can of tomatoes at the grocery store goes up by $0.50 most people blame the grocery store for the price increase. They rarely put the blame on the Secretary of the Treasury, or the Chairman of the Federal Reserve, or their representative in Congress. When those trillions of dollars get printed, the debt goes somewhere. So far, the US has been able to export the debt over the past 30 years. China’s central bank and Saudi Arabia have been willing buyers of all that debt. But the willingness of those countries to fund US deficits seems to be evaporating. For now, we’re in the middle of a global pandemic. All economies are suffering. When asked the question about which currency to buy, there doesn’t seem to be a stronger currency emerging. The Euro is in bad shape, the Yen is hopelessly over-leveraged, and international investors are not about to put their trust in the Chinese Central government. As we get closer to the election, and even after the election whoever wins we can expect the yield for 10 year Treasuries to go up. You have a small window in which to lock in historically low interest rates. Even if the Fed keeps rates low, I believe Treasury yields will go up, and therefore interest rates for investors.

Commercial brokerage house CBRE conducted a survey of CBRE investment and valuation professionals in the last two weeks of August. One of the top items that I saw in that survey was the word risk. As we’ve talked about several time recently, risk has become top of mind for most investors this year. There are a number of sentiments in the survey that are worth noting. We’ll start by talking about investment market conditions. Survey respondents report that a disconnect between buyer and seller expectations has emerged, with more than 60% of buyers looking for discounts from pre-pandemic prices versus 9% of sellers willing to offer them. One-third of survey respondents were underwriting with the same rental income assumptions as in Q1, with the remaining two-thirds adopting more conservative assumptions. Half of those with unchanged underwriting assumptions were in the industrial sector. CBRE professionals indicate that investors are placing greater importance on certain investment criteria than before the pandemic, particularly tenant credit quality (cited by 85% of respondents), length of remaining lease term (64%) and building occupancy (64%). Roughly two-thirds of survey respondents believe that investment activity will recover to pre-pandemic levels within one year. But that sentiment varies widely by asset class. Let’s dig into the details. When asked how it will take for market conditions to return to pre-pandemic levels, the answer varied widely by asset class. In the office asset class, 72% of respondents said it would take more than 12 months for offices in the central business districts. For offices in suburban settings, 48% said it would be more than one year, versus 52% who said it would take less than a year. In the retail sector, 58% of respondents said it would take more than one year for market conditions to recover to pre-pandemic levels. In multi-family 84% said it would take under a year and 45% said it would take less than 6 months. Industrial seems to have hardly skipped a beat during the pandemic. When asked about the factors influencing investment decisions, respondents said that three new factors loom large when looking at new investments. 1) Building occupancy 2) Length of time remaining on leases 3) Credit worthiness of the tenants These factors seem much more important than in the past. There is no question that the business outlook is considerably more negative, especially in office and retail.

On today’s show we’re talking about chaos. This year has been anything but orderly. The handling of the pandemic by governments all over the world has been met with raging opinions across the board. There are those who believe governments are not doing enough to keep us safe. There are others who believe the entire response to the pandemic is overblown. In order to effect the best decisions the right things need to happen, and they need to happen the right way. You will never please everyone. But if the rules appear arbitrary and inconsistent, that very fact will reduce faith in the rules and reduce compliance with the rules. The level of frustration in the population stems from the seeming contradictions in public policy. It’s difficult to reconcile those contradictions. There was the time when public officials told the population that masks were a bad idea. That guidance made no sense. It was not honest, and anyone with a shred of intelligence knew it. Now masks are mandatory in many places, but not all places. A full scale lock down of the population was seen by many as being heavy-handed. Taking a walk in the forest, distanced from others was not putting anyone at risk of either spreading nor contracting Covid-19. But for a time, it was against regulations in many states, towns and nations. It’s pretty clear that we are entering a second wave outbreak of Covid-19. But our governments are acting in an inconsistent way. My own provincial government closed down restaurants, gyms, and strip clubs this weekend for at least the next month. But they kept schools and universities open. This defies logic. In response to the restaurant closure, I know of several people who chose to go out for dinner in a restaurant for one last “hurrah” before the restaurant closures. If it’s not safe to go in a restaurant on Saturday, then it’s probably not safe of Friday night either. If smart educated people are defying logic, then they’re not believing what government is saying to them. We’ve been seeing that the majority of new cases in younger people. Yet, we’re doing nothing to reduce social contact in younger people. In our school system student in 4thgrade need to wear masks. Students in 3rd grade or younger need to wear masks. I know of one teacher who teaches a split class where half the students are in third grade and half and in fourth grade. Half the students are wearing masks and the other half are not. In Europe, there is a patchwork of regulations that are difficult to understand, and again seem to defy logic. The loosening of restrictions this summer helped Europe’s economy and partly saved the tourism season that is critical in countries such as Italy and Spain. But it also contributed to a sizable jump in the number of infections. Countries such as the U.K., France and Spain are now logging confirmed infections close to or above last spring’s numbers. Restricting arrivals from outside Europe isn’t an effective containment method when you have a rampant pandemic like we are seeing right now in most of Europe. Travel restrictions from abroad work in places like New Zealand and Australia where the case counts are extremely low and they have effectively kept Covid-19 out of the country. But when you have a full-on pandemic and you can travel freely within the EU, the logic makes no sense. If you’re confused by now, you’re probably getting the idea that governments are having a hard time getting their arms around making decisions. I follow Dr. Chris Martenson and Adam Taggart at Peak Prosperity. They have a very solid science based video series on Youtube that is published regularly with the latest on what has been learned. I also follow the work of Dr. John Campbell in England who has done a great job of curating the scientific and medical studies on the pandemic.

Phillip Vincent is the principal at MomsHouse.com where they specialize in helping families transition the elderly from their single family home to assisted living. During those moments, the families are experiencing a complex web of problems and Phillip's focus is on solving their problems. You can learn more and connect with Phillip at momshouse.com.

Valerie Malone is the principal at Quill Decor where she specializes in interior design for short term rental properties. Her clients are all across North America, even though she is based in Cambridge in the UK. On today's show we're talking about the design  elements that make for a winning short term rental property. You can connect with Valerie at quilldecor.com.  

One of the consequences of 2020 is that taxes are going to change in the coming year. I’m going on record as predicting that regardless who wins the Federal election in November, taxes are going to change. I know that I’m not saying anything terribly earth shattering. I suspect you all expect that. Tom Wheelright is one of the most well known accountants on the conference circuit. He’s one of Robert Kiyosaki’s Rich Dad Advisors and I love the degree to which he explains the tax code. Some people think of the tax code as a way for governments to extract money from the population. There are two ways you can look at a tax rate. You can look at it in absolute terms as a percentage, or you can look at the rates relative to what they were last year. Did the rate go up or down and by how much? Often politicians tend to focus on revenue collection, but they ignore the side effect which can be difficult to predict. But Tom has a secondary definition which I find equally useful. The tax code can be seen as a series of incentives. In that secondary definition Tom makes it clear that you’re not taxed on how much money you earn. You’re taxed on how you receive that money. Structure matters more than dollars in this instance. If you receive money as employment income, versus interest income, versus active business income,  versus capital gains they all get different tax treatment. The most favorable tax treatment can be considered an incentive to adopt the most favorable structure. This is something that governments sometimes forget. All levels of government collect tax. Some tax consumption. Some tax property ownership. Some tax income. There are taxes everywhere. Most cities calculate the amount of property tax owing based on a tax rate which is multiplied against the assessed value of the property. The tax rate can vary by area depending on the type of property and the costs associated with the infrastructure in that area. For example, some areas with new schools or higher water costs may have a higher tax rate. Some rural areas that don’t have water supply or trash collection may have a lower tax rate. In my home city, the tax rate averages about 1.07%. The city of Vancouver which is one of the most desirable and beautiful cities in the world has a tax rate of 0.26%. Houston Texas has one of the higher tax rates in the country at an average of 2.09%. But Texas has one of the lowest state income tax rates. Illinois has a high state tax rate and the second highest property taxes in the country. California has relatively low property tax rates at 0.76%, placing them in the lowest third of state property taxes. But they have the highest state income tax rates. The state that created the largest incentive for people to leave was New Jersey. They have the 6th highest state income tax rate, and the highest property tax rate in the nation. When you look at Florida’s average property tax rate placing it 26th among states in the Union, combined with a zero personal state income tax rate, is it any wonder that you hear so many New York, and New Jersey accents in Florida? The incentive was for people to move to Florida. Think of Taxes as merely incentives, and make your decisions accordingly.

On today’s show we’re talking about the top 4 causes of erosion of our scarcest resource. Whether we’re talking personally or more broadly, the scarcest resource is time. Time wasters are the among the most tragic of outcomes. After all, that’s all we have is time. Time is the great equalizer. Many of those who have managed to amass wealth have learned to manage their time better than others. They use their wealth and their time together in concert to create leverage. They spend money to save time. They invest time and money together to multiply their business and life objectives. But there are things that happen in life that can derail focus and cause massive amounts of time to slip by. On today’s show we’re going to focus on the top three causes of time erosion. 1) Low Value Activities. There are so many activities that make up part of daily life. Some people spend time mowing their lawn. That’s minimum wage work. If your time is worth $10 or $15 an hour, then by all means you should mow your own lawn. But if you aspire to more, then you should delegate that work to others who can do it for less than your time is worth. I rarely go shopping these days. I try to order almost everything I can online. It might be for pickup at the grocery store. 2) Emotional Disruption When people get uncomfortable, they often seek distractions in order to manage their emotional state. Some people spend time on social media. Some turn to alcohol, or watching TV, computer gaming or any of a number of distractions. There is a massive difference between idle time wasting and regeneration. Regeneration is an important and vital activity. Time wasting has little regenerative quality to it. 3) Health A health issue can cause a massive disruption in one’s life. This could something as simple as a common cold which can sap you of energy to a more serious situation. My sister recently had a bout of appendicitis. I’m happy to say that the surgery and treatment she received post-op has been successful. She fully on the mend. That single event has taken her offline for a minimum of three weeks. The last health issue I had was back in high school when I too suffered with intestinal issues that caused me to miss about 3 weeks of school. Today here in 2020, even a mild symptom that matches the Covid-19 description is cause for self-isolating for a minimum of 14 days. If you test positive for SARS Cov 2 you’re going to be infectious for a period and could lose 4) Conflict Conflict can sap you of energy and focus. I know that whenever my wife and I have a disagreement, which doesn’t happen often, I have witnessed 3-4 hours just vanish into thin air. We’ve both got much better are coming back from those hardened positions and resolving conflict more quickly. But conflict comes in all shapes and sizes. If you’re party to a lawsuit, that process can drag for months or years. The amount of lost time and energy in dealing with a lawsuit can be astronomical. Right now, there is nothing more important for society than dealing with the Covid-19 pandemic and the impact to the health of people and the health of the economy. But the US is in the middle of an election cycle. The last time there was consensus and collaboration among lawmakers was in the early Spring when the Cares act was signed into law on March 27. The past six months have seen nothing new to help the economy. In fact, the White House reported today that they’re not even going to try and get consensus on helping the people until after the election. That’s another month wasted. In the meantime, the economy is suffering, people are losing their jobs, businesses that can’t make it in the current environment are closing permanently. The most important thing you can do with your time is manage your time, energy and health.

On today’s show we’re talking about the materials cycle. Construction costs are influenced by the cost of materials. These commodities vary due to short term supply and demand fluctuations. Last year, the industry was buzzing about the rising cost of steel due to the trade negotiations with China. A lot of the steel used in US construction is sourced in China these days and the tariffs on imports meant that Chinese steel would be more expensive. The price of US Steel went up to match the higher price of Chinese steel. It seems that every time a major hurricane makes landfall in the US, there is a spike in the price of lumber. These storms create extreme demand for construction materials, especially in the Southern States. The ripple effect is felt through-out North America. We saw this after Hurricane Harvey soaked Houston. We saw it when Hurricane Laura smashed through Southwest Louisiana last month. I have friends who have been grumbling that prices for plywood have tripled since earlier this year. I even saw 2x4 lumber priced at nearly $8 per stud last week. I’ve never seen lumber studs priced that high. I’m going to introduce you to the metric for lumber commodity futures. Lumber commodity prices are measured in USD per 1000 board feet. Over the past 25 years, these prices have fluctuated in a range between $200 per 1000 board feet to $400 per board feet. As recently as March of this year, prices were below $300. By 14th September of this year prices hit an all time high of $984 per 1000 board feet. Two days later, by the 16th of the month, prices had fallen nearly $380 to $600 per 1000 board feet. Lumber futures prices fell 3% just today in the time it took me to record this podcast episode. The question is twofold: 1) What is the right price for planning purposes if you have a new project that you’re undertaking? 2) How do you plan your project to take advantage of the most advantageous pricing. When prices spike, it’s because of a short-term supply demand imbalance. The choke point in the system are the lumber saw-mills. There is actually a surplus of trees. The past three decades saw more acreage planted than at any time in history. Many of these investments were made by those seeking a recession resistant investment. Trees grow by about 15% per year, regardless what the economy is doing. As many sawmills sought greater efficiency and lower cost over the past decade, many smaller sawmills closed down. The result was a significant reduction in sawmill capacity across the industry. That sawmill capacity was better tuned to the average demand and resulted in better profit margins for the sawmill companies. This reduction in capacity also exposed the industry to greater price volatility for finished products. That’s exactly what we’re seeing right now. If you’re a developer, rehabber or builder who relies upon price stability in order to make your margins, how do you plan your projects? This comes down to an exercise in risk mitigation. If you know you’re going to use lumber in the next year, and your cost of borrowing funds is, say, 5%. You can store lumber for up to a year for a very low cost. If you can get your lumber at a price that meets your budget, you should consider locking in at that price, or pre-purchasing the materials and storing them yourself in order to guarantee that security of supply. If you failed to do that, then waiting a few weeks might be the smartest thing to do. In any industry that is sensitive to commodity prices, you need to pay close attention and manage your supply chain accordingly. Southwest Airlines was the most profitable airline in the US for nearly a decade simply because they had done a better job of securing long term fuel contracts at a price that made sense for them.

On today’s show we’re talking about how multiple layers of red tape can kill a project. Today’s show is a real-life story of a project where the additional layers of red tape literally killed an industrial project. This is a project that should have been able to be built by right. When we say by right, we mean that the zoning lists a number of permitted uses. If your intended use falls within the zoning rules, you don’t need to ask further permission, apart from a building permit. A building permit is required to make sure that any improvements to the land comply with the building code. The city provides a fairly clear list of what types of improvements require a building permit, and those that don’t. If you’re building a new structure such as a house, a garage, a warehouse. Any of those things would clearly require a building permit. In this case, the land in question has multiple zonings. Part of the land is zoned industrial and part of the land is zoned rural. On a portion of the rural land is an environmental protection overlay. Clearly, there are development restrictions in the environmentally protected zone. The industrial zone has a number of permitted uses which include: · animal hospital · auto dealer and service station · Cannabis Production Facility · kennel, · light industrial uses · parking lot · retail store · storage yard · truck transport terminal · warehouse Our initial plan for the property is to land bank the property and simply put a storage yard for equipment, boats, and RV’s. This seemed like the lowest possible investment that would allow the land to carry itself while waiting for potential future development opportunities. The city provide a sample list of items that don’t require a permit. They go onto say that if you’re not sure, to call the building department and to speak with a plans examiner. Projects that don’t require a permit include: New flooring Fences Painting and decorating Landscaping So we thought, great. We have a land that meets zoning. We have a project that doesn’t require a permit. We confirmed that with the city. We should be able to start construction of the fencing and bringing gravel onto the site. The seller of the land provided copies of old surveys, an old environmental impact study, the previous zoning applications and so on. There was nothing in those reports that gave us cause for concern.  We read the rules that we thought applied to our case. Everything was showing green lights for the project. We called the environmental consultant who wrote the original reports that the seller provided us. It was at this point that we were made aware of additional rules of which we were unaware. That phone call turned out to be a massive education. It turns out that the rules also say that if any portion of the land is environmentally protected, no matter how far away you are from the environmentally protected zone, the entire parcel of land is subject to site plan control by the conservation authority. That means that even half a mile away from the environmentally protected zone, you can’t erect a fence without going through the entire conservation authority process. This story is a lesson in due diligence. It means going a level deeper than just reading the reports. It means talking to the experts in the field to make sure you’re not missing something. I feel like we dodged a bullet on this project. We could have been tied up for a year or more in government bureaucracy just to erect a fence. Not only that, we would have been tied to that bureaucratic process for the entire life of the project. Doing anything on the property would involve going through that process each and every time.

This is another AMA episode. Anders from Ottawa asks. You can now report rent payments and non-payment to the Landlord Credit Bureau and this will be reported on the tenants Equifax credit report. It sounds like a great incentive for tenants to pay rent on time. Do you see any drawbacks for landlords except the cost ($19.95/month) and some administration? The landlord credit bureau is a concept that was founded in Canada back in 2012 by a retired Royal Canadian Mounted Police officer who specialized in fraud prevention and a retired corporate lawyer turned technology entrepreneur. Both men were frustrated by their own experiences as landlords, LCB shines a spotlight on good and bad tenant behavior. Over time, the LCB has established a relationship with Equifax, one of the credit reporting agencies in order to have rental history become part of the overall credit report. The LCB suffers from a couple of problems in my opinion. The grand vision for LCB is a good one. The question is how to get from the startup phase to broad market adoption. Eight years since inception, the program is still in startup phase. In order for it to be useful for landlords, the landlord credit bureau needs wide-spread adoption. I could say the same thing about a number of new technology initiatives that suffer from being below critical mass. If 1% of tenants are members, then chances are high that when I get a vacancy in an apartment, the new prospective tenants won’t be in the system. Facebook by itself has no value. The biggest part of its value is based on the fact that it has 2.7B users. If the Facebook software existed in its current mature form with all kinds of features, but it had no adoption, it would be worthless. Think about other platforms that have achieved wide adoption. Think about Youtube, or Facebook. Both these platforms went several years with a free service in order to maximize market penetration before figuring out how to monetize the offering. If I’m a landlord, and I have a good tenant, I’m not going to pay $20 a month out of pocket to report on my good tenant. The value proposition for landlords having good existing tenant relationships is simply not there. The landlord credit bureau might be useful to me in 10 or 20 years time when enough people have adopted it that I get some real value from being a member. I’m not going to be a member for 20 years hoping that someday it might be useful. If I’m a large landlord with hundreds or thousands of units, maybe I will get more value. But the pricing goes up if you have more units in your portfolio. The concept is good, but the problem is in their business model. In my opinion, they should find another way to monetize the offering that eliminates the membership barrier. Think about it this way. If I have a vacancy as a landlord, I’m going to be thinking about solving that problem. I have two problems in fact. 1) When am I going to get a tenant? 2) Am I going to get a good tenant or a problem tenant? At that moment, I’m probably willing to spend money to solve that problem. I might be willing to spend $200 for a package of credit searches during that 30 or 60 day period of vacancy. But I might not be willing to spend $20 a month for the possibility that someday down the road I might get some intangible benefit. It’s the difference between vitamins and pain medication. When a landlord has the problem, they’re more likely to spend money to solve the problem. If they don’t have the problem, they probably won’t spend the money on the vitamins that have an uncertain benefit down the road. The landlord credit bureau is a business, and I fully respect that they need to make money to survive. . My personal opinion is that they need to refine the business model to better connect with a value proposition that both landlords and tenants will find compelling.

George is a repeat guest on the show. We are all so blessed to have access to a gentleman of such wisdom. He is distinguished by virtue of having represented some of the most iconic names in New York real estate. He worked for Sol Goldman, who was one of the pre-eminent landlords in New York for more than a decade. He worked for the Wilpons family who own the NY Mets baseball team. He taught negotiation at the law school at NYU for 20 years. He is best known for his role in the Trump Organization and as a judge on the TV show "The Apprentice".  On today's show we get George's thoughts on the Presidential Debate held earlier this week and a very important life question.  Enjoy today's discussion with George.

Zandiee Hurtado travels the world while managing her real estate portfolio. She built her business on the premise of owning seller financed loans which pushes the responsibility for the physical management of the properties on her clients. She has mastered the art of lifestyle design using real estate investing as the tool to accomplish her life goals. You can find her on Facebook by her name Zandiee Hurtado. 

Today is another AMA episode. Karla asks, My husband and I are renting out our old house. In the process of switching a homestead home to a rental home I am doing due diligence. What are your recommendations regarding requesting quotes for a rental home insurance? What are the often overlooked things we should pay attention to when deciding the insurance company? Thank you Karla, This is a great question. I’m not an insurance expert by any means, and I certainly don’t want you to make any insurance decisions based on something you heard on a podcast. I’m happy to share what I know so that you can ask some good questions of your insurance broker. Rental property insurance comes in a couple of different flavors. A single family home could fall under a residential policy and many insurance companies offer a consumer product that is geared towards this type of property. But understand that these policies resemble a residential policy much more than a commercial policy. Some residential insurance policies allow you to add a second rental property to your domestic policy. They can sometimes be bundled with the insurance policy of your primary residence. A proper commercial policy is focused on insuring not only the physical asset, in this case the home, but the breadth of the business. You’re in the rental business and you want to insure the business, not just the house. The policy might include a loss of rents clause, whereas a residential policy may or may not. Recognizing that this is a rental property means that if you had a fire or flood, and let’s say that the property could not be inhabited for 6 months during the repair process, you would still need to pay your mortgage and you would still need to pay your property taxes. Some companies sell mortgage insurance separately. The second thing to consider is the style of policy. Some policies are drafted as named peril policies. This type of policy insures against specific named risks. For example, there could be coverage for fire, flood, vandalism, and so on. But if that risk isn’t listed, you’re not insured.   The second type of policy is a broad form policy. In a broad form policy, you’re covered for everything except specific exclusions. For example, you might be insured for anything except say named storms. So if a storm is given a name like Hurricane Laura, or tropical storm Beta, you would not be covered in that instance. When I get a quote from an insurance company, I always ask to see a copy of the full policy. This request is usually met with surprise from the insurance broker. The rate sheet rarely lists the terms of the insurance policy. It sometimes provides a summary of coverage limits, but you can’t cover the full depth of the policy in just one or two pages. Insurance companies are good at selling you on fear. For example, I was recently offered a supplemental insurance to cover damage from riots. But this insurance would only kick in if the riot damage exceeded $110 billion dollars in national riot damage in aggregate during a single year. The first $110 billion in riot relief would come from government, and the insurance would kick in after that. How much would the insurance company charge for this amazing protection? $150. They would gladly take my $150. Most clients never bother to actually read what they would be getting for their $150. It’s a policy that would be virtually impossible to collect on, and if you did manage to collect, it would be years after the settlement. Again, my objective in this discussion isn’t to tell you what kind of insurance to get. It’s to let you know there are choices. Unfortunately, there is no shortcut to truly understanding what insurance coverage is being offered. Asking lots of questions of your broker and reading the policy is the path to understanding the best type of insurance to buy.

Our book this month is Be Present In This Moment, a Practical Guide to Mindfulness by Tessa Watt. The author Tessa Watt is based in London England where she has been practicing and teaching meditation for 20 years at the London Shambala Meditation Center. This book is not a new book. It was published in 2012. Mindfulness is growing in popularity as a technique which teaches us to appreciate our life. This Practical Guide explores how to listen to your body to reduce stress and anxiety in all areas of your life; how to focus better at work by becoming more aware of what is happening in the present, and how to enjoy life more by bringing mindfulness into everyday actions. Free of jargon but full of straightforward advice, case studies and step-by-step instructions, this book makes the practice of mindfulness accessible. Through mindfulness, you’re not trying to get calm, or relaxed or to become a better person. You are befriending the person you already are, and the place where you are, and you get to experience the present moment as it is. You’re not thinking about how you wish it would be, or how it could be, or how it was. You are simply experiencing the present moment as it is. Mindfulness is an exercise in slowing down the mind, letting go of the racing thoughts. It’s not a theory, or a science. It’s a practice. I think of it like doing push-ups. Push-ups are something that done regularly. You don’t just do 10 perfect push-ups and say OK, good. I’ve done it, and now I’m set for life. Push-ups are the development and strengthening of a muscle. Mindfulness is just like that. I’m a busy guy and my mind is full of projects. I find myself bouncing from the next initiative to be taken on a development project, to how I’m going to solve a staffing shortage, to how I’m going to solve a capital shortfall on another project, to the next topic for a podcast episode. One of the most powerful exercises in the book is surprisingly simple. It involves eating a single raisin. Most of the time when I eat a handful of raisings I grab a handful out of the bag, and slam it back barely paying attention to what I’m eating. I’m probably on the phone while I’m grabbing a snack and raisins are not crunchy so they won’t interfere with the phone call. But this exercise is different. It involves eating a single raisin. You want to look at it carefully first, examining the exterior texture, the wrinkles, the shininess of the skin, the softness. Is it soft and malleable or hard and dry? Mindfulness means paying attention in a particular way, on purpose, in the present moment and non-judgementally. The exercise involves exploring the raising with all the senses. When you put it to your mouth, first run it along your lips. Notice how you mouth reacts to the raisin. Maybe your mouth starts to salivate. When you put the raisin in your mouth, taste it with different taste receptors in the mouth, on the tongue, on the cheeks. Bite into it and observe how it squishes.  You probably never knew there was another way to eat a raisin. There is the usual way, and then there is a mindful way that involves being fully present. How did this raisin experience compare with your memory of eating raisins? I’ve spent a lot of time studying the habits of high achievers. Ray Dalio from Bridgewater Associates, the largest Hedge fund in the world credits his success to his mindfulness practices. So many of the members of the mastermind that I belong to say the same thing. I hear over and over again how the shift to mindfulness practices changed their lives. How it improved their relationships, how it lowered their stress level, and how it brought inner peace. This book is a workbook, designed to improve your mindfulness practices and create stronger habits.

Yesterday it was reported in the Wall Street Journal that JP Morgan Chase was going to pay $920 million to settle a market manipulation investigation DOJ, CFTC and SEC tied to manipulation of precious-metals and Treasury markets. These market manipulations were tied to a practice called spoofing. Spoofers typically send large orders to futures exchanges intended to change the appearance of supply and demand. If prices move in response, the spoofers may succeed at their goal—getting a smaller order filled. They then cancel the larger order as quickly as possible. The law was changed in 2010 and forbids the practice of sending misleading orders that traders don’t intend to have executed. The problem with spoof orders is that it leaves the counterparties with a loss on the cancelled orders. The practice which is illegal is alleged to have occurred hundreds of thousands of times. The Commodity Futures Trading Commission provides oversight over the commodities market for precious metals. Not only did JP Morgan pay a fine, they also admitted to misconduct. Three traders, two of whom still work for Chase and a third who left the bank in 2009 were charged criminally in the case. The charges were filed in Chicago Federal court about a week ago. In addition to spoofing and other federal offenses, the indictment charged all three men with racketeering, a claim that is more typically found in cases against organized crime entities. Authorities said it represents the first time that defendants accused of spoofing electronic derivatives markets have been charged with racketeering. While the government has been active in outlawing the practice in commodities trading, the practice is believed to be widespread and largely unmonitored in the market for federal treasury bills. Spoofing is closely linked to a form of market manipulation that we experience all the time. It’s rooted in a psychological concept called anchoring. Anchoring sets an arbitrary expectation by drawing an imaginary line in the sand. If you go to one of the department stores that’s not bankrupt and buy an Armani suit, you might find it on sale for, say $1,300, marked down from $2,000. It’s a bargain at $1,300 and so you decide to buy it. But wait a minute. Who said it was $2,000? Was the $2,000 real or was it a fabrication designed to manipulate the consumer? Would the buyer truly pay $1,300 for that same suit if they thought the retail price was $1,200, or $1,300 or $1,400? How often do we see manipulation in real estate markets? Have you ever seem multiple offers for the same property? One or two offers are substantially below the asking price and then one offer comes in at a more reasonable, but still low number? The seller, starts to get conditioned to the idea that their asking price is too high and feels compelled to take notice of the lower offers as being representative of what the market will bear. Acting out of fear, they accept the reasonable offer. The same buyer of course was behind all of the offers and they simply wanted their third offer to be accepted. The one thing that causes these manipulations to be effective is another human emotion, called FOMO, or fear of missing out. FOMO, combined with anchoring is at the root of most market and negotiation manipulations. Property managers often schedule multiple tenant appointments at a vacant apartment for the same time. If some of these prospective tenants are not real tenants, they can create the false perception of high market demand for the apartment. The property manager might say, there are many people interested in this apartment. You should apply in the next hour if you have any hope of getting the apartment. You can start to spot these manipulations with a bit of training.

Earlier this week, it was reported that UBS and Credit Suisse were in preliminary merger talks. These two banks are Switzerland’s largest banks and they are also longstanding competitors. If combined, they would become Europe’s largest bank. Both banks have major international interests including in the US. A few years ago, two of the banks I deal with were involved in a merger. To be fair, it was DNB First that acquired East River Bank. All of the East River Bank branches were converted to DNB First. You would think that the impact of this would be minimal since we were customers of both banks. Of the two banks, DNB First was much more aggressive in their lending practices and we definitely preferred DNB First over East River. But several of the senior executives from East River Bank were given responsibility for the loan committee at the parent company. The loan underwriting team from East River Bank was given responsibility for loan review reporting to their former bosses, now in charge of the loan committee. Needless to say, the loan underwriting practices at DNB First changed and became much more conservative. Nearly every middle-market bank in the industry is looking to either acquire another bank or be acquired, and it’s likely that yours is no exception. Many banks see an acquisition or merger as a chance to expand their reach or scale up operations quicker. Yet, a bank acquisition is not without its drawbacks as well – particularly for the unprepared banking customer. So why would banks be merging in today’s environment? Many banks were consolidated in the wake of 2008, not because they wanted to be acquired, but because the banking regulator forced the issue through their stress tests. If a bank’s balance sheet was suspected of being weak, the regulator required an increase in the bank’s equity in order to keep operating. There are numerous banks in Europe where we will see this kind of consolidation in the next 18 months. For the moment, in the US, the Federal Reserve has agreed to guarantee the debt of the banks on a large scale.  We don’t really know how this will play out in the long term. Integration risk is a major danger in bank mergers. In some cases, banking executives don’t commit enough time and resources into bringing the two banking platforms together – and the resulting impact on their customers causes the newly merged bank to fail completely. Sabadell bought TSB from Lloyds in 2015, the UK parent bank provided a £450-million “dowry” fund to facilitate the three-year integration project to move TSB’s customers onto Sabadell’s system. Once complete the integration was expected to save £160 million a year. But by 2018, following the migration of 1.3 billion records, its customers reported a host of major glitches. Online banking customers were locked out of accounts or even saw the accounts of other users. The ensuing problems cost the chief executive his job.

Joseph from Boulder Co asks: My question is about the viability of shipping containers as building material. I have seen amazing things being done with them and I'm wondering if it would work for our current project. We have the intention of creating a glamping vacation rental getaway (620 - 1240/sf) for parties of 4-8 people gearing towards millennials and tiny home fans. (Attached is a typical 2/1 draft design) Concerns we have are: - refinancing after project is up and running to get initial investment money back to investors. - construction cost with containers vs standard building materials. Our partner builder has done builds in CA for $110-130/SF hard cost. - city/county planner objections to use of material I appreciate any thoughts you have. Thank you again for all your work and content. Joseph this is a great question: In my experience shipping containers make for a robust structure. I love the idea from the perspective of re-using materials that might otherwise go to the scrap heap for recycling. But here’s the problem with shipping containers. They’re 8 feet wide. When your building block for your room is too small to fit basic furniture, the resulting finished product has extremely awkward room sizes. For example, if you’re making a bedroom, you need a minimum of 11.5 feet to fit a bed, a walking space and a dresser in that dimension. If you want a queen sized bed with two bedside tables, you need a minimum of 9 feet just for the furniture to fit in the room.  If you want a bit of breathing room it needs to be larger. In both cases, the minimum room dimension is above 8 feet. So you’re going to be cutting out a wall, a thick steel wall. That’s an expensive cut. Now your room is 16 feet wide. That’s a nice dimension, but it can lead to a larger footprint than you’re after. Wood framed construction is not that expensive. I’m building apartments and single family homes all day long for about $120-130 per SF. So there is no savings in the overall cost of construction by using shipping containers compared with conventional stick built. Let’s look at a standard 8 x 20 foot container. They can be purchased for $2,500 each plus delivery. I just took delivery of one of these and paid $300 delivery. If you look at the cost per square foot for a structural box, you’re looking at $17.50 per SF. Most of the cost of construction is embedded in the infrastructure and the finishes. The total cost of framing is about 15% of the total project cost in a regular stick built home. But even when you’re building with containers, you need some framing for the interior walls. This might be wooden strapping which is less expensive than structural framing. But it’s not zero. When you’re building with shipping containers, the insulation becomes key. Metal containers are highly conductive. You need channels to route the utilities like water, sewer, electricity, and HVAC. In order to get sufficient insulation, you end up with thick walls, or expensive insulation. If you have thick walls, now your interior room dimensions shrink and you end up with a smaller room below the 8 foot dimension. Framing makes up a small percentage of the overall construction schedule. Most of the time is consumed during the rough-in and interior finishing stage. Even if you set the framing portion of the schedule to zero, you would not save more than about 20% of the overall schedule, with virtually no savings in investment. I want to thank you Joseph for a great question. It’s one of those ideas that intuitively looks like it should be a benefit, that doesn’t get realized in real world practice.

Jorge is a multi-family investor, developer, and property manager based in Dallas. He manages a portfolio of over 2,000 units in multiple markets including Houston, and most recently South Dakota,. To learn more, you can visit elevatecig.com. 

Paul Hopfensperger has swum the English Channel three times. I can't tell you how difficult this achievement has been. Today's story is such an inspiration. Paul is so humble and you're going to love this conversation.  Enjoy...