On today’s show we’re talking about getting access to high value market data for free. I’m a big believer in getting access to market data and using that data to make decisions. I also believe that independently developed market studies are essential to make sure you’re not deluding yourself. Whenever there is a new commercial project undertaken, you can bet that there is going to be a third party market study. These studies are both expensive and time consuming. Before you take a project through the entire process of entitlement and a capital raise, you will want to commission a market study. But before you commit significant resources to a project, it might be nice to get a hold of an existing study that would help you understand the dynamics of the market. That kind of early look at the market can save you a lot of time and money by allowing you to validate and refine your product concept.   On today’s show I’m going to give you a shortcut. We know that work performed by government bodies carries with it a requirement for transparency. That doesn’t mean that governments publish all of the work they do. In fact they don’t publish that much. But you can often get a hold of information from government bodies through a formal access to information request. Almost all levels of government have a formal access to information process. So if you’re looking for market studies that can cost anywhere from about $5,000 to $50,000 to produce, you might just find that the information you’re looking for already exists and can be secured by simply asking the relevant government department to send it to you. Now a market study and an appraisal are not the same thing. But they often can contain the same information. I recently made a request to a government department for a market study in the industrial sector. They responded that they didn’t have the specific market study I was looking for. However, they did have an appraisal for several comparable properties in the area. Would I like to see a copy of the appraisal instead? Clearly the answer was yes. The appraisal was a 54 page document that was jam packed with sufficient market data to meet my needs at the start of a project. It showed more information than I was expecting. It showed annual absorption of square footage by neighborhood within the city. It showed total inventory and vacancy by neighborhood. It showed average rent per square foot by neighborhood. What did this document cost me? It cost a single email and about 10 days, and a follow-up email. The appraisal was a little more than a year old. Would I ultimately commission my own market study? Of course. But to get a project validated and to help refine a product concept, that document was more than sufficient.

Technology is testing the boundaries of new business models, and the pandemic is creating sufficient disruption to accelerate the adoption of these new business models. I had dinner delivered to my house last week from a restaurant. The restaurant is only about a 2 minute drive from my house, but having dinner delivered during an evening when I had a packed schedule was incredibly convenient. A new startup company is hoping to become the Uber of evictions and post-eviction cleaning. There are approximately 4.5 million homes in the US in some form of financial distress. One startup is treating the dire situation as a moneymaking opportunity for gig workers. The company, Civvl is recruiting freelancers to sign up as eviction crews for landlords and lenders, calling it the “FASTEST GROWING MONEY MAKING GIG DUE TO COVID-19.” Civvl is a company that started its online presence back in May of this year is hiring gig workers in all 50 states. Their website says that they’re accepting new gig workers in all 50 states and Canada. But when I attempted to register on their site, it was not capable of accepting a Canadian address. While there is a large scale moratorium on evictions, some evictions that do not fall under the moratorium are happening. The company aims to provide services in 4 separate areas: 1) Process Serving 2) Foreclosure and eviction clean-outs 3) Property Inspection 4) Eviction Standby and assistance The system basically aims to match landlords and lenders with process servers and cleaning crews who would be involved with the eviction process. The agents would not be responsible themselves for the eviction of tenants or the eviction of occupants in the event of a foreclosure. At the heart of the system is an iPhone or Android App that agents have running on their phone. When a new gig comes into the system in a geographic area, potential agents are notified of an incoming gig and then they have an opportunity to snag the gig. Pricing is negotiated between the user of the service and the agents who take the gig. I’m personally not ready to hire an unknown gig worker to serve legal documents. Yes, that will probably be less expensive than hiring a professional process server. But if the service doesn’t follow the process to the letter of the law, the landlord or the lender runs the risk of having the service being invalidated. In that situation you would believe that the notice was served, when in fact you would not be in compliance. Hiring someone from an app to complete an eviction clean-out would probably be an ideal service as long as there is enough resource available at a decent price in order to hire reliably. This is something that I would be inclined to use as a lender or as a landlord. I read through the company’s 28 page agent agreement that any gig worker would have to sign prior to becoming part of their network. I don’t know whether Civvl is ultimately going to be a good service or not. But we are living in a time of innovation and there is no doubt that new business models will emerge for services. I’m not here to offer advice. But rather this is an idea and information that you can keep on your radar.

There is a black knight at the black jack table. At first this statement might seem a little obscure. But stay with me on it and you’ll see it. If you’ve been listening to this show for a while, you’ll know that I’m a big believer in economic fundamentals. I’m a believer that 1+1=2 and the math needs to balance at the end of the day. I have this strange belief that in order for an investment to return a profit, the company needs to generate positive net income. For an investment to go up in value, that income needs to increase. If the income drops, so too does the value of the company. The power of the purse is vested with the federal reserve. This year the Fed made a commitment in March to deploy hundreds of billions of dollars to prop up the economy. The Fed promised to buy corporate bonds and exchange traded funds that invest in portfolios of corporate debt. The Fed can’t buy the debt of individual companies. But they can buy funds. The central bank tapped BlackRock to help advise it and buy the bonds and funds on its behalf, though the central bank retained ultimate authority over what to purchase. So while they met the letter of the law to ensure they’re in compliance, they’re certainly not living up to the spirit of the law. I’ve said this before, if you went to Las Vegas to play a game of black jack and one player at the table had the ability to add cards to the deck at will, some thugs would take that player out back and break their knees. But that’s exactly what the Fed is doing. They’re printing money and using that funny money to skew the card game in the favor of whoever they designate should be the beneficiary. The Federal Reserve had budgeted up to $750 billion for these asset purchases. In the end, the thaw in markets meant the Fed only spent about $13 billion of the $750 billion it had designated for corporate-bond and ETF buying. The positive signal sent by the Fed was enough to bring capital back into the market. Investors believed that the Fed would buy all this toxic equity and provide an effective backstop to investors from losing money. Whether that was true or not is immaterial. The fact is, investors believed it to be true and that was enough to have money pour back into equities. For the past three weeks we’ve seen an 8% pullback in stock valuations, including a 3% drop just today. But the problem is that none of these valuations are connected with the profit producing capacity of these companies. The folks at Blackrock have amassed another $57 billion in new investment during the past quarter and how have 7.3 trillion dollars worth of assets under management. Just because everyone is piling into the stock market without regard for company fundamentals doesn’t mean you should do it.

Jonathan Tuttle is based in Chicago Illinois where he invests in mobile home parks nation wide. On today's show we're talking about mobile home park investing and gaining insight into how that market is evolving. You can reach Jonathan at midwestparkcapitalfund.com

Mike Simmons is from Try Michigan. Today's conversation is all about how to scale your business from a solo-preneur to a larger business.  You can connect with Mike at mikesimmons.com

Today is another AMA episode (ask me anything)  Ryan asks: "I live in Los Angeles and have been working on my education and networking to break into the Commercial Multifamily Investing space (particularly in Arizona); however I do have an opportunity to possibly break into ground up development of built to rent units here in Los Angeles. A buddy of mine who develops (completed 24 units, 6 units and currently raising capital for 33 units in decent areas such as West LA, Hancock Park) is willing to let me tag along on his projects to learn while being a passive investor. Any advice on which path to choose (B & C class MF in AZ vs. ground up build to rent here in Los Angeles, CA)? I am leaning towards MF in AZ given the business friendly atmosphere there, but it's hard not being in the market." Ryan this is a great question. You’ve presented your question as one of two choices. Either new construction in Los Angeles, or B & C Class in Arizona. For reasons that I’ll go into in a minute, I probably would not choose either of the two asset classes you’ve presented. I’d like to encourage you to consider additional alternatives. In fact, I’d suggest that before you commit to a single project, you get clear on the type of project that is going to meet your investment criteria. In my world, an investment needs to follow the laws of supply and demand. That means I want to be in a market with growing population, growing employment, and a shortage of supply for housing. Los Angeles lost population in 2018, 2019, and it has lost population in 2020. In fact, LA ranked fourth in the nation in terms of population loss in 2018. All other things being equal, that means that prices will drop for both rentals and purchases. The problem with rentals in an expensive market like Los Angeles is that the cost to deliver a finished product is quite high compared with the net income you can generate. In addition, many submarkets are rent controlled. That means that the properties often don’t meet their potential because the rents are being artificially held down. I’m not a fan of C-class properties in Arizona. I’ve owned investment property in both Maricopa County and Pinal County. The problem with C-class is that the income strength is not there. If you’re renting property to people who don’t have stable income, then your investment is at risk every month. If they’re relying on government subsidies, you’re renting to people who are broke. They’re not going to take good care of your property. I’ve never lost money in A-Class properties. But I have lost money in C-class. You will find that C-class properties tend to have more than their share of surprises and unplanned maintenance. In terms of meeting your investment criteria, it’s important to get clear on what constitutes a good investment for you. I can’t decide that for you, I can only share what my investment criteria are. 1) I’m looking for projects that generate 30% net profit margin within 12-24 months. That means I’m buying at enough of a discount that I can generate that 30% margin after all expenses and interest carrying costs. We’re at a unique cross-roads in history. This is an exceptional time to start in investing. We are on the cusp of a repeat of 2008 all over again. Except this time it is happening in slow motion. We know it is coming. We can prepare. The moratorium on evictions, and the moratorium on foreclosures are both holding the market in a form of financial hibernation. I would hate to see you jump into the market a few months too soon in what amounts to the absolute top of the market, only to have a huge number of distressed properties hit the market all at once. When that happens, even with low interest rates, the laws of supply and demand dictate that we will see a precipitous drop in prices in some markets.

On today’s show we’re talking about the latest guidance from the Federal Reserve regarding interest rates. Yesterday the Fed announced the result of their latest committee meeting. They reaffirmed their guidance on maintaining interest rates low for the next 18 months, and then they extended that guidance by another year until the end of 2023. The Fed talked about the role for monetary policy which simply describes interest rates. The Fed has made it clear that simply lowering interest rates won’t do much to further stimulate the economy. Whether interest rates are 2% or 0% isn’t going to all of a sudden get people to run out and make new investments in The Fed chairman also spoke about fiscal policy. This is controlled by the Treasury department’s spending of money to stimulate the economy. Naturally the Fed has a hand in this as well because the treasury is empty and any spending requires the treasury to come back to the Fed with cap in hand asking the Fed to print more money. Right now, political wrangling has created a stalemate whereby the losers are those who are in need of financial help. The politics of an election have come ahead of helping a crippled economy. After nearly a month with little congressional progress on a renewed assistance package, the economy is in peril from lack of government action. So interest rates are at historic lows. What do you do with that information? What decisions should you be making knowing that interest rates are going to remain low for some time to come? As I see it, low interest rates may possibly reduce your income if you’re in the business of lending money.  But if you rely on debt to fund the growth of your business, then you have a series of decisions to make. 1) The best think you can do in this environment is reprice existing debt into a lower interest rate vehicle with as long a horizon as possible. When you borrow money in an inflationary environment, you are basically shorting the dollar. You banking on those future dollars being worth less than today’s dollars. If your interest rate is, say 2%, and let’s say that inflation is running at 3%, then the debt is being devalued at a faster rate than what you’re paying in interest. The money is essentially free at that point. I believe we are at the cusp of free money for that reason. But even more important than shorting the dollar, refinancing the debt into a lower interest rate facility gives you stronger cash flow and makes your business more resilient to economic shocks. We are not out of the woods yet with the pandemic and all the economic side effects. Lowering the cost of your debt is just plain responsibility. 2) It’s tempting to go and secure additional debt to grow your business. After all, the debt is so cheap, it’s tempting to go get as much capital as possible to take advantage of the low interest rate environment. But here is where you need to think carefully. What is the purpose of the debt? Is it to provide a cash buffer for the business? Is it to fund a growth in the business that is based on verifiable sustained demand? Is the growth speculative? In today’s environment of uncertainty, you want to be establishing clear criteria for how you make investments. When are you going to make incremental investments? Have you established a high bar for making investment decisions? Investments are made within a context. That context makes a number of assumptions. For example, in 2010 the context was a distressed market where assets could be purchased for 30-40 cents on the dollar. Today’s context isn’t fully known or understood. For that reason, my guidance is that new projects need to be undertaken very carefully. New debt should first be used to reprice existing debt and improve cash flow.

On today’s show we’re talking about where are we with this darned pandemic that has dominated this year 2020. There are lots of conflicting data points and individuals, business leaders, public health officials, elected officials, and investors are trying to figure out where this is all heading. This is an area I’ve been studying deeply for a long time. The Corona Virus is new in the past year, it’s not that well understood to the medical community, and it threatened our global society with a very high mortality rate. We’ve had a bit of a reprieve over the summer months. The weather is getting cooler and people are spending more time indoors. We are seeing infection rates rising dramatically in many countries including Spain, Israel, France, India and Brazil. The United States will pass a grim milestone in the next day or so with 200,000 deaths so far this year from the pandemic. There are some potential vaccines undergoing early clinical trials, and it’s reported that a few hold considerable promise. However, even if these are found to be effective, it will be many more months before they can be manufactured in sufficient quantities and administered to a large enough percentage of the population to have a meaningful impact. We’re hearing of outbreaks in the school system as children return to school. We’re hearing first hand accounts of outbreaks in university residence buildings. So where does that leave us? It’s possible that we have a second wave coming. Some point to the Spanish Flu pandemic of 1918, which infected 1/3 of the world’s population in four successive waves. It was the later waves of the Spanish Flu that were the most deadly. Is history about repeat itself with the Covid-19 virus? I’ve been following the work of Dr. John Campbell from the UK. He has been reporting on a number of recent studies showing the correlation between the severity of Covid symptoms and Vitamin D levels. There are numerous studies showing that there is a strong link to severe Covid symptoms and vitamin D deficiency. A recent small scale experiment of 76 patients conducted in Spain showed that out of 50 Covid patients chosen at random who were given the best available treatment and high doses of vitamin D, all survived, and only one out of 50 deteriorated to where they needed to be admitted to intensive care. Out of the remaining 26 cases, all were given the best available treatment, and no vitamin D supplements. From this control group 13 / 26 deteriorated to where they needed intensive care and two died. Fully 50% ended up in intensive care. You can find the videos from Dr. Campbell on Youtube at https://youtu.be/iNji13yoW9g Over the past week, Dr. Campbell has presented numerous other papers and studies from the Journal of the American Medical Association, two large scale studies from Israel, to name just a few. It’s strange that the WHO, the CDC, the Oxford Center have not initiated a large scale clinical trial of Vitamin D. But the studies to date seem pretty compelling. I’ve maintained for a long time that it would take one of two things to bring the pandemic to an end from a social and economic impact. 1) Full herd immunity. Either everyone got it, or large scale deployment of a vaccine 2) An Effective treatment If you look at the statistics coming from Europe, we see that case counts are rising dramatically. Paradoxically the death counts have not been rising correspondingly.  It’s too early to declare the pandemic over. Some of the studies have shown Vitamin D to be effective as both preventative and as a therapeutic. Vitamin D is produced within the body by exposure to sunlight. As a supplement, it is readily available, and is easily manufactured in high volume.

On today’s show we’re talking about the usefulness of your property and how the title report can help you understand what you’re buying. You’re buying a piece of property. You pay the purchase price, and now it’s yours. But the truth is, it’s not that simple. There are so many things that can encumber the use of your property. All kinds of things that affect your property can be recorded in the official records of a property. To start with, the title report can tell you a lot about your property. There is an enormous amount of complexity in what seems like a pretty straightforward transaction. Sometimes these reports can be lengthy and boring to read. But they contain a ton of information about the history of a property. I recently received a title report that was 96 pages in length. It had all kinds of details, including when transfers happened between family members, loans taken out against the property, when they were repaid, when the owners were behind on their taxes, or their water bills. So much information is contained in the property records. The first and simplest item is the deed. This is the ownership. Who owns it and under what kind of structure is it owned? Is it owned by a person, an entity like a company, or a land trust. If the property was transferred as a result of a foreclosure, the new owner would be listed on the property. But some areas have a right of redemption period after the transfer whereby the original owner can get their property back. For example, there is a rule in Philadelphia that says if a property is sold at the Sherriff’s tax sale, and the original owner was not properly notified of the impending sale, they have a right of redemption period whereby they can pay the back taxes owing and get their property back. How long is that redemption period? Get ready for this. It’s 21 years. That’s right, 21 years. There is additional complexity coming from the various forms of encumbrances that can be attached to a property. This can be a lien. But there are other forms of encumbrances. There could be a right of way or an easement. These are sometimes used to provide utility companies the right to have a pipeline, or an electric transmission line cross your property. It might be a right for a neighbor to access your property for a driveway in order to prevent their property from being isolated. Sometimes there can be a deed restriction recorded on title. It could literally say anything. It might say that the property is transferred on the condition that the any structure built on the property must be painted yellow. You can literally put that kind of restriction on a deed. That restriction might be temporary or perpetual. Unless you perform a full title search, you may not know what burdens you are signing up to. They’re contained in the history of the property. I’m dealing with an issue on a property right now where one of the owners granted an easement to the electric utility company to have wires crossing the middle of the property. That easement was granted in 1938 and the property owners were paid a grand total of $4 for the right of way from the utility company. From a practical standpoint, the electric utility is highly unlikely to ever enforce their right to access the property. But if I build a house in the easement, they could theoretically come to me one day and ask me to demolish the house. Then you have to consider what new regulations might be in place. Just because a house exists on a property, doesn’t mean you’re permitted to modify what’s there. Many elements of the building code allow existing structures to continue in their current location. These are the so-called grandfathering clauses. But sometimes, the new rules say that if you make any modifications to the property then the new rules apply. Pay very close attention to the title report and I recommend that you read every word contained in it.

Today is another AMA episode (Ask Me Anything). Brad from Ottawa asked me to look at a prospectus for an international hotel fund. He is asking for my opinion on the offering. Clearly the global environment for hospitality has changed dramatically. Nobody knows what the new normal will be for hospitality following the pandemic. We’re talking about hotels in warm weather getaway destinations. We don’t know what airline capacity will be in the coming months or years for those destinations. Without knowing the airline capacity on those routes we have no way of assessing the demand for hotel nights. There’s no basis for building a new hotel without that data. The offering memorandum document is out of date with respect to the current market conditions. There’s no way that an investor should be even thinking about putting capital into a new construction hotel. I want every listener to understand that I’m not preaching about someone elses’s project. I say this even for myself. I have a development project in the core of the city in one of the hottest neighborhoods. My original plan was to build a 4-star hotel in that location. It would have been the perfect location and an ideal product in that location. I really wanted to build that 120 room hotel. And then the pandemic hit. I know that in an environment where hotel occupancies worldwide are below profitability for the existing hotels, there is no basis for engaging anyone in a discussion about building a new hotel. The most knowledgeable investors for hotels are those who have invested in hotels in the past. Many of these investors have decades of experience having invested in the hotel sector. It makes sense to talk to those investors and ask them about their strategy for hotels going forward. Understand that we have a set of market conditions where a large percentage of existing hotels are in default on their debt. The actual percentage depends on the location. On August 28 of this year, just a few weeks ago we dedicated an entire episode to what is happening in the CMBS market for hotels. In NYC, the default rate is 38%, in Houston 66%. While these hotels have not gone into foreclosure yet, I predict that some of them will. When they do, there will be high quality assets for sale in the market at a discount. In that environment, would an investor rather acquire an existing hotel for a deep discount or would they roll the dice on a new development project that won’t generate revenue for another 2-3 years? I’ve been saying this for a while. Now is the time to be patient. I’ve had a number of conversations with investors in recent weeks where they’ve had funds available. It seems like the money is burning a hole in their pocket and they want to put the money to work. I totally get that money sitting in a bank account is earning essentially zero interest. I have the same situation and it’s tempting to put the money to work. I know we’re in what appears to be a hot market. In the residential market prices are continuing to rise, largely fueled by low interest rates. But that doesn’t translate into higher prices in the investment market. As investors we value property based on its income potential. In my home city, sale prices for condo’s are up 24% this year over last. That means that at the entry level of the market, people are willing to pay more and they’re gobbling up inventory in order to avoid being priced out of the market. But that has nothing to do with the valuation of rental apartments. Unless rents have gone up 24%, and I can tell you that they have not, the valuations for rental properties has remained steady or perhaps gone down a little. The valuations for hotels have gone down a lot.

This talk was given earlier this week at the Durham Real Estate Investors meeting in Toronto. When we think about project management, there are so many facets to consider. The goal of this talk was to give attendees something tangible and actionable to use the very next day.  Enjoy...   

Britnie Turner is CEO of the Aerial Development Group in Nashville, Tennessee. She is also the founder and CEO of the Aerial Recovery Group. On today's show we're talking with Britnie and her chief of operations Jeremy Locke about the initiative that she and her team are taking to aid in the disaster recovery from Hurricane Laura in Lake Charles Louisiana.  If you want to learn more, you can direct message @AerialRecoveryGroup on Instagram, @BritnieTurner on Instagram. You can also find out more ways to help at laura.usastronger.com. 

On today’s show we’re talking about the law of large numbers. The law of large numbers is a mathematical theorem in statistics thatdescribes the result of performing the same experiment a large number of times. According to the law, the average of the results obtained from a large number of trials should be close to the expected value and will tend to become closer to the expected value as more trials are performed. But we’re not going to be talking about statistical theorems today. We’re talking about the ability of the human mind to process large numbers when presented with these big numbers. We have so many facts and figures that are so big that they become incomprehensible. If I said to you 100,000 or 1,000,000,000, the impact is almost the same. I mean think about it. The wildfires in California have burned 2.3 million acres so far this fire season. Most people can’t process what that means. Yes, I know it’s a lot. But how big is 2.3 million acres. It’s not a unit of area that most people can process, let alone multiply by a large number. An acre is a unit of area that measures about 208 feet by 208 feet. In a dense urban setting you will often get between 6-8 houses per acre, and 12-15 townhouses per acre. An acre isn’t huge, but it’s not small either. Maybe square feet are easier to understand. A square foot is a unit of area that measures 12 inches by 12 inches. Or if you prefer metric, it’s a unit of area that measures 30 cm x 30 cm. We’re talking wildfires that have burned 100 billion 188 million square feet. Somehow, I’m not finding it any easier to comprehend how much has been burned in California in this year’s wild fires. Perhaps it’s easier to talk in square miles. This year’s fires have burned about 3,600 square miles. Even that is hard to process. If I told you that this is an area equivalent to 12 times the size of New York City, it’s starting to get easier to understand. Or if I told you that it’s about 40% of the total area of the Dallas-Fort Worth metro area, you’re now starting to be able to comprehend it. In truth, I haven’t told you anything different in any of these examples. But when I give you a frame of reference, it’s starting to become easier to process. So far this year, the Corona Virus pandemic has killed 196,000 people in the US over a six month period. Exactly how many people is that? Yes, that’s a lot of people. It’s a massive human tragedy. It’s three times more American soldiers than were killed in the Vietnam War. That doesn’t really help either. Think about taking Fenway Park in Boston where the Boston Red Socks play. You would need 5.2 stadiums the size of Fenway park to hold that number of people. That’s a jarring visual image. Numbers by themselves are abstract, even for mathematicians to comprehend the scale and proportion. If I told you that the newest Amazon fulfillment center to be built in my home town was 1 million square feet, how many people could truly comprehend what that means? But if I told you that you could put 60 NHL hockey rinks in the same area, or you could fit 17 football fields, it is starting to get easier to understand. So why am I telling you this? As you communicate with your investors, with your stakeholders, with your business partners, or with you grandmother, don’t throw numbers at them. Make sure you create a frame of reference that is understandable when you communicate a number. Have an awesome 86400 seconds.

Today is another AMA episode (Ask Me Anything) John from New York asks: With states, cities and towns possibly being under financial pressure due to decreased business during pandemic, how would you underwrite the purchase of a multifamily asset?  How much of the increased tax can be passed along in a rental increase? John, this is a great question. If you look at most cities, they get their cash from one of several sources. 1) Property Taxes 2) Service Fees 3) Other Levels of Government 4) Borrowing Despite the pandemic, I don’t expect property tax collections to go down very much. Eventually, the city will get the property taxes, whether it means a tax lien on a property, or an outright tax sale, the city will get their money.  Service fees are the area that have been hit the hardest during the pandemic. Services fees include everything from the revenue collected when a someone rents a meeting room for an event, to parking tickets, to library fines. This is where cities have experienced the most impact during the pandemic and it’s also the area where the cities have reduced staff. You don’t need to hire life guards if the swimming pools are closed this year. Transfers from other levels of government have been largely unaffected. Borrowing is restricted to capital projects in most cities. Most cities are prohibited from borrowing to fund day to day operations. The only way to cover the shortfall is to either raise property taxes or to beg another level of government for more money. How each city will deal with the problem will vary from one to another. Nashville increased their property taxes by 34% in their most recent budget. Hopefully most cities don’t experience that kind of increase. One  problem in your question is how can you pass on these costs to tenants and recover some or all of the income lost to higher taxes? Some jurisdictions have rent controls. Where you’re from in NY is famous for its complex web of rent control regulations. Where I live in Ontario Canada, the province limited rent increases to zero % for 2020, arguing that the pandemic has caused enough pain for tenants. In most communities,  taxes,  utilities, insurance, have all increased rates in the past year. A zero percent rent increase is basically legislating landlords to lose money. So back to your question which is how to underwrite a new project? When there is uncertainty, you need to build safety into the project. That means increasing the debt coverage ratio to ensure you have a higher profit margin and lower debt service. Most lenders require a debt coverage ratio of 1.2. Let’s look at a simple example. Let’s say that your project generates 120,000 in profit before debt service. In that scenario you would have $100,000 in debt service and $20,000 in free cash flow. But that’s the minimum your lender would allow and it doesn’t leave much margin for things to go wrong. For example, if your property taxes went up $10,000 and your occupancy dropped, and you had some unplanned maintenance, you could find yourself in a negative cash flow situation. I would urge you to borrow a little less money, and bring more equity to the table. You might lower your borrowing from 80% loan to value to something lower, like maybe 65% or 70%. You would want to target a higher debt coverage ratio like 1.5. In that scenario you might take that same $120,000 profit and target $80,000 of that to go towards debt service and $40,000 in free cash flow. The stronger cash flow on paper makes the project more resilient towards surprises. You could need that extra buffer. In our projects we are targeting higher debt coverage ratios above the minimums in order to bring that extra level of safety into the projects.

On today’s show we’re talking about an event that took place about a month ago. It made a few headlines at the time, but there’s been very little said about it ever since. There’s a global debate raging on the best way to handle the global pandemic. Let’s be clear, there is no good solution. There are three trade-offs to be made. 1) Protecting health for people who might be susceptible. 2) Minimizing damage to the economy through social isolation and quarantine activities 3) Protecting the health care system from being overwhelmed with hospitalizations Unfortunately, what is a scientific and economic problem has become politicized. At the end of the day, the virus doesn’t care what passport you hold, what political party affiliation you have, where you live, whether you’re old or young. Last month, there was a motorcycle rally that was held in Sturgis South Dakota over a 10 day period in which nearly 500,000 people descended upon a small town of about 7,000. This annual event brings people from all over the country. A new paper which examines this event was published last week by the IZA Institute for Economic Development, funded by The Deutsche Post. The paper is  DP No. 13670 entitled: "The Contagion Externality of a Superspreading Event: The Sturgis Motorcycle Rally and COVID-19".  The Sturgis Motorcycle Rally represents a situation where many of the “worst case scenarios” for superspreading occurred simultaneously: the event was prolonged lasting 10 days, included individuals packed closely together, involved a large out-of-town population. Attendees to the events were only required to show that they had a mask in their possession, but were not required to wear it. The only large factors working to prevent the spread of infection was the outdoor venue, and low population density in the state of South Dakota. A month after the event, it looks like the number of cases in the community multiplied by a factor of 4-5. To be clear, the case counts in Meade county prior to the motorcycle rally were low. There were approximately 2 cases per 1,000 population. After the rally, the number grew to 9 cases 1,000 population. Not only that, but the event was also responsible for the spread of the disease in the communities where attendees originated from. The study used anonymized smartphone data from SafeGraph, Inc. They used the SafeGraph data to measure the number of non-resident visitors to the census block groups (CBGs) where Sturgis Motorcycle Rally events took place, (ii) trace those attendees back to their home counties, and (iii) measure stay- at-home behavior among residents of Meade County. South Dakota is one of the least densely populated states in the country. They naturally had social distancing built into their society. For that reason, South Dakota has had no restrictions on restaurant closings, no restrictions on social gatherings, no restrictions. They put the responsibility in the hands of residents and visitors to act responsibly. There is no mask wearing mandate, and there is no work from home requirement. The makeup of attendees was 0.9% from the local county, about 8.5% from other counties in South Dakota and close 90.7% from out of state. All of this data was provided by the smartphone pings. The authors of the study concluded that the Sturgis Motorcycle Rally generated public health costs of approximately $12.2 billion. The authors financial conclusions were flawed in my opinion, but the rest of the study was solid.   This study is the first real petri dish experiment of a large gathering involving large numbers of people to a live event, and involving travel from many parts of the country into a single location. Since the study was published last week, I expect that it will play a role in shaping public health policy for governments around the world.

While the August numbers for unemployment look encouraging, there are signs on the horizon of a fresh wave of corporate layoffs that will deal another blow to the global fragile economy. Some of the layoffs are merely announced and have not taken place yet, so they won’t appear in the official statistics until September, October, and in some cases after the US election. Some businesses in the resorts and hospitality industry have now started to make temporary job cuts permanent. MGM Resorts sent layoff notices to 18,000 people a little over a week ago. The airline industry is poised to cut hundreds of thousands of jobs starting on October 1. The US Federal government’s cash injection for the airlines runs out on September 30 and there is no new money on the horizon that would seek to prevent a massive shrinking of the airline industry. United Airlines is letting 16,000 people go. American is letting 19,000 people go on October 1. Boeing is cutting 10% of its workforce. That’s going to have a trickle down effect to the hundreds of companies that supply parts to Boeing. But it’s not just airlines and hotels. Ford Motor company is letting 1,400 people go through early retirement, a reduction of 5% of their workforce. Daimler, which owns Mercedes Benz may cut up to 30% of its global workforce. Coca-Cola is offering buyout packages to 4,000 people. We don’t know yet how many will take up the offer and how many will be forced to leave in the end. Salesforce.com is letting 1,000 people go. LinkedIn has cut 6% of its global workforce. Warner Media is letting 600 people go starting in August. NBC Universal is expected to cut about 10% of its workforce. The big issue for most of these businesses is the massive amount of debt that is being carried on the balance sheet. When revenues are a fraction of the pre-pandemic levels, these businesses are insolvent. They had the ability to withstand a few months of bleeding, but we’re now 7 months into the pandemic with no clear end in sight. Frequent listeners to the show will know that I went on record early this Spring and predicted an 18 month economic winter. If my prediction is correct, then we will start to come out of this mess sometime in mid 2021. We are in the middle of an election campaign in the US. Despite this, there are signs that the government will not be able to prop up the economy through the length and breadth of this pandemic induced downturn. They can prevent distressed properties from coming on the market by artificially freezing evictions and foreclosures. But they can’t do that indefinitely. Otherwise they create an environment where there is no consequence to defaulting on debt. The Fed simply won’t buy all the toxic debt in the world. This means that there will be a downturn in real estate. We’re seeing the beginnings of it in the hotel industry, in retail and in  office asset classes. Eventually the job losses will cascade the pain into the residential housing market. That’s unavoidable, even if the short term metrics show a hot market. These job losses will ripple through the economy and real estate prices will not be immune. Your job is to start amassing cash to rescue the right projects when the time comes. That will be an exercise in patience and waiting for the opportunities to arrive.

Melanie Finnegan is based in Orem Utah where she specializes in tax lien investing, specifically on land. You can learn more at taxlienprocess.com or at taxlienwealthsolutions.com. Today's conversation was packed with valuable strategies on how to multiply your investment. 

We’ve been saying it for a while. There is no such thing as returning to normal. What will emerge from this pandemic is a new normal. Exactly what that will look like is anybody’s guess. But there are some clues that the pandemic has amplified. If you are the Owner of Class A office space, that has become a hazardous occupation. Existing deals are getting undone on a weekly basis. Back in May, Shopify announced that all 5,000 of its staff would be working from home permanently. Last week, Pinterest Inc. announced it has terminated a 490,000-square-foot lease signed just last year. It’s a mixed-use development slated to replace the San Francisco Tennis Club near the company's headquarters campus. Pinterest's agreement involved a one-time payment of $89.5 million in the third quarter of 2020 to break the lease. The termination means that Pinterest will no longer be liable for future minimum lease payments of about $440 million. One of the largest law firms in Toronto made a decision which we don’t believe has been publicly announced to keep their lawyers working at home. They are planning to reduce their office space requirements by two floors in a Class A office building. The resulting savings are estimated at about $1.4M in leasing costs per year. Moody’s Analytics estimates that the value of office buildings across the U.S. will fall by 17.2% in 2020. A recent report from CBRE shows that on average, new leases are being signed with an average rent concession of 8.9 months of free rent in the second quarter of this year. That’s up from an average of 8.4 months of free rent prior to the pandemic. Facebook announced that they expect half of their workforce to work from home over the next decade. Suburban office parks have lost their luster for a variety of reasons, including a growing preference among younger workers for life in more dynamic urban centers than in sometimes staid and sleepy suburbs. And the rapid pace of technological advancement has made the need for many clerical and processing jobs and the real estate to house those workers increasingly obsolete. These buildings are about as useful as the fax machines that you can still find hidden in the closets of some of those buildings. Many companies chose to relocate their offices into the downtown core in order to attract a younger workforce that wanted to be located in an urban setting. So the trend was back into the urban core. But today, if you drive around NYC, you will see that nearly 90% of office workers are not coming into the office. WeWork has about 2M square feet of empty space in NYC. The folks at Twitter have told their workforce that they can work from home if they choose. When they do re-open, they expect to occupy only about 20% of their current office space. Google announced a month ago that they would keep nearly 200,000 employees and contractors working from home until at least next July. Is the office model dead? No. But the model for working is changing and companies are definitely going to reduce their footprint. They will reconfigure office space to include more meeting rooms, temporary offices and more configurable flex space for those times when collaboration is needed. What we’re seeing right now is an acceleration of a trend, and a significant downward shift in the value of office space, not only the suburban office space, but also prime office space in the urban core.

Today is another AMA episode. Carolyn asks. I’m not an expert in Excel and I paid to purchase an Excel based tool for analyzing multi-family apartment projects. I’m still learning about everything the tool can do. What is your recommendation for analyzing project? Carolyn, this is a great question. In my experience, there are several different types of analysis that need to be performed depending on the exit strategy for your project. It’s that exit strategy that fundamentally changes the type of analysis you’re going to do. If the project has a long term hold component, then you want to model the construction phase, the leasing phase, the steady state operation, and finally the exit. But the exit will be different depending whether you sell the building, or refinance it. We tend to break down the project into those individual phases. Each phase has to be analyzed separately and each phase has to work on a standalone basis. For example, it won’t help to have a great long term hold if you can’t get through the leasing phase. Leasing won’t matter if you can’t get through construction, and so on. I find that most of the pre-packaged software solutions assume a single model. They assume a straightforward purchase, improvements, and sale. But the truth is that most projects are really executed in phases. The financing of those phases will often vary. For example, you might purchase the land with a small amount of equity. You might raise additional financing to go through the zoning process with a small interest reserve for the debt during that phase. From there, you will raise additional equity and debt for the construction phase. Once construction is complete, you might have a short term bank financing, and then after a seasoning period you would re-appraise the property and replace the financing with permanent financing. For that reason, we create our own custom spreadsheet each time we undertake a project. Each of these phases look like a separate project with their own financial metrics and criteria. A separate financial model is needed for each phase of the project, and then they need to tie together. When you add the different types of financing terms, that affects how the project is modelled. I’ll give you a simple example. Let’s say that you have two classes of investors, the first class of investors are straight equity investors who have a share of the ownership of the project. The second class of investors might be preferred investors. They have a rate of interest calculation on their investment and perhaps a lower ownership. Maybe their interest rate only starts to accrue when you get the building permit and then becomes payable to the investor when you get your occupancy permit, and then the interest accrual terminates when the refinance into permanent financing is complete. What I’ve described is a perfectly normal situation. But I can guarantee you that very few of the canned software solutions out there will model this correctly. By the time you’ve figured out all the formulas in the spreadsheet you just purchased don’t model your specific situation properly, you have expended the same effort as if you would have created the spreadsheet yourself. When you’re dealing with investors, or even if it’s your own money, you need to understand the formulas in the spreadsheet and make sure they accurately reflect what is actually going to happen in your project. If the financial model is different from your assumptions, then you’re going to have a problem. It’s a problem that could have been avoided if you had an analyst who is an expert both in Excel and underwriting projects of your type. That analyst needs to audit the spreadsheet multiple times until they are no longer finding mistakes in it. I realize this is probably not what you wanted to hear. But it’s my best advice based on seeing many projects.

Today is another AMA episode (ask me anything).  Kristi from Dayton Ohio asks: I had to let my most trusted foreman go. I was really sick for 3 months last March and this man became my right hand man. I let him have more control of my job sites than I normally give any employee because I trusted him. He also became our friend and would frequently send food and candy home for me and my husband. I stopped talking directly to my employees and only communicated with my foreman. We went through 38 employees since January. I had multiple complaints from my employees that my foreman would yell at them, have unrealistic expectations, and wasn't doing any work on any of the job sites, he was only giving orders. My first mistake is that I thought the job my foreman was doing for me was more important than listening to my employees who had reached out to me. I let my foreman fire the people who weren't working out. I decided to watch the work he did during a course of a week. During this week of observation, hardly anything got done, the work he did was shotty, and he tried to take credit for others work. There was no one else to blame for the short comings. He had to go. Where did we go wrong?

Our book this month is Dream Big by Bob Goff. Bob is someone who lives his own life out loud. After graduating law School, Bob decides to take a 3 month vacation with his family and visits a remote part of British Columbia. He has taken the personal initiative to build a lodge in a remote ares of British Columbia. He buys a 2500 acre parcel of land and spends 5 years building the lodge. On a visit to Uganda, he witnesses the atrocities being committed by so-called “witch doctors” against young children. He influences the Ugandan parliament to enact legislation to outlaw these practices and then undertakes to prosecute one of the witch doctors under that new law. He then realizes that prosecution is not the answer, so he starts a school for Witch doctors so that by educating them to be better witch doctors, they will no longer commit atrocities against children. He started a school in Afghanistan for girls. He has brought warring heads of state to his lodge in BC and negotiated peace treaties with zero authority to do so. A short time later, he was appointed as the Ugandan ambassador from Uganda to the United States. He is a US citizen, an non-Ugandan, and is representing the Ugandan nation as Ambassador to the US. Bob has truly done the impossible, simply by daring to dream big. But when he talks about dreaming big, this is not the idle dreamer he’s talking about. He’s talking about becoming clear on your life’s purpose and then aligning your actions to be congruent with your life’s purpose. This book is not a typical formula based self help book, even though it might sound like it from the outset. Before you can awaken to your life’s purpose, you have to get clear on who you are, and who you want to be. This is a deep exercise in introspection and self awareness. Knowing where you are is an essential part of developing that self awareness. But we’re not talking about where you are geographically, we’re talking biographically. Once you know that, you want to get clear on what you want, what you really want out of life. No we’re not talking about a new Porsche. That’s a distraction. There’s nothing wrong with wanting a Porsche. But if that’s your driving ambition, then you’re not awake to your life’s purpose. We’re not talking about what you want to do either. Some people wrap up their purpose in doing. A better approach is to determine who you want to be and use that to inform what you want to do. Now Bob, is a person of Christian faith. He does make references to that faith in the book. I’m not of the same religion as Bob, and his references to his faith might be problematic for some. They were not for me. Regardless what you believe, his exercise in clearing your life of everything and putting back only the things that truly matter is critical to fulfilling your life’s purpose. You can’t accomplish anything of significance if your life if cluttered with too many distractions. Bob Goff personifies the word Audacity. He takes the time to get clear and do the unconventional if it furthers his dream. But these are not just idle dreams. You see if Bob had done just one extraordinary thing, like opened a school in Afghanistan, that would be cool. But he’s a serial dreamer who has figured out how to execute one audacious idea after another. Has he failed? Sure. He’s failed plenty. But no different than the best baseball players in the world are batting less than 500. Michael Jordan, one of the best basketball players of all time, has lost more games and missed more shots than anyone. But then he’s probably taken more shots than anyone. The size of your ambitions don’t necessarily indicate the difficulty of achieving them. Think instead of the magnitude of the impact they’ll have on your life and the lives of the people around you.

Today is another AMA episode - “Ask Me Anything”. David asks, I know that every year you have a goal setting workshop. You most likely established some very detailed short and long term goals. How have these goals been impacted with the current change in world events? David, That’s a great question. 2020 is emerging for many as one of the most uncertain years in recent memory. It started with the Covid-19 back at the end of January. Last week, it was Hurricane Laura, decimating one of the communities that I have several projects underway. I would not have predicted that I would spend days with my mental energy consumed by hurricane and its aftermath. As you rightly pointed out, I’m a huge believer in goal setting. In fact, one of my goals this year is to hold my annual goal setting workshop in the first week of December. We plan to hold it in the beautiful Banff National Park area where we have a portfolio of properties and we can minimize the risk of disease transmission. But from where things stand right now, I’m not sure if we will get to even hold a face to face event. I can tell you that it is difficult to hold an effective event that requires deep introspection when done over a virtual environment. There are simply too many distractions in the home office. We will see if we hold the goal setting workshop this year, and if so, how we will do it. So back to your question. In the last week of November of 2019 I spent three days on the beach in Mexico with a small group of like minded entrepreneurs setting goals. It’s a deep exercise in which you focus on getting alignment of your values. There are two types of goals that you can set. You can set attainment goals. These goals are things that have a tangible outcome. You might set a goal of buying a new house or buying your first investment property in 2020. That would be an attainment goal. The second type of goal is a habit goal. This is where you might set a goal of meditating daily, or running two miles each day, or getting 8 hours sleep daily. That’s a habit goal. So when we talk about goal setting in 2020, we need to look at both attainment goals and habit goals. In my case, most of my attainment goals for 2020 are progressing but are delayed. The truth is, we are still on track to accomplish those goals on a later timeline. One thing that many people struggle with is abandoning a goal when the original objective can no longer be met. In our culture we have a highly competitive social conditioning on ideas like success and failure. So much of that definition is based on comparison culture. Did you meet your objectives for the quarter? Did you win the basketball game? Did you meet your sales quota for the month? On July 1 we reviewed the book “The Infinite Game” by Simon Sinek as our book of the month. In that book, Simon distinguishes between the finite mindset and the infinite mindset. In the infinite mindset, you are not playing the win-lose game. You’re playing the game of continuous improvement. You’re focused on how you’re using your most precious resource, that is time. The fact is, much as we would like to be in control of our lives, that are some things we can control, and other things we can’t. Getting clear on what we can control is essential to making those choices. It’s easy to get into a mindset that says your hands are tied. The truth is, you have a lot more choice than you might think. Surprises can invert your priorities in the short term. In an uncertain environment, my focus is on my habit goals.

Chris Arnold is a real estate investor based in Tulum Mexico. He's a specialist in using old fashioned radio to market his real estate business. Today's conversation on using radio is packed with wisdom on how to market effectively. You can learn more or reach Chris at wholesalinginc.com/reiradio

David Holman is based in Portland Maine where he runs Holman Homes and Katahdin Property Management. On today's show we're talking about the experience of renting to new immigrant families.  You can reach David at KatahdinManagement.com. Such a great conversation.  

In June of 2019, the Securities and Exchange Commission issued a draft working paper in which they solicited feedback on a possible change to the definition of an accredited investor. The idea was to increase the number of investors who would be eligible for making main street investments. Over the span of several months, the SEC collected input from the investment community. Thousands of people send comments on the proposal, including yours truly. Yesterday, the SEC announced the new definitions. I’m going to quote directly from their press release. You can read the full press release here.  "The Securities and Exchange Commission today adopted amendments to the “accredited investor” definition, one of the principal tests for determining who is eligible to participate in our private capital markets.  Historically, individual investors who do not meet specific income or net worth tests, regardless of their financial sophistication, have been denied the opportunity to invest in our multifaceted and vast private markets.  The amendments update and improve the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in those markets." The details of the new definitions are contained in the accredited investor definition in Rule 501(a): add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order.  In conjunction with the adoption of the amendments, the Commission designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons.  This approach provides the Commission with flexibility to reevaluate or add certifications, designations, or credentials in the future.  Members of the public may wish to propose for the Commission’s consideration additional certifications, designations or credentials that satisfy the attributes set out in the new rule; include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund; clarify that limited liability companies with $5 million in assets may be accredited investors and add SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs) to the list of entities that may qualify; add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered; add “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act; and add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors. So what does this mean for syndicators? It’s too early to say exactly. We are waiting on guidance from our own securities lawyers on how to interpret the new changes. We’ll do another episode in the near future once we have some legal opinions to share on the topic. From my perspective, this is a welcome change that will become effective 60 days from now.

On today’s show we’re bringing you an up to the minute update on the major hurricane that slammed into the Gulf Coast overnight. We’re talking about a major category 4 storm called hurricane Laura. About half a million people were evacuated from the low lying coastal area. Some people I spoke with drove as far as Austin Texas, 5 hours away in order to find a hotel room. We have several projects in SW Louisiana. So what was happening in Lake Charles is of direct personal interest. We have staff, residents, suppliers, lawyers, accountants in the market that we speak with on a daily basis. The short time available for preparing for the storm illustrated where we had weaknesses in our emergency preparedness. For example, in the future we will have a checklist for protecting key pieces of equipment, and records. When the staff closed down the office, we can only hope that they took the appropriate precautions. Some things will have been done well and others, perhaps not. We will certainly do a lessons learned and put some process into emergency preparation. But the important part is that we will carry that beyond our Lake Charles team into the other geographies. Some of those areas also have tropical storm threats. We knew there would be major power outages across the region and we took additional precautions by disconnecting the power to our buildings and powering down the water treatment plants and sewage treatment plants. These systems will be restarted in an orderly manner when power is restored following the storm. The national hurricane center published a map showing the impact of the storm surge, even 30 miles inland from the coast. That forecast predicted widespread flooding across several hundred miles of coastline, and up to 30 miles inland. If you stayed in the Lake Charles area, you’re getting wet. Now that the storm has passed, we know that the major impact was from the wind and that the storm surge was much less than predicted. Overnight we had reports of downed trees, of many broken electrical utility poles and downed power lines. We saw many broken windows and lots of debris scattered through the streets. One of the things that makes these storms so damaging is that the wind changes direction. Once the eye of the storm passes over you, many structures have been weakened or compromised. Then the backside of the storm brings back the hurricane force winds from the opposite direction and that’s when the real damage happens. You have a weakened structure that can’t handle being hit a second time from the other side. Whenever there is a major storm, people dig out their insurance policies and start reading policies, if they even have the full wording of the policies at all. Most of the time when we buy insurance, the insurance broker sends a one page quote with a signature line at the bottom. We always ask for the full policy and we’re often met with surprised reaction. What that tells me is that most people don’t really know what their insurance coverage is. Many policies have exclusions or limitations for named storms. Certainly Hurricane Laura would meet the definition of a named storm. Most policies have limitations on their coverage for water damage. They make a distinction between wind damage and water damage. If your building was damaged by wind and then water got into the building because of the wind damage, that would be covered under wind damage. But if the water came up from below, either because of a storm surge or because of a sewer backup, then that would be covered under a flood insurance policy. The insurers make a distinction on where the water came from when it comes to insuring that risk. As far as we know, all of our staff complied with the mandatory evacuation orders and will be fully ready to get to work on the cleanup in the coming days.

On today’s show we’re talking about what is happening in the world of hospitality. The American Hotel and Lodging Association is an organization that represents the hotel industry in North America. The AHLA reports that since the public health issue began escalating in mid-February in the U.S., hotels have already lost more than $46 billion in room revenue. This figure is devastating with hotels currently on pace to lose up to $400 million in room revenue per day based on current occupancy rates and revenue trends. Earlier this year I attended a virtual conference of hotel owners. In that conference, the owners talked about their forecast for the remainder of the year and the measures they had taken to protect the solvency of their businesses. Most hotel owners had assumed occupancy of 50% for the year, and had assumed that they needed enough cash to survive until September. Well, here we are in the last week of August. Last week, financial analytics firm TREPP issued a report on the delinquency rate in hospitality industry for those hotels that have debt in the CMBS market. The numbers are somewhat shocking. To be clear, we’re talking about hotels that have CMBS loans. We have no reason to expect that hotels with other forms of debt would intrinsically be in better or worse shape. They should be about the same, but we don’t have hard data on that aspect. The report highlighted 10 metro areas across the united states. The New York area had about $1.5B in delinquent loans representing 53 hotels and 39% of the market. Second was Chicago with $976M in delinquent loans spread across 28 hotels representing 54% of the hotels in market being delinquent. Houston has $664M of delinquent loans across 40 hotels representing 66% of the market. As a point of comparison, the delinquency rate in December of 2019 prior to the pandemic was 1.34%. The overall lodging delinquency rate increased to 2.71% in April and to 19.13% in May. The percentage of loans that are 30 or more days delinquent is 23.4% as of July 2020. This is the highest percentage on record. We have about $20.4B in hotel loans that are delinquent 30 days or more. At the height of the post 2008 financial crisis, there were $13.5B in delinquent hotel loans. We have a serious economic crisis underway and governments the world over are busy fighting over votes. This is like re-arranging the deck chairs on the Titanic while the ship is sinking. I was invited to attend a webinar tonight to discuss the investment opportunity for a new construction hotel in San Antonio. The numbers in the projection were glowing. It’s as if they forgot there is a pandemic underway. They’re assuming it’s all over by the time the hotel is built and that travel patterns return quickly to pre-pandemic levels. That’s far from assured. Why? Because the airlines are shrinking their businesses as well. If there is less air travel, then there is less demand for hotel rooms. The question is, why would an investor who wants to invest in hotels put money into a new hotel, when they can probably buy any one of several thousand distressed hotels for pennies on the dollar. For those who truly understand the dynamics of the new travel industry, there will be opportunity to make some spectacular investments. But this will require some guts and some well placed bets before the outcome is obvious.

My friends Jarrrett and Raja are magicians. They live in Las Vegas and they’ve had a magic show at the Stratosphere Hotel. They’ve been semi-finalists on America’s Got Talent. They’ve been featured frequently on the TV Show Masters of Illusion. They’ve even appeared on the TV Show Shark Tank. I’m sorry to disappoint you that when the canvas booth goes up in flames and the girl disappears from the booth and appears seconds later across the room floating in a water tank that’s inside a Grand piano, it’s not magic. It’s an illusion. Well folks, magic doesn’t happen in real estate either. I get so many questions from listeners that follow the same theme. I see real estate listings from brokers that assume magic happens. When I say magic, I truly mean magic. Let’s imagine that you were running a retail store. Customers come into the store. They buy your product at the retail price and you purchased the inventory at a wholesale price. Your profit quite simply is the retail price, minus the wholesale price, right? No, of course not. You have to pay rent on the space for the store, and you have to hire cashiers to take payment, and inventory managers to manage the inventory levels and purchasing of new inventory. You have to spend on marketing and advertising. All of that costs real money. If you don’t account for the actual management of the business in your business plan, then you’re relying on work getting done by magic. I really want to banish the term passive income from the dictionary because it doesn’t exist. All of these businesses are active businesses. There was a question from Joe who is evaluating a 20 unit mobile home park. The mobile home park is at 80% occupancy and has $59,000 in gross income. After expenses, the park nets about $37,000 a year in net income. The 20 unit park is on an 8 acre property. At a purchase price of $375,000, Joe is wondering if this is a good deal. The problem with this deal is that it assumes that magic is happening. If you don’t have a person dedicated to managing the business, then nobody is managing the business. A 20 unit park is not large enough to hire a dedicated manager. So that means hiring a part-time manager, and a part time maintenance person. That’s a problem. If you finance $300,000 of the purchase at 5% interest, you’re looking at an additional $24,000 in debt service. So the cash flow is now $13,000. That assumes that nothing goes wrong, that you don’t lose another tenant, that the septic system doesn’t need repairs, or that the water well doesn’t face contamination from an agricultural source. So often, I see these financial projections put together based on a snapshot of recent performance. But the problem is that these snapshots are incomplete. There are categories of work that attract real expense. The projection of $37,000 in profit and a 10% cap rate is a pure fantasy. There is no money allocated in the expenses for cutting the grass on 8 acres. That amount of landscaping will cost nearly $1,000 a month if the grass is cut weekly. The point here is not to dig into the weeds on this particular deal, but to frame the problem. Last week, I visited a historic manor inn. The Inn is in a wonderful location. It’s a perfect venue for hosting weddings. It has been beautifully decorated and the rooms would attract a high nightly rate during peak season. It’s a perfect setting for corporate retreats. What’s the problem? It only has 11 guest rooms. It’s too small to be economically viable. Unless the operator lives onsite or nearby and acts as an owner/operator, the economics don’t work. This is the problem with projects that are too small. They rely on real work happening that isn’t allocated in the operating budget. When something happens for free in a business, that’s magic. We all know that magic doesn’t really exist. It’s just an illusion. There is a sleight of hand happening.

Today is another AMA Episode (Ask Me Anything).  Paul asks: "I have been acquiring gold/silver since December of last year. Outside of a small physical holdings possession what do you recommend for storage for a larger portion of your holdings? I have heard Russel Gray talk about holding gold/silver and then borrowing against it to buy real estate. I love the idea but my search hasn’t found a trusted institution to do this? I believe you have mentioned in your Podcast you have bought from your bank. Would you be open to sharing your thought on how to find a custodian to store and borrow from your own precious collateral?" Paul, this is a great question. In fact there are a couple of questions wrapped up in this question. Let’s take a step back and talk about the purpose of holding physical gold. Of course, the amount of gold that you hold will ultimately influence your decision on where to store it. Gold is a store of wealth. It’s money, one of the only true forms of money. Although the government would like to have you believe that it’s not. It used to be of course. When you buy gold, there are many forms you can buy gold. Most people buy gold certificates. We don’t recommend it. Just because most people do it, doesn’t mean it’s the best thing to do. When you buy gold certificates, you’re buying a futures contract on gold at the spot price for gold. But the biggest problem with certificates is that you’re only holding a piece of paper. The piece of paper is essentially an IOU. This is not different than holding US dollars which are an IOU. It is subject to counterparty risk. The IOU is only as good as the company providing the IOU. The 2008 financial crisis showed us how even a legendary name like Lehman Brothers with over 150 years of history could leave an investor exposed. I’m personally a fan of holding the real metal. So when you buy gold, the question is where to buy it from? There have been a few isolated cases of counterfeit gold being sold on the open market. So you need to buy from a reputable dealer. Generally, these dealers buy directly from the mint, or from a distributor who buys from the mint. I like holding gold at private security companies where the records of who holds the safe deposit box is kept private. Your second question is where to store gold that his being held as collateral? You have a few choices. You can allow the lender to hold your collateral if you trust them. It’s more common to have collateral held by a third party who is in a fiduciary role where the functioning of that trustee is documented in a trust agreement. There are trust companies that can act as the trustee for precisely that purpose. They charge a fee for that custodial role and you need to decide if that fee is worth the additional security of having the collateral being held by the trustee. Sometimes the trustee can be an individual like a lawyer, if you are confident in that person fulfilling their role as trustee. After all, lawyers do have trust accounts where they hold money on behalf of their clients. This is conceptually no different. Let’s say that you want to invest in real estate. You might have some gold and you don’t want to sell the gold. Clearly you’re going to pay a higher interest rate to borrow funds with no security. You can use the real estate as collateral for a portion of the loan. But the remainder, the equity is the more expensive money to find. What if you could borrow money against your gold to fund the equity portion of the purchase?

Ari Rastegar specializes in upgrading and repositioning multi-family apartments to A-Class finishes at discounted prices in secondary markets. He's based in Austin Texas which is on the cusp of becoming the 10th largest metro in the US. You can reach Ari at https://rastegarproperty.com/.

Today's show is an excerpt of a conversation with George from earlier this week. George taught negotiation in the law school at NYU for over 20 years.  The outline of his course formed the basis of his best selling book on negotiation, which was published in 17 languages by John Wiley and Sons. On today's show, we're looking at a real life case study on how to negotiate the purchase of a property. George provides his perspective based on his years and hundreds of transactions in which he was a principal negotiator. Today's show is filled with pure gold. Enjoy...

On today’s show we’re talking about a new policy that positively affects owners of short term rental properties. As of August 20, 2020, Airbnb announced a global ban on all parties and events at Airbnb listings, including a cap on occupancy at 16. This party ban applies to all future bookings on Airbnb, and it will remain in effect indefinitely, until further notice. Today’s show is an excerpt of an interview that I had with a news reporter for CBC Radio and TV in Montreal on the topic of AirBnB’s new policy.

On today’s show we’re going to take a brief history lesson for the year 2020. We saw the first outbreaks of the pandemic in China, followed by countries where the infection had spread. These included Korea, Italy, Japan, Spain and France. Soon after followed Switzerland, Belgium, Sweden, the US and Canada. For much of the Winter and early Spring, North America was about 3 weeks behind what was happening in Europe. Critics in North America tended to dismiss what was happening in Italy as something that was specific to Italy. It won’t happen here in the US or Canada because Italy has an older population. It won’t happen in Canada because there is less population density. It won’t happen in the midwest of the US because there is already social distancing built into the way people live. Yet, there is a trend in almost every conversation...and that is the person agrees that the pandemic is a problem, but it won’t be a problem here. Why? There’s always a reason, until they’re wrong. At the other end of the spectrum, there are those who say there was no need for a large scale lockdown. The number of cases didn’t explode in their community and the damage to the economy was needless. So here we are again, with a near doubling of new cases in France and Spain in a very short time period. Many European countries have implemented new travel restrictions based on the increased number of new infections. Spanish authorities have flagged social gatherings—in nightclubs and among family and friends—as the primary source of infection. In France, high-risk workplaces and medical facilities have been the top sites for disease clusters. I was reflecting on those situations when I used to catch a cold. So far this year, I have not caught a cold. The last cold I caught was in July of 2019 when I attended a wedding. I haven’t had one since. Before the pandemic, I rarely used to catch a cold. If I did, it was because my children brought it home from school. Sometimes I would catch a cold from attending a conference, or perhaps someone seated nearby on an aircraft was coughing and sneezing. Catching a cold required contact with those who are infected. I know I’m not telling you anything earth shattering. So now, we have schools going back into session. Some schools have already started holding in person classes. We have differing protocols from one school board to the next. Some schools are requiring children to wear masks. Others have established plastic partitions in the classroom. Others are reducing class time to three days a week. Some have chosen a mix of hybrid online and classroom teaching. Some schools have reduced the number of subjects being taught at a time. The hope is that by concentrating the full year math course into a full-day 6 week period, the amount of social interaction will be reduced. These measures might help. But it’s fair to say that we are heading for another wave of increased covid-19 infection. Where this will hit, and when, or how broadly is anyone’s guess. Just like in the Spring of this year, we looked to Europe to see our future. I’m going on record, right here, right now as predicting that we will see another wave of infections. Those businesses that rely upon social gathering or movement of people will take another hit. That means a further setback for travel, hospitality, food and beverage, car rentals, and live entertainment. Some geographic areas have the core of their economy built on tourism. I’m thinking of places like Las Vegas, Orlando, many islands in the Caribbean, coastal beach towns. These sectors of the economy are going to be hit again. If you want to see your future, look ahead to Europe.

On today’s show we’re talking about what it takes to increase profitability or reduce the cash burn rate in the pandemic environment. Many businesses have taken advantage of the government programs that have provided emergency funding. But the indications are that emergency government funding is going to reduce or come to an end over the coming months. Now is the time for businesses to tighten their belts and focus on expense reduction before those subsidies expire. The biggest expenses for most businesses are debt service, taxes, employee salaries and other fixed costs like contracts. At a time when businesses are being tested for resiliency, this is the time to focus on improving profitability. That means a combination of tactics and strategy. Strategy is all about improving revenue, new marketing, new sources of income. These approaches can have a big impact on business performance. But when you focus all of your attention on the strategy, these changes sometimes take longer. There is also something to be said for working on the short term tactical. If you have suffered a loss of revenue during the pandemic, you are probably dealing with a drop in cash flow, or even negative cash flow. That means focusing on expense reduction. It’s amazing how much a company can accumulate in terms of discretionary expense over a period of time. Expenses that made perfect sense on the day they were approved, might be of lesser value a year later. Subscriptions are one of the biggest culprits. Now sometimes these expenses are small, which is why they’re allowed to linger, month after month. I’ll give you a good example. My company hosts its mail with Google using their business applications suite. Each email account costs $6 per month. For the quality of service, Google delivers a tremendous amount of value for $6. But there are two items that make a big impact on the profitability of a real estate project. Lowering interest costs Lower property tax costs Many cities are under pressure to cover revenues lost during the pandemic. They’re not allowed to borrow funds to cover operating expenses. As a result, you can expect significant property tax increases. There are two ways that cities increase taxes. The first is by increasing the tax rate charged against the assessed value of a property. The second way is by increasing the assessed value. The tax rate is something that is debated at city council and passed into municipal law. But the property assessment valuation is a hidden tax increase. If they deem that your property went up in value by 10%, well then your taxes just went up by 10%. The responsibility rests with you as the property owner to contest the valuation increase and maintain a lower valuation for tax purposes. Large developers that I know maintain a full-time position for the sole purpose of contesting property tax valuations. On a large portfolio, the savings more than pay for the salary for that person, and still result in a net tax saving to the owner. So you want to be contesting your property value assessment and making arguments that your property has been unfairly assessed. The second big saving comes in lowering your debt service. That can come in several different ways. You can refinance over a longer amortization period. This will go a long way towards reducing your monthly principal and interest costs. We are in an era of historically low interest rates. These rates are projected to persist for the next couple of years based on guidance from the Federal Reserve, and numerous other G20 central banks around the world. If you have high interest bridge loans, you want to negotiate better loan terms with your existing lenders, or replace those loans with lower cost debt.

While I don’t pay close attention to the stock market, there are a few rare exceptions that are worth noting. One of them is Warren Buffet’s Berkshire Hathaway. Buffet and his partner Charlie Munger don’t invest in the stock market. They buy companies, and happen to trade the shares through the stock market if they’re publicly traded companies. Berkshire Hathaway filed their 13F form with the SEC for the past quarter ended June 30. In that form, they disclose their holdings. From that form you can compare their current holdings with the previous period. It’s an exercise in addition and subtraction to figure out what they did during the quarter. There are a few items that are noteworthy from that report. BH unloaded more than a quarter of its stake in Wells Fargo. They also sold about 61% of its position in JPMorgan Chase, and dumped its entire stakes in Goldman Sachs. They also sold their stake in PNC Financial. Finally, they also exited their holdings in the airline industry including American Airlines, Delta Air Lines  United Airlines and Southwest Airlines. It marks a rare moment when BH has lost money on an investment. So that’s what BH is getting out of. What’s interesting is what BH has been buying over the past 90 days. They spent $563 million on a position in Barrick Gold. While the position is only about a 5% stake in the company, there are a few things significant about this. When you are buying a gold mining company, you’re really buying gold at a discount. The process of mining gold only makes sense if the cost of getting the gold out of the ground is substantially less than the cost of buying gold on the open market. The recent run up in gold prices makes this an even better buy. The disclosure is only reporting the purchases up to June 30. Another 6 weeks have passed and it’s likely that they have increased their ownership position since then. Barrick is a well managed company. They don’t take a ton of risk when it comes to exploration. They take a disciplined approach to mining. So Buffet has decided that the airlines are going to take far too long to bounce back to invest in them. The banks and financial services represent a sizeable downside risk as we go through this economic cycle. Gold is a good buy. When you buy anything, the idea is to know what it’s worth when you buy it. For example, I can value an apartment building based on rents, expenses, and market cap rates. The analysis is never perfect, but I can project future cash flows and market-based asset prices, and derive an appropriate value for what an asset is worth. But gold does not intrinsically generate cash flow like a business or rental property, so that analysis doesn’t work. People often try to predict the price of gold by examining certain financial benchmarks. For instance, in theory there are some loose relationships between the gold price and the money supply. But these relationships are far from perfect. There’s another theory that gold prices increase because the dollar is weak. But this relationship is also far from perfect. Finally, there’s a theory that the gold price is correlated with ‘real interest rates’, i.e. the rate of interest after adjusting for inflation. This relationship is also far from perfect; The bottom line is that there’s no magic formula to tell us what the gold price should be. Dollar weakness, real rates, and money supply are all useful indicators. But they’re not predictors. For the most part, the price rises when people lose confidence in the financial system, in their government, in their central bankers, or in each other. And that’s what we’re seeing now. Ignore Warren Buffet at your peril.

On today’s show we are talking about how the narrative in your mind is selecting the data from which to make decisions. To properly frame today’s discussion, we need to look at two things: The data itself The way you process the data Let’s start with the data. There is no question that the data showing up in the market is contradictory in so many ways. We have the stock market in record territory and at the same time we have economic contraction and unemployment in record territory. We have record low inventory and rising prices in many real estate markets at the same time as we have millions of properties in financial distress. But almost none of those properties are appearing on the market as distressed properties. We have rising real estate debt and falling consumer debt. We have signs of economic recovery and looming signs on the horizon of a second wave of infection coming in the pandemic. Although it’s too soon to say whether that is indeed what is happening. We have some school boards reopening and others not. How many people will be home schooling their children this year and what will be the impact on the employment workforce of those millions of individual decisions? People are for the most part paying their rent. What will happen when the emergency financial aid comes to an end? It’s truly difficult to make sense out of all of these conflicting data points that under normal conditions would be useful in determining the current state of the market. Ok so the data is confusing to say the least. The question is how are you processing the data and deriving conclusions based on that data? To answer that question we’re going to look at how people listen. Whether you’re listening, or reading, or watching, you’re processing what is coming at you in one of eight different ways. What I’m going to share with you now is something that I developed a decade ago called the 8 forms of listening. I’m going to mix a metaphor here. When I’m talking about listening, I’m also talking about reading or viewing. So here we go with the 8 forms of listening. 1. Ignoring listening 2. Partial listening 3. Selective listening 4. Active listening 5. Empathic or sympathetic listening 6. Know it all listening 7. Pretend listening 8. Focused listening

Today's guest went to Stanford Business School in 2011 and started an online used car company after graduating in 2013. Nicholas raised a total of $10M, went through the startup accelerator Y-Combinator and sold his business to Carvana in 2017. After the sale of his company, Nicholas started investing into real estate projects in Phoenix. The founder realized that real estate is a fantastic assed class for entrepreneurs. After leaving Carvana, Nicholas and his former co-founder Chris joined forces again to build a digital platform to refinance auto loans, called WithClutch.com.

Gary Pinkerton's career trajectory into real estate was definitely not typical. He spent 26 years serving as a Submarine Officer in the U.S. Navy, including commanding the nuclear attack submarine USS TUCSON from 2009-2011 and retiring as a Captain. On today's show we are talking about making career transitions in mid-life and how to navigate the uncertainty of that transition. You can learn more about Gary at www.garypinkerton.com or connect with him through his website. Gary is also the host of the Heroic Investing Show with co-host Jason Hartman. You're going to love this heart centered conversation with Gary Pinkerton. 

On today’s show we’re going to ask a fundamental question about business structure. I’m not going to answer the question. But give you something to think about. The potential problem arises when you have a mismatch between a short term revenue commitment from your customers and a long term expense commitment in your business. These situations arise all over the industry. Starbucks signs a multi-year commercial lease for a location. But the customers are not making a long term commitment to buy coffee. A customer commitment to a coffee is a 15 minute commitment. Somehow, the folks at Starbucks are comfortable and confident with the notion that someone who bought a coffee today is likely on average to buy a coffee tomorrow even though there is no long term commitment to do so. In the co-working space, companies like WeWork and others in the same segment are experiencing a dramatic drop in revenue because customers in many cases had a 30 day commitment to the space. Whereas the co-working landlord had made long term financial commitments. Critics of the business model point to the 30 day commitment as the Achilles heel of these companies. I too have been a critic of WeWork for that reason. But the exact same theoretical problem exists all over the place. The entire Self Storage industry is based on the notion of customers renting a storage locker in 30 day incremental commitments, and the storage company has a long term commitment to the business. The entire hotel industry is based on clients making a one night commitment. You can cancel free of charge up to 6PM on the night of arrival. Yet the hotel owner builds a multi-million dollar, building complete with swimming pools, conference facilities, a restaurant and a big fancy lobby. All of this for a one night commitment of revenue. Most of the time these mismatches between a short term asset and a long term liability work out just fine. Then again, in the rare case it results in complete business failure. The entire rental car industry is suffering terribly because of this fact. Hertz Rent A Car is in bankruptcy because they have long term commitments to their bond holders to the tune of $19B dollars. Here too, customers commit to rent cars one day at a time. The airlines purchase an entire fleet of aircraft where each aircraft costs a couple of hundred million dollars. Many of these purchases are financed. In some cases, the planes are leased and there is a long term lease. The customer on the other hand is committing to fly to London and back over the next couple of weeks. Maybe you’ve purchased a property and put it into the short term rental market with AirBnB or VRBO. You have mortgaged the property to get some bank financing for the next 25 years. Again, the customers are committing to a couple of nights stay at your beautifully furnished vacation rental by the lake. You’re starting to get the idea. It’s easy to look at WeWork or Hertz and have sage wisdom on the folly of their business model. It’s easy to be an armchair quarterback and say how you would do it better. But the reality is so much of the business world and the lending world has accepted the notion that a mismatch between the lifespan of an asset and that of a liability can be different. But that mismatch has some risk inherent in it. The greater the mismatch in time, or the greater the volatility of the revenue, the greater the risk. The risk is of a pandemic, or a terrorist flying a jet into a building, or armed conflict, or social unrest. Any of these things can result in business disruption that can expose the risk to the revenue stability. Again, I don’t have all the answers. But it’s something to think about how you mitigate that risk, incredibly small as that risk may seem on the day you sign on the loan agreement.

On today’s show we’re talking about how to interpret price volatility. Property prices tend not to be that volatile from one day to the next. If your goal over the long term is to acquire property, you’re happy that prices rise when you’re selling, you’re happy that prices rise when you look at your statement of net worth. But if you’re looking to acquire more, you are happy when prices fall so you get some bargains. We’ve seen the price of gold fall from a high of 2084 on Aug 6 to below $1,900 in less than a week. That’s a 10% drop in a week. I bought more gold this week. It was more expensive than the gold I bought in March and less expensive than gold a week ago. For the speculator, these price swings are headline news. Price swings cause anxiety and they drive emotional decisions. But for the professional investor who truly understands the fundamentals of the market, these moments are like finding your favourite food on sale at the grocery store. The reaction is, Wow, I just got a bargain. It’s not life changing. You just got something that you were going to buy anyway on sale. I just placed an offer on some land. Prices are rising in the market and the level of competition for quality properties has risen dramatically. When a bargain comes along, you execute. One builder I spoke with this past weekend had 200 offers in the first hour for 8 building lots that were released on Saturday at 11AM. A professional investor is looking past the next few hours, or the next week, or the next month. They’re focused on portfolio building. The professional investor knows that real assets are a hedge against inflation. We also know that there will be a flight from the world’s weakest currencies to the world’s strongest currencies. Much as the US dollar is a hot mess right now, it’s hard to identify a currency that better. While the US dollar is being devalued by excess printing, the demand for US dollars outside the US seems to be growing as fast as the Fed can print them. Printing money is a strategy that works for a period of time, until it doesn’t. Printing of money has the effect of making the currency less valuable. An original oil painting is worth the most. A limited edition print copy of the painting is worth less than the original, but will still have some value. An unlimited number of photocopies renders the copies virtually worthless. So it is with currency. When we sell assets, we don’t aim to sit on the cash for very long. We aim to sit in dollars for a short period of time and then exchange for another hard asset fairly quickly. Now is the time to accumulate dry powder and to be ready to execute on opportunities when they present themselves.

The thought experiment goes something like this: “Which came first, the chicken or the egg?” Some people decide to go around that circle a few times and then give up. Others will go to Charles Darwin’s “Origin of Species” and argue that the Chicken evolved from a prehistoric bird dating back to the time of the dinosaurs. Others will tell you that the Chicken, like all living things are creatures of God and it was God that gave life to the Chicken. But if we put that philosophical argument aside for the moment, we can safely say that if we have an egg, there’s a good chance that once it hatches, we will have a full grown chicken in a few months. It’s also pretty clear that if you go to your local farmer and buy an egg, you’re going to pay less for the egg than you would pay for a full grown chicken. Yes, I know, the egg will become a chicken, but it’s not a chicken now. The discount for an egg compared with a chicken is much more than simply the time value of money over a few months. This is such an important idea that I’m going to say it again. The discount for an egg compared with a chicken is much more than simply the time value of money over a few months. When we’re talking about an egg and a chicken, it’s pretty clear that an egg is not a chicken, a chicken is not an egg, and they’re priced differently for a very good reason. They’re not the same thing, even though the egg might become a chicken in the near future. Once the egg hatches, it becomes a chick. You might pay a little more for a chick than an egg, and you would pay an even higher price for a full grown chicken. So why are we talking about chickens on a real estate podcast? Because when we find undeveloped land for sale that has not been approved for development, you are finding the land equivalent of an egg. Yes, you can go through the zoning approval process. You can have the site plan drawings completed. You can hold the community meetings and collect the feedback from the community. You can develop the storm water management plan so that your newly developed property won’t cause flooding on your neighbour’s property. Once the property has been approved for development, and the site plan has been approved, and the building permit has been issued, the land is clearly worth more because it’s a large step closer to being a full grown chicken. I was recently offered a property that was zoned DR. DR stands for development reserve. That means that it is land that the city has designated for development. But it’s not approved for development yet. You would have to go through the process to get the land rezoned. The city will eventually approve that land for development, when city council decides that its ready. Maybe that means when there is capacity in the local schools. Maybe they’re waiting for an upgrade to a water main, or a larger sewer pipe. There can be all kinds of reasons why a city might delay the approval of a particular land use. This particular seller was valuing the land as if it had already been fully developed, and all the services were in place. But the truth is, this land was not a full grown chicken. It was still very much an egg. I’m not going to pay the same price for an egg that I would pay for a full grown chicken. Needless to say, I didn’t buy that property from her. She said that she was expecting another offer that very same day. I wished her the best of luck. I’ve had so many conversations with land owners in the past week where the land owner is trying to sell a chicken, when in fact, all they have is an egg. I don’t care whether you buy a chicken or an egg. Both are perfectly valid purchases. Just don’t pay the price for a chicken, when all you’re buying is an egg.

Today is another AMA episode, Ask Me Anything Joseph asks. A friend of mine has contacted a person who is both a coach and a source of turn-key properties. My friend likes the idea of a one-stop-shop to get their start in real estate education and investing. The arrangement involves paying a coaching fee and then partnering 50/50 with the coach / trainer on each turnkey property. I did what searching I could do (some of this on bigger pockets and just random google searching); the reviews seem to be all over the place. The BBB doesn’t  list him as a bad business person. I’m concerned for my friend though who worked hard to save up the cash to do this. What do you think of this arrangement? Joseph, this is a great question. First of all, the coaching fee you quoted seemed fairly low. It’s certainly a lot less than I charge, but then I don’t work with rookie investors. It sounds like your friends are trying to accomplish a few things at once. Learn about real estate investing. Buy some investment property. Minimize the time they invest in the management of the properties. There is a lot of confusion in people’s minds about what an investment really is versus an active business. The confusion arises because “Real estate can be a good investment.” The fact is, a rental property, whether it is turnkey or not is an active business. Sometimes an operator aims to make it appear like a passive investment by calling it a turnkey property. Working with an experienced professional property manager who is acting in the best interests of the property owner is the key. Here’s the problem that I see with the proposed structure. There is an inherent conflict of interest. The person providing the education is teaching the student to buy the coach’s product. I don’t like the structures where there is a knowledge imbalance and the student is assuming a disproportionate amount of risk. The coach needs to be in a pure coaching If the coach is putting up 0% of the money and remaining in the deal for a 50% stake, then the risk is high. If the coach is putting up 50% of the money for their share, then the interests of the partners are aligned and the coach has significant skin in the game. In order to be successful in your real estate investing business you need three things. These are the same three things you need to be successful with anything in life. You need the knowledge. This you can get from courses, from books, from your local REI Club, from podcasts. And yes, you can get knowledge from a coach as well. But sadly that’s not enough for you to be successful. You need the emotional fortitude to be successful. That’s a matter of getting your emotions under control so that they’re not driving your business decisions. You need to become immersed in the environment where you’re hanging out with other real estate investors on a regular basis and masterminding around what’s going on in your business. Joining a real estate mastermind can be a really effective way of accomplishing this. Simply hiring a coach may not give you all three of these things I’m a believer in hiring a coach. I have a handful of clients who having approached me have hired me as a coach.  I don’t advertise that service at all. The coaching fee that your friend was quoted is very reasonable. But it’s hard for me to assess what they’re getting for that price. To recap, I don't like structures that have an inherent conflict of interest. 

On today’s show we’re talking about the health of a high turnover businesses. One business in particular that has been very hard hit during the pandemic is senior housing. Under normal circumstances, those entering assisted living are there on average for about three years. Some facilities offer respite care, but most residents are there until they move into a skilled nursing facility, or if they decline quickly, they go into hospice. Senior housing relies in a continual flow of new residents coming into the homes to maintain their occupancy. Generally speaking, there has been a lot of construction of new senior housing in anticipation of the baby boomers aging out of their homes. It’s expected that the size of the senior housing industry is going to double over the next decade. So much of this excess supply will eventually get absorbed. So here we are in 2020, in the middle of a pandemic that has impacted many senior care homes. The stories of homes that have been devastated by outbreaks of Covid-19 have made headlines. There have been a handful of really badly managed situations, acute staff shortages, resident neglect and high death toll. On the other hand, the vast majority of facilities have continued to be well run, and have not experienced any Covid-19 outbreaks. But the headlines have stigmatized the entire industry. We are now 7 months into the pandemic and a number of residents have left the assisted living community where they resided. This may have been due to a deterioration of the pre-existing condition, it may have been as a result of Covid-19, and it may have been as a result of family pulling Mom or Dad back home. Senior facilities continue to operate under strict lockdown protocols. That means that someone new coming into a facility must quarantine for 14 days. After that, they may have contact with other residents in the facility. But family is still barred from visiting indefinitely. The lack of human contact for the elderly can be emotionally devastating. Families are simply not electing to put a family member into assisted living under these circumstances. While facilities have been open to accepting new residents for some time, the number of new residents has been a trickle compared with normal conditions. That means that senior housing as an industry is going to experience declining occupancy until well after the pandemic is over. Some newer facilities were in the middle of their lease-up when the pandemic hit. According to a report in Senior Housing News, 53% of communities are continuing to report declining occupancy. Ventas is a large national operator. They’ve seen occupancy drop from 85% in some of their facilities to about 80% since April. WellTower, another large player with 612 senior housing operations in their portfolio reported a 79.4% average spot occupancy rate for its portfolio in July, a significant decrease from the 85.8% occupancy rate it reported in February before the pandemic hit. We believe that the big box operators are going to get aggressive in their marketing in the coming months as they try to fight for market share under these challenging conditions. We also believe the economic model is going to change. The number one cost in assisted living is staff. Labour costs are on the rise in the industry as caregivers and personal support workers demand higher wages to compensate for the added costs and risks associated with working in the pandemic environment. These higher costs are ultimately going to be passed on to customers, except in those cases where there is a government or insurance contribution. Labour rates are rising faster than the cost of living allowance that both government and insurance have built into their rates. The result will be a profit squeeze for operators. Some who are already suffering due to lower occupancy will get hit again as their profit margins get eroded.

This weekend we're talking about using video for marketing yourself and your business. Greg is based in the San Francisco Bay Area. He is a specialist in using video to market for real estate. He can be reached at Greg McDaniel on Facebook, GregMcDanielREU on Instagram, or by text at 925-915-1978. 

Dan Rochon is a specialist in video marketing for real estate, based in Northern Virginia. He's the author of The Real Estate Evolution and the curator of the Consistent Predictable Income (CPI) Community. You can reach Dan on Facebook or connect with him through his website at www.therealestateevolution.com. 

On today’s show we’re talking about navigating the fine line between collecting commercial rent and pushing your tenants to close their doors. The financial stress is all over the world of commercial. Rent collection used to be automatic at this time last year. Revenues are down for most businesses. Most importantly, even if a recovery is underway in some businesses, the worry remains that the recovery won’t last. We could experience a second wave later this year. We could see a subsequent shutdown. We see government programs to assist businesses drying up. In many cases, small businesses failed to meet the eligibility criteria for government assistance. Commercial tenants are asking for rental concessions. They are clearly experiencing hardship. Vacancy in commercial space is also a reality of the current environment. Solving the cash flow problem involves a two printed approach. Getting existing tenants to pay the rent Finding new tenants to fill the vacancy. It’s often tempting to believe that you won’t find new tenants in today’s environment. While it’s true that so many businesses are having a hard time, there are still businesses looking for space in the current environment. That means getting aggressive on pricing and concessions in order to attract them. Today we’re looking for tenants that are doing a bang-up business. At a time when the economy is on life support and the unemployed number in the millions, it’s hard to imagine businesses that are booming. But they do exist. In one of our properties we had a single vacant retail space. We managed to find a tenant that was in desperate need of additional space. We had space that was ideally suited and they moved in a matter of weeks. At the other end of the spectrum we have tenants that have been forced to close during the pandemic. They’re being kept afloat by government emergency benefits. They’re paying a fraction of their rent and they seem to be teetering on the brink of closing. We asked them to pay the full rent this week, and they said that they simply don’t have the cash. They would have to close their door permanently. So we accepted partial payment and have applied for another round of government relief on our rents. It’s a lot of paperwork for another 30 days of rent relief. The cycle of negotiation with this tenant will repeat in another 30 days. At this time, the name of the game is survival. It’s not a time to optimize and maximize highest and best use revenue. It’s a time to be pragmatic. We entertained several potential tenants for the vacant space. One was a construction firm that would have used the space as an office and material depot. They were looking for a low rent situation and there was concern that the traffic of equipment and materials would be incompatible with the existing tenants in the building. We entertained the owner of a coffee shop who had a space rented a few blocks away at a much higher rental rate. She was losing money and could not afford her rent. She was looking to break her existing lease and get into a lower cost lease. When we evaluated her financials, it was clear that moving to a lower cost space would help her situation. But the deal breaker was the realization that she would have needed to sell an unrealistic amount of coffee in her old location, just to fund the monthly rent, without paying staff, buying food or generating a profit. So the additional rent from our new tenant is being used to cover the negative cashflow and is making it easier to negotiate rent concessions with the existing tenants. We’re not making money at the moment, but we’re not bleeding red ink either.

Today is another AMA episode. Today’s question was actually asked twice by two different people. The questions are virtually the same to I’ll answer it only once. Both Chad and Michelle asked I have a portfolio of smaller multi-family properties duplexes, triplexes and some singles. I’m thinking of putting a blanket mortgage across the entire portfolio. The question is how to value to the portfolio? Should I be valuing each individual property independently or using a cap rate calculation to value the portfolio? This is a great question. Let’s start with discussing how an appraiser would look at valuation for a property. They use three methods. Generally speaking, appraisers determine the value of a property using one of three methods. Replacement Cost Comparable Sales Multiples of net income The problem exists when the three methods don’t agree, which of the three do you select? Generally, the appraiser will choose the lowest of the three. But here too they need to apply judgement and discard the one that doesn’t apply. The biggest problem in particular for commercial real estate is that in many cases there are no truly comparable properties in the same area. In those cases, a like for like comparison is truly impossible. If your property is a 10 unit building, there may not be any other 10 unit buildings in the area. There might a 12 unit, a 16 unit, a 20 unit. So what do you compare? Do you compare price per unit? Do you compare price per square foot? Are the properties truly comparable meaning are they of a similar vintage with similar levels of finish and attracting a similar tenant base? If not, then they’re not true comps. The appraiser will then look at replacement cost. They will look at the finishes of the building, and make a cost per square foot estimate construct the a new version of the same building today. Often times, buildings are trading below construction cost because they might have been built some number of years ago and the increase in value has not kept pace with the rising cost of new construction. Finally, the third method is multiples of net income. This is where a property is valued on its ability to generate profit. That is, after all why we real estate investors are in this business altogether. The appraiser will look at what, say, B class apartment buildings are trading for in the area. It might be 6.5% cap rate. They will then analyze the financials for your building and determine the income and the expenses for the property based on a bank approved model for properties in the local area. Now your case is a little different. If all the properties are within a small radius, say, a few blocks of each other, then you can effectively treat the portfolios the same as you might a single building. If all the properties are of a similar vintage and the apartments are positioned similarly in the market, then you can compare them together as a group. The approach you’re suggesting is something we’ve done for nearly a decade. In our case, we rebuilt a portfolio of properties in a small geographic radius of a few blocks in Philadelphia. Almost all of the units were rented to students, and they were all pretty similar. The rent for each bedroom of student housing was very similar. The lender was comfortable with putting a blanket mortgage across the portfolio. You also need to be aware that the lender may want to look at the yield on cost instead of the cap rate. You might not be familiar with the term yield on cost. It’s a calculation which is similar to the cap rate calculation. Some lenders like to be conservative and don’t want to lend you so much money that you cash out of your initial investment. They may want you to keep some of your own cash in the deal.  It comes down to the specifics of your deal and what your lender will allow.

When we think of hotels we tend to think of a few large brands that dominate the market. Marriott is the largest after having gobbled up with Starwood Group which had all the Sheraton brands. Hilton is #2 with about 30 brands under its umbrella, and Intercontinental Hotel Group which owns Holiday Inn and a host of brands is number three. There are remarkably few independent chains left. Hyatt remains largely independent. The Accor Group in France owns brands like Mercure, Ibis, Novotel, and Sofitel to name just a few. Some would think that the hotel industry is highly consolidated with a small number of players. From an operations standpoint, there is a lot of consolidation of brand ownership. But that doesn’t mean a lot of consolidation of hotel ownership. Some hotels are owned by the brand, but in fact most are franchise arrangements. Hotel owners are investors, like us, who happen to specialize in owning hotels instead of apartment buildings. There are all kinds of different plays in hotel ownership. Some specialize in resort properties. Others specialize in local hotels, the ones that crop up all over the city. These serve a small radius and have anywhere from 80 to 150 rooms. Some are combo hotels where you might find two hotels side by side on the same property with different brand positioning. One might be a suite hotel for more extended stays, and the other might be a more budget hotel for shorter transient stays. There are business hotels in the central business district or in the shadow of business parks. There are hotels that cater to convention centre traffic. All these segments are distinct businesses with unique client needs and distinct business models. Today, in the pandemic environment, most are hurting quite badly. There are a few rare exceptions. Some hotels that are driving distance from major population centres and are in vacation areas like Myrtle Beach are doing comparatively well. The rest are all losing money. I’ve been in discussion with a number of hotel owners over the past several months. Most had built a 90-150 day cash buffer into their plan. That assumed that they would have low occupancy. They assumed that the return to normal would start in late Spring and that by the fall, occupancies would be back to normal levels. Hotels are small businesses. They tie up a lot of capital and they have a lot of debt, but they don’t employ that many people. The largest number of staff members are fairly low wage earners. The huge fixed operating cost and debt service that hotels face is the one thing that they can’t do much about. They can cut costs temporarily by cutting staff. They can reach some agreements with their lenders for a few months. But that will save maybe a third of the expense for a finite period of time. Most of the hotel operators I spoke with said that they had enough cash to last until the fall, maybe September or October. It’s now August and there are no signs of significant recovery in the travel industry, and recovery in hospitality is definitely levelling off. We also see a difference in demand based on property type. In the midscale and economy segments, occupancy is roughly double that of the luxury segment. That means that corporate travel and luxury have not really started to pick up yet. This is going to be a long and slow recovery. The only thing driving the market right now is the summer vacation demand. This will diminish as schools reopen in August and will shrink further after labor day. Corporate travel shows no signs of picking up. Therein lies the worry for many hotel owners. The resurgence we are seeing is going to be short lived with a drop in occupancy starting in September, followed by a more severe drop if we see a resurgence in the number of Covid-19 cases. We will start to see high quality assets at discounted prices in the near future.