Barry Wolfe is with Marcus and Millichap in Ft. Lauderdale. He specializes in retail assets and spent his entire career, including his early career as a lawyer working on retail assets. On today's show we're talking about the current state of retail.

On today’s show we are reviewing “Yes to Life, in spite of everything “ by Viktor Frankl. Viktor Frankl is best known for hist book “man’s search for meaning “ which chronicles his discovery of the meaning of life during his 3 years in 5 different concentration camps during WW2. During that time he saw his parents killed and his pregnant wife. Somehow he managed to survive. The book Yes to Life was curated by Daniel Goleman who assembled a series of lectures given by Viktor Frankl in 1946, only a year after the end of the war, and before the publication of Frankl’s groundbreaking book. Daniel Goleman is a best selling author known for his own body of work including the books “Emotional Intelligence “, “Primal Leadership “ , “Focus”, and “Altered Traits” to name just a few. After the War, most people who survived the atrocities emigrated to start a new life rather than reintegrate in the community that allowed such horror to take place. Frankl on the other hand returned to his native Vienna where he became professor neurology and psychiatry at the University of Vienna. He would look into the eyes of colleagues who claimed ignorance of the Nazi machine, even when they were part of it. He developed a new body of work in understanding psychotherapy called logo therapy. He held visiting professorships at Harvard, Stanford, Southern Methodist and Duquesne universities. For four decades he made countless lecture tours all over the world. He received in total 29 honorary doctorates. He authored thirty-nine books which have been translated into 50 languages to date. The book “Yes to Life” brings forward some of Frankl’s clearest thinking in the immediate aftermath of the holocaust. In our social media infused, consumption driven, Netflix intoxicated world, we rarely slow down enough to ask existential questions. Frankl is clearly focused on answering the very fundamental question about the meaning of life. Since death is certain, does not life itself become meaningless? Does death not make all our beginnings seem pointless from the start, since nothing endures? Let’s ask the question the other way around. What if we were immortal? But if we were immortal we could postpone everything. It would never truly matter whether we did a particular thing right now or the next day or the day after or in a decade. There would be no reason to do something right now or experience something right now. There would be an infinite amount of time. The fact that we are mortal and our time is restricted and our possibilities are limited is what makes it meaningful to do something. Therefore our mortality form the background against which our act of being becomes a responsibility. We do not judge the life history of a particular by the number of pages in their life story, but by the richness of the content it contains. Every hour, every minute loads our existence with the weight of a terrible and yet beautiful responsibility. Any hour whose demands we do not fulfill, or fulfill halfheartedly, this hour is forfeited ,for all eternity. Life can only become more meaningful the more difficult it becomes. The athlete, the mountain climber who actively seeks more difficult tasks, creates difficulties for themselves. If life has meaning, then suffering must also have meaning. Our modern culture seems obsessed with having a happy life, a life free from stress with all the creature comforts. Compared with our great grandparents, most of us live like royalty, and yet how many are happy? Frankl makes the case with example after example that people created their own sense of meaning from within. They didn’t rely upon external circumstances to establish that sense of meaning. Their own agency created the meaning even under the most adverse conditions. Though written in 1946, these lectures stand as a timeless piece of work.

Frustrating when your Podcast hosting company has a problem preventing new shows from being published to the feed. Listeners must be wondering what's going on.... The hosting company acknowledged the problem and are working on it.

Now that parts of the economy are opening up, we’re starting to see the opening up of the courts as well. We’re continuing to see rising cases of Covid-19 which has claimed 155,000 lives in the US since March and 9,000 lives in Canada. With that we’re starting to see litigation associated with the Covid-19 pandemic. A report in the Wall Street Journal on Thursday reported that hundreds of lawsuits have been filed for damages caused by the pandemic. Employers across the country are being sued by the families of workers who contend their loved ones contracted lethal cases of Covid-19 on the job, a new legal front that shows the risks of reopening workplaces.  Walmart, Safeway, Tyson Foods, and some health-care facilities have been sued for gross negligence or wrongful death since the coronavirus pandemic began unfolding in March. Employees’ loved ones contend the companies failed to protect workers and should compensate their family members as a result. Workers who survived the virus also are suing to have medical bills, future earnings and other damages paid out. Fortunately, we haven't had any outbreaks in our facilities.  There are stories in the WSJ article that frankly are heartbreaking. There are stories of people who were told to report to work or be fired. Some employees were told that protective masks would not help and not to wear a mask. Clearly we have millions of people who have been exposed to a high risk pathogen without the appropriate precautions. But this is not just an issue of workplace safety. The virus doesn’t care if you’re at home, at work, at a social event, lounging by the swimming pool. If you’re a tenant in a multi-family apartment complex, you need to feel safe in your own home. You need to be safe in the common areas. If it can be shown that a landlord acted negligently and a tenant slips and falls on an icy walkway, you can expect a lawsuit. It stands to reason that if you follow the same chain of logic that if a tenant uses the gym amenities and contracts Covid-19, then there might be a case against the landlord. The risk of lawsuit is very real. If you own a multi-tenant building, whether it’s an office building, or a residential building, you have risk of litigation if someone gets sick. You need to make sure that common areas and public bathrooms have a much higher standard of cleaning than normal. There is a real cost to these additional protocols. In the office building that I manage, we have instructed members of the public who might enter the building to call in advance. They are to wait in their car until their appointment. They will be escorted into the building and directly into their appointment. The waiting rooms are closed, the chairs are off limits with yellow caution tape. Senior homes are another area of risk. There have been numerous outbreaks in nursing homes in Europe, Canada and the US. Tragically, these outbreaks have ripped through the populations in these long term care facilities and the loss of life has been staggering. Here too, this is an area of risk. What about hotels? The common areas, the food and beverage establishments all represent an area of risk. The legal system is all about what you can prove. It’s not about what you know, it’s what can be independently verified. You definitely want to strengthen your cleaning and sanitizing protocols. That alone may not be enough to prevent you from being sued. It’s important to post placards and communicate your policies. If you’re communicating what you’re doing, and documenting it, there’s no guarantee that it will be enough to prevent someone from becoming sick. But it becomes harder for someone to argue that you were negligent.

On today’s show we’re talking about Freedom of Speech and what it means to be neutral. The year was 1889 and Almon Strowger was the local undertaker in Kansas City Missouri. Clients would call the operator and ask to be connected with the undertaker. The operator was called Mabel. They were all called Mabel. In those days, the operator would patch you through by pulling a wire out of the console and connecting the call manually to the destination. The problem is that one of the operators was married to the other competing undertaker in town and Almon Strowger was losing business to his competition because, in his opinion, the operator was giving calls intended for him to the competition, her husband. So Almon Strowger invented the first mechanical electrical phone switching system that would allow users of the phone system to dial the number of the destination and the connection would be made with no human intervention and no bias. The machine was truly neutral and would connect the parties following the commands of the person dialing the number. The Stronger Step By Step Exchange was eventually sold all over the world and became the dominant phone system around the world for close to 70 years. The system was eventually replaced by a digital exchange invented at Bell Laboratories and at Bell Northern Research. These systems maintained the neutrality inherent in the initial system devised by Almon Strowger. If you called Fedex, you were sure that you would be connected with Fedex and not UPS or DHL. So that’s the concept of neutrality, and the phone network solved that about 130 years ago Now let’s talk about freedom of speech and we’ll come back to talking about Strowger later on. So exactly what does Freedom of Speech mean? Most Western democracies have some form of Freedom of Speech enshrined in the constitution. That’s true in the US, Canada, the UK, most of Europe and so on. So what exactly does that mean? It means that you can’t be persecuted for what you think or what you say. There are limits on those freedoms. You’re not free to harm others through your speech. For example, you can’t frivolously yell “Fire” in the middle of a crowded movie theatre. You can’t make defamatory statements which aim to damage the reputation of another person or company. You literally have the right to stand on a soap box in a public place and make a speech. In the good old days, that might have been on the Boston Commons, or perhaps in Central Park in NYC, or on the Mall in Washington DC. Today, that means on the Internet, perhaps on social media, or who knows, a podcast. The makers of social media platforms are the modern day manufacturers of the soap box. The manufacturer of the soap box clearly can’t be held responsible for what someone standing on the soap box says. They merely cut some wood and screwed it together to form a box. Arguably, social media is private property, not public. The use agreement between users of the platform and the owners of the platform is between a company and the user. This is clearly a legal gray zone. Something said on social media is not truly public, but in many ways it is public. There are so many messages being put out on social media. How is a piece of software supposed to figure out what’s a legitimate use of the platform and what is in violation of the use standards. The amount of fake news is astounding. This week, the CEO’s of Amazon, Apple, Facebook and Google appeared before congress to answer questions about the amount of power and influence they wield to shape public opinion. They are the modern day Mabel. By curating what’s displayed on the platform, they’re filtering out what you get to see. When that happens, then free speech gets suppressed, neutrality is gone and Mabel is back in control of how calls get routed to the undertaker, and how propaganda gets presented to the voting population.

As students prepare to go back to school, the question on the minds of many student housing operators is “Has a university education changed forever?” Universities in the US represent about 20 million students, faculty and staff. That’s almost the same as the population of Chile in South America or Romania in Europe. those planning to reopen campus to students have different ideas about how best to do that. Duke University announced Sunday that it would limit campus housing to mainly first-year students and sophomores, rather than bringing back juniors and seniors as well. Stanford University will alternate groups of students by class year for each 10-week academic quarter; Harvard University plans to allow mainly just first-year undergraduates on its Cambridge, Mass., campus. The neighboring Massachusetts Institute of Technology campus is hosting mainly seniors. Cornell currently plans to return students to its Ithaca, N.Y., campus, with a mix of face-to-face and online classes. The University of California, Berkeley announced last week that fall classes would begin online, and said face-to-face instruction won’t start until the Bay Area’s Covid-19 resurgence is reversed. At Temple University in Philadelphia they are going to be making changes at the individual course level. They plan a return to campus in the fall. Some will be In-person classes: These are the typical, traditional classroom or seminar-style classes, but they will take place in rooms adjusted to allow for each student and the instructor to maintain six feet of distance from each other. Hybrid classes: These classes will blend in-person and online learning in an effort to reduce the number of students on campus and in classrooms at once. Online classes: These classes will be conducted fully online. I know of several students who elected to take a year off. They didn’t want their university experience to be compromised because of the constraints being imposed by the pandemic. There is a perception that watching a video online is a lower value experience than an in person experience. If you’re a student and you were expecting to pay a huge sum of money, possibly going into debt to sit at home and attend classes by video conference, there’s a good chance you’re going to think twice about making that investment in that way. Now if you’re in a faculty like medicine on dentistry, many of those classes can’t be taught in an online format. You’re not likely to take a year off from medical school waiting for the pandemic to pass. The folks at UT had already transitioned 52% of the classes at their Arlington campus to having an online option prior to the pandemic. They too will have a mixture of on campus classes, hybrid classes and fully online classes. Some of the hybrid classes will conduct the lectures fully online, but hold the labs in the lab with smaller lab numbers and increasing the times available for the labs. One thing is clear, the attendance on campus this year will be lower than in past years. If you’re a student housing owner or operator, you have to be thinking about three questions: How will I get through the 2020/2021 academic school year? What will university life look like after the pandemic? How long will we be living with the pandemic? If there is going to be long term vacancy in student housing this year, how will the monthly income be affected? Not just will you be one of the unlucky ones experiencing a vacancy, but will operators vying for a smaller student population drop prices in order to attract tenants? Student housing operators are accustomed to renting by the bedroom and they typically get a premium over a market rate rental.

On today’s show we’re talking about the discipline of making decisions based on the numbers. In the past couple of weeks I went through a process of underwriting a property that is a rare property. We’re talking about a property at 316 Water Street. As you might have guessed by the name, the property is on a body of water. This was a distressed property that was a bank power of sale. In my home market prices have shot up significantly in the past year. The average price is up 14% in the past year. The largest price increase has been at the bottom of the market. We’re seen prices at the bottom of the market up more than 25% in some cases.  A detached home of any description is selling above $650,000.  Imagine my surprise when my wife came across a distressed property, a little bit outside the city that was listed for $219,000. Even rural properties are being priced similarly to properties in the city. There is just no inventory. Not only was this property at a good price, it was actually on 3/4 of an acre on a beautiful body of water with a permanently deeded conservation area across the river. The area on the far side would never be developed. Immediately in front of the house the water is quite shallow and you would never have powerboats nearby. Fishermen would come within a few houses with their trawling motors but again, they’re pretty quiet. The property had a row of mature trees at the water’s edge. The house was about 15 feet above the river and very safe from the risk of flooding. At first the house looked like it could be an opportunity for a flip. Valuations for a single family home on the water we’re accustomed to building in higher volume. So while some of the trades would be competitive with volume pricing, we also knew that trades like plumbing and electrical would be more expensive. The biggest variable was in determining the scope of work. With a bank power of sale, the property is being sold as-is, whereis with no warranties of any kind. So if there was any doubt about a particular part of the property, we had to assume a rebuild. The bank gave us a week to complete our due diligence. A total of 20 trades would be required to complete this project, not much different than constructing a new house. We felt that if we could keep the renovation and repairs below $200,000 we would have a very viable project. A house on the water would sell easily for $600,000. As time went on, we started to put our budget together, it was looking increasingly like the project would exceed the original idea of getting it done for under $200,000. The house had a lot of problems. This would be a full gut of the property down to the bare timbers. It would mean a new roof, new flooring, new plumbing and electrical infrastructure, new HVAC, new exterior siding, new windows, a new attached garage. It would need a new water well and a new septic system. As a rural property, there is no municipal infrastructure. There was a condemned addition on the house. The separate garage structure was also condemned. The chimney was condemned. The house was sagging in places, but overall, the house was pretty robust. The walls were over 12” thick. There was considerable moisture in the basement, and the basement had not been cleaned from the dog breeding operation that had been underway. Entering the house safely required special breathing apparatus with N95 filters. We considered demolishing the house and building a new house with a better orientation facing the water. Both my wife and I were captivated by the allure of buying a waterfront property for considerably less than the going rate in the market.  Our heart said yes, and the numbers said no.

Ben from Oklahoma City asks We are looking at building a residential assisted living center consisting of 12 residential care homes. What are your tips on mapping supply and demand for the market. Our current approach is googling and building a list and talking with folks that are already in the assisted living industry for the market.  Do you usually commission a 3rd party to do a market study? What are your criteria for hiring and finding someone to complete that study? Thanks! Ben, this is a great question. You are focusing on residential assisted is very smart. The assisted living market is part of a continuum of care that starts with independent living with a very light amount of services at one end of the spectrum and skilled nursing at the other end of the spectrum. Assisted living fits somewhere in the middle. The first step is to get your own market intelligence. That consists of talking with lots of people in the local market. You want to find out which banks have funded the local projects. This is done by simply searching title and seeing who has the mortgage recorded on title. You can then talk to those banks and get their assessment of the local market conditions. Next we talk to people who operate the local facilities, including staff. Do they like their job? How long have they worked in their current job? Is there high staff turnover? You and your wife should visit all of the possible competitor facilities in the market as a secret shopper. You can interview each facility under the guise of looking for a place for a family member who is getting older and will need a place soon. When you do, find out the current occupancy of all the competitors. But most important, make an assessment of their strengths and weaknesses. If the market were to become saturated and oversupplied, you need to know what it will take to compete to win and get more than your fair share of the market. Then to answer your question directly. Yes, we always commission a third party market study. This is done for every major project. Some accounting firms and brokerages have consulting divisions that specialize in market studies. In the assisted living world, there are also consultants that have industry recognition. You perform a market study for three different purposes. Make sure you’re not deluding yourself into thinking that you have a viable project. It’s easy to get project fever and become emotionally attached to a project. Your lender may require it. If you’re raising capital from investors, it’s a good practice from two points of view. You can show your investors that you’re taking their investment seriously. The market study is part of your fiduciary responsibility to them. The market study which shows demand for your product can be part of your communication with your investors as to why the project might be a good investment. The market study is going to look at other elements. They’re going to examine the demand and the ability to afford your product. So they will look at the number of people in the age demographic. But they will also match the age demographic with the income of the kids. Because often, the funding for the assisted living stay is coming from the next generation. If the parents don’t have the money, maybe the kids do. So you will get a comprehensive picture of the market. The market study will look at the capture rates for independent living as a leading indicator of what the capture rate might be for assisted living a few years down the road. They will also look at the capture rate for assisted living and compare that with industry averages for a healthy market.

Jyoti is an analyst with Trepp in New York City, specializing in commercial mortgage backed securities. On today's show Jyoti gives a basic tutorial on the CMBS market and how it operates. If you want to learn more, reach out to her at [email protected].

George is a repeat guest on the show. He's best known for his role as Executive Vice President in the Trump Organization. He's the best selling author of two books on real estate and negotiation. He taught at the law school at NYU for over twenty years. In business for over 60 years. At 92 years of age, one of the wisest men I know. On today's show George discusses the current market conditions, the moratorium on evictions and foreclosures and what to do about it.

On today’s show we’re talking about your frame of reference. The price of silver has gone up 28% in a little over two weeks. But we’ve been saying for a long time that silver is undervalued relative to gold. Two months ago gold was trading at 115 times the price of silver. In historic terms, that’s a nearly record breaking ratio. Either gold was over valued or silver was undervalued. Through much of history the ratio between gold and silver has been hovering in a range between 50 and 70. Sometimes it would go outside that ratio. For example, in the period from April 2010 to May 2011, the ratio dropped from 65 to 30 before rebounding back to 60 a year later. When silver was trading at such a discount, buying more silver seemed like the obvious thing to do. Markets are truly inefficient. Even markets with high degrees of liquidity and millions of participants can get off balance for a period of time. If you’ve been listening to this podcast for a while then you’ll know that I’m not a huge fan of the Wall Street Casino. While the price of silver has nearly doubled since March of this year, that may be an illusion. That’s because your frame of reference is dollars. Frame of reference is extremely important. Some people measure their wealth in terms of dollars. Others may choose to measure their wealth in ounces of silver and gold. You see, you might be standing still as you’re listening to this podcast. Or you might be seated at your desk. If you’re in your car on the freeway, you might be driving 60 miles an hour. But of course none of those are correct. You’re on the edge of the earth that is spinning at about 460 meters per second or about 1,000 miles an hour. It doesn’t feel like you’re traveling that fast, because of your frame of reference. It turns out that 1,000 miles an hour isn’t quite right either. You see the earth is spinning around the sun at a speed of about 30 km per second or about 67,000 miles an hour. It all depends on your point of reference. Some people choose to keep dollars as the point of reference. But dollars are constantly in motion. They’re continually declining in value. Dollars are not money, they’re merely currency. In order for something to be considered money it must perform two vital functions. It must serve as a means of exchange and as a store of value. Dollars are a very effective means of exchange, but not a very good store of value. So far, we’ve been successful in exporting our inflation. When you go to Walmart and buy a pair of shoes that were made in China, or perhaps an electronic gadget, the supplier to Walmart gets paid in US dollars. That supplier has no real use for US dollars so they go to their local bank who exchanges the dollars for Remnimbi. China’s central bank ends up with a surplus of dollars. So they go in search of assets they can buy with US dollars. For years, they’ve been buy US Treasury bills. It’s the perfect solution. The trade deficit with China results in China buying the surplus debt of the US Government. All those extra dollars in circulation get taken out of the economy in the West and end up buying the excess government debt. It’s a system that works perfectly until it doesn’t. When you put dollars in the bank , you’re  exposed to counter party risk. If the bank goes bust, then you don’t have any money, you merely have a claim on money that is actually the bank’s money that you have put on deposit with the bank. When you hold the physical metal in your hand. There is no counter party, and therefore there is no counter party risk. So back to the frame of reference. My analysis is pretty simple: the more money that central banks print, and the more debt that governments take on, the more valuable gold and silver will become. Said another way, : the more money that central banks print, and the more debt that governments take on  the less valuable the currency will be.

On today’s show we’re taking a look at what’s happening in the housing market and make sense out of some pretty confusing data. Last week we reported that lumber prices have increased to record levels, driven by outdoor construction projects at restaurants, the low inventory in homes for sale, and numerous home improvement projects are driving demand for building materials. On a recent project that I’m building, I’m receiving quotes of 5-6 weeks delivery for wood siding that normally should be a two week delivery item. Construction trades for large projects in my market are booked for the next 18 months. We just had a builder in Utah decline a very attractive land purchase that had been previously committed. When that happens, it’s usually because they’re worried about making a financial commitment to building houses. In this case, they declined because they’re so busy with existing construction jobs that they don’t have the capacity to even start those jobs in the foreseeable future. The headlines read that housing sales volumes for existing houses jumped 20.7% in the past month. Driving sales are apartment renters seeking more space, young families moving to the suburbs, and wealthy city dwellers looking for second homes, brokers and economists say. At the same time, the supply of houses for sale remains low, with the pandemic making potential sellers cautious about letting people tour their homes. The demand for houses is there. To put this in perspective, home sales are still down 11% compared with this time last year, which was a slow year by many measures. So arguably the market has the ability to support a higher level of activity without being considered overheated. Home sales had been in a two-year rut heading into 2020, weighed down by perennially tight supply and historically high home prices. Even solid U.S. economic growth and low unemployment couldn’t get sales moving back in 2019. That seems like a lifetime ago. Homes typically go under contract a month or two before the sale closes, so the June sales data largely reflect purchase decisions made in April or May when we were still in a stricter lockdown environment. Some agents and brokers I’ve spoken with are optimistic that the usual spring demand has been pushed to the summer, and that momentum is building. The spring is normally the busiest season for home sales, as buyers with children want to move into new homes before the school year starts. My take it that the market is being constrained on the supply side. People are not moving in the same numbers that we’ve seen in historical years. That’s reduced the supply of houses coming on the market. We often see this happen when prices rise. People want to move but don’t because they can’t find anywhere to move to. They bought their house a decade ago at a good price, maybe $150,000 or $200,000. Their home has increased in value and now would command a sale price of, say $500,000. But the seller is still living in a house that they paid $200,000 for. If they buy something new, they’re looking at prices starting at $500,000. Yes, they have a lot more equity to work with. But they often don’t see the purpose behind getting a larger mortgage and buying a house with a larger price tag. They’ll move because they’re forced to move for employment or a life event, but not for a change of scenery. I’m currently in negotiation with a home owner whose name is Andy for a property that’s on the edge of a larger development site. Andy and his wife bought their house for $350,000. Prices in the neighborhood have skyrocketed to more than $1.2M. They don't want to pay that much for a new house.  So they’re deciding not to sell and stay where they are. That’s another house that will not go on the market this year.

On today’s show we’re taking a look at what’s happening in population migration. Over the past 20 years population growth among secondary and tertiary markets has outpaced that of the country’s large primary metros. A new report from Marcus and Millichap shines a spotlight on a trend that has been accelerated by the events of this year. Over the past two decades total population growth was 70 percent higher in secondary and tertiary metros than in gateway cities. Since 2014 that ratio has climbed to over 200 percent. In my opinion, the number one driver that has enabled growth in secondary and tertiary markets has been the installation of fiber infrastructure for communications. When you have a fiber connection to your home or office, you have communication speeds that are among the best in the world regardless of your location. Speed of electronic connection is on par with the importance of physical presence. The fact is, you will always need to meet with people who are more than driving distance away. There will always be people who are more than flying distance away. Even before the pandemic, I was routinely spending hours each day in video conference meetings. The pandemic has merely accelerated a trend that was already underway. In my opinion, the Marcus Millichap report is over-simplifying the trend. They mention that New York and Chicago have lost about 600,000 population in the past 5 years. But high taxation and difficulty of doing business have played a major role in that trend. The beneficiaries have been cities in lower tax environments. These include the primary markets like DFW, Atlanta and Houston, and the secondary markets like Austin, Nashville, Charlotte. 

On today’s show we’re talking about how the Pandemic is going to shape the near future for real estate investors. Our entire economy situation, both in the US, Canada and much of Europe is based entirely on the printing of money by central banks. Our entire economic system is fully dependent on the free flow of low cost debt. Every major sector of the economy has a financing plan associated with it. Virtually every facet of every family of every business is being supported by debt, and now government subsidies. Let’s look at debt for a moment. Of course there are two types of debt, there is good debt and bad debt. Good debt is the kind that is paid off by an income producing asset. Bad debt is consumer debt that is strictly to pay for luxuries that people can’t afford to buy today. Some economies are more highly debt dependent than others. For example, I walked into an electronics shop in the downtown area of Cancun Mexico, that is outside the tourist zone. The prices for most items were not listed. The only price listed was the bi-weekly payment if you financed that particular gadget. I saw the same thing at the supermarket. You could buy a motorcycle at the supermarket. The price listed was not the purchase price, but the bi-weekly payment. People were being socially conditioned to judge affordability based on how much of their bi-weekly paycheck they could allocate to that luxury. The same thing happens of course in the US, Canada and Europe, only to a lesser degree. When you go to the car dealership, the sticker price displayed on the vehicle is often the cost of a lease payment. We can’t shut of the credit markets without creating economic collapse. But we have to acknowledge that we are way too dependent on credit for things that really should not be financed. Our society has a planning horizon of two weeks. That sounds harsh. But there’s an element of truth to it. The real question as to what will happen as a result of the pandemic rests on two fundamental questions: 1) When will the stimulus money stop? 2) When will the confidence in the currency collapse? The US has largely exhausted the payroll protection program funds. They extended the period of time that payroll funds can be used. But they haven’t allocated any additional funds to the program or allowed borrowers to get access to more than 2.5 months worth of payroll. We are now 5 months into the pandemic. The number of people collecting unemployment benefits started to decline in June but is now growing again. The pandemic unemployment benefits in the US are set to expire at the end of July in less than ten days. There are still more than 32 million people collecting unemployment benefits between the regular state run programs, and the pandemic programs. Turning off the taps to relief money would create mass riots. Deciding new benefits  will be government's task in the next week.  The next question is whether to give the money to households or to employers. In Canada, the emergency relief benefit being paid to businesses has been extended until the end of the year. I had a conversation with a restaurant owner yesterday who share that 75% of his payroll if being covered by government funding. In April, at the peak of the shutdown, he thought his business was over. Today, he has opened up seating for 150 outdoors. He’s doing a robust take-out business, and the tables are busy and he’s making more money today than in his best months prior to the pandemic. When the subsidy disappears, he will need to reduce his staff by 50%. As real estate investors, our income comes from our tenants. Our tenants get their rent money from their job, or lately from an unemployment benefit. As investors we need to acknowledge the uncertainty that depends entirely on what governments will decide in the coming week regarding further stimulus money.

On today’s show we’re talking about how shopping has changed. But not just shopping in general. We’re talking about how my shopping has changed forever. Last week, my wife and I were on vacation. We chartered a boat on an inland waterway in central Ontario. We were going through the locks and my wife lost grip of the boat hook and it fell in the water. Normally, a boat hook is a specialized item that you can only find at a marine chandlery. They can be expensive, usually starting at about $75.00. She was pretty upset and was worried that the charter company would charge us a large amount of money to replace the lost boat hook. So I went on Amazon and found a basic telescoping boat hook of similar quality to the one that now is sitting at the bottom of a lock. We ordered a replacement for $31.00 and with free shipping it arrived at the charter company before the end of our trip. I solved three problems with that online order. 1) I replaced the lost boat hook 2) I eliminated the fear and uncertainty that my wife was experiencing around the lost boat hook. 3) I saved at least 50% compared with buying from a retail marine chandlery The owner of the charter company was hugely appreciative that we ordered the replacement. It solved a problem for them and frankly they were surprised to receive an anonymous boat hook in the mail without warning. This is the new world of retail. If you own a retail store or a chain of stores that offers a variety of products at high margins that are easy to ship without being needed immediately in expensive retail locations, then you're in big trouble.  There were items that I religiously said I would never buy online. Top of that list was clothing and shoes. I find it difficult to buy shoes that fit. I often will try on a dozen pair of shoes before I even find one that fits.  The idea of sending shoes that don’t fit back in the mail seems offensive to me and I won’t do it. This year, I had a pair of running shoes that had worn out. There is one manufacturer that I can count on to fit my foot. Rather than go to the store and try on running shoes, I decided to try buying online. I ordered the same size from the same manufacturer that I already had. It was a new model, but I reasoned that the sizing should be consistent within the same manufacturer over time. The purchase price online was less than the retail store, and I spent a total of 4 minutes on the transaction. Two days later, the running shoes arrived and I spent less time than it would have taken to drive to the store. So the emotional obstacle to buying clothing online has largely been overcome, at least in my case. Will I buy a new dress suit online? Probably not. But I would buy a dress shirt online from a brand that I know. I would buy somethings, but not all things. I maybe would buy half of my clothing online in the future. If you’re a clothing retailer and you lose 50% of your sales to people like me who now buy things online, you’re going to suffer. In fact, you’re probably not going to survive financially. Is retail dead? No. But how many retailers can survive a 50% drop in sales volume? Those that remain will thrive, but only once the industry has shrunk enough to allow those remaining to survive. As real estate investors we need to pay attention to the changing landscape of our communities. If the smaller family run retail businesses die off as they seem to be doing, who will occupy all those retail store fronts? The change in retail will change the flow of traffic in the community. It will change how people choose to live in a particular location. They want amenities nearby that they care about. They definitely don’t want vacant abandoned storefronts

John Fortes has been syndicating apartment projects for a small number of years. He's a relative newcomer to the world of syndication. Listen to how he rapidly made the transition from investing in single family to multi-family properties. John can be reached at JohnFortes.com. He's also the host of the Passive Investor Show. You'll want to check out that show as well. 

Steffany Boldrini is a former technology entrepreneur and host of the Commercial Real Estate Investing From A-Z podcast. She is based in San Francisco and on today's show we are talking about what's happening in several asset classes in the San Francisco market including the residential rental market, and the commercial rental market.  

The much feared W shaped recovery is upon us. Attempts to open up the economy and to restart the floundering food and beverage industry have hit a snag. This past week saw a record number of new infections across multiple states in the US. There is understandably a degree of Covid-19 fatigue in the population. Summer is in full swing and people want to enjoy the outdoors. The question is how to do it safely? The US recorded a stunning 130,000 new cases of Covid-19 over a two day period this week alone. Hotspots include the populous and economically important states of California, Florida, Arizona, Texas and Louisiana. Texas, California and Florida are all reporting record numbers of deaths so far in the pandemic. In a world where scientific data seems to be politicized, it’s hard to get reliable data. In a world where economic data seems to be politicized, it’s hard to make sense of anything. In a world where getting reliable data is increasingly difficult, several software as a service  companies can offer a window into what is happing in the economy. It seems that data often is presented with an agenda, or a narrative. On this show we aim to share data, mixed and confusing as it may be and allow you to draw your own conclusions. OpenTable is used to reserve a table your favourite restaurant. I use it frequently when I travel. Data from OpenTable showed that people were venturing back out to restaurants at the end of May and early June as the economy reopened. But in the last few weeks, reservation bookings on the platform have slipped, especially in states that have rolled back reopening plans, such as Texas, Florida, and Georgia. Homebase, a time scheduling and tracking software used mostly by small businesses, saw the number of hours worked plateau in the last week of June, which is likely to continue, according to data from the company. The pace of improvement of businesses reopening and workers coming back in June slowed from a month earlier, according to Homebase's monthly report. In May, the number of employees working improved 37%, while in June, gains were only 6%. In addition, Homebase is seeing declines in growth in states with higher COVID-19 cases, such Arizona, Florida, and Texas. It’s unlikely that we will see a national shutdown like we saw in March. The appetite doesn’t seem to be there in the White House. It’s likely that we will see numerous state level and local shutdowns in hot spots as outbreaks flare up. The slowdown in infections that was predicted during the warmer summer weather hasn’t materialized. In fact, we’re seeing quite the opposite. Many school districts across North America are making plans for the upcoming school year. Some are opening two days a week. Some are going 100% online for the start of the school year. Others are opening fully with attempts to increase social distancing in the classrooms. The number of families where both parents work is going to be further impacted by the decisions made by school boards. Some families don’t have the luxury of finding child care. So what does this all mean for real estate investors? This is starting to feel like 2008 all over again. I’m seeing distressed properties coming on the market, below construction cost. In earlier months, properties like this would have been snapped up in hours. Now, they’re staying on the market for days before being snapped up. If a deal meets our criteria we'll place an offer. Otherwise, we'll pass. There will be plenty of opportunity over the next couple of years. 

We are living through one of the most perplexing periods I’ve ever seen. On today’s show we are talking about how in the middle of an economic downturn, some indicators suggest a red hot market. Restaurants, Construction Companies, and DIYers Drive Demand Lumber and plywood prices are hitting record highs as various sectors of the economy respond to the pandemic. Restaurants and bars are buying wood to build makeshift outdoor seating options. In many parts of the country, including in New York City, outdoor dining service is permitted, but indoor operations are not. Additionally, home builders are purchasing large amounts of wood as they respond to rising demand for new homes. Low mortgage rates and a desire to be able to social distance in a single family home has led to an increase in construction. Additionally, people stuck at home this summer are working on home improvement projects and flocking to stores like The Home Depot (HD), Lowe’s (LOW) Lumber futures have risen over 85% since April 1. July futures hit $499 per thousand board feet last week, and September futures reached $481.90. Mill companies like Georgia Pacific have seen their shares rise due to booming demand for lumber since June. In March, as shutdowns hit the US, wood prices tumbled and share prices of companies like Georgia Pacific fell nearly 40%. Home sales slowed, as did construction. In response, many mills scaled back production. Now, these trends have been reversed, and mills are doing their best to keep up as construction companies, restaurants, and individuals flock to buy lumber. GP shares are up 50% in the past month. All of this points to strong demand. These statistics mirror my own first hand experience. Last month, I purchased a small quantity of cedar lumber to build some planter boxes for my wife. All of the major suppliers of cedar lumber were out of stock with no forecast for new inventory. I was eventually able to buy what I needed, but it took several attempts to source the building materials. I’m also seeing significant shortages in construction labour. If the project is small, consisting of half a day of work, finding labor is relatively easy. The weekend warriors who have full time work will often moonlight on small jobs. But if you have a significant job, be prepared to schedule the job several months out from now. Other factors that can drive a spike in lumber prices include summer storms. In past years we have seen a significant jump in prices following a major hurricane. We are just starting hurricane season and have yet to experience any major storms making landfall in North America. It could be that we have a lighter than average hurricane season, but it’s too early to tell. It’s conceivable that we have some weather events at the same time as we are dealing with the COVID-19 pandemic. The demand for detached housing seems to be stronger than ever in many parts of the country. We have seen a big drop in demand for high end rental apartments in the most expensive cities like New York, San Francisco, Miami, and Seattle. If you looked only at the construction metrics in the economy, you would think we are in the middle of an economic boom. There are no signs of 11% unemployment, or of distressed properties hitting the market. There are 4.5 million properties in default on their mortgages in the US. There are a likely similar number of rental units with tenants in default on their leases. Because there is a freeze on evictions, we won’t know the real statistics for many more months. It’s hard to make sense out of this economy. If you are sitting on a construction quote that is more than 30 days old, chances are high that you will need to get a new bid for your job.

Dominic asks, Dear Victor, Thank you for the ongoing excellent content. While awaiting projects to invest in that make sense to me, I’ve been looking at various places to hold capital. Do you have any thoughts regarding the “infinite banking” concept using whole life insurance policies as a collateralized asset? The pitch seems to be that these policies provide tool to park unused funds with some dividends.  When a suitable investment comes along, the insured borrows from the insurance company with the cash value acting as collateral. The pitch being “your money is working in two places”, earning dividends within the policy while also being deployed in a higher return investment.  Other advantages being potential tax advantages on accrued values, some asset protection as insurance policies may be exempt from some collection actions, and generational wealth transfer. In concept, this seems to me to be similar to leveraging collateral of other assets, such as real property, precious metals, etc. I would be very interested to hear if you have any thoughts on the utility of this. Dominic, this is a great question. Let me preface my comments by saying that your question really gets to the heart of personal philosophy around money and around how to best invest. It’s a little like asking whether the image on the magazine cover is beautiful. I personally am not a fan of life insurance policies in general. But that’s just me. Remember, life insurance companies make a profit. There is no free lunch. When you borrow against your life insurance policy, it’s my understanding that the value of the policy is reduced by the amount you have borrower. You are correct, borrowing from your life insurance policy can be a quick and easy way to get cash in hand when you need it. You can only borrow against a permanent or whole life insurance policy. Policy loans are borrowed against the death benefit, and the insurance company uses the policy as collateral for the loan. But you need to read the fine print. Some policies penalize you more than just the money borrowed. Those who advocate life insurance as an investment usually justify it on the basis that the cash balance of the policy grows inside the policy tax free. The argument is that if you don’t touch the cash for a long time (20 years), you get growth of the cash. If you don’t collect on the policy, then you can often negotiate flipping the policy into an annuity with the life insurance company. Earlier this year we did an analysis of annuities from life insurance companies and we found the quoted rates of return to be approximately 1%. The yield was better in US Treasury bills. The only reason to put the money with an insurance company is if you have zero financial discipline and can’t leave the cash in your own bank account. As an investment vehicle, life insurance policies have very high fees. These fees are much higher than a mutual fund on Wall Street. If you're horrible at money management but can swing your premiums for the long haul, then a whole life policy could serve as a means of forced savings, since you'll eventually have the option to tap your policy's cash value. My personal preference is to buy term life insurance and then make investments separately. True real estate investors have the ability to generate much higher returns than an insurance policy. The amount of money required to make a solid real estate investment is far beyond the cash value of most life insurance policies. There’s a mismatch between the amount of capital in a life insurance policy and the cash required for real estate investing. Savings as the path to building wealth in real estate is the slow train. You won’t be able to realistically save fast enough. If you develop the skill to raise capital, then you can multiply your returns much faster than is possible with savings alone.

On today’s show we are talking about how to look at a property through the lens of a developer. So often when I talk to the seller of a property, they will tell me about the zoning of the property and how the property has so much potential. Sometimes they will tell me what is possible with a zoning change. Some have even gone so far as to tell me what another property sold for that was approved for a 20 story apartment building. Somehow that is supposed to justify their asking price. The value of a development property is based on what you can actually build on it, not what you might dream of building, or what you might want to build, or what the city might approve in a decade from now. My first question is where will the parking be located and how many spaces are possible? That will ultimately determine the density and the number of dwelling units that are possible. Some areas will allow for one parking spot per unit, whereas others want more. If the property has a mixed use component, you need to factor in the parking for the commercial elements. Some downtown projects that are close to public transportation will sometimes allow for less than one parking space per unit. I always want to supply at least one space per unit. Zoning is all well and good, but the market wants parking. In a market downturn, I want to eliminate the fundamental objections that a prospective resident might have. Let the vacancy go to the properties that lack parking, or to the ones that lack modern amenities. The second thing I look at is access. Where will cars and pedestrians access the property and does the flow actually work? Is there an existing curb cut in the sidewalk, or will we need to apply for one? The third thing I look at is the overall dimensions of the property including the setback requirements and the height restrictions. The other restriction is the floor area ratio. Simply put, if your floor area ratio is, for example 3, and the building is going to cover 100% of the land, then you will only be able to build 3 stories. If the building covers 50% of the property, then you might get 6 stories, subject to any other restrictions. Sometimes a larger property doesn’t translate into a larger building. You see an apartment has certain natural dimensions. It would be rare to design an apartment that is longer than about 35 or 40 feet in one direction. If you want two apartments separated by a hallway, the ideal dimension for the width of the building is around 75 or 80 feet. If the property is too wide or deep in that dimension, you won’t be able to make a larger building. At the other end of the spectrum, there are properties that are too small to make into an apartment building. Some properties are restricted by the size of shadow they cast on neighbouring properties. In that case a shadow study might be required to prove you won’t be adversely affecting the neighbours. When you look at a property that has development potential, understanding the true scope of its potential is an exercise in understanding the constraints. Are all the utilities available at the property line? Is there an overhead electrical transmission line that you will have to work around? The key is to work with an urban planner, or an architect who specializes in the type of building that you have in mind. When you are talking to the right person, you will know it instantly. They will be looking at the project through the lens of a developer to understand the constraints and clearly know the limits on the development potential. If you are going to do the work to get the entitlements on the property, then you as the buyer are creating that value. The seller gets no part of the value increase because they didn’t do the work to create the value.

On today’s show we are talking about how to deal with inertia when you hit an obstacle. There are two types of inertia. The first one is obeying Newtonian physics. But we’re not going to focus on that one. Hitting an obstacle when you’re in motion usually results in a crash. But we’re not talking about physics. We’re talking about when your project encounters an obstacle. We’re talking about finding that perfect balance of persistence and knowing when to pivot. As syndicators we have to keep our fiduciary responsibility to our investors at the forefront of our decision making process. That consists of a combination of preservation of capital and maximizing investor returns. We also have a responsibility to the employees of the organization and the residents of our properties. So along comes a pandemic and financial performance suffers. Agreements that were in place prior to the pandemic evaporate. The choices are simple. Keep pushing on the current path. Slow down and wait for the obstacle to clear Give up Change course I have several projects that have been impacted by the pandemic. In one case, there is a dramatic decrease in construction capital available for that project. So we decided to pivot and deliver a different product in that location. Our original idea was to build a 4 star hotel. But at a time when hotel occupancy is at historic lows, it’s very difficult to engage people in investing in a new construction hotel. So much of the hotel capital is waiting for the deluge of distressed properties that are expected to hit the market in the coming months. So if a hotel doesn’t work this year in that location, what should we build? We feel that a high rise building in the core of the city is best suited to provide one of three products. Hotel Apartments Condominiums All three were analyzed at the start of the project. So a pivot to one of the alternate options was straightforward. We knew that all three products were viable in that location, When a lender on another project surprised us with a much higher interest rate and higher fees, we had to change gears again. The reason for higher rate was the uncertainty introduced by the pandemic. The appraiser gave a low valuation compared with the historic data. His rational was the uncertainty introduced by the pandemic. The appraiser reduced the rents in his model compared with the actual rents in the market. He also changed the cap rate compared with the market in order to account for the uncertainty associated with the pandemic. The net result was a financing that was simply unworkable. Again, you have here choices, Keep pushing on the current path. Slow down and wait for the obstacle to clear Give up Change course Trying to convince a lender to fundamentally change their terms rarely works. A bad quote from one lender is hardly a reason to give up. Changing course is the only sensible option. We have another project where the negotiations on the land have been underway for an extended period of time. In the end, the land owner put the land under contract with conditions with another buyer. The seller put the chances of the buyer closing at 50%. But somehow he had convinced himself that he had made the best choice. Obstacles appear in every project, often without warning. Sometimes it’s a regulation change affecting construction. At other times it’s an increase in interest rates. This year it’s a pandemic. The question of when to push, when to wait, when to quit, and when to pivot presents itself with every obstacle.

Yonah Weiss is an incredibly well connected member of the real estate community, not just in his home town of NYC, but nationally as well. He specializes in cost segregation in addition to his role as a real estate investor. On today's show we're talking about cost segregation and how it can be a powerful tool for improving the tax efficiency of a real estate investment.  You can reach Yonah at yonahweiss.com.

Today's show is an excerpt of a conversation with Keith Elias held earlier this week at the Ottawa Real Estate Investors Organization. Keith heads up the Player Engagement Department at the National Football League. He's a former real estate syndicator, and a former running back with the Giants and the Colts. Our conversation sets a powerful context for living. Rare to have such an intimate conversation about meaningful topics so publicly. Thank you Keith for sharing. 

On today’s show we’re talking about the many impediments to getting stimulus money. One of the newest programs is the Main Street Lending Program. This program is designed to help medium sized businesses that have been impacted by the Covid-19 Pandemic. When you look at any business, there is the basic financial score card consisting of the income statement and the balance sheet. That’s every bit as true today in a moment of crisis as it would be in more normal times. Businesses that have experienced a massive drop in income as a result of the pandemic have taken a hit on the income statement. The income statement speaks only to income and expense. The balance sheet captures the assets and liabilities. How much cash does the company have? How much does the company owe? What cash is expected to come in the near future? What fixed assets does the company own that have intrinsic value. All these items are shown on the balance sheet. If you have an income statement problem, perhaps a drop in revenue or an increase in expenses, the best sustainable solution is also found on the income statement. You need to find a way to increase revenue or cut expenses. All too often, the proposed solution to an income statement problem is to lend the company money. If the problem is truly a short term problem, then a short term loan might be a good solution. But simply taking on more debt may not be the right long term solution. Under the Main Street program, banks will lend between $250,000 and $300 million to businesses that were creditworthy before the economic crisis began. A Fed facility will then buy a 95% stake in those loans, leaving originating banks with 5% of the credit risk. Out of the 11,000 federally insured banks and credit unions, 260 lenders have completed the registration process, while another 174 are still signing up. There are not many lenders in the program. The participation in the program has been very small so far. So I decided to take a closer look to see why the program might be having trouble getting off the ground. I went through the lending criteria for the various main street programs. I have to tell you that the rules are incredibly complex and the documentation required to qualify for the loan is heavy weight to say the least. There are over 30 documentation deliverables that must accompany each loan application. The restrictions are immense. In fact, it took me nearly an hour to fully come to terms with the lengthy list of restrictions. Virtually every sentence reads like another rule that would disqualify a wide category of borrowers. Knowing how businesses operate, I can’t see many real business agreeing to the terms of these loans. Not because the terms are all that unsavory, but because they’re that difficult to meet. I predict that we will see this major loan program go largely unused. The will be a large number of businesses that could use the money that can’t access it and will go into bankruptcy anyway. There are government programs for specific big businesses and industries like the airline industry. There are unemployment benefits for workers that have lost their jobs. The PPP program was a small program that provided a small amount of lifeline stimulus, but not enough to really save a business. The big question is the missing middle. Those tens of thousands of medium sized businesses that each employ hundreds or thousands of people. They’re the forgotten ones that will be left out in the cold. As real estate investors, we’re making daily investment decisions based on what’s happening in the larger economy. If business failures are going to multiply despite government efforts to help, we real estate investors need to pay close attention. Our revenue comes from the combination of demand and ability to pay. Demand is irrelevant without the ability to pay.

That is the question.  On today’s show we’re Talking about one of the strategies that are working in today's changing market conditions. Many markets are experiencing historically low inventories. We've gone through a period of reduced market activity, and this has resulted in shorter days on market, multiple offers and higher prices. These are traditionally the perfect market conditions for buy-fix-sell projects. That is assuming you can make the numbers work. You need to buy at low enough a price, maintain the improvements within the budget, and most importantly make sure that the improvements will be accepted by the home buying community. The worst situation is the one where you perform a substandard improvement. It’s not good enough to meet market demand, and it’s too new for a buyer to rip it out and replace it. But understand, while the market conditions are looking favorable for flips, the market conditions could change quickly. If you’re going to do a flip, who is your ideal customer? Some of the traditional sources of demand like immigration have been severely curtailed this year. Despite the hot market conditions, there are signs of softness. We know there is a large backlog of properties in forbearance. Currently there are 4.3M distressed properties in forbearance in the US. There are also a large number of properties with tenants in default. Unless the government steps in to forgive these loans, we will eventually see an increased number of distressed properties coming on the market. When that happens, the market conditions for selling a slip could change quickly. On the other hand, we could see a return to normal market conditions, a resumption of immigration, and another round of government assistance to protect property owners from foreclosure. There’s no point in providing help in the short term, and then allowing those properties to fall into foreclosure six months later. That investment in bailout funds would have been wasted. We remain in a low interest rate environment and demand for housing is expected to remain strong, as long as the employment market regains strength. Low interest rates are driving demand for homes. So let’s say you’ve decided that the market risk is acceptable. The next question is what kind of property to flip? Much of the price increase in the market has been in the bottom 2/3 of the market. Buyers fear getting priced out of the market. So much of the increase has been at the bottom of the market. At the top of the market, with homes priced above $1M we have seen much less movement in price. Some would say that the more expensive homes have seen close to zero price increase. The result is price compression. The price per square foot for the larger more expensive homes is in fact much less than the price per square foot for the smaller entry level homes. The key to a renovation project in this market is to make sure you get the property renovation done quickly. If a renovation is going to take more than 30 days, I would not take the risk. A flip project that is on a 6 month timeline would be incredibly risky in today’s fluid environment. I would also make sure that when you structure your deal you maintain lots of margin. That means you can’t pay too much for borrowed money. You need to be aggressive on sourcing well priced materials, and you need to negotiate with your subcontractors and clearly define the scope of work so you contain the cost of the renovations. You want to be assured that you’re selling into a segment of the market where there is still an extreme shortage.

The path from A to B is rarely a straight line. As humans, we like things to be nice and neat and orderly. Linear relationships are simple to calculate. They are simple to understand. We’re conditioned to think linearly. We have been conditioned to forecast the future based on extending a straight line from the past into the future. Most investment graphs imply such an exercise even when the usual disclaimer “Past performance is not an indicator of future performance” is attached. We are about a month into the so-called economic recovery. Governments the world over have been pumping money into the economy to prevent economic collapse. But we have conflicting data. The biggest factor affecting the economy is related to confidence. Some restaurants are open. My wife and I observed on the weekend that the outdoor patios had done a good job of spacing the tables far apart. The open air environment reducing the risk of transmission. The warm weather brought people out into the parks. The parking lots were full and the Police were liberally handing out parking tickets to the cars that couldn’t find a legal place to park. The beaches were full. The restaurants were busy. But then in California, the beaches were closed this weekend. The number of infections with Covid-19 keep rising in Arizona, Texas, Florida, Louisiana and numerous other hotspots in the country. The opening of the economy in several states has taken a step backwards as the US is experiencing record numbers of new cases each day. Texas and Florida rolled back their re-opening plan. New York City delayed the re-opening of indoor dining in restaurants. Several locations in Arizona also rolled back their re-opening plans. New Jersey is resuming summer camps and in-person graduation ceremonies. In my home town, the school board is going to be reducing density in the classroom and having students attend classes physically two days a week. The impact on parents who can’t work from home is going to be significant. There will not be adequate child care which will limit the number of people who are able to return to work. As a minimum, some parents will need to stagger their work day so that at least one parent is at home to care for the children. Those single parents who don’t have the support of a partner will really struggle balancing work and raising a family. The US economy recovered 4.8 million jobs in June and the unemployment rate fell from over 14.7% in April to 13.3% in May and to 11.1% at the end of June. 40% of the gains in employment were in the leisure and hospitality sector which includes restaurants and hotels. The stock market is up again sharply in early trading this week on hopes that the recovery is taking hold. The market was up 1.1% on Monday morning. All of these mixed signals are occurring at the same time. The Federal Reserve gave guidance that they won’t be raising interest rates until 2022. Yet the yield for the 10 year treasury note increased at the beginning of the week. There are no foreclosures or evictions happening, but that’s because they’ve been banned. We have 80,000 eviction cases backlogged in the landlord tenant tribunal in my home province. We have 8% of mortgage loans in the US currently in some form of distress. They’re either in forbearance or in default. We have some hospitals empty waiting for the onslaught of cases that never materialized. We have other hospitals in California at capacity. The US has recorded 360,000 new corona virus cases in the past week, that’s an average of over 51,000 cases a day. So far in the past three months, the country has recorded over 133,000 deaths. That’s a terrible statistic. When this started in February, I predicted that the deep economic impact would be at least 18 months in duration. From where I sit today, I re-affirm that prediction.

While the world has been distracted with the Covid-19 pandemic, and while much of the US has been consumed with rage, China as decided to ‘never let a good crisis go to waste.’ On today’s show we’re talking about the sweeping new security laws in Hong Kong and the impact of that on real estate in both Canada and the US. When Hong Kong’s basic law came into effect in 1997, it left some unfinished business. There was supposed to be universal suffrage, the right for everyone to vote. That was never implemented. Secondly, there was supposed to be a new national security law. The first attempt to implement this in 2003 was abandoned when more than 500,000 people took to the streets to protest the proposed law. Last week China’s central government imposed new national security legislation on the city of Hong Kong to stamp out a year of protests. So far in the first week, it is estimated that several thousand people have been detained under the new security law. So who is at greatest risk of being detained? Well, someone with a foreign passport could be charged with aiding a foreign government. Those with foreign passports have also been the ones who have been the most vocal opponents of China’s control of Hong Kong. It is estimated that there are at least 300,000 and perhaps as many as 500,000 people who hold Canadian passports living in Hong Kong today. There are approximately 85,000 people with US passports living in Hong Kong. If there is a crack down, it is reasonable to expect that a significant percentage of those who have the complete freedom to come to Canada or the US will do so. Of course, this is made a little more difficult as a result of the travel restrictions being imposed by the global pandemic. If 300,000 Hong Kong residents were to come to Canadian cities, the demand on housing would be significant. The US has suspended the H1B Visa program temporarily during the pandemic. But if 85,000 Hong Kong residents were to descend upon American cities in a short time period, the impact would be significant We already have market conditions with historically low inventory, rapidly increasing prices and properties routinely selling above asking price. If we see an exodus from Hong Kong, I predict that it will happen quickly. Flights from Hong Kong are significantly reduced, but it will still be possible to have several thousand people a day leaving Hong Kong bound for North America. Despite the worries over Covid-19, I believe that people will fear prison in mainland China more strongly than the fear over catching Covid-19. So here’s the question, “If you knew that there would be an exodus from Hong Kong into your home city, what would you do to be prepared?” Which properties would you get under contract? Which real estate agents would you make sure to communicate with? What financing would you get lined up to take down properties in advance of their arrival?

On today’s show we’re talking about whether markets really need a market maker. But first we need to define what a market maker is. The role of the market maker is to introduce liquidity into the market. The problem in many markets is that too much time passes between the buyer and the seller getting together. This passage of time means that the market price can fluctuate up and down depending on the number of buyers and sellers and the spread between the bid and the ask. Exactly what does the market maker do? They step in when there is no buyer and they buy, and they step in and sell first when there is no seller. The role of the market maker is to ensure that any time there is a sale, there is someone waiting to buy. Whenever there is a buyer, they step in and sell. In exchange for providing this service, the market maker makes a small profit margin. The market maker is not exposing themselves to undue risk because there is an expectation that the market will continue to operate in an orderly fashion. The major stock exchanges around the world work on this premise. When someone buys shares of Tesla on the NASDAQ at the market price, they are buying the shares from the market maker, not the seller of shares. The market maker ensures that when someone put shares for sale maybe two minutes ago, there would be someone available to make the trade without having to wait for the trade to be fulfilled when a buyer materializes. Markets of all types exist throughout the world without the role of a market maker. The real estate market in my local community has no market maker. When you bargain for a bushel of tomatoes at the farmers market, there is no market maker. The Federal Reserve said on June 15 that it will begin buying individual corporate bonds under its Secondary Market Corporate Credit Facility. Let me get this straight, I could be a captain of US industry with the need for additional debt. The banks won’t lend it because there isn’t sufficient collateral. The income isn’t consistent enough to sell the bonds because we have a global pandemic on our hands. So the Fed will step in and buy that debt that is too toxic for real investors to touch. All of this is being justified as providing market liquidity. The central bank also spelled out for the first time how it plans to implement its buying strategy, saying it would follow a diversified market index of U.S. corporate bonds created expressly for the facility. The Fed built the index internally, and a spokesman couldn’t immediately say whether its details would be made public. So here’s the rule that needs to be followed. It’s listed under section 13.3 of the Federal Reserve Act.  An index assures the Fed complies with the spirit of the law under Section 13.3 of the Federal Reserve Act which says emergency lending facilities must be broad based, and provides a mechanism for the central bank to avoid industry concentration. A program or facility that is structured to remove assets from the balance sheet of a single and specific company, or that is established for the purpose of assisting a single and specific company avoid bankruptcy, resolution under title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or any other Federal or State insolvency proceeding, shall not be considered a program or facility with broad-based eligibility. So here’s the deal. The Fed is going to make up an index that has a few companies in the index, or who knows, maybe even one company so they can stay in compliance with the letter of the rule in section 13.3 of the act. That explains why the stock market indices are at such crazy levels, despite the economic downturn. The Fed is going to buy corporate America’s bad debt, and they’re going to do it with printed money. That folks looks like a bailout, and definitely not like market maker activity.

Dan Butler has about 3,000 apartments under management in the Memphis market. Memphis is a difficult city from an economic stand point. He shares some insights on the pandemic and how his business has fared during this period of social isolation.   

Gary Beasley is the founder of Roofstock.com, an online marketplace for turnkey rentals.  This fascinating innovation has sold thousands of homes so far. You can reach Gary at Roofstock.com.

Evan from Toronto asks, My wife and I, along with our Real Estate Partner, are looking to buy our first rental property in the GTA by the end of the year! We really like the BRRRR strategy but have some questions since we've never used it before! 1. What have you found is the best way to structure private lending? 2. What are the top three things that can go wrong? 3. How do we find comps in smaller/more rural neighbourhoods? Evan, this is a great question. But before I answer your specific questions, I want to set the context so that you look at the opportunity the right way. You see the prices in Toronto are so high that it’s almost impossible to charge enough rent to recoup your investment in a reasonable timeframe. You end up tying up too much cash in the equity of a home in order for the numbers to make sense. The driver for housing in Toronto has been population growth. The city has added about 125,000 population a year and has only added about 35,000 units of new construction a year. The supply isn’t keeping pace with the demand which is why prices keep increasing, commute times keep getting longer, and the boundaries of the city keep expanding. When you’re paying $700,000-$800,000 for a townhouse, it’s hard to charge enough in rent to cover the cost of financing this project. The ratios are too far out of whack. What is working in the Toronto market is to renovate with a sale to an end-buyer as the exit strategy. You can go to lower density more rural areas, but they’re a long commuting distance from the core of the city. Low density also means low demand. There is so little developable land within commuting distance that the land is worth a lot of money. Construction is cheap by comparison. I personally don’t think the BRRRR strategy works in Toronto. Of course the market is in a strange state right now with the Covid-19 pandemic still affecting the market. We have less immigration which has been a traditional demand driver in Toronto. We also have a lot less foreign investment in the market. The key to buying a suitable property in the Toronto area is to buy at a sufficient discount and to add enough value. You see in Toronto the municipal development charges, what are called impact fees in many cities are incredibly high. For a single family home you’re looking at a fee of $84,000 depending on the area in which you’re building a new home. So two identical houses side by side could differ in cost by $84,000. One is new construction and the other is replacing an existing house. You can do a lot of renovation for $84,000. You could take a single story house, cut off the roof, add a second level and more than double the value of the house, without doubling the cost of the house. You want to see what is working in an area and copy it. Don’t try to be a hero and blaze a new trail on your own. That’s a recipe for disaster. The other main challenge in Toronto is finding high quality subcontractors and trades people that are reasonably priced. The guys that are good are already busy for the next two years with existing projects. Trades people are in high demand. Contractors are often looking for smaller projects as gap fillers in order to keep their people busy. They have to keep their people busy or they will lose them. But the flip side to that is that getting people to come to actually work on your project can sometimes be a problem. Finally, you have to consider the sales tax. There is sales tax on new home sales, but not on the resale of existing homes. That adds another 13% to the cost of a new home in addition to the already exorbitant development charges. So you want to make sure you don’t renovate the house too much so that it is considered a new house. You want to be treated as if you are re-selling an existing house that has already paid the sales tax.

On today’s show we’re talking about the effect of the pandemic on rental markets across North America. The results are somewhat surprising. The biggest worry has been whether tenants would pay rent despite the staggering job losses. It seems that the stimulus money that governments have been showering the country with have been effective in protecting rental payments. The National Multifamily Housing Council Rent Payment Tracker found 94.2 percent of apartment households made a full or partial rent payment by June 27 in its survey of 11.1 million units of professionally managed apartment units across the country. This is a 0.5 percentage point decrease from the share who paid rent through June 27, 2019 and compares to 93.3 percent that had paid by May 27, 2020.  While the rent collections for June were down 0.5% compared with a year earlier, we are seeing that some tenants are struggling to make payments on time and are paying later in the month than previously. But here too the difference from last year is small. The biggest drop in rent collections happened in March and April, before the unemployment benefits were fully rolled out. Collections have steadily improved in May and June with the June numbers being virtually identical to the 2019 numbers. There is one caution and that is what is happening in the smaller self-managed rental market. We’re hearing data that collections in that segment of the market are much lower. We will try to get more data on that segment for a future show. So if rental collections haven’t really dropped, then what’s changed in the rental market? According to a new report on Zumper published in June of 2020, we can see some changes in the rental market. Zumper’s National Rent Report analyzes rental data from over 1 million active listings across the United States. Data is aggregated on a monthly basis to calculate median asking rents for the top 100 metro areas by population, providing a comprehensive view of the current state of the market. The report is based on all data available in the month prior to publication. Covid-19 has shifted demand away from the most expensive markets. When you look at month over month data, all of the top 10 priciest cities either had flat or declining rents. It seems the pandemic has shifted the demand for apartments away from the most expensive cities, since usually demand picks up as we head into summer but now the opposite is true. As more and more companies move into remote work, many renters don’t want to pay the big city price tag when they are unable to use the amenities and are looking for more affordable options outside of large, metropolitan areas. The most expensive city in the nation experienced the largest year-over-year drop since we started creating these reports in 2015. San Francisco one-bedroom rent is down 9.2%. Similarly, the 3 next most expensive markets, New York City, Boston, and San Jose, all had negative year-over-year changes for their respective one-bedroom rents as well. Some cities have actually experienced rent growth during the pandemic. One city in which my team has projects is Spokane Washington. The Spokane Valley is an area where rents have increased 5.1% year over year for one bedroom units and 3% for two bedroom units. Much of that change is recent with rents having increased 3.8% in the past month for 1BR units and 3% for 2BR units. In my opinion, there’s no question that changes in employment are affecting people’s choices of rental accommodations. These choices are being influenced by affordability. If someone loses a job, they’re going to be looking for less expensive accommodation. If they’re going to be working from home for an extended period of time, then they may choose to move from a high cost dense urban environment to a lower cost area where they can socially isolate and continue to work from home with more access to the outdoors.

The book this month is called The Infinite Game by Simon Sinek How do we win a game that has no end? Finite games, like football or chess, have known players, fixed rules and a clear endpoint. The winners and losers are easily identified. Infinite games, games with no finish line, like business or politics, or life itself, have players who come and go. The rules of an infinite game are changeable while infinite games have no defined endpoint. There are no winners or losers—only ahead and behind.   The question is, how do we play to succeed in the game we’re in? In this revelatory new book, Simon Sinek offers a framework for leading with an infinite mindset. Leaders who embrace an infinite mindset build stronger, more innovative, more inspiring organizations. Ultimately, they are the ones who lead us into the future. Infinite games, in contrast, are played by known and unknown players. There are no exact or agreed-upon rules. Though there may be conventions or laws that govern how the players conduct themselves, within those broad boundaries, the players can operate however they want. And if they choose to break with convention, they can. The manner in which each player chooses to play is entirely up to them. And they can change how they play the game at any time, for any reason. Infinite games have infinite time horizons. And because there is no finish line, no practical end to the game, there is no such thing as "winning" an infinite game. In an infinite game, the primary objective is to keep playing, to perpetuate the game.

On today’s show we’re talking about some leading indicators that might predict what will happen in the housing market 3-6 months from now. As we all know, there is a moratorium on evictions and foreclosures in most areas right now. In the US, the moratorium on evictions was extended again until at least the end of August. The big debate is whether we will face a period of real estate asset deflation before we experience large scale inflation. Let’s look at the drivers that might be affecting the real estate markets. The big question is what will happen in the credit markets. We have a 13.3% unemployment rate in the US and 13.7 percent unemployment rate in Canada.  For now, unemployment benefits remain in place. But they won’t remain in place indefinitely. When they start to disappear we will start to see defaults in consumer credit, automotive credit, and eventually in mortgage credit. But here is where the numbers get interesting. Only 15.9% of loans in forebearance made payments in June. That’s down from 28% in May and 46% in April. These forebearance agreements are finite in duration. The question is what happens six months from now. More than 100 million auto loans and student loans have had missed payments since the start of the pandemic. As of the end of May, 4.3M real estate loans were in default, and increase of 723,000 from the month before. More than 8% of US mortgages were past due or in foreclosure. That compares with a normal mortgage default rate of 0.42%. There are now 4.3 million homeowners past due on their mortgages or in active foreclosure – including those in forbearance who have missed scheduled payments as part of their plans – up from 2 million at the end of March. On a percentage basis, there are now 7.76% of homes in the US in a distressed situation. But the fact is, almost none of these are on the market, thanks to the moratorium on foreclosures. As the amount of government bailout money dries up, the number of distressed homeowners will only increase. Over the span of 5 years from 2008 to 2013, a total of 10 million people lost their homes in what was at the time the biggest distressed home market in history. We have lots of people with traditionally good paying jobs that have experienced significant income disruption. We’re talking about airline pilots, dentists, dental hygienists, hotel staff, flight attendants, fire fighters, police officers, physiotherapists. The list goes on and on. Airline pilots and flight attendants are obviously impacted by the pandemic. City employees like fire fighters and police officers is less obvious. The problem is that cities are forced to balance their budgets and most have experienced a 25% loss in revenue during the pandemic. As we reported last week, Nashville just passed a 34% property tax increase in order to try and make up the shortfall. Whether that truly solves their problem remains to be seen. Other cities have been forced to reduce staff significantly. There are a few hotspots where the delinquency rate is much higher. Mississippi, Louisiana, New York, New Jersey, and Florida all have delinquency rates above 10.5%. Mississippi is close to 13% delinquency. You can expect that there will eventually be a sharp increase in distressed inventory working its way through the system. At what point will the bailout money dry up? We are in an election year in the US and neither Republicans nor Democrats want to be seen as abandoning the population in a moment of need While all the traditional real estate market indicators point to a strong real estate market in many cities including low inventory, low interest rates, rising prices, multiple offers. These conditions may be artificial and could be hiding a much different underlying condition.

On today’s show we’re looking at some of the leading indicators to predict what might happen in the housing market three to six months from now. We’re currently in the middle of a moratorium on both evictions and foreclosures. Let’s talk about rentals first. We will talk about foreclosures on Tuesday. The moratorium on evictions doesn’t mean that tenants don’t need to pay rent anymore. It simply removes one of the remedies that landlords have in the case where tenants don’t pay their rent. In most states and provinces, there is a landlord tenant tribunal that deals with disputes between tenants and landlords. In Ontario where I live, the current landlord tenant board has a backlog of more than 80,000 cases. The tribunal is not handling eviction cases, except in severe cases where safety is threatened. But a little known remedy within the tribunal system is to get the tribunal to render a judgement on arrears. The judgement simply states whether the tenant owes the money to the landlord or not. The landlord still can’t evict, but armed with the judgement, can take other collection actions. You see if the landlord can demonstrate that the tenant still has the means to pay, and is using Covid-19 as an excuse not to pay, they could likely win a judgement in their favor. I’m going to cover two cases. The first case involved a student tenancy where 4 tenants had entered into the standard industry lease, the terms of which bind all tenants on a “joint and several” basis. Prior to the lease commencement date, 2 of the 4 tenants informed the landlord that due to COVID-19 and the prospect of on-line classes, they would not require the tenancy and would not be moving in. Two tenants agreed to honour the lease and paid rent for the commencement of the tenancy. The defaulting tenants took the position that the application should be dismissed since they never moved into the unit: they were not “in possession” In the second case, a tenant proposed to vacate without proper notice on the basis of his fear that the risk of COVID-19 in a multi-res building was very high and he wished to move his family into a lower risk environment. The tenant stopped paying rent and, since L9 applications don’t require advance notice, the landlord immediately applied to the LTB for judgment for arrears. In an ARREARS  application, the LTB’s only function is to determine whether there are rent arrears; furthermore, in contrast to eviction applications where the LTB has a discretion to delay or deny eviction and force the landlord into a repayment plan for arrears, in an ARREARS  application there is no “overriding discretion” to refuse or delay a remedy, the only issue is whether rent is owing. In its analysis, the LTB Member stated: "With respect to the health risks arising out of Covid 19, I am sympathetic to the fear this pandemic has placed on everyday living practices. However, once I have made a finding that the rent for May 2020 is owing, I do not have the jurisdiction to tell a Landlord that he must forfeit rent that is validly owing.” Now I’m not a lawyer, and the law varies widely from one jurisdiction to another. You definitely need to seek your own legal advice and examine the facts that are specific to your case. These two cases illustrate that there might be other remedies apart from eviction. Don’t just assume that a moratorium on evictions means that landlords are stripped of any tools to enforce a duly signed rental contract. As cases like these become more highly publicized, you may start to see greater compliance. The fact that Ontario has a pending eviction case affecting about 4.7% of all rental properties in the province. The real number could be much higher. You see some landlords will not have even filed paperwork if they believe the application will be denied. Check out your local remedies. 

Rich Danby hails from my home city of Ottawa Canada and can be reached at [email protected]. On today’s show we are talking about how most goals for 2020 were impacted by the pandemic and what to do instead. How can you set goals in an environment of such uncertainty? 

Vacation bookings usually happen months in advance. Employees book the time off work. They buy the airline tickets far in advance to get the best prices. Of course this year is different. But people still want a get-away, perhaps even more than ever. The perception is that it’s not safe to board an aircraft, that a cruise is risky. In fact, the cruise industry is largely shut down, and the airline industry is operating at about 20% of its capacity. Most of the air travel is essential travel and it’s short to medium haul in nature. Air travel has all kinds of restrictions. You will be expected to wear a mask for the duration of the flight. Meal and drink service has been cancelled and this becomes impractical on a 13 hour flight to Asia or even a 9 hour flight to Europe. People have decided to vacation close to home. That means driving distance. We are now in peak summer season and listings for most vacation properties show that they’re fully booked until the end of August. The exception to this is in areas where there is a lot of condo’s like at ski resorts; there tends to be a lot of availability at ski resorts. The perception is that it’s more difficult to social distance in a condo than in a standalone cottage or lakefront home. The other place where vacation rentals are easily found is in areas where government mandated travel restrictions are still in force. We also find that boat and RV rentals are almost fully booked for the entire summer. The only ones available are the result of last-minute cancellations because of international travel restrictions. Those with long standing reservations seem to have hung on until the last minute to see if travel was going to be possible. Some vacation markets rely heavily on air travel to fill the rooms in a market. Those areas are definitely going to experience higher vacancy during peak season and lower nightly rates. For example, we have a portfolio of vacation rentals in the Rocky Mountains near Banff Alberta. The local driving distance population centers of Calgary and Edmonton will provide a strong source of demand. But they won’t make up for the plane loads of tourists from Japan, China, and Korea that regularly frequented the area in years past. Instead of the usual $650 per night rate, we’re seeing strong occupancy at a more modest but acceptable $250 per night rate. Markets along the eastern seaboard like the Jersey Shore, and the Carolinas are seeing strong occupancy. Hotel occupancy in Myrtle Beach is close to pre-pandemic levels according to hotel data analytics company STR Global. Urban vacations are not as popular these days with social distancing still an important criteria for many families. For example, hotel occupancies in NYC have risen from the lockdown low of 9% to a current occupancy of about 40%. Nightly rates in NYC have dropped from an average of $250 per night to about $125 per night. But since NYC was a hotbed of Covid-19 outbreaks, it’s probably not at the top of the vacation destinations this summer. Some areas are opening up to tourists, subject to a negative Covid-19 test result that is less than 72 hours old. Some tourists have entered Canada by car and told the border agents that they were driving to Alaska which is allowed. But it seems some of them have been found stopping in Banff National Park. If a visitor drives straight through to Alaska with only minimal stops for fuel and food, that is permitted. If a visitor stays in a hotel, then they’re required to quarantine for 14 days at a designated quarantine location.

Much has been written in recently years about the retail apocalypse. Earlier this year we shared the mind numbing statistics of retail store closures that amounted to over 10,000 retail stores in the US in 2019. The pandemic clearly hasn’t helped most retail establishments. On today’s show we’re taking a closer look at what is happening in retail. These days, my email in inundated with listing offers for retail real estate. They aren’t bargains for the most part. I’m seeing  pharmacy locations, banks, fast food establishments, convenience stores, has stations, and automotive service shops like muffler and tire shops. The list is long and varied. These for sale listings are not bargains. I recently saw an offering for a 21,000 SF multi-tenant property that houses four large restaurants. The asking price is at $588 per square foot. This is well above replacement cost. Remember, these restaurants have been closed for quite some time and the metrics for restaurant dining post pandemic have not been established. It would be very hard for this investor to pay that kind of top dollar with the risk that is inherent in four new restaurants as tenants. Simon Properties is the largest shopping mall owner in the US. In the past four years, Simon has acquired three of its tenants. Now they’re in discussion with Brookfield Property Partners to potentially acquire JC Penney. JC Penny is an anchor tenant in several of Simon’s shopping malls. When a mall loses its anchor tenants, the mall usually dies. You see our credit system isn’t designed to handle an economic downturn. There is so much debt in the system that businesses can’t survive a drop in revenue. The businesses have borrowed money to fund their inventory. They’ve borrowed money to advance funds for their accounts receivable. They’ve borrowed money to pay for equipment, or perhaps the equipment is leased. Either way, the fixed costs of these retail businesses are high and these businesses are not resilient to economic fluctuations. The problem is further compounded by the fact that the mall owner can’t survive a long period of economic vacancy. As a commercial landlord, I frequently face questions from tenants looking for rent concessions to help them with revenue fluctuations.  The massage therapy office that rents from us needs rent relief. The clothing store needs rent relief. We know that some stores will close as a result of the pandemic. Some stores simply won’t survive. Here’s the scenario that I believe we will face in the world of retail. Retail space will get repriced, on a massive scale. There will be lots of pain along the way. Even those retail owners with firm leases will find themselves negotiating rent concessions on a large scale. Let’s imagine that we have a 20% reduction in retail floor space as a result of the combination of the pandemic and the ongoing trend of local retail sales being replaced by online sales. There might have been already a 10% vacancy rate in the market. Add another 20% and you’re near 30% vacancy. So now some of those properties go into default on their loans and the buildings are sold at a fire sale price, say, 50% off their construction cost in a foreclosure auction. The new buyer owns these buildings at 50% of their replacement cost. They can charge a lower rent compared with the competition and still make a healthy rate of return. New tenants will flock to the newly available space that is priced 1/3 less than the comparable market. Tenants in existing spaces will renegotiate their leases. They will argue that the move to less expensive space is necessary for business survival. The existing landlord faces a difficult choice. The landlord either offers a rent concession, or they lose the existing tenant and revenue goes to zero. It’s a lose lose scenario for the landlord.

On today’s show we’re talking about the merits of two different approaches for raising capital. It’s a bit like asking which is better, Ketchup or Mustard? Some people like ketchup, some like mustard, and some like both. The two funding models are the blind fund and the syndication for each project. Some syndicators have a preference for raising capital for each new project. Each project stands on its own and investors who qualify to invest in these exempt market offerings make the decision to invest in each offering independently. They diversify their investments by investing in multiple different projects. Each project sits in its own separate entity and there is no chance of a problem in one property cascading and affecting any other property. There is a veritable fire-wall between each property. This structure is ideal for many investors since it allows investors to make individual choices on which project they want to invest in. The blind fund model requires a stream of similar investment over a period of time that matches the life of the fund. The benefit of a fund is that you raise the money into the fund at the beginning. Once you have access to the funds, you can execute quickly on deals. You don’t have to worry about being too aggressive when placing an offer. You know that you’ll be able to close since you already have all the funds you need to get the deal done. In today’s environment, if you’re going to be in the market for distressed deals when they become available, you will want to have the cash on hand before you even place the offer. There will be competition for the best deals and they will go to the ones with the strongest track record for closing. If you’re going to raise a fund, your investors are going to want to see a track record. Some investors will not invest in a company’s first fund. It’s not hard to see the paradox that this logic creates. When you have a fund, there is an expectation that the fund will be generating returns for the investors. Between the date the fund closes and the money being put to work, the investment capital is sitting in the fund manager’s bank account and earning zero. All the while, the investors are expecting a return on investment. It’s possible to raise too much money into a fund. If you can’t put the money to work, you might feel artificial pressure to accept a deal that doesn’t meet your standards because a deal that delivers 2% less than your target is still better than zero. In a fund, you’re restricted to a stream of investment deals that meet a similar criteria. They might be multi-family apartment complexes in Arizona. Or perhaps you might do a fund that specializes in mobile home parks. You could have a fund that invests in assisted living projects, or hotels. But if you’re a new fund manager, how do you create a new fund with no track record? In our business, we actually have both. We have raised a fund, and we have also raised capital for individual projects. Both have merits. But you also have to remember that a single project creates an aura of exclusivity, whereas a fund suggests that it’s open to all comers who qualify for the investment. It comes down to knowing your investors. The investor who invests in a single project may not be the same investor who would invest in a fund. Funds tend to be a little more opaque than single projects. Some hands-on investors will want the higher degree of transparency and reporting that is associated with a single project.

Today's show is a real life story of a negotiation between Sally and Mark. It's about how negotiating leverage is the key to getting a successful deal done. 

This question is from Meg in Westchester NY. I listen to your podcasts regularly.  I find them thoughtful and provoking and love that you get to the point in the short amount of time. We are residential investors and primarily design and build new single family homes in Westchester NY.   We have a very savvy group of buyers.  With that, one aspect we have come to understand is that our buyers want functionality and flexibility in their homes and we strive to provide designs that accommodate this. I was perplexed on your recent podcast when you were discussing how designers should consider supplying 2 offices and 1 bedroom in new apartments as opposed to 3 bedrooms.  Maybe that can be an innovative marketing strategy but I don’t see why you wouldn’t want to ensure that all three rooms can be used as a bedroom or office. With the codes as they are, for a room to be a bedroom you have to have an egress window (or sprinklers) but not so for an office.  So why not make sure you have the rooms set up so they can be used for either and let a buyer or renter determine what is best?  We often end up choosing at least 1 bedroom that we label as bedroom/office to imply this flexibility.  It is usually a smaller sized bedroom but very nice size office. I was confused by your suggestion and was hoping to hear a bit more from you to clarify. Thank you again for providing such insightful and current information on your podcast.  It isn’t easy to find helpful real estate information without gimmicks . Meg, thank you for a great question. I love the Westchester area. My family is originally from NYC and I used to have a cousin who lived on Mamaroneck Blvd in White Plains. For the listeners at home, the Westchester area is a bedroom community for NYC and there are a lot of professionals, who live in Westchester and commute into Manhattan. Meg you are correct that the building code has specific requirements for a room to classified as a bedroom. If you could meet all the necessary requirements for both a bedroom and an office, then naturally it would make sense to do so. Designers of a bedroom tend to think about the size of room required for a bedroom. You need to support either a single or double bed, a night table, a dresser, and maybe a bookcase. They don’t think through the requirements for an office, or if they do it’s an afterthought. If you were designing a room to be used as an office, you would be paying close attention to how the office would be designed. What styles of desks could be used in the room? Would the design be on a wall, or in the middle of the room? Would the desk be facing a window? Where would the door be placed? Where would the filing cabinet, the printer and the scanner be located? Where would the electrical outlets be located?, and the hardwired data connections? If there was to be a wireless access point in the room, where would it be mounted? If the office was going to host regular video conferences, how would the lighting be optimized to provide a good video image? Will the lighting support a full day of computer work, or will there be glare on the computer screen during the afternoon hours? You see it’s one thing to build a bedroom with a single electrical outlet every 12 feet of linear wall space as required by the electrical code. Its quite another to think through the placement of people and equipment to create a viable work flow. Would the flow be different if the client uses a sit-down desk versus a standup desk? You see there are lots of three bedroom houses. There are very few one bedroom, two office houses.  The person who needs two offices that are truly designed to be offices will pay extra to fulfill that need.

Robert is the best selling business author of all time and the author if Rich Dad, Poor Dad.  He's the host of the Rich Dad Radio Show and you can find out more about him at Richdad.com. 

Today's show is an extract from a keynote address I gave on the 2020 Virtual Investor Summit.

On today’s show we’re talking about the difference between price versus value. So often I see new houses, new apartments that are very “traditional” in design. I have nothing against tradition. But it doesn’t take very much thought to imagine how a family will live in a space. You can tell those who design based on a spreadsheet. They simply maximize the building envelope to what the zoning code allows. They maximize the height, they maximize the number of units and the number of bedrooms without any regard to how the space will live. They put the minimum sized closet that will legally classify the room as a bedroom. After all, the appraised value for a two bedroom apartment will be higher than for a one bedroom. It’s all about maximizing the appraised value. Or is it? Those of you who know me, will know what’s coming next. That’s right. I’m going to bring up the law of supply and demand. But I’m going to focus on a more granular segmentation of the law of supply and demand. It’s not just the supply and demand of houses, or apartments that matter. It’s the supply of features amenities that matter. In a dense urban environment like our projects in Philadelphia, we aim to include parking even if there isn’t much land available. You see there  is so little parking available in the core of Philadelphia that it’s not just the supply of 2 bedroom apartments that matters, it’s the supply of 2 bedroom apartments with parking that’s the differentiator. Unless our society moves to a post-automobile form of transportation, the shortage of parking in Philly is going to continue for decades to come. If there were ever to be an elevated vacancy rate in Philadelphia, those apartments with parking will still always be fully leased. The large garden style apartment complexes are increasingly participating in the amenities arms race. They’re adding a playground for the kids, a dog run, a splash pad for the kids, pickle ball courts. The list seems to grow longer with each passing year. Go back ten years, how many people were taking delivery of goods and services through e-commerce? Is there a place for the delivery of large parcels to be held securely? So back to tradition. The traditional home has a formal living room, a dining room, a kitchen, guest bathroom, master bedroom with en-suite bath, kids bedrooms, a laundry room, and a front closet. But today, the hub of the house is the kitchen, larger than kitchens of previous decades. The living room is usually furnished and never used. The formal dining room gets used once every few months, if at all.

On today’s show we’re talking about a morning after shock. No we’re not talking about an earthquake. This is the morning after the City of Nashville voted in a 34% property tax increase. You’re probably thinking. I’m glad I don’t live in Nashville. Folks, this event should be a wakeup call for cities all over the world. There are a couple of vitally important questions we need to answer on today’s show. 1) Are the issues that triggered such a massive tax increase unique to Nashville or do they exist elsewhere? 2) What will be the impact to Nashville, the local economy, the price of real estate, and the growth that the city has been experiencing over the past decade? So why did Nashville face such a massive tax increase? The Council voted 32-8 to approve an alternative budget proposed by Councilmember Bob Mendes after a night of several failed budget proposals. The Mayor had proposed a budget that called for a 32% tax increase. That motion was defeated. The Council weighed four different budget proposals, each of which called for a significant tax increase. The full 9.5 hour meeting can be seen on youtube https://youtu.be/Mm4a_BIfr4oand the link is in the show notes. At the root of the tax increase was a threatening letter from the State of Tennessee’s financial comptroller.  The letter said in plain terms that if the city didn’t put enough money in their rainy day funds, the state could come in and take over the city’s finances. The state called the failure to act would be considered a surrender of the responsibility to govern which would trigger the state taking over the management of the city. Clearly this is an issue that has been brewing for several months. The new budget faced calls for defunding the Police and redirecting funds to community outreach. In the end, the full police budget was approved and an additional $2.5M Council, in a surprise move, approved a plan early Wednesday morning to reroute $8.2 million from the school district's savings to a contingency fund in order to pay for teacher raises. The budget shortfall was caused by a tornado in March, and the Covid-19 outbreak and over a 16 month period is estimated at a $470 million shortfall. The problem with this tax increase of course is that the city can’t truly count on receiving all that revenue. At a certain point, families on fixed incomes won’t have the extra cash to fork out. Remember, property taxes are indexed to property value. Over the past decade, property values have increased dramatically in Nashville, as they have in cities all over North America. As property values increase, so too does the amount of tax collected. Real estate investors who own rental property sign loan covenants that require them to maintain a minimum debt coverage ratio. The property tax increase will cause tens of thousands of property owners into a technical default situation with their lenders whereby they are no longer in compliance with the terms of their loans. Then there will be those who truly can’t afford the increase. They will eventually lose the property to foreclosure, or at the tax sale for non payment of taxes. The new rate, $4.221 per $100 of assessed value. We have also seen cases where properties that face high property taxes have in fact fallen in value. Some high tax locations like Chicago have certainly experienced this phenomenon. The city can try increasing taxes, but there is only so much money available in the general population.

On today’s show We're talking about the legacy of Covid-19 on the office market. My company used to have an office location in Sunnyvale in the heart of Silicon Valley. My permanent office was near my home in Ottawa Canada. But I used to visit Sunnyvale frequently. I had staff there. The CEO of the company relocated the headquarters from San Diego to Sunnyvale. When I was visiting the Sunnyvale office, I would sit in a spare cubicle outside the CEO’s office next to the CEO’s assistant. When I was there, the CEO would see me and ask me questions, often as frequently as once an hour. My boss had his office next to the CEO. He too would talk with me far more frequently when I was physically no more than 10 feet outside his office door. But if I was in my home office in Ottawa, the CEO would rarely call me. We might speak once every few weeks. The frequency of communication varied dramatically depending on the physical presence. Was that a failing of my CEO, of my immediate boss? No, they’re just being human.

If you’ve been listening to this show for a while, you’ll know that I’m a huge believer in the laws of supply and demand. On today’s show we’re going to look at what’s happening in new construction of senior housing. In virtually every market I examine, I’m seeing signs of saturation. Despite this, new construction projects are everywhere. The projects completed two years ago aren’t full, and there are thousands of more beds coming into the local market.  I’m left wondering what market study the lenders looked at before approving the project. A new report just published by Marcus and Millichap aims to put some numbers behind what we’ve seen intuitively. Units under construction represent approximately 10 percent of existing inventory, limiting the potential for a rapid turnaround in operational efficiencies any time soon. In the most saturated markets, new units represent more than 13 percent of inventory. Frankly, this boggles the mind. I’m asking myself how any self respecting lender would finance a new project with market numbers clearly showing over-supply. I’ve been having direct conversations with senior living operators over the past several weeks to try and understand the dynamics in the market. My take is that operators are vying for market share and are willing to take a hit on operations in the short term in order to be positioned to win the war when the largest wave of baby boomers hit assisted living. The size of the market is expected to nearly double over the next decade. Back in 2012, senior citizens made up 12.8% of the total population. By 2028, they’re expected to represent over 20% of the population. Cap rates have started to compress.  Assisted living assets are highly sought after, which has narrowed the average cap rate relative to independent living levels. Overall, the average cap rate for independent living trades is in the mid-5 to mid-6 percent area, assisted living assets trade for an average be- tween 6 and 7.5 percent, and skilled-nursing properties change hands at an average in the high-11 to high 12 percent area, based on location and quality. Then along comes Covid-19. The truth is that 93% of assisted living facilities have evaded Covid-19 so far. The care facilities most impacted by the pandemic are those long term care facilities and skilled nursing facilities. Many people in the general public don’t know the difference between a skilled nursing facility versus an assisted living facility. The memory of outbreaks in long term care facilities is going to remain in people’s minds for some time to come. Staffing has been one of the largest challenges facing this industry under normal circumstances.  Tens of thousands of employees walked off the job because of fear of catching the disease. Those who remained have demanded higher pay. Labor represents the single largest cost in an assisted living facility. Hourly rate increases in excess of 50% are expected later this year in order to attract and retain quality staff. This fact alone will challenge the economic model for assisted living. We are seeing long lasting economic impact to the sector as a result of the pandemic.