Ed Rogan is founder of the Penn Capital Group, a tribute to his native Pennsylvania. He lives in Philadelphia, but invests in Houston Texas and Huntsville Alabama.

Lots has been said about the history in the making, how we’re at an unprecedented time in history. My parents grew up during the depression. While they both came from affluent families, my grandfather on my father’s side was a pharmacist, and on my mother’s side was an industrialist and inventor who ran several paper factories. Then WWII broke out and my parents came to NYC in 1939 with next to nothing. Those years shaped a generation. People saved money. They didn’t spend. They kept spare parts that might be re-used someday if something broke. They even kept broken parts that might be re-used someday if a new part needed to be somehow manufactured. I never quite understood that one. My father would save scraps of paper and write the shopping list on them. He would save used envelopes and take notes on them. Here we are in 2020. New patterns are being shaped. People have avoided human contact for nearly 90 days. Use of social media and online services have exploded. We’ve become more disconnected and Attention Deficit as a society. Alcohol consumption has increased in many communities. The powerful lesson from 2020 is that anything can change, dramatically, at any time. Your business might be performing well one day, and shut down the next. You can’t have a plan that you can count on. Over the past 50 years, we’ve had a continual, steady increase of debt. But since debt is borrowing from the future to make money available today, it only makes sense to borrow if you’re certain about the future. Those companies that have the most debt, are those in the greatest difficulty during this period of economic disruption. Some of the largest organizations are entirely debt funded. They felt really certain about the future. But we know the future is uncertain. It didn’t take a pandemic to teach us that. The signs were there before. But only now are people really understanding uncertainty on a large scale. Will people and businesses change their pattern of indebtedness in the future? Our entire banking system depends on people borrowing money. If people start saving and living within their means, how will that affect the economy over the long term? The number of parents consumed by guilt that they can’t handle work and home-schooling  their children. Some students are refusing to go to university until in-person classes resume. Our society has pushed the elderly into care homes when the kids could no longer look after aging parents. The pandemic has injected a wave of fear across the entire industry. Assisted living homes are forcing new residents to quarantine for 14 days before coming into the home. For many who have high needs, a 14 day quarantine is a practical impossibility. The way we care for our parents may change. How it may change, remains to be seen. We won’t know for some time. We have children of school age for whom their schooling experience has been majorly disrupted. Those in their high school years will feel this most acutely. The millions of job losses will impact teenagers getting their first job. Those patterns of enterprising young adults entering the workforce are being disrupted during the formative years. Instead of mowing the neighbor’s lawn, they’re home playing video games or watching movies. Many people are spending a lot more time in sedentary activities. They’re not getting out and exercising. The gyms have been closed and many are scared to go back even when they do open. The swimming pool is now a lot less important as an amenity. These are all new patterns in the making. The longer these patterns take root, the more difficult it will be to establish new healthy patterns.

On today’s show we’re talking about how borrowing is like dating with the intention of getting married. No, we’re not talking about casual dating, or any extra-marital hanky panky.  I know what you’re thinking. That’s a strange analogy. You see at the heart of a loan is a relationship. It’s a relationship that culminates in a signature on several hundred pages of documents. The advancing of funds is like the honey-moon. But before we get ahead of ourselves, let’s talk about the natural progression of the relationship. Imagine for a moment, the you have a friend who is going to introduce you to someone really special. They’ve told you about this person and they sound perfect. They share the same values, they like the same kind of cooking. Your friend keeps passing messages back and forth between the two of you. But the two main parties to the relationship haven’t spoken yet. You haven’t met, you haven’t gone on a date, you haven’t had dinner together, you haven’t been able to ask for yourself what the other person likes and dislikes. But still, your friend insists that this person is the one for you. You can stop looking, you’ve found your future spouse. Look no further. In our example here, your future spouse isn’t really someone you’re going to marry. They’re your potential lender. You friend is the mortgage broker. The broker is in the communication path between you and the lender. You haven’t met the lender yet. You don’t know what the lender wants. You haven’t seen a term sheet, or a closing checklist. Still the mortgage broker insists that this is the perfect lender for you. Not only that, they insist that the lender is going to get you a term sheet in the next day, and they can close in just a few days. Two weeks go by, and you still don’t have a term sheet. You still haven’t met the lender. All communication has been through the broker. When you build a relationship with the hope of marrying someone, there are a series of steps in the natural progression of that relationship. You would want to spend considerable time together. You might travel somewhere on vacation together. You might play a board game together. Seeing how competitive your potential partner is in a game of monopoly might tell you a lot about If you try to skip steps in that process, the risk of the relationship failing go up. If you try and rush it, the risk goes up. I know that in certain cultures there are arranged marriages. The families act as brokers between the ones who are to be married. But here too there is a process. There are a series of steps that culminate in marriage. When you’re contemplating a loan, the term sheet is the very first step. Upon signing of the term sheet, you’re now officially dating. You’re not engaged yet, that comes later. There’s a whole pile of due diligence to be done. You need to find out about your partners finances. Do they know how to manage money? Do they have good taste in food? Have you met their family? Once the term sheet is signed, there might be a commitment letter. This is the point where you’re now engaged. Subject to a few due diligence items, you’re going to get married and you’re going to get the loan, you’re going on a honeymoon. There are a number of items that are an expected part of the process. If one or more of those are missing, you can tell that you’re not heading towards marriage, and you’re not going to get the loan any time soon. Perhaps your future spouse has given you a list of values that they find important in their future spouse. If you haven’t seen your future spouses’ list, then how do you know you’re right for each other? That’s the same as the lender’s closing checklist. I know you’re thinking that the spousal checklist isn’t very romantic. I’ll grant you the possibility that the analogy doesn’t capture the romance aspect.

On today’s show we’re talking about the flexibility of being a real estate investor. When I had a job and was short of money, I needed to wait until the next paycheck. If I really wanted to increase my income, I had to wait until I got a raise, or perhaps a promotion. I could take initiative as an employee and my employer would be appreciative of the extra effort. Somewhere down the road, I might get a raise or a promotion. Someone else was in control of that process. There was no direct connection between my effort, the creation of value, and the financial compensation for that extra effort. After all, that’s the difference between being an employee and an entrepreneur. Then about 10 years ago I made the switch from being an employee to a full-time real estate investor and developer. Let’s be clear, my income took a hit. I had saved a bunch of money hoping that my business would take off before my savings ran out. Somewhere along the way, I came to the realization that each of the projects by themselves could generate some income. Some projects ran into delays and the income I was expecting from those projects didn’t materialize. At those moments it was tempting to go back and get a job with a steady 6 figure income. But somewhere along the way, I realized that I could truly generate income at will. It could be the result of taking on a new project. If I needed an extra $5,000 I could host a workshop that would deliver something of value to people in my network. It could be a class on underwriting rental apartment projects. Perhaps I could say yes to the numerous offers of consulting engagements. Maybe I could flip another house, or wholesale a contract. I could generate income at will. So here we are in the year 2020. Tens of millions of people are out of a job. But the vast majority of them are waiting on the sidelines, waiting for someone to hire them, waiting for someone to discover their hidden talents. That process involves sending out resumes to hundreds of places, hoping that your resume gets on a short list and maybe you’re invited for an interview. I’ve been that hiring manager many times. When I post a job these days, I will usually get 50 applicants within a day or so. Of those, maybe four or five are a good fit and worth calling in for an interview. There have been times when I had to review 600 resumes in a single resume review session. When there are that many to review, you really don’t have more than about 5 seconds to spend with each one. I feel bad for all those folks who took the time to send out their resume. We can’t practically response to all of them. For those who are looking to generate income, there’s an awful lot of waiting involved. Let’s contrast that with the world of entrepreneurship. In my world, income involves solving problems. If that sounds abstract, let me make it clear. You might be walking down the street and notice that a house has tall grass. You could walk up to the house, ring the doorbell and tell the homeowner that you couldn’t help but notice their grass hadn’t been cut in a while. Would you like me to take care of that for you? I would solve that problem for only $30. Some might say no, but I believe you wouldn’t need to visit too many houses before you had $30 in your pocket. Maybe this example is a little too trivial. After all, you’re not going to go and start mowing people’s lawns. Maybe your expertise is in project management. You might walk up to a real estate investor who is overwhelmed with flip properties and offer to solve the project management problem for them. You see the secret to generating income at will is based on the power of using your senses and your curiosity to notice problems that need to be solved.

On today’s show we’re talking about what’s happening in the industrial and logistics market. Last week, commercial brokerage house CBRE held a detailed webinar on what’s happening in the logistics market. There were over 1,200 attendees on the call. We’re going to summarize the perspectives on the industrial market. How has federal stimulus impacted the economy? The stimulus has gone a long way toward smoothing over the impact of the pandemic. We are going to have a very negative year in 2020, down 6%. 2021 is expected to be a rebound of nearly 6% in GDP. We’re looking at two lost years of economic growth. Much like the residential home market which has seen large drops in volume during the pandemic, Industrial transaction volume has been down by 2/3. The main reason for that is price discovery. Buyers and sellers haven’t figured out where pricing should be in the current market. The capital market for the sale of industrial assets has been fairly steady throughout the pandemic. When buyers and sellers come together, the cash is there to get deals done. The top tier for investments are industrial and multi-family. The small number of rental defaults has shown a lot of stability in the multi-family market. The top assets in industrial are for big box, cold storage. Lease rates are holding strong and increasing in some markets. Sublease space is largely occupied space. Some companies are trying to temporarily downsize space requirements on an opportunistic basis. They’re not looking to sell space, but are hoping to cover costs within existing facilities by subdividing space. Construction dropped by about 30 million square feet in the current quarter. But at the end of Q1, there were more than 300 million SF of space under construction. That’s an all time high.  Pre-leasing is in the 30% range for that space. Record low vacancy of 4.5% across the industrial market. Compared with 2008, the market had 7.5% vacancy and very quickly moved into an oversupplied scenario. Ground-breakings have dropped in the most recent quarter and is expected to create a drop for new supply in a year. The biggest demand driver is e-commerce. Amazon is by far the largest driver. Retail sales are expected to grow to 39% of the all retail over the next several years. Final mile logistics is the biggest area of change. Walmart and Target are extremely effective omni-channels with instore pickup. Some independent third party fulfillment centers are coming into the market to provide omni-channel logisitics fulfillment and last mile inventory. There are very few distressed properties appearing in industrial. Those that are appearing on the market are typically owner-occupied properties where the seller needs liquidity elsewhere in their business. In fact, this mirrors what I’m seeing as well. A friend of mine was looking at a manufacturing company with a weak balance sheet that was looking to do a sale lease-back of the factory. Amazon is the elephant in the industry. The company has grown from adding 25 million square feet of space per year, to more than 50 million square feet of new capacity per year. Amazon has grown from 70 to 255 operational delivery locations.  In the coming year, Amazon has 45 new sites. They are mostly non sortable fulfillment centers.  The sortable facilities are multi-story facilities. The sortable facilities ae more efficient because they have air conditioned space.  Market rent is attributed to usable square footage. But the expenses are lower.

On today’s show we’re taking a look at the economic recovery. Some sectors will bounce back, and others will take a long time. In real estate, we’re seeing some encouraging data during the month of May for several asset classes. In the broad economy, the US lost about 30 million jobs in March and April. Canada lost about 3 million jobs. But in the month of May we’ve started to see the beginning of a recovery. The US added about 2.8 million jobs in May, excluding farm employment. Canada added about 290,000 jobs in the same time period. May saw about 10% of the jobs lost in March and April return. This is encouraging. Frankly, I was expecting that the wave of bankruptcies would create permanent damage to the economy.. Construction registered the strongest improvement among goods-producing industries with an increase of 464,000 jobs, or almost half the number lost in April. Despite the coronavirus shutdowns, house prices continued to rise, and some real-estate brokers and economists say they see signs that demand for new homes has started to rise in recent weeks. In fact, om May, we’ve seen demand for new homes surge 21% compared with the same period last year. Mortgage applications for home purchases in the week ended May 29 also rose for the seventh straight week, up 5.3% from a week earlier and 17% from a year earlier, according to the Mortgage Bankers Association. Several real estate brokers I spoke with in the past week are seeing a flurry of activity. One broker said that she sees a busy summer ahead with a large number of new listings coming in the second half of June. It’s as if the traditional Spring market is happening anyway, but just a couple of months delayed. Those who wanted to move in 2020, are going to move anyway unless they lost their job. Many markets are still experiencing a shortage of supply and rising prices. In my home market, detached homes at the entry level of the market show the lowest inventory. Homes in this category are usually selling on the first day of listing with multiple offers. So far during the pandemic, we’re seeing a 6.1% price increase compared with the same period last year. Let’s be clear, this is a couple of weeks of data. It doesn’t define a trend. If this is a wave of pent up demand, that wave could subside later in the year. If we have a second wave of the pandemic, we could see a significant slowdown in the fall and winter.

Last week Neal and I talked about the state of the capital markets. On today's show we're talking about which asset classes are hurting in the current environment, and which ones will thrive. 

Colin Douthit is a property manager from Kansas City Missouri. On today's show we're talking about how to manage during this period of uncertainty, lost income, and disruption. You can reach Colin at atlaspropertymanagement.com. 

On today’s show we’re talking about the great ideological debate about help, government help. Our economy has suffered the largest fall in activity in recorded history. All of this is in the name of saving lives. Economic suffering is preferable to death. I’ve heard many articulate that some death is acceptable as long as it’s someone else’s death. There are over 40 million people in the US newly unemployed as a result of the pandemic. It’s not clear how many have been re-hired. There’s more than 7 million in Canada who have received some form of assistance. The payroll protection program kept a number of people employed at businesses that were forced to shut down. Now that these government dollars have been largely exhausted, it’s not clear whether these people will be kept on the payroll. A study by Forbes in 2019 found that 78% of workers were living paycheck to paycheck. That is to say they had essentially zero financial buffer. A more recent study by Nielsen showed that 74% of all employees were living paycheck to paycheck. The fact is, there is no good solution. We have a pandemic on our hands. The art is in finding the least worst solution. governments have tried to protect the public from the pandemic by imposing restrictions on movement, which has obviously hurt the economy. They’ve tried to compensate with financial assistance. So here we are, four months into a pandemic and three months into a steep economic downturn. The political appetite for opening the government coffers and showering the population with cash seems to be waning. But those three quarters of the population who were living paycheck to paycheck, are still living paycheck to paycheck. They haven’t magically amassed a war chest of cash in the past few months. Some people believe that we just need to re-open the economy and let the economy take care of itself. Some believe that government help breeds dependence. Some believe that people are hurting and they need government help and they need it now. Some believe that as our economy changes and many repetitive jobs are being replaced by a piece of hardware we need a universal basic income to provide for our population. Well guess what? If you go looking, you’ll find multiple examples to support all of these arguments. They’re all valid, but not universally true. More importantly, I’m seeing people expend tremendous amounts of energy and time talking about what someone else should do. The government should do something. Big business should step in and help. The landlord should give the tenants a break. You see economic activity is not the result of money being dumped into the economy. It’s the result of money circulating in the economy. If the government gives me a check for $1,000 and I put $800 towards rent and I spend the rest on groceries, that money isn’t doing much for the economy. If instead I come across a problem that needs to be solved, and people are willing to spend money to solve it, then I have an opportunity to generate income. If it’s a big problem and I’ll need help, then I can hire people and put them to work on solving that problem too. Now that’s starting to feel like economic activity, and money circulating through the economy. After all, isn’t that one of the fundamentals of business? In fact, it’s more acutely true today than at any other time in history. While some people are at home watching movies, I’m busier than I’ve been in a long time. We still have a number of active projects. We still are attracting investment. Using your personal sense of agency is the key to getting the economy going again, but only for things that are needed now.

On today’s show Matt asks, I have been invited to come into a new construction project for an 8 unit apartment building as an investor. The hard construction cost is $1.2M and the total value of the project is about $1.8M after lease-up. We should be able to return the majority of the equity on refinance. The investor who wants out made an initial investment of $250,000 and has been with the project since inception until now. They are asking for $310,000 for their 50% share of the project. The project qualifies for a 10 year tax abatement. I’m hearing that construction costs are falling and am wondering if we should find a lower cost general contractor to complete the project. I’m going to need to raise money from investors for the equity participation in the project which is proving difficult in today’s environment. Some of my investors are dentists who have been hit hard by the pandemic. Any thoughts on the project and the investment? Matt, This is a great question. There is no question that raising money in today’s environment is more difficult than it was even 6 months ago. Some investors are sitting on their cash waiting for deeply distressed bargains to appear on the market. I’m familiar with the location of your project and I think you should be conservative in your underwriting for the investment. Assume that rents will be lower than the current projections. There has been a lot of new construction in the area and the numbers of unemployed will put downward pressure on rents. Assume that rents fall 10% compared with today for a building that will complete a year from now. If the numbers still work, then pull the trigger. I understand that the current partner in the project wants to get bought out. They also want a profit, which is perfectly fair for value creation. But the value hasn’t been created yet because the project isn’t complete. I would make a counter-offer to the current investor that they can get their initial capital back immediately. The profit portion would deferred until a later milestone in the project. It could be paid when the building hits break-even leasing, or perhaps when the building achieves its certificate of occupancy. It doesn’t make sense that a partner cash out of a project and expect to collect a profit before the project itself generates a profit. I think you can make a compelling argument that the partner’s profit be deferred until the project is complete. If the investor objects that their profit isn’t secured, you can offer one of several solutions. You could offer a shareholder pledge. This would put shares of the company in trust and they would automatically transfer to the investor in the event that you default on your commitment to pay the profit at the agreed point in time. You could also secure their profit on title with a mortgage. This mortgage would need to be approved by your construction lender, or it would be an un-recorded mortgage, only to be recorded in the event of default. You also asked about getting a new bid on the project. We’ve seen labour costs reduced in several markets. This is the result of millions of unemployed people across the country. We believe that putting people to work who have no work is an awesome thing to do. But you need to be careful as well. Most problems in projects are the result of making a bad hire. Since you’re not local to the investment, your risk is higher of problems not being caught in a timely manner. That means you need a lot more formal process in place for management of construction funds, construction materials, and quality control. Don’t just hire a new general contractor because they gave you a low bid for the project. We’ve done lots of shows on the perils of the hiring the wrong contractor.

Could your well managed city be going bankrupt? You see the federal government has the right to invent currency out of thin air. They can just print it. In modern day terms, that means changing a number in an account to say that you now have more money. The US Federal Reserve does this in the US. The Bank of England is responsible for this act of magic, and the Bank of Canada has the official right to perform this sleight of hand without going to jail. But let’s talk about what a city is. A city is not constitutionally enshrined. It only exists, usually as a corporation, enacted by the state or provincial legislature in which it resides. The bylaws of the corporation are determined at the state or provincial level and they define the decision making power of the city council around how local regulations can be enacted and they define the rules around the collecting and spending of money. You see, many cities were only allowed to borrow money for very specific purposes. I’m aware of a lot of cities that can only borrow money for capital projects. They’re barred by law, from borrowing money to fund operating expenses. That seems like a prudent bit of fiscal management. A city that borrows money to fund day to day operations is heading for bankruptcy at some point. Since the start of the pandemic, many cities have experienced shortfalls in revenue. A review of several cities showed that they were carrying little more than 40 days of cash burn in the form of liquidity. Under the current circumstances, that may not be enough. Many cities collect about ¼ of their revenue in the form of service fees and user charges. Since the start of the pandemic, these revenues have fallen to nearly zero. In addition, cities have seen a significant drop in tax revenue collected. Tax revenues account for about 50%-70% of a city’s total revenue. Many cities have responded with significant workforce reductions. They’ve cut non-essential services like libraries, swimming pools, recreation facilities and so on. They’ve maintained essential services like police, fire and various emergency services. They’ve deferred maintenance where possible. But at a certain point, there are no more discretionary services to cut. First responders are key to protecting life and safety in our society. So what happens when a city declares bankruptcy? First of all, unlike a corporate bankruptcy, there will be no liquidation. In the US, a city bankruptcy is governed by Chapter 9. A judge will be appointed to oversee the spending of monies and the rebalancing of the budget. There will be no free pass that allows the city to abdicate responsibilities for providing municipal services. The City still has the obligation to get its fiscal house in order. It still have to balance the budget. It still has to settle with the claimants. The city still has to pay its legal bills, and the city still has to deal with its unfunded liabilities. When there's a label put across a city or a county that says, you're in bankruptcy, it equates in the minds of the public to dysfunction. You couldn't manage your own business, so you end up in bankruptcy. The lasting legacy of a bankruptcy is that the city is not a place to invest. It discourages people from moving there. It discourages the creation of jobs. It’s assumed that the place is economically depressed. Jobs start to leave permanently. Then real estate prices start to fall. They fall because jobs are leaving The inevitable cutting of essential services means reduced safety for residents who live there. You might see an increase in crime, in vandalism. You might see an increase in desperation within the population. Even some of the best managed cities could stumble into bankruptcy. In these uncertain times, a review of a city’s financial state should be part of the required due diligence for a new project.

On today’s show we’re talking about running a virtual organization. For many the idea of working from home is new. It comes with its own benefits and drawbacks. When you get in your car and transition from home to the office, your mind shifts. You get into work mode. On the drive to work, most people spend their drive time going over the plan and priorities for their day. By the time they’re in the chair with a cup of coffee close at hand, they’re ready to tackle what the day has in store for them. The office has structure, systems, and processes. If you need something, you swing by a co-worker’s desk and ask them for help. If you need to call a meeting, the conference room at the end of the hall can solve problems and create a collaborative environment. The face to face communication means that you can read body language. New people in the organization need particular hand-holding and training. A study published by MIT in 2006 showed that the probability of communication in an office setting dropped dramatically the further people are apart. By the time people are 160 – 200 feet apart, they don’t communicate at all. So here we are in June of 2020, a global pandemic has forced millions of people to work from home. The good news is, you’re saving all that commute time twice a day. You’re saving gas. You don’t have to get dressed up. You can be in comfortable clothing. You can work when you want to.Together with all that flexibility comes the dark side. The dark side is full of distractions. The garden that needs to be watered, or that unfinished home improvement project. It would be really nice for the deck outside to have some sun shade so you can conduct conference calls from your back yard. Before long, you’re working until 11PM at night. The work day and the family day get blended together. After a few weeks, you come to the realization that your life has no structure. You used to be so disciplined. What I’ve discovered is that no matter where you work, the systems and processes for managing your day should remain the same. But if you’re working outside the office, you need an extra discipline. That also means creating streamlined connections with people, and you need to create and maintain structures that work. That means starting your day consistently, and ending your day consistently. If you have zero commute time, then have a virtual commute. This is a ritual task that marks the start and end of your work day. It might be as simple as closing the door to your office. Even before the outbreak, most of my teams have been thousands of miles from me. Conference calls, video conferences, and screen sharing have been normal for more than 20 years. Most of my team were on different time zones. They were in France, or India or Israel. It didn’t matter. Within our core team, we use a walkie talkie application called Voxer. It’s a push to talk system. There are quite a few out there. We use Voxer, but there are many others to choose from.  No time wasted calling someone on the phone, waiting for the phone to ring, waiting for them not to answer, listening to the voicemail greeting, and then finally leaving them a message that usually they don’t even listen to. Sometimes we hold and entire conversation over the span of a couple of hours, just by messaging back and forth using voxer. It’s a private direct connection, faster than sending a text message. You can even perform group chats using the same software. The key is to treat your team as if they’re with you all the time, the same as when you’re in the office.

Our book this month comes from one of the master story tellers of our time. The book is called “Ask: The Bridge From Your Dreams To Your Destiny”, by Mark Victor Hansen and his wife Crystal Dwyer Hansen. Mark was a guest on the show two weeks ago. He’s known for being the best selling author of all time with over 500 million books sold, many of them part of the Chicken Soup series. Mark and Crystal believe that asking is the key to getting anything you want in life. But you need to know how to ask, and you need to know who to ask. There are three people you can ask. 1) Yourself 2) Others 3) God When children are young, they ask all kinds of questions. There is no filter. The questions just flow, one after another. But somehow as we age, asking questions doesn’t seem to be socially acceptable. How many people die inside at age 25 and then spend the rest of their lives trapped in a prison of their own making. Mark and Crystal have discovered that there are 7 principal Roadblocks to Asking: 1) Unworthiness / Insecurity 2) Naivete 3) Doubt 4) Excuses 5) Fear 6) Pattern Paralysis 7) Disconnection The power to unlocking the path to your destiny is found by asking. It starts by asking better questions. What you focus on becomes amplified. It becomes your target. If you’re focused on the negative, then negative will be emphasized in your life. For example, if you ask “Will I go bankrupt?” will take you on a different trajectory than asking “How much wealth will you accumulate?” They tell the story of Mitsy Purdue. Mitsy was the daughter of the founder of Sheraton Hotels. She had been struggling with failure for much of her life. The fear of failure was preventing her from moving forward, from achieving her goals. Then one day, she reframed what it meant to fail. At first, failure was defined as having been denied a request, of being turned down. But then she realized that when she got turned down, she wasn’t failing. She was paying her dues. The only failure was in not trying. Failure was in giving up. That simple reframe of failure changed the trajectory of her life. She tells the story of how she met her second husband Frank Purdue. She was cultivating rice in California and hosting radio and TV shows. Frank was at the other end of the country raising chickens. The speed and certainty of their union was the result of  asking clear questions.

On today's show George and I discuss the current climate for borrowing funds. His stance surprised me a bit. Check it out. 

Neal Bawa is a Silicon Valley based syndicator, and educator specializing in multi-family asset classes. On today's show we're talking about the state of the capital markets and where investing is heading in multi-family apartments.  You can reach Neal at http://multifamilyu.com.  

On today’s show we’re talking about stranded assets. These are assets that can’t be used at all. In some cases they’re merely under-utilized assets. You can find deeply discounted assets in today’s market. But only if you train yourself to look for them. Underpriced assets have a substantial sunk cost in them. The old school way of doing this was to go to the weekend garage sales and buy items of high value for pennies and re-sell them on Ebay for a higher price. The problem with this approach is that it requires a lot of time, the dollar values are low, and therefore the profit potential is low even if the percentage gains are high. Buying gym equipment or bicycles will net you a few tens of dollars every time you stop in someone’s driveway. These opportunities exploit inefficiencies in the market for used items. But I want you to think bigger. Think restaurants, hotels, boats, trucks, cars, ships. Sometimes, the assets are not physical. It could be a list of customers, or a handful of high quality relationships. You see the value of a business is based on the quality of its customers. If you want to do better business, then find better customers. The headlines over the past several weeks have focused on the tens of millions of people who have lost their jobs. That’s a tragedy by itself. There’s been almost no mention of the tens of millions of customers who have lost their favourite restaurant, their favourite clothing store, the ice cream stand next to the barber shop. Oh and the barber shop is gone too. Who is out there serving those millions of clients who have been separated from the businesses they have been loyal to all these years. the hidden assets which are less tangible could likely be purchased for zero dollars and nothing more than a royalty. The good-will that has been built over the years between restaurants and diners, between florists and funeral directors, between health food stores and those with dietary restrictions has real value. Let’s look at back at the people who have been laid off. There are millions of front line workers, some of the bottom income earners in any business that have been impacted the most. At the other end of the spectrum there are very senior people, those with immense technical and business know-how. These are the high six figure earners that the businesses could not afford to retain. Most importantly, these folks have immense connections. They have incredible relationships. These folks are probably not getting hired into another company in a comparable role anytime soon. They have a lifestyle and cost structure to match their previous salary.  The relationships they have, could be the seed of a business transformation for those businesses that know how to leverage them. Many of these laid off workers are sales people who are used to working on commission. They’re used to getting paid for performance. They know that money doesn’t flow until something gets sold. Maybe a re-energized top notch sales team that costs you nothing to hire and only makes you money could help your business. These are all assets that you can find at a garage sale. These are assets that are hard to connect with the right buyer. Because the right buyer is unlikely to stumble across them by randomly wandering around.

On today’s show we’re going to make an important distinction between two words that are often used interchangeably but have vastly different meanings. The two words are “pain” and “damage”. If you hit your thumb with a hammer by accident, you will experience pain. In fact, the pain will be so acute that you can think of little else for the next few minutes. Eventually the throbbing subsides and you can get on with your day. I know the weekend handymen are cringing as I’m describing this. I know you can clearly visualize the last time this happened and the mere mention of it immediately takes you back to that moment when the hammer slid sideways off the nail and made contact with your thumb. No doubt you were in pain. But if you hit it really hard and you actually break a bone, then the impact is much longer lasting. You might have done enough damage that the impact could be permanent. The context of today’s discussion is not your thumb, but the economy. There’s no doubt that individuals and companies the world over are experiencing economic pain. The bigger question is, where in the economy are we experiencing damage? When Hertz Rent a Car has next to no clients for two months, they’re experiencing economic pain. When they’re forced to seek creditor protection using bankruptcy laws, they’re experiencing economic damage. Some companies manage to convince a bankruptcy judge to restructure some debt and then re-emerge from bankruptcy as a viable business. This takes time. It results in a shrinking organization. In other cases, the bankruptcy judge will argue that the business is too far gone to ever recover and will be forced into liquidation. At that point, the damage is permanent. Now you may not have the ability to singlehandedly save Hertz. But companies don’t need to be over-leveraged like Hertz in order to experience damage. I’m going to tell you the story of a restaurant named Stonefaced Dolly’s. This restaurant has been a fixture in little Italy for a few decades. It’s a family owned restaurant and multiple generations of the family are involved. The problem is that the founder of the company is now 75 years of age. They have three locations. The owner is tired. He doesn’t have the energy to restart the business when the economy re-opens. He believes that re-opening is going to involve some heavy lifting and he simply doesn’t have the emotional fortitude to go through that at 75 years of age. He is not alone. I’ve spoken with three restaurant owners in the past few weeks. All of them are thinking of throwing in the towel. They’re not bankrupt. They’re not in extreme pain. They’re just tired. But when these businesses which have no succession plan, no sale plan, and no viable path to re-opening, they just die. This folks is the very definition of a bargain. When a significant percentage of restaurants close because they can’t see a way back, those that remain will eventually have an incredible amount of business coming their way. That may not happen in a month, or maybe even six months. Economic pain is becoming economic damage. That damage is occurring for a variety of reasons. In some cases, the businesses were carrying too much debt to survive the current market conditions. In some cases, their competitor got a bail-out check and they didn’t. But in some cases, the owner is just tired. The opportunities to find viable businesses for pennies on the dollar are becoming apparent even now in the early days of this pandemic.

Love the show. I could use your advice. Last August I acquired a property in a tax auction at a bargain price in a class c neighborhood in a different state than where I live. This was my first venture into rehabbing a property and figured this might be a good way to learn with a fair amount of cushion for mistakes. I found a contractor on Craigslist who was willing to work in this address (several were not). Work got underway quickly. Flooring, painting, kitchen updates and other misc repairs were all needed based on pictures the contractor sent over. He estimated about 20k worth of work. That seemed reasonable and he pulled permits and work got underway quickly. As work progressed bigger problems arose. Contracts were drawn up for each project successively. He would call me at least weekly with updates to what was doing, supplies that were needed and different things that code inspectors wanted to see updated. Every time I thought everything in the house was finally ready something else would be found. This all culminated in me finally growing very suspicious. I called the code office to find out where things stood and was devastated to learn they had never stepped foot inside the house. Moreover all the permits had been pulled in MY name without my knowledge. I had an investigator walk through the property and send more detailed pictures and the place is a mess. He did 85% of the siding work but cropped pictures of the final job and big chunk of the back of the property is unfinished. Lumber and materials are lying all over the job site. Between materials and labor and dumpster fees I have now put in about 2x what the property is worth fully renovated and really have nothing to show for it. Many of the materials I bought appear to be missing. This is a big hit for me. Is there anything I can do? At the very least maybe I can get a tax write off? I am obviously rethinking real estate altogether as an investment choice. JP, This unfortunately is all too common a situation. I’d like to zero in on a couple of things that you said. You’re talking about rethinking real estate investing. I’ve got bad news for you. What you’ve been doing is not real estate investing. You put yourself into the house rehabilitation business. That’s an active business that’s pretty similar to the construction business. You got into the construction business without even knowing it. Your construction business had no quality control because nobody was staffed to fill the position. If that position had been staffed, there would have been no surprises. I understand how painful this is right now. But if you stop, you’re going to lose 100% of your investment. If you have debt on the property, you’re going to be on the hook for that too. There are only three viable paths from here. 1) Fire sale the property as is and take a substantial loss 2) Bring in a partner with additional capital to complete the renovation and then sell the completed property at a loss. This may be a smaller loss than a fire sale scenario. 3) Complete the project, and rent out the property as a long term hold income property. You told me in a subsequent email that you’re looking at a total investment of about $125,000 and a monthly income of about $1,400. That means you’re collecting about 1.1% of the property value in rent each month. That’s a good percentage. It has the potential to carry the expenses of the property and pay down the debt. You will want to get a low interest rate permanent financing structure in place at the highest possible loan to value ratio. If there is still work to be done to complete the project, the ownership of the building permit isn’t a problem per se. In fact, in this instance it gives you the freedom to fire your contractor and you can hire someone else without having the original contractor transfer the permit.

Duane asks, Just curious. Have you ever come across something that looks like a great opportunity, but was way beyond your capabilities? Duane, This is a great question. The short answer is yes. That’s the only way to grow. But the further you are from your proven capabilities, the lower your chances of success are going to be. So if you know going into the venture that your chances of failure are real, you want to make sure that: 1) You’re bringing the best people with the most relevant expertise onto your team to improve your chances of success 2) You want to limit the risk on the downside. So if you fail, the cost to you personally will be acceptable, and more importantly It takes courage to do something that is unknown. After all, you might fail. Failure has all kinds of negative connotations in our culture. When you fail, you’re a failure. Even worse, you’re a loser. On the other hand, if you’re a scientist running an experiment, then somehow experimentation is elevated to a higher stature. An experiment, by definition will have an unknown outcome. It may not be your desired outcome, but it will have an outcome and the main purpose of an experiment is to learn. Therefore, an experiment can never really fail. So the question is how do you undertake projects that can be a little bit of an experiment? I’ve done this several times in my career. For example, in the world of technology, the year was 2003. IBM had a division that designed and manufactured microprocessors. I had been at Tundra Semiconductor developing system controller chips that worked with the IBM microprocessors. So I had the crazy idea of going out to raise the money and build the management team to buy that division of IBM. I had never raised $250,000,000 in one shot before. I had not run a business of that size before. I didn’t have the brand name to go down to Wall Street and raise the money. I started with an idea. The first person I called was someone who had been general manager of a similar business. He had sold processors into Apple. He ran an automotive microprocessor business and counted Mercedes, General Motors, BMW, VW, and Toyota among his customers. His name is Brian Wilkie. The venture was my idea. But I hired Brian to be my boss. I contacted the CEO of another chip manufacturing company. She had previously run that division inside IBM and reported directly to the executive who had responsibility for that business. She became one of my advisors. I brought another 5 people on board with similar pedigree. Brian and I went down to NYC and met with Credit Suisse First Boston’s private equity group. We met with Citicorp Ventures who in that year had been very aggressive about investing in technology buyouts. As a result of these relationships, our pitch to IBM matched almost exactly what IBM was looking for in a partner. IBM entered into exclusive negotiation with us. We spent 3 weeks at IBM headquarters, negotiating 19 agreements around the clock. IBM wanted to close the transaction before March 31, 2004. A week before closing, the IBM management team delivered some bad news from one of the customers. That spooked our banker who asked for additional time to complete their due diligence. At that point, the senior executive in IBM said that he needed the asset sale in the quarter to compensate for a loss elsewhere in the division. He was a on notice from the CFO that he should not deliver a negative surprise to Wall Street. The asset sale was required to prevent that embarrassment. At that point, IBM invited a California company called AMCC to bid on the business. Literally at the stroke of midnight, AMCC offered $100,000,000 more than us and scooped the business out from underneath us. We were devastated.

I'm trying to narrow down to 1-2 focus markets for buy-and-hold SFR/small multi-family investments. I've come down to the following options and am curious about any feedback: 1. Huntsville, AL 2. Memphis, TN (high crime) 3. Charlotte, NC 4. Omaha, NE (steady but not super growth oriented) 5. Columbus, OH 6. Atlanta, GA (already overheated market) I like all of these markets from a population / job growth perspective and affordability as a new investor. I'm curious about any major positives / negatives about these markets I might be missing - high crime, new employers, high poverty levels, etc. Kerry, This is a great question. I’m a believer in the laws of supply and demand. But it’s more than just demand that matters. I’m talking about demand and ability to pay. The current job market turmoil puts a big question mark around ability to pay. For now, millions of people are collecting unemployment benefits. But it’s unclear how long those benefits will be in place. At some point, the weakness in the job market will cascade into the financial markets, which may precipitate a shortage of lending. The last time we saw this was 2008. The cause was different, but the effect is likely to be the same. There are several considerations you want to examine. 1) The partnership and the team. 2) The city. Is it attracting jobs. 3) The micro-market. Real Estate is always hyper local. Some neighborhoods maintain value while others don’t. 4) The asset class 5) The deal structure. How much debt is on the property. Personally, I like Huntsville because it has a strong jobs story with the auto sector having selected Huntsville for manufacturing. There is a history of technical expertise in both radio and military R&D centers. The drawback, is that the rent per square foot in the market is low, averaging at about $1.10. While there is a shortage of rental housing, there doesn’t seem to be much upward pressure on rental rates, which is keeping new supply from coming into the market. I personally would stay away from Memphis. It’s a tough market and you need expert property management to make money in Memphis. I know several investors who own property in Memphis, and it’s got more risk than I’m comfortable with. Charlotte NC is a growing city and has attracted a several financial institutions. It’s emerging as a banking center in the South. It’s not very high priced, but overall it has good fundamentals. It’s hard to say what the impact of the current economic downturn will be on Charlotte. I simply haven’t researched it. Charlotte is definitely worth a closer look. I don’t have an opinion on Omaha. I simply haven’t researched that market. Columbus Ohio is likely to suffer from its higher than average exposure to retail in the current economic conditions. Columbus is also a financial and insurance center in the middle of the country. Overall, Columbus has been one of the fastest growing cities in the country for a number of years now. It’s definitely worth a closer look. Atlanta is also a growing city. But like any city it has a lot of areas. Some that I would not consider investing in, and others that are growing. But before choosing a city, I would focus on finding a team to work with. Having the right people on your team, is more important than choosing the city. I would also be patient about investing right now. There will be opportunities to buy properties at a deep discount to the market. This will take some time. We currently have a moratorium on foreclosures. That will eventually be lifted. Much like the period following the 2008 recession, the opportunities took years to materialize. The best years for finding deals were 2010 and 2011. It took a while for the deals to show up, and I believe that will be the case this time around too

On today's show we're talking about developing resort properties using RV's and mobile homes with Shane Melanson. You can reach Shane at shanemelanson.com.

On today’s show we’re talking about the merits and pitfalls of just accepting a contractor’s bid. When you’re experienced in construction, you get a feel for what items should cost for both materials and labor. But there are two distinct markets, the retail market and the developer or contractor market. In the retail market, there are businesses out there charging what I consider to be outrageous prices for what amounts to basic commodity construction. Yes, quality matters. But I often find that in the retail market you get amateurs charging more than the most skilled trades people. These are the crooks. Frankly, they’re out there and you can run into them often. I have a job under construction right now where the entire crew didn’t show up to work yesterday. Why? Because one of the members of the team has a family member with a health issue. Because one person couldn’t work today, an entire team of three people didn’t show up. This crew was in fact the lowest bidder. To be honest, the number they quoted was lower than I expected. So I wasn’t surprised or upset when they discovered that they underbid the job. I fully expected to pay more. I feel badly that the subcontractor has a family member with a health issue. He’s absolutely doing the right thing by being with his family. Somehow, I’ll have to find a way to maintain the schedule with alternate labor. Otherwise the delays will cascade.  I knew I was accepting a low ball bid and that there was risk of problems. The first bid that I received was from someone who said they could do the work in a week and at a competitive price. But in the end, they quoted 4 times the price of the low bid, and fully three times what I considered to be a fair price. I made them aware that I was a developer and we discussed per square foot rates. Somehow between that conversation and the paper quote, something got lost in translation. Clearly they didn’t get the job. I had another subcontractor quote me a price that was double what it should have been. I worked out the hourly rate and concluded that they would be charging me $125 per hour for what amounts to unskilled work. I reminded the subcontractor that I was a developer and that I had a volume of business in the pipeline. He offered that if I paid cash, I could save the sales tax. At that point, I knew I couldn’t hire his company. But I decided to see where the negotiation would go. I offered that if he gave a really good price on this project, I would give him early visibility of new projects in the pipeline. So he offered me a 4% discount. Needless to say, they didn’t get the job. I had another contractor inflate the square footage in the scope of work on another part of this job. He argued that he needed to add 10% to the area because there could be wasted material. I completely agreed with the additional material allowance. There is always material wasted because the cuts result in odd remnants that can’t be used. But there should not be 10% wasted labor. The labour component of square footage is the actual square footage. The funny thing is that these attempts at cheating the customer aren’t even sophisticated. They are plain as day. Perhaps these subcontractors think that customers don’t know how to perform basic arithmetic. I found one subcontractor selling materials from second subcontractor with an additional markup on the original supplier’s price. Folks, the path to saving tens of thousands, or in some cases millions of dollars is found in being curious, asking lots of questions, and checking the math against known benchmarks.

On today’s show we’re talking about Student housing. I’ve been a student housing investor since 2012. Historically, I’ve loved student housing. I got my start by owning property in the shadow of Temple University in Philadelphia. When you add together the revenue from each room in a student rental, it adds up to much more than the revenue from renting, say, a 3 bedroom apartment. Yes, the turnover is high. Yes, students can be messy. They all tend to move in and move out on the same day. The cycle for student housing follows a very specific schedule. If you miss the window for rentals, you might be facing vacancy for the entire school year, not just a month. But the big story in student housing is the massive change that is taking place in online classes. Long before the mass move to online classes that happened mid-semester due to Covid-19, the trend toward online classes had been underway for more than a decade. When I started investing in student housing, there was a shortage of housing next to Temple University. We were easily able to rent rooms for $600 a month and sometimes even $650 a month. By 2014, as more capacity entered the market, prices started to drop. When the university opened a new dormitory with 1,200 beds, the market flipped from under-supplied to over-supplied overnight. So we started looking further afield. We held numerous meetings with architects, planners, and consultants in the city of Arlington Texas. Arlington is the home of the University of Texas campus. The largest UT campus is in Austin. But in order to get into Austin you needed a 90% average. You could get into UT Arlington with an 80% average and then transfer to Austin after two years. It was a way to get into the Austin campus with a lower grade point average. . We placed numerous offers on properties for development. Ultimately, we never did quite succeed in getting a large enough property to develop. We decided last year in 2019 to take another run at delivering student housing to the UT market. We received the latest market study authored by the student housing office at the university. What it showed was pretty telling. The campus had grown to 51,000 students. A large school by anyone’s measure. The combination of on-campus housing in one of 18 building, along with numerous projects within a short distance of the campus provided housing for 6,000 with approved projects in the pipeline that would ultimately bring 11,000 units of housing for a campus of 51,000 students. So far, it sounds like the addition of another 100 units would not create an oversupply situation. But here’s where a small piece of data, changed our outlook completely. In 2019, 52% of the classes held on campus were also being simulcast online. That meant that if a student lived in the Dallas Fort Worth area, they could spend an increasing amount of their academic year engaged with the university through their computer screen. If they needed to come to the campus once or twice a week, they would drive. The case for living on campus was starting to get weaker. Well folks, now the Covid-19 pandemic has forced the acceleration of the trend that was already underway. Now I get it. There are some faculties that can’t be taught online. The school of dentistry won’t be taught online. The PhD program in psychology won’t be taught online. In the past week, Queens University announced that the majority of its classes next fall will be conducted online. The University of Texas is holding the balance of its Spring term, and both summer sessions online. New York University is doing the same. So if you’re the owner of student housing, you can expect negative cash flow this summer, and possibly into this coming fall semester. You may need to take action now to develop creative marketing plans for getting your units leased before there is a glut on the market.

On today’s show we’re taking a short trip through the history books to see what history might teach us about today. The year was 27 BC and Augustus was the emperor of Rome. Their money was the roman denarius, made of 98% pure silver. The pure coinage remained until 64AD when there was the Great Fire of Rome which destroyed close to 60,000 buildings, almost 90% of the dwellings in the city.  Nero was the emperor at the time and it took a lot of money to rebuild the city. In order to afford the rebuilding, Nero made monetary reforms which reduced the silver content in the coins to 93%. Emperor Vespasian reduced the silver content to 89%, Marcus Aurelius reduced the silver to 75% and Septimius Severus reduced the silver content to 50%.  By the time Gallienus was Emperor from 260AD to 268AD, the denarius had a meager 2.5% silver content. These coins were made of bronze and had a thin coating of silver which tended to wear away very quickly. It was during the time of Gallienus, despite a number of military victories, that important provinces started to splinter away from the Roman Empire. From 249AD to 262AD, the Plague of Cyprian which lasted 13 years caused widespread shortages across the empire and was one of the major contributing factors to the eventual demise of the Roman Empire. Rome was the epicenter of trade in Europe. As the coins had less and less silver, soldiers in the empire demanded higher pay. Prices for commodities increase. Eventually runaway took hold. By 265AD, there was less than 0.5% silver left in the coins and prices increased 1000%. Only mercenary solders were paid in gold. The trifecta of rising administrative costs which caused soaring taxes, runaway inflation and worthless money caused much of Rome’s trade to collapse. I totally understand why governments all over the world are printing money in response to the pandemic. In some ways, I think they have little choice. Many think that we’re not in an inflationary period. That prices are not rising out of control. So the printing of money is appropriate. Remember, inflation is an average. We have seen prices for oil drop in the short term as the level of economic activity fell during March and April. What will happen when there are shortages of food? What will happen when there are shortages of building materials like steel or ceramic tiles? Will those prices go up? In places they already have gone up in price. You see, if printing money were the path to prosperity, the Zimbabwe and Venezuela would be the richest nations on earth and they’re not. So here we are in the year 2020 AD. We have global trade splintering into local trade. We have plagues. We have printing of money. Every time this has been tried in human history, the path to prosperity has been interrupted by economic collapse.  We’ve seen this movie before. We know the ending. The actors are different in this remake of the movie. But the plot is basically the same. I’m calling this movie “The return of Caesar’s coin stamping machine, part 29.” When newly printed money is dropped from the sky, it’s not falling uniformly, or even fairly on the population. It’s going to some people first, and then to others not at all. When the unfairness of this wealth transfer has become visible in the past, the result has almost always brought armed conflict. The headlines this morning tell the story of economic recovery that is now underway. The economy is the result of output of its people, not the printing of money. When people are sitting at home, collecting a check from the government, they’re not producing. That check breeds dependence. It stifles creativity. I know that I would not be thinking hard about business strategy if I was getting paid to sit home and watch movies. In truth, I don’t think I would want that check.

On today’s show we’re talking about how your business can survive the Covid-19 outbreak. Of course the degree to which you take action is a function of the nature of your business and the assets in your portfolio. We remain in a period of unprecedented uncertainty. You don’t know if the businesses in your commercial space will survive. You don’t know if your tenants will lose their job and when their unemployment benefits will run out. Every single property must be treated like a business. That means paying attention to both income statement and balance sheet. Business survival is based on one simple concept, positive cash flow. The emphasis needs to be on cash flow. If your cash flow has turned negative, you need to decide whether this is a temporary situation or a long term situation. When cash flow is negative, then cash reserves become of paramount importance. How many months can your apartment building survive if it is losing $5,000 a month, or $10,000 a month? Often times, I’m seeing investors trying to solve a cash flow problem with the balance sheet. That means borrowing more money. If your problem is short term, then that’s the appropriate solution. You take on a little more debt, but you save the property. It’s easy to assume that people are not moving during this period of social isolation. While it is true that the level of activity has dropped, it’s not zero. For example, I moved in the middle of March. Cities like Dallas continue to attract new business. According to a report in the Wall Street Journal two weeks ago, there were 1,500 corporate headquarters staff relocating from California to Texas in the middle of the pandemic. I’m talking with landlords who are continuing to attract tenants. At the same time, I’m also reading market reports that show zero movement. Both are true at the same time. These are challenging market conditions. It’s tempting during these times to take your foot off the gas and rationalize that it’s not worth the effort. Marketing is the exercise in generating interest. Salesmanship is the process of converting interest into sales. Now is the time to practice and improve your skills at closing the sale. Let’s say that you’re running a restaurant that has closed its dining room and you’re trying to make ends meet by offering take-out. It might not be your restaurant. Maybe the restaurant is a tenant in your building and you have a vested interest in having the restaurant survive. The restaurant could offer clients the option of repeating the same order for the next 3 weeks for a 10% discount. Their Friday night dinner is taken care of for the next month, and the client is helping a local business. It might save them a trip to the grocery store. I saw a video from a jewelry store owner in Brooklyn yesterday who was complaining that her store wasn’t allowed to open when Walmart and Costco were open. It seemed incredibly unfair to her. Her revenue was zero. My heart goes out to her. She could do a window shopping campaign. I’m redefining window shopping to mean the following. The store should send an email to all their clients reminding them that a gift received during the pandemic is worth 10x what a gift is worth during normal times. It would be so unexpected, that the receiver will remember the gift for decades to come. The client calls the jewelry store from outside the window. The shop keeper talking from the safety of being inside the store shows the client the merchandise. The order is placed by credit card and the product is delivered to the client by courier or by curb-side pickup. Mail order businesses and e-commerce businesses are not closed. A small re-thinking of the transaction opens up the possibilities that were not available before.

Maheen the Machine asks, Hello Victor, I trust you are safe and healthy! I have always had this belief that you collect gold for the day that the dollar loses most of it's value and then you "cash" it in??? Yet, I never hear the experts say to "sell" your gold. They always mention using gold as "insurance" but never go into detail or give examples. You interviewed Russell Gray and he is amazing. When he was talking about Gold He mentioned using gold with debt. He recently said the same thing on his recent podcast "Golden Opportunity." He states you should "marry" gold with debt. This is unclear to me. I was wondering if you could shed your perspective. Sometimes the same information coming from a different source "penetrates." At least, for my sake let's hope so. HA! Thank you for what you do. It truly is invaluable! Thank you Maheen for the kind words and for a great question. The philosophy that both Russell Gray and I share is that you should have the bulk of your assets in the form of hard assets with intrinsic value instead of paper assets that could carry counter party risk. In order for money to be money it has to perform two functions. It must be a store of value and a means of exchange. The US dollar is a very good means of exchange. A for a store of value, that’s not as clear. We can debate how much inflation we think we have. But when you look in retrospect there is no question that we have experienced significant inflation over the years. In my lifetime, a cup of coffee has gone from 15 cents to more than two dollars. A gallon of gas has gone from 25 cents to about $2.50 cents, and at times over 3 dollars. We like to invest in real estate. More importantly, we like to use other people’s money. That is in essence a form of leverage. When you use other people’s money and you retain a portion of the ownership, you get to multiply your rate of return. But using other people’s money isn’t free. There’s a cost. You either give the lender a rate of return on their money, or you give them a percentage of equity in the project. If you borrow money, the interest rate that you pay is a function of risk to the lender. If the lender has a lot of security, they’re probably going to be willing to offer you a lower rate. Funds borrowed with a high degree of security in today’s rates might be as low as 3% or 3.5%, depending on the lender. Unsecured funds could be easily above 12-15%. The cheapest money will be the money that the lender has a guarantee of getting their principal back. Most of the time, borrowers secure their loan against a piece of real estate. The lender ends up having to qualify the borrower, the market and the specific asset. That’s a lot of due diligence. Let’s look at a specific example. Let’s say that you want to invest in a townhouse that you’re going to hold as a rental. The purchase price is $200,000 and you’re going to borrow 75% from a bank. The remaining 25% is the equity contribution. So you need $50,000 in cash to buy the property. Where are you going to get $50,000? You decide that you want to borrow the $50,000 that would normally be considered the equity contribution to the purchase. So you go to your friend, the rich lawyer who has tons of cash and you ask to borrow the $50,000. You offer to put, say, $70,000 worth of gold in your friends safety deposit box as collateral. So you pledge 40 ounces of gold. When the loan gets repaid, you get your 40 ounces of gold back. But a few years have gone by, and your 40 ounces of gold are now worth $100,000. In the meantime, the lawyer charged you 3.5% a year for the loan of $50,000. The property has also gone up in price and instead of selling it for $200,000, you now sell it for $300,000. Your initial investment of $50,000 has now grown by $100,000, and your gold has increased in value by $30,000. You get to keep all of that profit. 

Mark Victor Hansen is the best selling author of all time and is famous for the "Chicken Soup" series of books along with his partner Jack Canfield. Mark has a newly launched book called "Ask" which talks about the transformative power of simply asking. Mark and Nicky are also hosting a huge virtual summit this week with notable people including John Maxwell, Ken Starr, Candace Owens, Ashar Alam, Marc Von Musser, Jeff Hoffman, Crystal Hansen, Theresa Dugwell, Nicky Billou, and several more amazing speakers.  There is no cost to attend this two day event on May 21-22. Simply register at yourfinesthoursummit.com. This talk with Mark was so much fun. We agreed to sail together in France as soon as conditions make sense for all to do so.

Today’s question comes from Sue in Pennsylvania. Sue asks, “I have a buyer who wants some debris removed from the property as a condition of closing. I’m worried that I won’t be able to get the debris removed from the property in time to close and that it might jeopardise the sale altogether. It doesn’t seem like a big deal that should hold up the closing and my attorney says the buyer is using it as an excuse to stall on the purchase. What do you suggest?” Sue, that’s a great question. You can’t really tell if the buyer is dragging their feet on the purchase with this. But there is a simple way to find out. There is a concept in marketing called risk reversal. The idea here is to transfer the risk from the buyer to the seller, to eliminate the objection. This is the same as what happens when a buyer finds a bunch of problems during the building inspection. They’ll complain that the bathroom window seal needs to be fixed and that the railing on the stairs needs to be tightened and that the old smoke alarms need to be updated because they no longer meet the building code. When buyers come forward with these types of objections, they’re often looking to negotiate a discount on the property. As the seller, you might be feeling a lot of pressure. You might be saying the discount is disproportionate to the cost of making the actual repairs. There might not be time to get all the repairs done by the closing date. My suggestion is to not negotiate a lower price. Instead, offer the buyer what is called a hold-back. If the repairs would cost $2,000 to complete, and the seller is asking for a $5,000 discount, I would offer to put $10,000 in escrow with the title company. That money would remain in trust until the repairs have been completed. If the repairs are not completed by a specific deadline that you both agree upon, then the $10,000 would revert back to the buyer. In essence you’re guaranteeing the performance of an item post-closing by pledging a bond that is many times the cost of the item in question. In truth, you’re not really going to risk $10,000 or $50,000 or whatever number you agree to pledge. You have zero intention of losing that money to the buyer and you make it clear to them that you are confident in completing the work by pledging a larger amount than is necessary to do the work. You’re simply agreeing to get most of your money on the closing date, and you’re pledging to fix the listed defects post-closing. The key to not arguing over the holdback with the buyer is to make sure your lawyer does a great job of listing the terms under which the funds will be released to you with the presentation of the inspection report to the trustee who has received an irrevocable letter of direction on how the funds are to be disbursed. The goal here is to eliminate the objection, and for you to maintain your negotiating leverage. When you can easily overcome any objection with a simple solution like this, you demonstrate to the other side that you have strength. It discourages the buyer from chipping away at you with more objections. Some negotiators are bullies. When they smell weakness and they succeed in getting a concession from you, they often don’t stop at one concession. They keep coming back for more. If it worked once, maybe it will work again. You want to put a stop to behaviour where the buyer feels like they have the negotiating upper hand. You want to restore balance to the negotiation.

On today’s show I want to address something that has been on the mind of many investors I’ve spoken with in the past week. We’re talking about the frustration be feeling stalled, of deals falling apart, of delays as a result of the current market conditions and the pandemic induced delays. I’m hearing from a lot of driven type-A personalities that they feel like they’re failing. When you’re used to getting things done, to slaying a dragon each and every day, it’s unnerving to feel like the market has passed you by. We have seen delays of all kinds. We have seen professionals like lawyers and accountants take longer than normal to respond. We have seen lenders take longer. We have seen contractors struggle with supply chain disruptions. We’ve seen customer support calls facing incredible wait times. In the past, wait times that were 6 minutes, are now sometimes 30 minutes, or even 3 hours. Materials that should have been delivered to a job site in one day have been waiting for over 5 days with no clear forecast on when they will be delivered. Parts for a vehicle repair have been waiting for nearly 4 months. Office supplies that should have been delivered in a single day, took nearly 3 weeks. When they were delivered, the quality was not up to par. Last year, deals were too expensive. Today, the economy has changed and the deals are still to expensive. It’s going to be another bunch of months before prices fall to the point where the valuations make sense. More waiting. Oh, it’s an election year in the US. That means some investors will want to see the outcome of the election so that they know what tax rule changes might come into play, depending on who gets elected into the White House. All of these uncertainties mean only one thing – more delays. As professionals, we pride ourselves in being able to set expectations. I pride myself in being able to control the outcome. These days, I’m finding myself incredibly frustrated by the seeming inability to deliver items whenever there is a single external dependency. I don’t control what others do. All I can control is myself and my own response to others. I find myself making excuses and resetting expectations. Things that used to take a few hours are now taking a week. It’s hard to adjust to the new pace. I’m not working any less. I’m not taking my foot off the gas. It just feels like life is in slow motion. I hadn’t given myself permission to adjust to the new pace. Is this the new normal? This week I was in a mastermind meeting with other developers. We compared notes on what was happening in the market. We talked about the struggles we were facing. It was through the process of masterminds that I finally gave myself the permission to slow down. By talking with other entrepreneurs I was able to see that I wasn’t alone. Everyone was experiencing greater difficulty in getting tasks to completion, to having projects achieve their milestones. Everyone was experiencing changing terms from lenders, seemingly variable commitments from investors. Everyone was experiencing slower progress and labor shortages in construction. Everyone was experiencing supply chain disruptions. The stress I was experiencing was the result of the gap between my expectations and the reality on the ground. I only control my expectations and the expectations that I set with others. I can’t change reality. I may be able to influence the future through my actions. But reality is in the present, not in the future, and not in the past.

On today’s show we’re talking about a major change in the way realtors market properties. In particular, the National Association of Realtors are the defendants of a lawsuit brought by a consortium of agents called Top Agent Network in U.S. District Court for Northern California. Top Agent Network, a San Francisco-based, members-only platform for real-estate agents. The California Association of Realtors and the San Francisco Association of Realtors are also co-defendants in the lawsuit. At issue is a new policy called Clear Cooperation. The suit seeks unspecified damages and to reverse NAR’s newly enacted “Clear Cooperation Policy,” which went into effect May 1. The new policy requires NAR members to share their listings through the local multiple listings service rather than shopping them privately to a few contacts, a practice increasingly preferred by wealthy and high-profile sellers. Members who violate the policy face punishment, including fines. The problem with clear cooperation is that in many cases sellers want to maintain privacy. Contrary to the NAR policy which mandates that its always in the sellers best interests to make the property available to the widest number of buyers. Privacy is sometimes a hallmark a concept called exclusivity. If a property is a sought-after property, like a waterfront property, the seller wants to attract a qualified buyer. The seller doesn’t want to be inundated with showings. They want a small number of fully qualified buyers to come and view the property. What NAR is saying is that the seller doesn’t have the intelligence, in fact they don’t even have the right to choose how their property is marketed. Last month they had the choice, now NAR says that they don’t. As I’m recording this episode, I have a gold coin on my desk. Part of what gives the gold coin its value is the scarcity of gold. If gold was as abundant as water, there’s no way it would maintain its value. It’s that exclusivity that gives it value. When you take something that is rare and commoditize it, you actually lower its value in the eyes of the buyer. It’s surprising to me that a sales organization like the National Association of Realtors would fail to understand such a basic concept. The idea of value seems paradoxical. We know that if there are multiple bidders on a property, the value will be higher than if there is just a single offer. Casting the net wider using the public MLS makes it possible for more potential buyers to become aware of the property. The fact is, realtors have multiple tools in their toolbox. It’s not a one size fits all. Clearly an exclusive listing for a commodity 1BR condo in a building that has hundreds of units might be inappropriate and not in the best interests of the seller. But to outlaw a tool, because it might be possible to abuse a tool seems highly unreasonable. At the end of the day, the seller should have the choice of which method to market the property.

Incredibly we have seen the stock market rebound in the past week in response to the Federal Reserve monetary stimulus and the government’s fiscal stimulus. But there are several characteristics about this market rally that are troubling. 1) The volume of shares being traded is way down. Not only that, the market index is being influenced by a smaller number of companies than perhaps at any time in history. Let’s talk about what thin trading volume means in this context. It means that after the major selloff, there are not that many people looking to execute trades in the market. So a smaller number of buyers or sellers can significantly influence the price of a stock. The prices have gone up in the past week, but the buying sentiment is not broadly based, its very narrowly based. That means its quite fragile. A similar sized sell-off could easily crater prices. 2) Let’s talk about patterns of investing. I’m one of these folks who believes in investing on the basis of fundamentals. There is another school of investing called technical. That’s when you speculate on market timing and market psychology. Terms like bull market and bear market come from the world of technical analysis, where traders aim to time the market. Many analysts are calling this a bear market rally that is a precursor to the big drop.  3) Warren Buffet spoke about a week ago to the shareholders of Berkshire Hathaway. In his remarks, there were three items worth noting. He is divesting if stocks including airline stocks. He is saying that it’s going to be a number of years before the airline industry recovers. After all, he is 89 years old and he likely won’t be alive to see the full recovery in the airline industry. In the last downturn Warren Buffet was active in doing deals. For example, helped GE with a line of credit to ensure they had liquidity if they needed it. Today, he’s divesting of certain assets and is holding onto a record amount of cash. He isn’t making the same kind of bullish statements that we heard back in 2008 and 2009. The Buffet indicator measures the total market cap (TMC) relative to the US GNP. If valuations are going up, and the economy isn’t growing, then the index goes up. Let’s talk about why the stock market matters. Some people in the press are saying that the stock market is not the economy. That’s absolutely true. It’s as if to say that stock values can drop and it’s only a few wealthy investors who are going to have a smaller cash pile at the end of the day. Big deal. That’s not affecting main street. Well folks, this is where the connected nature of our world is virtually impossible to escape. You see we have tens of millions of baby boomers who are nearing retirement, or have recently entered into retirement. Guess where those retirement funds are highly concentrated? That’s right, the stock market. It’s in mutual funds. It’s in pension plans. While I don’t advocate the stock market as a place to invest right now. In fact I have been recommending against it for about 5 years. When you’re dealing with people who are in their 30’s, they have plenty of time to recover from an investment setback such as we are experiencing right now. But if an investor is in their 60’s or 70’s, they simply don’t have the time to hope they can make it back. If they’re incurring losses, these losses are likely permanent. The focus has been on job losses in the employment economy. Let’s not forget that the scope of the pain is going to extend far beyond the immediate. If retirees suddenly lose 30%, or 50% of their retirement savings because of a stock market crash, their spending power has been diminished for decades to come.

Brian from Ottawa Canada asks. I'm wondering if there has been any discussion about the lack of government support for residential landlords? In this environment, it seems like we're one of the forgotten ones. Deferring mortgages seems to be a decent temporary measure but replacing rental income is far more important. Brian, this is a great question. Tenants and Residential landlords are both feeling the pinch from the current economic conditions. The economy is facing millions of claims for unemployment benefits. This is the time when you need to be in contact with your tenants on a regular basis to make sure they are clear on the terms of any reduction in rent payment. Governments all over the world have implemented a moratorium on evictions for non-payment of rent. That is not the same as saying that the tenant doesn’t need to pay rent. All it has done is remove one of the remedies that landlords have to enforce the payment of rent. If a tenants says that they can’t pay rent, then you need to ask them to produce documentation that supports why they need some rent relief. This includes, paperwork from the government on their new unemployment cheque. They need to demonstrate what their income was before they lost their job, and now what their income is now while they are collecting an unemployment cheque. In many cases, the current income numbers are very close to the previous numbers. If their income has gone down, then you need to ask the tenant to show you their budget. They can’t just stop paying rent because they feel like it. In a handful of cases, we have negotiated with our tenants a reduction of their rent for a period of time. The change has been written into a rent forgiveness letter, and the tenant must continue to pay the revised number.  You see, right now the government is stepping in and helping people who are out of work and replacing their income. If their income truly goes to zero and they don’t have the money to feed their family, then that’s a different story. A moratorium on evictions does not mean tenants no longer are required to pay rent. If a property owner is experiencing a shortfall in revenue, there are a number of different types of discussions that can be had. In many markets, we are seeing that the city has offered a 6 month deferral of property taxes. This ultimately won’t help with a shortfall of money. The city eventually wants its money. But if you have a short term cash flow problem, a deferral of 6 months in property tax is better than going out and borrowing money. You want to have a conversation with your lender. If you are experiencing a cash flow problem, you may be able to negotiate a small loan modification that consists of a deferral of the principal portion of your loan. Under that scenario, you would still pay the interest. The loan would be considered current, meaning there would be no default on the loan. The principal would not reduce according to the amortization schedule, and the effect of the principal deferral is that you would essentially be adding, say, 3 months to the length of the loan. Just like there is a moratorium on evictions, there is a moratorium on foreclosures in a number of jurisdictions. That doesn’t mean that property owners don’t need to pay their mortgage all of a sudden. The same logic holds here as well. While you are correct in saying that there are no programs specifically aimed at residential landlords, this actually makes sense. You see, the money is needed by the people who lost their jobs at the outermost extremities of the economy. I’m talking about the people who produce through their labour, who have earned income. Landlords are further up the food chain so to speak. As a landlord, I would not want to see a situation where the government pays the rent to me, but pays nothing to my tenants.

Steve Olson runs the Fourplex Investment Group (website fig.us). He has developed a strategy that is adding value to the market by building new product in areas where the land cost supports a rental rate to reliably recoup the investment, even in today's environment. I love this strategy. 

In this final segment of a four part series, Russ and I talk about how to value assets and in particular real estate. Today's final mind blowing segment will bring home the ideas that underpin how to think about investment.  You can hear more from Russ on The Real Estate Guys Radio show at realestateguysradio.com.

On today’s show we’re looking at how investors are investing today. There’s no question that we are living in uncertain times. The stock market is pushing valuations that can’t be supported by the current level of profitability in the economy. So what’s driving it? I feel like we need to go back to basics and talk about how investments are made, or at least how they should be made in my view. Money comes to you through one of three mechanisms Earned Income Residual income Capital Gains If we’re talking about investing, then it comes through one of #2 or #3 either residual income or capital gains. Residual income, by definition means that a business is generating cash positive cash flow. Capital gains happens either because you bought something at a deep discount to its true value, or the value increased from the time you bought it. In order to make a good investment, you need to be able to assess which of those is at play. Is there positive cash flow, payable to investors, and if so, how much? If there is a capital gains play, or a value play, are you buying the business at a discount or are they on a trajectory to create enough value from today’s purchase price that you are making a good buy? If you can’t give an affirmative quantifiable answer to one of those questions, I’m starting to lose track of what you’re doing. That drifts out of the realm of investing into the sphere of speculating. How on earth are you going to evaluate the value of a company that can’t provide any forward guidance on revenue or earnings? Many publicly traded companies in their most recent investor communications have declined to offer forward guidance. Don’t get me wrong, the executives are doing the right thing. They really have zero ability to provide meaningful guidance. If they gave a number, they’d be making it up out of thin air. So why have people been piling back into the stock market in recent weeks? It makes no sense to me. Quite simply, the investments are being made based on a belief that the Federal Reserve, and the Treasury will print as much money as it takes to save key sectors of the economy. If you believe that the airlines will be saved by the government, then Delta Airlines and British Airways must be a good investment, right? Or if you believe that the cruise lines will be saved, then Carnival Cruise line must be a good investment right? The only thing that makes the investment a little better than another is the notion that the Fed is going to save the company, no matter what it takes. But folks, that’s not the same thing as investing in a company based on fundamentals. In a few short weeks, the stock market has gone from one where investors invested in companies, to one where investors are front running the Fed expecting that if the Fed is going to pump money into it, it’s a good investment at any price. The Fed doesn’t have the power to grant money. They only have the power to lend money. The money actually will be coming from the government and the terms of those cash infusions haven’t been fully disclosed. What I’m seeing in the market right now is that people are making investment decisions based on who is getting a government handout. The government handout that is being helicopter dropped from the sky, falling upon some and leaving others behind. Don’t get me wrong, survival is a good thing. If you’ve decided that you want to hold onto a liquid investment, like shares of your favourite public company, then you definitely want to understand the story. But that’s not the same thing as making a new investment, expecting that you will get residual income, or perhaps you’re secure in the knowledge that you are buying a bargain at today’s price. I’m parking funds on the sidelines in physical metal, or in real assets where I feel confident in the earnings from those businesses.

On yesterday’s show I spoke about using the energy of the market to aid you in your quest. Use the energy of the market to your advantage as you evolve your investment strategy. On today’s show we’re going to look at a few asset types that we believe are eventually going to do well once through this period and once this pandemic recedes and we are into a recovery phase. My analysis of various segments of the market show that some sectors are feeling tremendous pressure, and others are just ticking along like nothing has happened. The ones that are doing poorly are will probably come as no surprise. But even in these segments, there are some bright lights. The worst performing asset class right now is hospitality. Hotel occupancies across North America are averaging below 10%. According to a report from Colliers, most hotels have laid off much of their staff and are either closed completely, or are operating on a skeleton staff. Short term rentals are a segment that overall have been hard hit. We’ve seen some announcements from AirBnB in recent days of large workforce reductions and cost cutting measures in response to the fall in bookings. But some short term rentals have done surprisingly well. In those locations, they’ve filled a particular need. Our own portfolio of short vacation rentals had very low occupancy in April, which in a normal year would also have very low occupancy. April is between seasons in the mountains. It’s after ski season has shut down and before the summer vacation season. As of last weekend, we’ve seen a flurry of bookings as lockdown orders have been relaxed.  Retail store front real estate is also struggling. The social distancing requirements have closed down most non-essential businesses. This includes clothing stores, restaurants, bars, many primary health care locations including dental clinics, massage therapists, and hair stylists. We’ve seen a 50% drop in our commercial rent collections. Commercial office space is also struggling. This is particularly true in the co-working office model. These businesses operate on very thin margins because their operating costs are high, higher than regular office space because they carry more staff. Many companies are re-examining their office space as they’ve continued to operate with large parts of their workforce remote. Residential multi-family continues to do well. But the huge impact to the economy means that many having lost their primary source of income will eventually lose the means to pay rent. Unemployment benefits are closing the gap. But the moratorium on evictions could have the effect of encouraging non-payment of rent. Multi-family remains a good asset class, but the degree of leverage will determine how well these assets perform under these challenging market conditions. There are three asset classes that are actually performing as if nothing has happened. Warehouse and distribution centres that serve essential businesses continue to do well. These include grocers, online retailers that have been less impacted by the shutdown. Online retail sales are up 10% year over year in March as residents leverage deliveries to purchase essentials to set up home offices. The operators I’ve spoken with in the Self Storage segment have seen no measurable drop in rent collection. That doesn’t mean this segment is fully insulated. If people are looking to cut costs, this might eventually become an area of cost cutting. But for the moment, it has not been the first to be cut. Boat and RV Storage also continues to operate with no measurable change. This might change if and when people look to sell their boats or RVs in order to raise cash. But even if they sell, the boats and RV’s still exist and will simply change hands. There are other asset classes that we have not analyzed yet. But for the moment, these are an initial analysis of the landscape.

When I was a young boy, I studied martial arts. But not any martial art. The fashionable ones at the time were Karate and Kung Fu. They were full of very flashy strikes and kicks. No I studied Judo, the Japanese art form. One of the things we learned in Judo is that if someone is coming at you, you could expend a lot of energy trying to stop them. Instead, in Judo, you use the energy of your opponent to their own detriment. In the simplest example, you might have someone coming at you at very high speed. If you stick out your foot and trip them, they are probably going to fall flat on their face. Or you could rotate them over your shoulders and flip them onto their back on the ground when you can easily pin them down. They’re too big and heavy to pick up slowly, rotate in the air above your head and then place them down on the ground on their back. But if they’re coming at you, it doesn’t take that much energy at all. Many people I speak with are trying to push against the system. We’re starting to major defaults across many industries. We’re seeing J Crew, JC Penny, Hertz Rental Car, Neiman Marcus, all filing for bankruptcy protection, or on the verge of filing for such protection. There are a lot of people out there fighting against the tide. They’re resisting the tidal wave of energy that is coming at them. My advice is don’t fight it. That doesn’t mean you shouldn’t fight to save your business. Absolutely you should. When I say don’t fight it, what I mean is don’t enter a state of denial. If the energy in the system is in the direction of an economic downturn, then lean into the downturn. When I say don’t fight it, what I really mean is to align yourself to take advantage of the energy in the system, to use that otherwise destructive energy to your advantage. You literally want to perform a judo flip on your investments.

Ryan from Arlington Texas asks Hi Victor, You always seem to be ahead of the curve, and you do a wonderful job informing your listeners about the trends you see in real estate and current events. Where do you like to get your news? What are some of your bookmarked websites (or other mediums) that you refer to most often? Love the show. Thanks for all the great content. Ryan, This is a great question. I produce several different types of segments on the Real Estate Espresso Podcast. Evergreen content Trending Stories Journaling - These are stories from direct observation of my own projects Interviews Book of the month AMA episodes Your question relates most strongly to those topics that are trending in the industry. These shows require the most research. They are those that somehow tie into something that is happening in the broader economy. For that, I have numerous sources. I tend to stay away from the headline sources like the NY Times, and the Washington Post. I almost never look at USA Today or CNN or Fox News. I find that when it comes to commercial real estate, the Wall Street Journal does a dreadful job. So I rarely look to the Wall Street Journal for real estate, but they are a source of good economic, and geopolitical information. I have many go-to sources. They include the World Economic Forum, Business Insider, and the newsletters of various economists. I go to the research departments of the major brokerage houses like Colliers, CBRE, JLL, and Marcus and Millichap. I use the economic research from the big 4 accounting firms. There are a number of people I follow regularly, many of whom I know personally. I’m thinking of folks like Peter Schiff, Simon Black, Dr. Doug Duncan, John Mauldin, Ray Dalio, and Harry Dent. While I may not quote them directly, the information I receive from them gives me a thread to follow. So for example, if the story is something on, say, demographics and the story references an updated data set in the census data. I’ll go find that census data, download it onto my computer, bring it into Excel and calculate a new slice of the data that would be relevant to our listeners. In your question, you talked about my reporting being ahead of the curve. It’s true that I’ve made numerous predictions this year that have appeared in the podcast days or weeks before they’ve appeared in the news. Whenever that happens, it’s the result of some analysis. I rarely just report the news without adding any value. Thought leadership involves using my own intellect to add value. That’s an exercise in connecting the dots. For example, on January 29, I predicted that we were going to experience a deep recession as a result of Covid-19. At the end of January, this was hardly headline news anywhere. Connecting the dots frankly was easy. If you go back to the impact of travel reductions in 2003 due to SARS, the GDP in the US fell 1.5%, solely from the impact to travel and hospitality. The scope of travel reductions and supply chain disruptions by the end of January were already looking to be larger in impact than 2003. Predicting a recession was as plain as day. I’m going to go out on a limb and make one more prediction. I’m going to predict that once social distancing requirements are eased, people who have been stuck at home for nearly two months will be looking for a get-away. But it won’t be the charter flight to an all-inclusive resort. It’s going to be a while before people have the confidence to jump on crowded flights. The vacation of choice will be a cabin on a lake, a chalet in the mountains, far from the crowd, or perhaps an RV vacation. If you own a short term rental within driving distance of a major center, you are well positioned to fulfill the demand that will return with a vengeance. 

On today’s show we’re going to do an analysis that show how you can use numbers from the same data set to construct virtually any story that you want. We are continually exposed to data in the news and the news source will provide an in-depth analysis with lots of supporting data. Let’s say that you wanted to create a narrative on which country is experiencing the worst outbreak of Covid-19. For the purpose of today’s show, we’re going to rely on data that is available on worldometer.com. This website collects all kinds of global data like population data, global oil reserves, coal reserves, the number of bicycles manufactured each year, and yes, statistics related to the Covid-19 outbreak. Of course the conclusions you draw from the data are only as good as the data collection that supports the numbers. But on today’s show, we are going to also examine which measures provide meaningful insights, and those which are completely useless. So back to our question, “Which country has experienced the worst outbreak of Covid-19?” If we go to world-o-meter, you would see that as of today, May 4, 2020, the United State has more reported cases than any other country. The data shows that of the approximately 3.5M globally reported cases, approximately 1.2M are in the United States. But we know that testing and reporting has not been uniform across the globe. There is a clear correlation between testing and reported cases. If you’re not testing, then the reported numbers would be low. So let’s take a deeper look at the testing numbers and see if that can give us a clue. The USA reports having performed more than 7.1M Covid-19 tests, more than any other country. Russia is a close second with 4.1M tests. So perhaps the numbers are accurate, the US has the worst outbreak in the world. Let’s take a closer look and see how the testing compares against other countries. So far, the US has performed 21,400 tests per million of population. That would place the US in 42nd position out of all countries in the world for extensive testing. So maybe that’s not the best metric. Perhaps we need to look at the number of serious cases and compare that with the ability of the health care system to handle the outbreak. Next down the list is Brazil with 8,300 serious cases. They have far fewer critical care beds and have experienced significant outbreaks in areas with very poor health care infrastructure. Perhaps Brazil is the hardest hit country? What about deaths? Which country has experienced the most deaths? Maybe that’s a better measure. So perhaps let’s look at the number of deaths due to Covid-19. Here too, the US leads the world with the largest number of reported deaths due to Covid-19 with 68,200 deaths. Clearly, the US is the hardest hit country. But wait a minute, perhaps that’s not a meaningful measure. The US has a large population and a huge land mass. Perhaps the number of deaths per million population would be a better measure. If you look at deaths per million, then San Marino leads the world with the most cases per million population at 1,208 deaths per million. But of course San Marino has a tiny population so even their small cluster outbreak which killed 41 people could provide a skewed statistic. Let’s see who’s next. Next on the list is Belgium with 7,844 deaths and a whopping 677 deaths per million population. The US which has more deaths at 68,000 deaths has 207 deaths per million, less than a third of Belgium. The next major countries after Belgium include Spain, Italy, the UK and France having the most deaths per million population. So the top 5 hardest hit countries are Belgium, Spain, Italy, the UK and France.

Dana Samuelson is owner of American Gold Exchange, a national dealer of gold and other precious metals based in Austin Texas. On today's show we break down the way pricing is done in the physical metals market. His  analysis brings a tremendous clarity to pricing that may be otherwise difficult to understand. You can connect with Dana directly at [email protected] or through his website at www.amergold.com.

Russell Gray is co-host of the Real Estate Guys Radio Show. He's a financial strategist and one of the smartest dudes I know.  On today's show we talk about the impact of counter party risk and where precious metals fit into the picture of real asset investing. It's an epic conversation as always. 

Today’s show is the book of the month. On the first day of each month we review a new book. In order to be considered for book of the month, the book needs to meet a very simple criteria. It needs to be impactful enough that it can change your life, or your perspective on the world.  The book this month definitely meets the criteria for book of the month. It is called “The End of Food” by Paul Roberts. The book breaks down how our food system works. It chronicles the history and the evolution from the most basic agrarian economy to the thousands of new convenience products introduced each year that now line the supermarket shelves. Paul Roberts’ work is extremely well researched and frankly is a riveting book to read. I simply could not put it down. Every page had some new insight. I don’t think I will ever see the contents of the supermarket shelf the same way again. Our current system of food supply is not at all related to consumer demand. It’s being driven by the need for the major food suppliers to grow their revenues and their earnings. As margins have fallen in various parts of the supply chain, the response has been to introduce innovations that restore the margins. But in order to get a return on those incremental investments, a higher volume of sales is required to recoup the investment. Imagine that a farmer is being squeezed on price for, say, wheat. The buyer tells them that if they go out and spend $400,000 on a new combine, they can reduce their cost per bushel. But in order to recover the $400,000 investment, they have to plant more wheat which brings more supply into the market. That increase in supply, selling into relatively unchanged demand has the effect of lowering the price at market. So the business case for fancy new piece of farm equipment is in fact somewhat flawed. Back in the late 1940’s fishermen in the Hudson River North of New York found that the fish kept getting bigger and bigger. Fishermen are rarely ones to complain about that. It turns out that upriver there is a pharmaceutical factory owned by Lederle that manufactured tetracycline, an antibiotic. At first the company thought it was the Vitamin B12 that was a byproduct of the fermentation process. But in the end it turns out that these micro-doses of antibiotics were enabling the fish to expend less energy fighting bacteria in their gut and allowing more energy to go into growth of muscles and bones. It wasn’t long after that the food industry discovered the same effect in chickens, pigs, and cattle. Mixing antibiotics into the feed meant that the growth rate of baby chickens was increased by 25%. It increased the growth in turkeys, pigs and calves by almost 50%. Of course, now we face a situation where antibiotic resistant bacteria are increasingly infecting entire herds of farm animals. Fast forward to today. Major food companies like Nestle are struggling to achieve major growth in the mature markets in the US and Europe. The emerging markets in Asia and Africa represent an opportunity for growth. But they require customization of products to local tastes. Nestle’s new R&D center near Shanghai has divided the country into regions based on flavour preference. The relentless focus on price has resulted in food that is of lesser quality and nutritional value; a food culture that is increasingly defined by value pricing and portion size; and a global production system so lean and just-in-time that it is simultaneously more likely to be disrupted and less able to absorb the impact of a disruption, as we have seen in recent weeks.

If you’ve been listening to this podcast for a while, you’ll know that I’m a junkie for Economics 101. What I mean by that is that so much of the market can be simply understood by watching the balance of supply and demand of any commodity. But markets are not always that efficient. They stumble from time to time and get temporarily out of balance. Prices can be highly elastic when it comes to short term imbalances of supply and demand. We’ve seen it in all forms of products. We’ve seen it recently in oil. We’ve seen it in surgical masks, some medications and toilet paper. One of the great illusions is that we operate in a truly free market economy. That’s true part of the time, except when it’s not. We know that multiple bids for a product result in a higher price. Fewer bids transfer the negotiation leverage to buyer. This is exactly the same in real estate. We know that if a multi-family project has 20 offers, it will sell for more than if it has only one. It’s a true market when there are multiple buyers and sellers. Increasingly, large buyers like Walmart create “perfect competition” where suppliers conduct a reverse auction bidding down the price to win a contract with Walmart or Costco, resulting in the perfect “free market” monopoly. We have experienced decades of falling commodity prices as global supply chains, consolidation, and increasing specialization have enabled that reverse auction to bid the price down. Our commodity economy continues to function as long as supply chains operate without disruption. But now, we’re experiencing an unprecedented collapse in both supply and demand. But not for everything. The market is operating in a very inefficient way right now. Normal demand patterns are disrupted. You only need to go to the supermarket to see this effect. People are staying at home and favouring canned food, packaged food over fresh fruits and vegetables. We are at the height of the strawberry season right now. Yet we are now experiencing a surplus of strawberries and a shortage of canned beans. North Americans consume most of their potatoes in restaurants in the form of French fries. With restaurants closed down, potato stockpiles from last year are overflowing. Farmers are having trouble selling potatoes and they are reducing their planned 2020 crop size. Naturally, potato prices have dropped. Markets all over the world are going to be experiencing these kind of disruptions. It means that we may see local price increases for certain commodities. Today I purchased some precious metals for my own portfolio. The premium for bullion coins charged by the dealers was 35% compared with the normal premium of about 10%. In fact, the licensed dealers in my home were 100% out of stock. I placed the order with the bullion desk at my local bank and the bullion will be delivered in less than two weeks. The dealers are quoting much longer delivery times and are charging a much higher premium. Again, this all relates to supply and demand. Real estate is no different. I’m starting to see distressed sales on the market. The disruptions here too are creating market inefficiencies. The big question is how long will the imbalance persist. Is this a short term condition, or a medium term condition? If the surplus is for retail space, it might indeed be a long term surplus. Look at all these conditions through the lens of supply and demand. 

On today’s show we’re talking about the difference between Main Street and The Fed. The bailouts of the economy have been making headlines over the past month. The Federal Reserve has agreed to buy back hundreds of billions of in mortgage backed securities from the banks and from the mortgage insurers. They have allowed banks to temporarily drop their deposit reserves from the traditional 10% reserve to zero. Under normal times, that would mean the bank is insolvent, but not today. The Fed has their back. The US Federal Government has pledged $2.7 trillion in bailout money since the end of March. The big question is who is getting the money, and more importantly, who is getting left behind? Today in the Wall Street Journal, FHA director Mark Calabria was quoted as having said that he doesn’t plan to do much to help mortgage lenders outside the FHA umbrella where Fannie Mae, Freddie Mac, have a potentially large exposure. Mr. Calabria, who heads the Federal Housing Finance Agency, is resisting pleas for help from lenders seeking relief as millions of Americans stop payments on their home loans, sending shock waves through the $11 trillion mortgage market. He has said he is willing to stand aside even if some of the mortgage lenders fail, and he says there is plenty of capacity to move business out of failing firms and into healthy ones, if necessary. His position offers a stark contrast to the rest of the federal government. As part of the emergency stimulus package approved by Congress in late March, homeowners affected by the pandemic were allowed to suspend mortgage payments for up to a year without penalty. As of last week, 3.4 million people had suspended payments, representing about $754 billion of unpaid principal, according to Black Knight, a mortgage-data and technology firm based in Jacksonville Florida. That represents about 6.4% of all residential mortgages out there. If you look at the breakdown even further, we can see that Fannie and Freddie make up less than half (precisely 46%) of the loans where borrowers have stopped making payments. FHA and VA loans have the highest rate of non-payment at 8.9%. The remaining 22% of the loans in forbearance are made up of loans where the lender is a privately held or portfolio held. I don’t have a problem with the notion that a bailout is coming. What I do have a problem with is the inconsistent application of the remedy. How can you protect 78% of the lenders, and then leave 22% of them out to dry? It’s not like the 22% private lenders did anything wrong. They took the same general risks as anybody else in the market. Arguably, they took less risk because they don’t have the leverage of being a bank where the banks loan out the same deposit another 9 times. Mortgage investment companies only loan out the money once. The same is true for issuers of bonds and insurance companies. What Mark Calabria is saying is that he doesn’t care if individual main street investors lose money. The banks will happily purchase those distressed assets for pennies on the dollar. The FHA position is alarming. If government isn’t going to help all lenders, just the ones they arbitrarily choose to help, this looks like a transfer of wealth. I don’t want to see equity investors lose money in these market conditions and I don’t want to see private lenders lose money either. Let’s say that a lender doesn’t get their interest payment for a month, or two, or three. Does that automatically mean that the lender is at risk of having a bad loan and losing their loan principal? Not necessarily. The question then becomes, how can private lenders work with their borrowers and stakeholder investors to provide the appropriate level of loan forbearance without risking the investor capital. This is clearly uncharted territory on a large scale.

One of the most powerful approaches to bring to any analysis is zero based thinking. Quite simply, it helps eliminate the emotions that often cloud our judgement. Zero based thinking means going back to the starting point of a decision, but armed with the knowledge and perspective of hindsight. Knowing what you know now, would you rush out today and purchase those shares of General Electric, or Boeing? Those Boeing shares have fallen in value over 60% so far this year. If you wouldn’t rush out and buy them today, then I guess the question is, why are you holding those shares in your account today? Oh I see, it’s because you already hold them in your account and you don’t want to crystallize a loss. By holding onto them you remain in the hope that the stock might bounce back. But that’s not investing. That’s speculating, that’s hoping, not investing. A speculator speculates, a gambler gambles, and an investor invests. So if you wouldn’t rush out and buy those shares today, then why are you still holding onto them? It’s not because the brokerage commission of $5 is holding you back from trading out of the stock and perhaps buying them back at a later time when they actually meet your investment criteria. The logic of the hold argument is often confounded by the emotion wrapped up in the consequences of the decision, not the decision itself. Let’s say that you have an offer out on a property and you have passed through your due diligence period. Perhaps your earnest money deposit has gone from refundable to non-refundable. Your lender is no longer offering the same terms as before. The viability of the project is unknown at this point. This is a moment to apply zero based thinking. Applying what you know right now, if you were making the decision all over again to buy that property, would you rush in and buy it? How do you handle the negotiation with the seller? The seller doesn’t just want your deposit money. They ultimately wanted to sell the property. A 1% deposit isn’t going to really help them. You have a few choices. Would you try and close the deal as planned? Would you walk away from the deal altogether and forgo your deposit? Would you renegotiate the terms of the deal? Delay the closing, but not just by a few weeks. We are talking scheduling a new deal several months out when it becomes clear that the economy will justify the project. The seller may legally be able to argue that the buyer failed to perform. But in truth, the failure to close has nothing to do with the buyer. It’s the result of the market conditions that have clearly changed dramatically in a matter of weeks. We don’t know if the easing of social restrictions will cause a resurgence of the disease and another lockdown situation in just a few weeks from now. Other places around the world that have attempted to ease restrictions have re-imposed them shortly thereafter. Here’s what few people are talking about. Government handouts are very easily accepted, and they breed dependence faster than you can say the word paycheck. Those who have laid off employees will be slow to re-hire them. Those who have taken government checks will be equally slow to give them up voluntarily. If you knew that 25% of the tenants in this apartment building have been laid off and are receiving unemployment benefits, would you buy that building? If you knew that there was going to be a 150 day moratorium on evictions, and rent collections were running at 2/3 of normal, would you buy that building today at the same price? If the answer is no, then difficult as it might seem, now is the time to renegotiate the deal.

On today’s show Anna from silicon Valley asks Is now a time to be investing in multi-family real estate? Surely there are deals coming up on the market. Anna, this is a great question. Some people have adjusted their criteria in terms of what is a deal as the market has heated up over the past decade. I’m a believer that the criteria for investing should not vary dramatically with market conditions. That is to say, you should be conservative in your underwriting. But the truth is, virtually nobody under the sun who is syndicating multi-family apartment deals would have realistically designed a project to withstand the kind of economic shock we are currently experiencing. No rational risk manager would have assumed a continent wide 75% drop in restaurant revenue in a 5 week period, nobody would have assumed a jump in the unemployment rate to over 20% in less than a month. There are now more than 33 million unemployed, or a real unemployment rate of 20.6%—which would be the highest level since 1934. The fact is, investors want certainty. Lenders want certainty. The process that both investors and lenders use is to point to history. If you have a seller looking to sell, they’re assuming the value is based on a historical metric which clearly is no longer valid, despite the fact that the history is no more than two months old. The buyer on the other hand is looking forward at what is, and what is likely to be the case in the coming weeks and months. Because of these two perspectives, there is currently a wide gulf in expectations between buyer and seller on how to value a property. It’s going to take some time for sellers to readjust their expectations of what their properties are worth The lender performs three forms of due diligence, the same as any investor should do. They need to qualify the borrower, the asset, and the submarket. All three of these require some history. But in today’s market, there is no Covid-19 market seasoning. We don’t have 12 months of history deep into this economic downturn from which to predict the future. The problem is that there is simply no modern day precedent for what has happened. A lender is really asking one simple question. If I lend you money, how am I going to get it back. How will I get it back if things go well, and how will I get the money back if things don’t go well. The key question is whether things will go back to normal when this pandemic is over? Or will there be a new normal that doesn’t resemble the way things were? Knowing how to value a property in this new normal is the key question. We simply don’t have enough history accumulated to be able to say what the new normal is going to be. In the world of multi-family apartments, the demand is the same now as it was two weeks ago. The population is largely the same. Very few people have moved during this period of social isolation. So the demand hasn’t changed. What maybe has changed is tenants’ ability to pay. With 26 million job losses in a matter of weeks, combined with moratoriums on evictions, politicians calling for rent boycotts, the ability to pay is highly questionable. But when you have a high economic vacancy, such as we have right now, establishing the net income becomes difficult. So then establishing the value becomes impossible.  It’s going to take time. Don’t be in a rush.

Loe Hornbuckle is founder and CEO of The Sage Oak Assisted Living with multiple locations in Texas and Louisiana. Loe shares his perspective on what the pandemic means from the perspective of an operator who truly has first hand contact with staff and residents.  You can learn more from Loe at [email protected] and he has a free book "The Sage Oak guide to Residential Assisted Living" available for download at goodhorncapital.com.

Russell Gray is co-host of The Real Estate Guys Radio Show, now in its 24th year. He's a financial strategist and today's show is part two of a multi-part conversation on the economy and how to understand what is happening out there.  If you haven't heard part one, you may want to go back and listen to last Saturday's show first.