On today's show, I'm talking with Matt Shields about how he made the transition from single family investing to multi-family apartment buildings. Matt is based in Cleveland Ohio and is investing in multiple markets including Atlanta. 

On today's show I'm talking with Loe and Austin about the merits of purpose built townhouses for rent. This particular product offers some advantages and differentiation in the market when compared with large scale higher density multi-family complexes. Loe can be reached at [email protected] and Austin can be reached at [email protected]

On today’s show we’re talking about the missing middle. Modern cities tend to get most new housing in either very low-density (usually suburban), or very high-density buildings. In many North American cities, most new units are either detached, semi-detached and townhouse units, or else condo apartments in high-density high-rise towers. The mid-density stuff in between tends to be harder to produce. Larger developers don’t want the hassle of these smaller projects. So the lowest cost developers won’t build these. It leaves the field wide open for the smaller developers to try their hand at developing these types of buildings. Frankly, this is precisely where I started my development career. Which part of that middle is missing, depends on the city. In some cities, the missing middle refers to the kind of small walk-up apartment buildings and stacked dwellings that can be built on urban infill lots. This range of mid-density infills, of up to three full storeys and containing perhaps eight or twelve apartments, can serve a wide range of household types. They are more cost-effective to build, and so can be made more affordable to residents, than both lower- and higher-density forms. A generation ago, there was plenty of affordable housing in the city. Most people chose to move to the suburbs, leaving a large supply of old, pre-war housing behind. But a lot has changed. People are coming back to the city, and that growing demand for urban housing has put relentless pressure on supply. People want walkable communities. People want lower maintenance. They don’t want to mow the lawn or shovel the driveway, and they want affordability. It has become clear that affordability and rental supply isn't just about building more housing: it's about enabling more of the right kind of housing. In order to keep costs down, you need to create density. Density, means going vertical in order to reduce the land cost per unit. The limiting factor in virtually any type of housing is not actually the housing. The limiting factor is parking. You might have a parcel of land of, say, 6,000 SF. The city might let you build, for example 16 units on that parcel. The problem is that the parking for 16 cars would consume almost the entire lot. So either you limit the parking, or you find a way to incorporate structured parking. But structured parking is incredibly expensive. If you want parking, then each parking spot costs as much as a brand new car. Many developers opt to build without parking if there is adequate public transit. But here too, the market still demands some amount of parking. If you want to build ground level structured parking, and elevate the building, then the height restriction becomes the constraint. If the city won’t let you build higher, then you can’t get the parking. Once you introduce the parking underneath the building, then you need to factor in an elevator to get up to the 4th floor. The key to lowering housing costs when land is expensive is to allow greater density. If you can get more apartments on the same land surface, then you can lower the cost of housing for everyone. If the rents aren’t high enough to pay for the building, then that building won’t get built. When new buildings don’t get built, then rents go up because there is less supply in the market.

On today’s show we’re talking about one vision for retirement that a number of people are actively doing. For some people, the vision of retirement is that they will take time and travel the world. There’s no better way to do that than aboard a cruise ship. From the early 1970’s my parents traveled extensively on cruise ships. In fact my father spent no less than 800 days aboard a cruise ship. He had taken the around the world cruise no less than 6 times. He did numerous ocean crossings, and dozens of Caribbean, European and Alaska cruises. Think about it, that’s more than two years of his life, spent aboard a cruise ship. When he was traveling that extensively on board, it was pretty unusual. In fact, from the time I was about 12 years old, my parents were gone for anywhere from 2 to 4 months out of each year. If that were to happen today, I’m guessing they would have been charged with abandonment. But that’s an entirely other matter. My sister and I lived at home, went to school, and did our homework. We cooked our own meals and looked after the house. That was pretty unusual too. These days, the cruise industry has grown dramatically. Last year, the cruise industry hosted 27 million passengers. Demand for cruising has grown 20% in the past 5 years and growth has been averaging about 4% a year. An additional 32,000 beds of capacity was added just in the past year alone. So let’s look at the economics of living aboard a cruise ship. The average cruise passenger spends $213 a day. But that’s with drinks, photos, tours, and all the various sales in the gift shops. If you’re living aboard, the real cost can be much lower. The average person spends $46,000 a year in retirement. That comes to a daily spend of $112 a day. I can tell you with a high degree of confidence that you can definitely live aboard a cruise ship for $112 a day on average. Even if you increase the budget to $150 a day, there is a large percentage of the population that could easily afford $55,000 a year. Understand, that if you’re living aboard, that pretty much covers all your daily expenses. Your bed sheets get changed every day, all your meals are included. You might need to buy some clothing and spend a little money ashore, and pay for medical insurance. Apart from this, you have no other financial obligations. Compared with the cost of senior living in an independent living complex, a cruise ship is still a bargain. There are activities, shows, entertainment, and a high level of service. Your cabin stewards, waiters, deck hands are all available to help guests at any time. The ships hospital is equipped to handle any emergency situations. But just beware, if you have a health issue, you can expect the cruise line to transfer you to a hospital at the next port. An increasing number of people are making the cruising lifestyle part of their retirement plan. I know of some people who have been doing this full time for over 10 years. Some people don’t like the cruise experience. They don’t like the crowds at the lunch buffet, and they don’t like the party crowd who can be a bit boisterous. But some cruise lines like Holland America and Royal Caribbean have built more of a reputation for being a bit more tame. They don’t attract quite as much of the Spring Break kind of crowd. While we don’t expect cruise ship living to represent a first choice for many retirees, it is definitely a choice for some. Even those who would consider a sunbelt destination in the winter months are choosing the cruise ship alternative to a permanent second home for those colder winter months.

On today’s show we’re talking about government over-reach which has been partially stopped in one instance. Municipal Governments all over North America are trying to implement rules to improve the quality of rental accommodations in their cities. One of the methods is called proactive enforcement. That’s code for inspections. The theory is that if landlords know their property will be inspected, they will have a stronger incentive to make sur their property complies with the building code and property standards that make a property considered inhabitable. Not only do things need to be in working order, they have to be safe, and free from health hazards like molds or other toxins. You would think that if the goal is to improve the quality of rental properties, then the tenants who have problems with the quality of their units would favour these inspections. Well, in the Commonwealth of Pennsylvania, that rule just got challenged in court. In June 2015, The Borough of Pottstown Penn enacted a number of housing ordinance amendments. At issue here, the amendments included provisions requiring each owner of a rental property to permit inspections of all rental units every two years. If voluntary access for an inspection is denied, the ordinance allows the Borough to apply for an administrative warrant. The new rule does not disclose what criteria, if any, the Borough must satisfy in order to obtain such a warrant. In the case before the court, the tenants, and the landlord refused voluntary access to their rental units by Borough inspectors. The Commonwealth Court overturned a lower court’s ruling in favor of Pottstown in a lawsuit challenging the borough’s rental inspection ordinance. The lower court upheld the right of the borough to enter residents’ homes without cause and without the residents’ consent. Tenants in the case asserted that the use of administrative warrants is unconstitutional because such warrants are issued without requiring and individual probable cause to believe any building code violation exists. Tenants also pointed out that each inspector is instructed to share with police any observation of an item in the rental unit that the inspector in their sole discretion considers an indicator of criminal activity. This effectively gives police the ability to obtain information about the contents of a dwelling without the need for a search warrant. The tenants also argued that the privacy protections under the Pennsylvania constitution are more extensive than the protections under the United States Constitution concerning individual rights of privacy and freedom from unreasonable searches. The actual article in the constitution says, “The people shall be secure in their persons, houses, papers and possessions from unreasonable searches and seizures..." This language is similar to that of the Fourth Amendment of the US Constitution, but provides broader protection than the 4th amendment. In June of 2018, the Borough filed a motion for Judgement on the pleadings. They argued that the inspection provisions of the housing ordinance were not unconstitutional. On Monday this week, the Judge who heard the cased rules in favour of the landlords and tenants who opposed the new rule. Judge Ceisler’s ruling said, “To require Tenants to endure the inspections before challenging the inspection requirement would render Tenants’ Article I, Section 8 privacy rights illusory,”. Essentially what the judge was saying is that Pottstown’s rental inspections regime was a way to get around constitutional protections for privacy rights. This ruling could ensure that every Pennsylvanian who resists a search of their home can only have the government enter with a warrant supported by probable cause that something is wrong inside.

For better or worse, we are addicted to growth. Our financial system that is heavily based on rising debt, virtually requires perpetual growth. When businesses shrink, bad things happen. Not only do people lose their jobs, businesses face problems meeting their debt obligations. If they shrink too much, then really bad things happen. When governments create conditions that are intended to help workers, they sometimes have unintended consequences. I’ve had the experience of managing employees and contractors in France which is one of the most difficult labour markets that I’m aware of. Every enterprise over 50 employees must have a union by law. On of the consequences of an overly regulated labour environment is that it’s very difficult for workers to find a job, because the liability associated with hiring someone often outweighs the benefits. Employers are very reluctant to hire in that environment. What was supposed to help workers, in fact has the unintended opposite effect. The State of California took the unprecedented step of requiring companies that hire contract workers to convert them into employees if they work for more than a specified period of time. AB-5, which went into effect Jan. 1, requires companies to reclassify a wide category of California contract workers as employees. A relatively new California company called Wonolo specializes in connecting workers and businesses. So far they have over 300,000 people working on their platform. Last month Wonolo secured an additional $35M investment from Bain Capital. At the same time, a couple of weeks ago, the company also announced that as of March 1, they would no longer allow businesses based in California to use their platform. This decision will affect tens of thousands of workers who currently use the Wonolo platform in California. The gig economy has all kinds of contract workers spanning everything from Uber, to drivers for Fedex and UPS. Their customers include all kinds of businesses from Coca-Cola, to Six Flags to Papa-Johns Pizza. Th company took the decision in order to protect businesses from any unnecessary risks associated with the new legislation. Wonolo doesn’t have the time or the resources to police compliance with the new AB-5 regulations. So what does temporary contract work have to do with a healthy thriving economy? So what does this have to do with real estate? One thing that drives demand for real estate is jobs! Jobs, jobs, jobs. If employment is falling, if it’s too hard to do business in a particular area, then jobs are one of the first casualties. After that then comes real estate as the second casualty. California legislators may finally get their wish, more affordable real estate. What that means is that prices will fall as more and more people exit the state. The problem is, the ones who are leaving California are precisely the ones that the state really needs to keep. The one’s who stay will be the least mobile lowest earning members of the population. Those who don’t pay taxes don’t really care that California’s taxes are high. It doesn’t affect them. The folks at Zillow have a nationwide view of real estate. In their latest survey of real estate sentiment, they are predicting that the San Francisco Bay Area will be the worst performing of all real estate markets in the nation. Of the survey’s markets most likely to underperform in 2020, six are in California and include Los Angeles, Sacramento, San Francisco, San Jose, San Diego and Riverside. The lyrics in the song Hotel California by the Eagles say “You can check out any time you like, but you can’t ever leave”. I suspect that California legislators have been listening to that song for far too long, because it’s actually not true.

Dr. Kevin Hsu from NYC asks, “ I’m curious your opinion on something I heard Jeremy Roll and various other experts say on podcasts in 2019 - that the market is very hot in Multifamily in the past several years, cap rates getting compressed, and the best thing would be to wait on the sidelines for the correction and then jump in.” Kevin, that’s a great question. There are two schools of thought when it comes to investing. The first is to treat the marketplace as an auction. Properties sell to the highest bidder. In an auction environment, there is a mindset of scarcity. The idea is that there is limited supply of deals, and more money chasing deals. In that environment, the fear of missing out creates an emotional reaction in many buyers. You’re proposing to not be an anxious buyer and that’s absolutely the right attitude. You never want to pay too much. You’re absolutely right that prices for investment properties are being bid up in the market to valuations that don’t make sense. In our business we have not engaged the market in the that most investors are. We’re not willing to pay too much. A simple example was of a property in South Dallas that we looked at last year. It was over 100 units, and decidedly a C-Class property. It’s not in a great area. In fact it is in the middle of an industrial area backing on a manufacturing facility, with a warehousing and trucking property on either side. This is never going to be a B class property, not in that location. The asking price put it at a 5% cap rate. Not only that, the seller was demanding 30 days due diligence, and $200,000 non-refundable deposit even to accept an offer. I have no idea if the seller got their price or their deposit. The argument for the high price and the incredible terms was that the market was supporting those conditions. But it made no sense to me. I would never pay that much for that property. It’s true that the money is made in the buy, not in the sale. If you pay too much for the purchase, you’re really setting yourself up for failure. You can go find deals, or you can create them. I personally prefer to create the deal. When you’re finding deals, there is a lineup of people bidding for the same deal. It’s truly an auction. In that environment, it’s tempting to wait things out until there are better prices in the future. But nobody can predict the future. Will you wait 6 months, two years, five years? What if prices don’t fall enough in a downturn to make the numbers work? I prefer to have a clear financial model for what makes a deal work. You can either Find those deals. They do exist, but there are not that many. Create them. So how do you create deals? Well, you look at the supply and demand imbalance in the market and you figure out what a project needs to look like to make the numbers work. You figure out how much profit you need per unit, what your construction costs would be, and ultimately what you can afford to pay for the land in order to make that all work. I’m finding that I’m able to build new product for 25%-30% less than the equivalent product is selling for in the open market. Yes, these projects take longer, and yes there is the additional risk associated with new construction. But when you can build brand new product that is in demand, in the right location, at the price you want, the risks can be managed. That’s proven to be a good tradeoff for me. That doesn’t mean it’s ideal for everyone. There are a handful of opportunities that appear as the result of special situations. These are things like an older property owner aging out of the ownership process. Sometimes, these opportunities come off-market through relationships with brokers.

Sean Gray has a special message for those under 30, and in particular, those who are twenty-two without a clue. By getting in the right environment,  by hanging out with Robert Kiyosaki and Ken MacElroy, he's managed to develop skills that are unusual for someone so young. Sean is on a mission to help those young folks who are trying to figure out their path in life, and how to ask themselves better questions.  Check it out. You can reach Sean at SeanDGray.com.

My good friend Robert Helms of The Real Estate Guys Radio Show has just completed the second full year of operation at Mahogany Bay Village, a Hilton Curio Collection Resort. This is an extraordinary property with features and experiences that are unique in the world. Like me, Robert also is passionate about goal setting. He hosts the Create Your Future Retreat in Lake Las Vegas on Jan 17-18. You can learn more at http://goalsettingretreat.com. My conversation with Robert is packed with value bombs. We are truly kindred spirits.

On today’s show we’re talking about one of the latest ideas in community design. It’s the 15 minute neighborhood. The idea behind the 15 minute neighborhood is that everything you need to live your daily life should be within 15 minutes walking distance of your home. That means a trip to the grocery store, a trip to the office, and a trip to the dry cleaner would all be within a 15 minute walk. Trips further afield could rely on a 15 minute walk to a public transit stop. The idea of walkable communities is not new. If you spend any time in Europe, you’ll find communities that were centered around the town square. These places were built before the advent of the automobile and they’re some of the most livable communities, despite the lack of parking. But if you go to even small communities in Europe of, say, 40,000 people, you will find 6-10 story apartment buildings, dense main-streets with clothing stores and a local deli, a neighborhood restaurant serving simple food, and a fine dining restaurant. You’ll find the local flower shop, the pharmacy and the health food store. The design of North American cities have created a separation between the commercial center and the places where people live. The suburban lifestyle where row upon row of identical houses with manicured lawns is an artifact of the 1970’s and 1980’s. This trend created a band of abandoned real estate outside the core of each city. Drive a bit further and you get into the suburbs. But really it makes no sense. Communities all over North America have rediscovered that band of real estate and started redeveloping it. My home town of Ottawa Canada has adopted the concept of the 15 minute neighborhood into its latest incarnation of the official plan. But if you research the concept, you’ll find other communities like Boulder Colorado and Portland Oregon adopting a similar concept. All across North America, we have bankrupted our cities and states by putting the everything ever farther apart, and then building huge networks of roads and public transit to connect it. Our cities have ballooned far faster in land mass than they've grown in population, and face ever-mounting maintenance costs for all that pavement, at the same time as residents clamor for yet more roads to deal with congestion caused by all the driving we’ve forced ourselves to do. If you’ve ever built a road, you know exactly how expensive they can be to build and maintain. The best way to lower these costs is to fill in the spaces left vacant in the middle of our cities that have fallen out of fashion. That means no new roads, no new public transit, no new schools. It’s re-using the infrastructure that’s already there and being paid for. One of the big tragedies of urban sprawl is the way we get children to school. I’ve lived in the suburbs for the past 30 years. My children have been walking distance from school. When I grew up, I used to walk to school, but my children never experienced that. They had to take a 30 minute drive on a school bus instead of a 20 minute walk to school. Frankly, that’s pretty messed up. I’d love to see the return fo the neighborhood school and get rid of all those school busses that are taking kids 30-60 minutes twice a day all over North America. As you look at opportunities for development projects, study the 15 minute neighborhood and inspire your local communities to make old world sensibility part of the new world city.

A milestone date is just another day, or is it? As we enter 2020, the only thing that’s different is that we are a day older, either more tired, or better rested, depending on what you did in the past 24 hours. It’s part of the social dialog to set New Year Resolutions. The fact is, less than 4% of the population actually set goals, and then the subset who do usually don’t meet their goals. So against those troubling statistics, it’s tempting to give up. I’ve discovered that the secret is to setting habit goals and putting those at the forefront of your daily practice. Habits govern the thousands of micro-decisions that make up your day, your month and ultimately your life. The result of doing is doing. The result of not doing is not doing. The result of trying is trying. The result of wanting is wanting. The only thing that counts is the decision to do or not do. As you go into 2020, take the time today, before the phones start ringing, before the laundry needs to be done to map out 3 habits that you decide (not want) to make part of your daily practice. You might be thinking, it’s already past the start of the year, and you’ve missed the opportunity to set goals. It’s too late. If that’s what you’re thinking, let me be the first to suggest that you let go of that story. That’s an arbitrary story that originated in your own mind. Today is a day, like any other. But you could choose to make today different. It could be the day you decide to establish some new habits. You might be looking to establish a new work habit. Perhaps you will turn off your phone for two hours every day, early in the day to make sure you have time with no interruptions to get focus work done. You might decide to confine your meetings to the afternoons only and make sure you have productive time in the mornings. You might be looking to establish a health goal. Maybe you want to get into a new sleep routine, or a new eating routine. You might be looking to establish a health goal. Maybe you want to get into a new sleep routine, or a new eating routine. You might have a family goal to spend more one on one time without interruptions each day. Being present with your family is a gift. I see so many people in restaurants having dinner together, but separately. They’re facing each other, but looking down onto a screen. The problem isn’t the electronics. It’s a decision to prioritize the stimulation of an electronic device and avoid the vulnerability of a face to face, eye to eye conversation. Everyone can carve out 30 minutes, or 60 minutes without an electronic device causing distractions. Ultimately it’s those personal connections that make the difference in the quality of your daily life. If you’re experiencing stress on a daily basis, it means that you’re spending too much of your day doing things that are not in alignment with your core values. If you allow your day to get filled up with things that are not in alignment with your most closely held values, then you will be unhappy. It means that you’re living your day, your life for someone else’s values, but not yours. Maybe it’s fear of disappointment that’s driving you, maybe it’s fear of looking bad against some measure that’s only serving your ego. Whatever it is, bringing your values into alignment with your daily decisions is the secret. If you spend enough of your day feeding your true core values, you can’t possibly be unhappy. Don’t wait for a milestone date to make the decision. Start living your life for you, authentically, purposefully, decisively. I wish for your all the health, happiness, and success in 2020 and the coming decade. Today is just another day, maybe the day you decide to integrate new habits into your life. Go make some great things happen.

Today’s book is in a completely different track from books we’ve reviewed in the past. Today’s book is called “The Body: A Guide For Occupants”. By Bill Bryson. Bill Bryson was born in Des Moines, Iowa. For twenty years he lived in England, where he worked for the Times and the Independent, and wrote for most major British and American publications. Bill Bryson has written more than 20 books and his works have been published in multiple languages. His latest book has achieved New York Times BestSeller status. On this day, I made the decision to fall prey to the marketing and choose a book off the New York Times Best Seller list. Had the book not achieved best-seller status, I probably would not have chosen to read it. The Body is truly a book about how to take care of this vessel that we use and abuse on a daily basis, expecting so much from it. It rarely breaks, requires surprisingly little in the way of maintenance or spare parts. You never have to change the oil or the spark plugs. This mushy miracle we call our body is pretty much taken for granted on a daily basis. The makeup of the body is billions of cells, bacteria and elements. If you were to purchase the individual components it would cost under $20 to make a human out of raw elements. The books is written like a user’s guide, much like you might get when you purchase a new barbecue or a new car. It shows you all the different systems, how to interpret the different warning signals on the dash board, and how to check your tire pressure. Some drivers know how to use the windshield wipers, but they don’t know how to refill the washer fluid. This book goes into all the different parts of the body and give you a tour of the various systems. The books is organized into 23 chapters with each section dealing with different part of the system. There is an entire chapter devoted to bacteria and microbes. There is an entire chapter devoted to sleep. There is a chapter devoted to nerves and pain. There is an entire chapter dedicated to the alimentary system. We swallow nearly 2,000 times a day, about once every thirty seconds, fully unaware of the 50 muscles involved in the intricate dance required to force food or drink from your throat down into the stomach. Why do we choose to chew some foods for a long time, and yet allow others to slide down our throat with hardly any grinding contact with our teeth? Why do some parts of our body itch, and others not? Why do you scratch your head, but not your spleen? Even in the late 19th century, it was thought that the male or female decision was not the result of chemistry, but by external factors like diet or temperature, perhaps a woman’s mood during the first trimester of pregnancy. For a little over a century it was believed that the X and Y chromosome were responsible for choosing sex during the gestation process. In fact, it was not until 1990 that two teams in London identified the sex determining region of the Y chromosome. We had sent men to the moon and back, but still didn’t know where boys and girls came from. How many of you know the difference between a tendon and a ligament? Do you know that the human body is made up of a roughly equal number of body cells and bacteria? Apart from the dozens of trivia like facts about the body, perhaps useful for a party trick, I found myself appreciating the various systems hard at work, mindful of what they do because of what I do on a daily basis and despite what I do on a daily basis. If you want to learn more about this thing we live in called a human body that we take for granted, check out The Body: “A Guide For Occupants”. By Bill Bryson.

Today is New Year’s Eve and it also marks the end of a decade. On today’s show, we’re taking a look at the decade in review. A decade ago we were in a post-911 world where many western countries were embroiled in conflicts in Iraq and Afghanistan. There was the genocide in Syria and the collapse of the society in Venezuela and numerous other conflicts like the Ukraine have been a blemish on our humanity as a species. In this past decade we all gave up a lot of personal privacy in the name of security. There is more tracking and surveillance than at any time in human history. This past decade was the decade of social media where it was once a peripheral distraction for early adopters and now has seen widespread adoption by almost the entire western society. Ten years ago it was 2010, the Great Recession was in full force and real estate prices were falling in many areas of the country. Borrowing was extremely difficult and the only buyers were cash buyers. Loan defaults were making headlines on a daily basis.  The next two years would see millions of foreclosures in the United States. Many of the defaults were the so-called maturity defaults where the borrower had made every single loan payment on time. But the loan came up for renewal at the end of a 5 or 7 year term and the bank then required an injection of cash in order to fix the loan to value ratio. Values had dropped so much during those two years that the banks didn’t have enough security. In many cases, properties were under water where the current value of the property was worth less than the loan. That seems like a distant memory. I remember attending real estate meetups in those days when you could buy properties for about 30% of the construction cost.  I had people telling me not to invest in real estate because it was too risky. We established the core of our “buy-on-the-line, move-the-line” strategy that proved extremely effective and scalable. By honing in on a repeatable process, I was able to build a sustainable development business. I somehow managed to attract incredible people into my life over the past decade. I also attracted a few of the wrong people. Learning the difference and acting to eliminate those who were not a fit was the most important thing for me to do. In this decade, I wrote two books, I learned how to communicate with the media and had hundred of media appearances and public speaking engagements. I took a leadership role in our local real estate investors organization and helped it grow to roughly double in size. Ten years ago I was listening to podcasts. These were mostly lectures and interviews with people from Silicon Valley. Little did I know that I would venture into this world only a short time later. In the past decade, I had successful development projects, and I learned to manage success, as well as how to manage failure, delays, and setbacks. There were times when I felt stuck, like I wasn’t making progress fast enough. It was like pushing a rock uphill. I learned that persistence was the key to ultimately achieving success. I watched my wife grow her family therapy practice from a single practitioner to having a staff of 9. I’m so proud of her. Within my family, all of my children grew up and transitioned from being teenagers to young adults and living on their own. As a parent, I wish the best for my children. It gratifying to see them chase their dreams and at times it’s difficult to watch them make choices that I not would have made. But that’s what makes them unique. They have to live their life for themselves. Above all, I’m committed to savouring the journey, to personal growth, and making each new day better than the one before. As we start the new decade, let me be the first to say, hindsight may be 2020, but 2020 is in your future. Have an awesome New Year and New Decade celebration

On today’s show we are looking back on 2019. The year in retrospect. 2019 is notable as much for what happened as for what didn’t. For me personally, it was a year of mixed results. We completed construction on two projects. We completed the refinance on two apartment buildings. We sold three assets for a good number. We have a major assisted living project finally get into construction after months of value engineering. We were working really hard in order to achieve an acceptable construction budget. We completed several acquisitions including securing a new development site for a high rise project. But not everything went according to plan. The podcast has been very successful this year on many levels. My goal from the beginning was to produce one piece of quality content each day. It didn’t matter where in the world I was located, I always found an internet connection to upload a show. If I happened to be at sea for a few days, I would upload a few shows in advance so that they would publish on schedule. I truly appreciate the feedback from you the loyal listeners. It makes me happy to know that the show is having an impact. You have downloaded more than 500,000 episodes and counting. That’s awesome and I recognize that your time is valuable. My wife and I ran an experiment of what it would be like to live on board a boat for 3 months of the year. It was not a vacation, just a different living arrangement. There were mixed results. My work productivity definitely suffered during those months. I learned a lot about myself, and my own habits during those months in Europe. I lost about 15 pounds, managed to eat healthy, and exercised pretty much every day. Once back at home, I struggled to establish my desired habits on a consistent basis. I wasn’t getting to the gym regularly. My daily meditation practice was not consistent throughout the year. Over the year I managed to successfully complete a number of projects. I put a few projects on the back burner, and brought laser focus to the ones that remained. The purpose in conducting a retrospective is to extract the lessons from what happened in the past year and to express gratitude. There are so many memories of the past year. It’s a little like mining for gold. The gold consists of those lessons that are hidden in all those memories. Like mining for gold, you need to sift through tons of rock and silt. Buried in the tailings from the mining operations are tons of things that serve no useful purpose. These are the emotional baggage that comes with emotions like regret, shame, fear. You can choose to hang onto the tailings, or you can choose to hang onto the gold. As you think back on 2019, run your own retrospective on what work, what didn’t, and what did you learn.

Steffany Boldrini entered the world of real estate investing from a technology background in Silicon Valley. She is also the host of the Commercial Real Estate Investing From A to Z Podcast. She can be reached at www.montecarlorei.com.

On today's show I'm asking George how to set expectations with myself and stakeholders when projects are running late and I'm carrying some of my 2019 goals into 2020. Love his practical no-nonsense approach.

On today’s show we’re looking at the efforts to disrupt the traditional real estate markets. British company Purple Bricks announced earlier this year that they are pulling out of the US market. The company is one of several fixed fee brokerage companies that have tried to penetrate and disrupt the traditional residential real estate brokerage industry. The heavy use of software, combined with minimal services was supposed to lower the cost base for consumers. Purple Bricks charges homeowners a fixed fee for listing a property on the MLS, whether or not a property is sold. Purple Bricks tried to differentiate by offering exclusive territories to its agents based on postal code. Part of the argument in favour of fixed price listing services is that in a hot market when any property listed will sell, often over asking price. The listing agent isn’t doing much work to earn their commission. The buyer agent has to take their clients on multiple showings, and draft multiple offers, the majority of which are rejected. It’s the buy agent that does all the heavy lifting. In a buyer’s market, during a downturn, the roles are reversed and the listing agent does the heavy lifting. In the traditional model, the seller pays the entire commission which is split between the buyer agent and the seller agent. The fixed fee model charges a fixed fee for listing a property. The fee paid to a buyer agent is in addition to the fee paid for the listing. The traditional brokerage commission in the US is 6% of the selling price. This is usually split between the buyer and seller agent. In some hot Canadian markets like Toronto, listing agents have fought back against the flat fee offerings by discounting the listing service. The still pay the full 2.5% commission to the buyer agent, while discounting the sell side commission to 1.5%, or in some cases as low as 1%. In 2018 Canada’s Comfree was purchased by UK based Purple Bricks for $51 million dollars. Under ownership of Yellow Pages, the company didn’t experience a lot of growth, as evidenced by the fact that they sold the business basically for what they paid for it two years later. Purplebricks Group Plc‘s stock climbed after the online estate agent said it was pulling out of the U.S. The company shares had lost 75% of their value since it ventured across into the US market in September 2017. The investment in the US expansion was bleeding the company of its resources and profitability was too far off in the future for investors and the board to accept. The stock has regained some value since the decision to focus on its more-established U.K. and Canada businesses. Purplebricks CEO said a “significant opportunity to disrupt the U.S. market,” remains, but it would take “substantially more management time and resources than the company is able to commit at this time.” The Solihull, England-based company reported a full-year operating loss in the country of 34.1 million pounds ($42.9 million), wider than the 16.8-million pound loss a year earlier. According to the national association of realtors, flat fee transactions accounted for about 2% of home sales in the United States in 2018. Another California startup called Reali set up shop in San Francisco. They’re offering a flat fee listing service at just under $5,000 for the service. Paying the buyer agent’s commission, if there is a buyer agent would be on top of the flat fee. The problem with discount brokerages is that they assume a high volume of transactions in order to pay for the overhead associated with the business. In a market downturn when sales volumes drop, the cost of carrying the fixed overhead doesn’t change. We’ve seen many large discount brokerages fail in market downturns which is why they don’t survive in my opinion.

Whitney from Phoenix asks. How many apartment units do you think I would need to retire comfortably if I’m just relying on the monthly cash flow. I’m finding it hard to project the cash flow into the future and properly model for inflation. Any thoughts on how I can analyze and plan would be helpful. Thanks. Well Whitney, this is a great question. I’m not sure how many years you have until retirement. But let’s talk about the process of investing through the entire lifecycle of a property portfolio. When you’re starting out, chances are good that you’re going to be relying on other people’s money to help you buy the property. That’s true if you’re going to be using bank money and even more true if you’re going to be bringing equity investors along for the ride. Let’s start with a simple example just to make the numbers really clear. Let’s say that your goal is to generate $10,000 a month in cash flow from real estate. If you are borrowing funds from the bank at something approaching 80% loan to value, you’re going to be producing only a small amount of cash flow each month. This might be no more than $100-$200 per month. If you’re like most people, the loan is going to be amortized over 25 years. So you’re going to be facing very low cash flow per unit for the next 25 years. That’s a long time to wait for the property to be paid off. Let’s say the property is generating $100 a month in cash flow. You would need at least 100 units to generate that cash flow. In the real world, with reserves for long term maintenance, your actual cash flow can end up being even lower. You could need even 200 units to generate that amount of cash flow. If you have equity investors and you are sharing the ownership with partners, you then only own a fraction of the portfolio. If you own 50% of the portfolio then you would need 400 units to achieve that $100,000 a year in income. If you own 25%, that’s 800 units. I know what you’re thinking, that’s a lot of units and it’s going to take me a long time to amass that many units. You could wait the 25 years, at the end of which you own the 200 units free and clear. The fact is, properties that carry no debt generate a tremendous amount of cash flow. If you owned those 200 units free and clear, you could easily expect about $800 a month in positive cash flow per unit. That’s 160,000 a month in cash flow. But you’ve got to wait 25 years to get that cash flow. In the meantime, you’re barely squeezing by. Not only that, you’ve got to build a huge portfolio and manage it for 25 years in order to achieve an incredible monthly cash flow. What if you don’t want to wait 25 years. What if you’re in your early 50’s and you only have 15 years until retirement. You’re worried that you’re running out of time. Well, there is a shortcut that can help you dramatically. If you’re facing a 25 year amortization, you will pay off 30% of that loan balance in the first 10 year. Let’s say that you buy one property of 50 units each year for 4 years. At the end of 4 years you own those 200 units. Let’s say that you hold them for 10 years and at the end of 10 years you decide to sell 75% of the portfolio. You’re now left with 50 units. You may have some capital gains, and you decide you will pay the capital gains tax on the properties you sold. So you may have some additional equity apart from the principal pay down on your loan. Remember, the principal pay down over those 10 years was paid out of after-tax income, so the equity you accumulated in principal pay down is already in after-tax dollars. So after 10 years you decide to take the cash proceeds from the sale of the 150 units and fully pay off the remaining loan on the 50 units that you are still holding. Now you have 50 units that you hold free and clear. Those 50 units will generate 40,000 a month in positive cash flow. That’s more than enough to meet your retirement objectives.

Thank you to all the loyal listeners. Producing a show each day has turned into a labor of love for me. I truly appreciate the letters and emails that I receive from you. I’d like to read a message I received earlier this week from Dr. Kevin Hsu in NYC. He writes, Dear Victor. My main reason to contact you was just to say thanks for sharing your insights. I just found your podcast in the past couple weeks. I appreciate your message about the 5 principles and there is a correlation with my field. My Patients’ compliance is affected by how much trust, and relationship there is. The idea of never “selling” my patients any procedure is dear to my heart. Treat them how I treat my mom. If I educate them properly they will come to me when they decide they need the procedure. After reading Rich Dad Poor Dad maybe 15 yrs ago during residency. I admit I didn’t really put it into practice. I only recently started listening again after a friend approached me about a syndication. Since I didn’t know much about it I wanted to educate myself. First place I went was Kiyosaki’s podcast/YouTube. First one I heard was your interview on Assisted living. Then went to your Real Estate Espresso podcast and heard your interview with Josh McCallen on work family balance. I thought it was so relevant and positive. Thankfully I have a wife who is practical and keeps me grounded. :) Then I listened to your interview with Dr. Jeff Anzelone, and another light bulb went off in my head. I thought Wow! Jeff is describing what I’be been through. Med school loans. Pay them off and now what? So I contacted him and we had a great phone chat last week. In summary as I embark on a rejuvenation to learning principles of cash flow, just wanted to say I can’t thank you enough for your teaching, and being an example of a businessman who is a family man. I’m also glad I didn’t just google “real estate” or something and end up on some random scammer site but rather got plugged into podcasts of trustworthy investors like yourself. Thank you so much and Merry Christmas to you and your family! Thank you Kevin for the kind words and it makes me happy to know that the show is having an impact. Congratulations on continuing your own personal and professional growth. I know so many professionals who worked really hard in University, and then once they got into the workforce, they stopped learning. I truly believe that personal growth is one of those fundamental daily needs like food, water, love, and oxygen. As business people, as entrepreneurs, there are only a few genuine places where these conversations are happening. I’m glad that the podcast is starting a conversation. As much as the podcast exists online, the real world is offline. Finding like minded people is truly where the journey starts for me. I like that you didn’t consume the podcast passively. You took action and reached out to one of my guests. Very few people do that. It’s easy to think of a book as an inanimate object, or a youtube video as a piece of content. A podcast is just a show. I don’t think of it that way. In fact, as I look at the bookshelf in my office, it turns out that 3/4 of the books on the shelf, I know the author personally. That’s pretty unusual. Many of the books are signed by the author. Even though I have read the books, I can’t seem to part with them. The signature on the inside jacket represents a personal connection with the author. There is an endless supply of learning. I spent this morning reading and incorporating the learning into myself. It’s amazing how these little steps, one by one, little by little, add up over an extended period of time to move you. Darren Hardy talks about this in his book the Compound Effect.

On today’s show we’re talking about value engineering your finished product. It’s hard to believe that a little bit of software makes it possible to save a bunch of money in the communications infrastructure for your projects. Today’s property has so many connections. There is water, sewer, electricity, telephone, Cable TV, internet, natural gas. When you are supplying services to a multi-family apartment or assisted living project, every single one of these services costs money. In fact, it’s common to have two water mains, one for the household use, and a second higher capacity water supply for the sprinkler system. These days, a modern building will be pre-wired with cable for telephone, internet, and Cable TV. It might even be pre-wired for the security system and for surveillance security cameras. We just recently went through an exercise where our general contractor missed a critical item in the scope of work. They agreed to absorb the cost of the error. But nevertheless it became clear that the designers had specified a lot of wiring in the buildings. We decided to undertake a significant cost reduction in the wiring of the project in order to save money. But the real question is whether we would experience any loss of capability or quality. We’re not willing to compromise on the quality of service. At the end of the day, the residents want their service and they want it to work reliably with great performance. The want to be able to make phone calls, watch TV, and access any internet based service. How that’s accomplished is immaterial. Traditionally all three of those services had their own separate infrastructure. Today, the technology makes it possible to put all three services on top of the basic internet service. It was an easy decision to eliminate the legacy telephone wiring. These days, even in the event of a power outage, the need for a hard wired telephone is virtually non-existent. So many people have wireless cellular phones that a hardwired phone is no longer needed. The second cost saving comes from eliminating the Cable TV wiring. There is no need for Cable TV. Virtually every market has a TV service provider offering a digital set top box that can be connected via Ethernet or WiFi. Now I know what you’re thinking. A wired connection is going to be a better connection than a wireless connection. WiFi connections are prone to interference. Wireless technology has changed dramatically over the past decade. The older legacy WiFi technology used the 2.4 GHz spectrum. That region of the airwaves is unlicensed and you can literally have all kinds of interference showing up in that radio band. You can have garage door openers, microwave ovens, cordless telephones, and yes, lots of other WiFi access points. If you’re in a sense urban environment like NYC, it’s common to see the radio signal of 40-50 other wireless networks. All that interference can make for a very unreliable connection. The newer wireless technology uses the 5 GHz spectrum. As you go up in frequency, the shorter the distance the signal will carry. That’s both good and bad. It’s good because it means that you will experience less interference. It also means that your own radio signal won’t go as far. You may be required to install multiple wireless access points in order to get decent wireless coverage within your desired coverage area. As an example, we’ve designed a system that will use five access points in order to provide coverage for a 9,000 square foot home. The reason for having five access points is to have each one operate in a difference frequency band within the 5GHz spectrum. This means that each region of the home will be very close to the base station. We've replaced the legacy wiring with bundles of 24 optical fibers per building. This ensures expansion capacity for decades to come.  

On today’s show we are talking about a proposed change to the accredited investor definition by the SEC. The effect of the change would be to make more private investment options available to individual investors who have a level of financial education and sophistication. The purpose of today’s show is to open the topic for you to investigate further. I’m not a lawyer, and I’m definitely not a securities lawyer and my role is not to provide legal advice of any kind. The proposal would expand the number of people allowed to invest in private securities offerings.  Currently, people who may invest in those markets, known as accredited investors, must have the financial resources to withstand big losses: either $1 million in net assets, not counting their home, or at least $200,000 in annual income. The SEC proposal, which was approved by a vote of 3-2, would allow investors with certain qualifications, such as an entry-level stockbroker’s license, to sidestep the income and wealth thresholds The SEC’s rules which were enacted in 1933 were born out of a Depression-era mandate to protect Main Street investors from the vagaries of financial markets. If you go back to the 1920’s, the irrational exuberance of the markets was littered with fraudulent public offerings. Companies with no underlying business issued public offerings and cheated investors out of their life savings. The SEC estimates that $2.9 trillion was raised through private channels in 2018, versus $1.4 trillion in registered offerings. The fact is, the vast majority of private offerings today that are filed with the SEC are under Regulation D, part 506. Under a 506 offering, there is 506B which allows up to 35 non-accredited investors and an unlimited number of accredited investors. However, under 506B, solicitation is not permitted. Under 506c, offerings are only open to accredited investors who must demonstrate that they meet the accredited investor criteria. Offerings under 506c are permitted to be advertised and do not require the pre-existing relationship that is part of the 506b rules. The proposal is outlined in a 153 page document that you can download and read from the SEC website. There is also a mechanism and a 60 day period for collecting comments from the public, and this too can be done on the SEC website. The methods for submitting comments are outlined on the second page of the SEC proposal. Just in case you’re thinking that 153 pages is a lot to wade through, I suppose it is. But on each page, there are substantial footnotes. Some pages consist of about 25% actual text and 75% footnotes. Unless you intend to go through all the footnotes and references, it’s actually not too bad a document to read through. The proposal includes Adding “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Advisers Act; The proposal also includes Add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors; If and when these changes might be implemented is anybody’s guess. They could be amended between now and then. Even once enacted in law, they could be further refined by policies governing the implementation of the new rules. In the coming years, we can look forward to the possibility of an expanded definition for accredited investor that could make a larger number of investors eligible for the accredited investor definition. That, in turn could make the 506c offering an even more effective tool for syndicators and project sponsors to raise capital for real estate projects and other business ventures.

Owen Barrett from San Diego is a specialist in energy management. On today's show we're talking about the economics of solar power for multi-family apartment and commercial real estate projects. He can be reached at valueaddsolar.com.  

I take several days each year to get clear on my goals and to set quarterly goals. This is such a vital exercise. On today's show I'm talking with my friend Rich Danby about goal setting in front of a live studio audience. 

This question comes from Kyle. I am considering a new construction MF project. My business partner is a home builder and general contractor. Through my research on MF syndication it sounds like the majority of these deals follow the same cycle: - Value Add Building - Refinance once units are rehabbed to market value - Payback investors with refi money When it comes to new construction how does your deal cycle compare? Thank you Kyle for a great question. In many ways you are correct in drawing a parallel between development and a value add deal. Conceptually, they are exactly the same. But where they differ is in the details, and its in the numerous details that the traps can lie. When it comes to development, there are just a lot of moving parts and any one of them can trip you up. Like a value add, the goal is the same, to add value, in fact to create enough value that you can refinance the project and recover your initial investment for a long term hold with little to no cash tied up in the project. In your classic value add project, you perform light remodeling, you add washers and dryers to the apartments, you improve the amenities, and you increase the rent accordingly. When you move into the world of development, there are just so many moving parts. You may have to hire the engineers to design your site and prove to the city that you are not adding more runoff to the stormwater management system. You may be required to perform a traffic study to prove the existing road infrastructure can handle the increase in traffic. You may have to perform a shadow study to prove that your building won’t cast a shadow on the neighbours property. You will need to make sure the water, sewer, and utility infrastructure has the capacity to handle your project. Will you be limited by storm water management? Will you be limited by soil stability and the strength of the soil to support the weight of the building? Will the city allow you to get a curb cut to access the property in your desired location? Will the proximity to other properties limit your choice of building materials? Will you be required to use fire rated doors and windows? Unless you know the answers to these questions and more, you can be facing substantial cost increases that will completely catch you by surprise. Apart from quite a few details that can trip you up, it’s exactly the same as a value add project. Having people on your team who know how to navigate these complexities is key to having a successful development project. The second area of risk is in construction. Hiring an established general contractor who does large projects is essential. If you’re hiring the smaller GC’s, the ones that I call “2 guys and pickup truck”, your risk of having corners cut and failing inspections goes way up. You might pay a tiny bit more for a more established contractor, but your risk of cost over-runs goes way down. It’s also important to hire a GC who has experience in multi-family. The subcontractors who work on multi-family are completely different. The project management of the subcontractors is completely different from other forms of construction. We don’t have time to go into all those details on today’s show, but you must hire a GC who specializes in multi-family construction. Finally, you want to hire an attorney to negotiate your construction contract, but not just any attorney. You want someone who has experience negotiating and litigating these types of contracts. These contracts can be filled with landmines and you need a specialist who can spot and correct the risks.

I’m coming to you live on location from Key Biscayne Florida. One of the most beautiful places to visit in the US are the Florida Keys. The waterfront homes in the keys are a dream to me. Many of them are built up on stilts to protect them from the storm surge of the occasional hurricane. This strip of islands stretches all the way from Miami to Key West. From the very first Key, called Virginia key, down the Rickenbacker causeway towards Key Biscayne. Further south, Key Largo. The entire drive through the keys stretches for 118 miles or about 190 km. The state has a rule that the island chain has to be able to get everyone out 24 hours before a hurricane hits. And there’s just one road out. So there’s a limit to how many people are allowed to live in the Keys. Hurricane Irma in 2017 did considerable damage to properties on the keys. Overall in Monroe County, 27,649 homes experienced some degree of damage, including 1,179 homes being destroyed, 2,977 homes receiving major damage, and 5,361 suffering minor damage. Starting in 2023, no new building permits will be issued in the Florida Keys, a stipulation of a 1970s state mandate aimed at controlling development in the environmentally sensitive archipelago and ensuring timely evacuation of tourists and residents in the path of hurricanes. Because the Keys were designated an area of critical state concern, development there is regulated by a law called the Rate of Growth Ordinance, known as ROGO, which requires property owners to go through a myriad of steps that can take decades before they can build. Many of the thousands of people who have not built on their land haven’t done so because they are mired in the ROGO process. The question is, will the renovation of an existing property be allowed? As long as the density is not being increased, will the county allow an existing property to be redeveloped, to be improved? This has not been made clear. As a real estate investor, this kind of situation is precisely what I look for. I love to see situations where there is a supply demand imbalance. In this case, there is a constraint being applied on the supply side. When these types of conditions exist, the downside risk to property value is reduced. The demand for homes in the keys appears robust. The Keys have already survived a devastating category 4 storm. That has not deterred people from wanting to live there, from owning their own piece of paradise.

On today’s show we’re talking about what’s happening in France. I spend several months a year in France and I used to manage a team of 110 people in France for several years. I understand a little about French culture, and it’s very different than we’re accustomed to in North America. Unlike in the US and Canada, the business environment in France is highly dominated by labour unions. In fact, any enterprise having more than 50 employees must have a works council. That is a union. Unions in France are incredibly militant. When I was managing a team of microprocessor designers, professional electrical engineers, I was surprised to see them on strike one day, picketing in front of the building and being interviewed by the evening news TV show. The retirement age in France is 62. That compares with 65 in North America, and 67 in some other European countries. The math is pretty simple. Demographics says that entitlement programs in most countries are under-funded when you fast forward only a few years into the future. Mr. Macron wants to consolidate the country’s 42 different pension plans—each with varying retirement ages and benefits—into one universal system. Many civil servants, including teachers and rail workers, worry they could lose some of the advantages they enjoy under the current system. The contentious proposal includes a system of bonuses and penalties to incentivize people to work until age 64, two years beyond the legal age of retirement of 62 years. Unions reacted by calling on workers to hit the streets. Workers are taking to the streets in droves virtually paralyzing the country. The latest estimate from the French Interior Ministry is that over 800,000 people participated directly in the protests. Even towns like Toulouse that have a strong manufacturing base with companies like Airbus manufacturing aircraft are seeing tens of thousands of protesters clogging the streets, bridges, and central squares. The largest protest in Paris was estimated at 65,000 people and turned violent at times. The French are incredibly militant when it comes to protecting their social programs, regardless whether the math adds up or not. There is a feeling that somebody will take care of it. If I have a pension that’s been promised to me, then it’s not my problem. Somebody owes me my money. There is a sense of entitlement that is so deeply ingrained in the culture that anything that threatens any aspect of the an entitlement program is enough to bring people out into the streets in force. But you need to understand why this is the case. The work environment in France does not favour entrepreneurship. If you’re an employee in France, if you work for a company for one year plus one day, you are entitled to two years of severance if they fire you. In an environment where it’s very difficult to fire people, its also very difficult for people to get hired. So it has the effect of reducing mobility. When someone has a job, has an income stream, they become incredibly protective of it because their choices are perceived to be extremely limited. The loss of job, the loss of benefits, the loss of even one day of vacation per year is enough to trigger protests. But just in case you think this is a France only issue, don’t be fooled. We have seen organized labour movements have a larger voice in the US than at any time since the 1980’s. We’ve seen more strikes by teachers, auto workers, and hotel workers than in decades. Public sentiment is much more favourable toward unions where they have a 64% favourable view in eye of the public according to a poll by the Gallup organization. That’s the highest it’s been in half a century. I’ve long maintained that if you want to see your future, have a look at what is happening in Europe.

On today’s show we’re talking about the war on short term rentals. Communities around North America have been establishing new regulations designed to reduce the number and scope of short term rentals in their communities. Many communities are facing a shortage of affordable housing and the perception exists that homes are being removed from the rental market and put into the more lucrative short term rental market, putting an even greater strain on housing affordability. By making these investment properties illegal, the hope is that many of these rental properties would be returned to the long term rental market, or sold outright into the owner occupied market. A widely accepted definition of a short term rental is one where you rent to the same person for less than 30 days. Many cities have put restrictions on short term rentals and limited them to owner occupied properties. So if you have a spare bedroom in your principal residence, you can rent it out. Some cities have introduced licensing as a way of regulating the industry and keeping tabs on which properties are in the short term rental market. On today’s show we’re looking at some of the activity across several cities in North America. The City of Vancouver says its efforts to regulate short-term rental units and bring more long-term rental options back into the pricey housing market are working. Active short-term listings are down to around 5,000, compared to more than 6,600 before the regulations took full effect last September, the city said. More than 2,000 unauthorized units that were taken offline have not been re-listed. In Austin, whether renting out an entire home, an apartment or a bedroom for a single day or all 365 days of the year, local law requires the owner to register and license the property as a short-term rental with the city. The city counts 2,500 licensed units throughout the city; however, a third-party firm working with the city has reported over 10,000 properties advertising as a short-term rentals. The City of Nashville is undergoing tremendous growth with about 120 people a day moving into the city. This is putting a strain on housing supply and on housing affordability. They implement new regulations at the city level, which were then subsequently blocked at the state level. One year after state lawmakers blocked the city’s plan to phase out non-owner-occupied short-term rentals by 2021, Metro Nashville officials are revisiting not only where rentals can operate through their zoning ordinance, but they also increased the annual permit fee by more than 600%. In San Francisco, new rules governing short term rentals were implemented a couple of years ago. Any home rented out in San Francisco for less than 30 days must be registered with the city, and someone must live there at least 275 nights per year. An NBC News report suggests that about 45 percent of short-term rental applications are now being denied for what appear to be false residency claims, in which the applicants falsely state they are the “primary resident” of the home, which is a requirement for all short-term rentals. If you’re noticing a trend here, that’s no accident. Cities around North America are actively trying to remove short term rentals from residential zones, and they’re making sure that they don’t lose hotel tax in the process. If you’re contemplating making an investment in short term rentals, you definitely want to know that the city has completed their regulatory process. If not, you’re taking a huge risk of the rules changing after you’ve made a significant investment.

On today’s show we’re talking about opinions. The nice part about opinions is that there is no shortage of them. The world is unlikely to run out of them any time soon. Last week we reported on the podcast that Fannie Mae had published their housing confidence metrics showing a very high consumer confidence index as it relates to housing. A new report published by CCN paints a far more pessimistic view of the market. The report referenced new guidance from Home Depot which has lowered its guidance on both revenue and earnings for 2020. They cite several factors for the lower guidance. There is an acute shortage of homes at the entry level of the market. Homes in this category are those priced below $200,000. The housing market is also experiencing a shortage of mid-tier homes, that is, those priced between $200,000 and $750,000. The author draws the conclusions that the shortage of supply combined with a possible future increase in interest rates could cause the housing market bubble to burst in 2020. The author went on to say, “In all, the U.S. housing market is suffering from a lack of supply. This could prove to be its undoing next year as buyers are likely to be priced out of the market if mortgage rates continue to tick up. Americans are already under duress, as evident from four straight months of declining consumer confidence.” When I read things like this, I sometimes find it hard to make sense of the logic. So I read the article 4 times. Each time, I tried to follow the chain of logic that would lead to the outcome the author is claiming. Yes, the consumer confidence has fallen for four straight months. It fell from a high of 135 to 125.5. In the past month the index fell from 126.1 to 125.5. A measure of 100 is considered neutral. While it is true that consumer confidence has fallen slightly, it is still considered well into positive territory and is consistent with what the folks at Fannie Mae reported last week. The author says “Consumer confidence is also low” which is an outright misrepresentation of the data. I’m sorry, consumer confidence is not low, it has dipped slightly, but remains incredibly high, well above historic averages. For contrast, consumer confidence hit a low mark of 60 back in 2013 and didn’t reach 100 until mid-way through 2016. The author of the report seems stuck on pushing a particular narrative and is quoting numbers that actually contradict his conclusions. It’s almost like they’re asking the reader not be confused by the facts. When there is a shortage of supply and an excess of demand, it has the effect of pushing prices up. That’s exactly what we’ve seen. The shortage is driven by population growth and by the millennial generation finally getting into home ownership. The number of new homes constructed is not keeping pace with population growth. Where we are starting to see bargains is in the upper segment of the market. These larger homes are selling at a relative discount to the market on a per square foot basis. We call this price compression.  Unless the demand evaporates, we can expect continued upward pressure on housing prices at the bottom of the market. We are seeing prices fall in areas where people are moving out. So did Home Depot lower its guidance? What does it really mean, and what is driving it? Could it be that a smaller number of homes on the market would in fact reduce the revenue at Home Depot as the author suggests? I read the entire transcript of their investor conference. The author has it wrong. In my view the author of the article has an agenda. They’re trying to paint a picture that the real estate markets have some downside risk. I get that. I have no problem with having that point of view. If the author wanted to hi light the downside risks, there’s ample data they can find to make that argument. There’s no need to make stuff up.

On today's show, I'm talking with George about how to maintain liquidity in your business. Having cash on hand is vital for dealing with the unexpected. I love George's practical wisdom and common sense approach. 

Josh McCallen is the CEO of Renault Winery and specializes in redevelopment of distressed resort properties. On today's show we talk about what it means to be a parent and integral to the family when the  business life of an entrepreneur can pull you in many other directions. Join me for a very intimate and vulnerable conversation. 

Today is another AMA episode, Hayden from Atlanta asks: I received an appraisal which in my opinion does not reflect an accurate picture of the property value. The comparable properties listed in the report include agricultural land with zero entitlements, versus my property which already is zoned for development, is fully paved and has 46,000 SF of buildings on it. The appraiser ultimately ignored the comparable properties and used an income multiple approach. But the cap rate he chose was a national average which does not reflect the local market conditions in South Florida. I understand that the appraisal process must be independent so that the bank can have an objective view of valuation. But this one is out to lunch. What do you recommend? Hayden, This is a great question. Unfortunately, this type of situation is far more common than you might think. Fortunately, it sounds like the errors are pretty grave. The most difficult situation to correct is the appraisal that’s only a few percentage points off. This one sounds like it’s way off. You are completely correct in saying that the appraisal must be independent and you can’t be seen as directing or otherwise tainting the appraisal. You want to keep the communication to the appraiser through the lender and under no circumstances should you communicate directly with the appraiser. If you can get a hold of a market study for your submarket, you may be able to ask the lender to direct the appraiser to narrow their radius and use local data and not national averages which are not meaningful. A third party market study should align with the appraisal quite closely. By showing the lender that the market study and the appraisal are far apart, you can likely convince the lender that there is a problem with the appraisal. The lender can have a dialog with the appraiser, but you can’t. I had a recent situation earlier this year where just like in your situation, the appraiser used five properties in their comparison. Three of the properties were not good comps at all and like you, compared land that was zoned agricultural with land that was zoned for development. When we replaced the bad comps with relevant comps, the picture changed considerably. Finally, you can research who are the best commercial appraisers in the submarket and provide a list of three to the bank, asking them to choose a new appraiser. This will requires paying for a new appraisal, and it could delay the closing date. If you need to delay the closing, you can often negotiate an extension with the seller by offering them an increase in the earnest money deposit, along with a daily interest charge for every day that the closing is delayed past the original closing date. The purpose of the daily interest is to cover the holding cost for the seller so that they don’t incur any losses as a result of the delay in closing. It shows the seller that you’re serious about closing and you should let them know that the cause of the delay was out of your hands. These types of situations are incredibly common and have to be handled very delicately. Sometimes a bad appraisal can taint a loan approval. I’ve had situations in the past when a bad appraisal meant abandoning a lender and starting fresh to get a new loan approval from a brand new lender and a completely new appraisal.

On today’s show we’re talking about home buyer sentiment. The folks at Fannie Mae have some of the best research in the country and last week they published their The Home Purchase Sentiment Index® (HPSI). It is a composite index designed to track consumers’ housing-related attitudes, intentions, and perceptions, using the net results of six questions from the National Housing Survey® (NHS). The index increased 2.7 points in November to 91.5, reversing the decline from last month and re-approaching the survey high set in August. Three of the six HPSI components increased month over month, including large increases in the percentage of Americans who believe it’s a good time to buy and that home prices will go up over the next 12 months. The data guessed correctly that the Federal reserve would not change rates and that’s exactly what they did. The Fed also signalled that rates would remain steady for some time to come. The analysis of the data mirrors what I’m seeing first hand in several markets. We are seeing price increases at the entry level in the market. The lower interest rates are creating conditions that enable first time buyers to bid up the price at the entry level. There is an acute shortage of housing at the entry level and many first time buyers fear being frozen out of the market. This is creating frothy conditions at the affordable end of the market, even if prices at the top of the market are flat and in some cases slightly down. So what does this mean for real estate investors? It means that we can expect some movement out of rentals into starter homes for first time buyers. Those leaving rental accommodations will be primarily millennials who are getting married, having children, or otherwise looking to buy a first home. We are seeing high variability in labor costs from market to market depending on the supply demand balance of construction labor. This translates directly into construction cost. Even a few percentage points difference in construction cost can affect the price of starter homes and the financial viability of new development projects. The result is that more and more developers are building smaller homes in order to maintain affordability, and they are focusing more on density. This means more townhouses, more stacked townhouses, and more condos. In higher priced markets, a starter home is not a detached home, but a condo. The populations of both the US and Canada are growing. We expect about 0.9% population growth in the US this coming year and about 1.6% in Canada. That translates into demand from an additional 2.9M people in the US and about 438,000 in Canada. New construction in the US is expected to maintain an annual rate of about 1.32M units. That’s barely enough to keep pace with the population growth. When developers In areas that have excess demand, we can clearly expect prices to rise. Areas that are losing population, like the traditional rust belt addresses can expect prices to remain flat or increase modestly. Sunbelt addresses where population growth, combined with migration inside the country are seeing very strong demand, in excess of supply. These are the market conditions that I find interesting as a real estate investor. The same short list of markets keep coming up. This includes Nashville, Atlanta, Dallas, Houston, Charlotte, Raleigh Durham, Austin, Orlando, to name just a few. If you can find opportunities to acquire development land in the path of progress in any of these markets, you can often create a tremendous amount of value. Remember, it’s population growth that drives demand, and jobs that drive the ability to pay.

Today’s episode comes to you thanks to Wayne in Austin Texas. His keen eye noticed that there might be some changes coming to the building code in Portland Oregon. In reference to the new initiative in Portland, Wayne asks, “Victor, will this kill commercial and residential investment in Portland?” Portland is not immune to a growing homelessness problem. Like San Francisco, Los Angles, Miami, New York, and Seattle, Portland is overrun with people sleeping in public spaces and on private property, many of whom suffer from drug addiction and mental illness. It’s a large and growing social problem that many of these people who desperately need help are not getting the help that they need. The state’s one mental hospital, Dammasch, which opened in the 1960’s was overcrowded and closed its doors in 1995, and released its patients with no follow up care, turning hundreds out on to the streets, ill-equipped to handle living on their own. Portland has the dubious honour of having the worst homelessness problem in the nation. The city estimates its homeless population in excess of 14,000. Now the City’s Planning and Sustainability Commission has accepted language into its recommendation to City council that would have new construction be required to incorporate mandatory “rest spaces” where the homeless can get safe shelter. Every city has the right to have their design guidelines. These define the character of the city. The preamble for the design guideline says that proposals that meet all the applicable guidelines will be approved, and those that don’t will be denied. The fact is, the design guidelines contain terms that are in fact at odds. Design is always a tradeoff of conflicting requirements. An absolute statement that says all guidelines must be met is a mathematical impossibility. In practice, it means that the approval will be at the discretion of the review board. The commission which writes and enforces the city’s building codes, approved a change to building guidelines last month that would require new construction to feature “opportunities to rest and be welcoming” for those who do not number among that building’s residents or customers. This does not apply to all new construction. It applies only to projects of a certain size. It applies for buildings taller than 55 feet, or more than 40,000 SF in buildable area. A review of the minutes of the meeting shows the motion from Commissioner Magnera where he says that wants to propose a change to the language to say that spaces should “Provide opportunities to rest and be welcome, pause, sit, and interact”. During the exchange in the meeting, Chair Schultz said: “I’m supportive but am a little concerned about what it means to “rest”... does this relate to sitting or sleeping or both?“ Commission members were asked for clarification on what the new recommendation meant. All of them refused to clarify the language. After the meeting, the chair of the commission, did offer a written statement. He said, “how private development can provide places for people to feel welcome and safe, as well as allow space for people to rest, especially in light of our current housing shortage.” Design guidelines like these are not the worst we’ve seen. California has become much more onerous by requiring solar power generation for all new construction, they’ve outlawed gas stoves for new construction, and they are requiring a long list of additional items to comply with the new regulations. The short answer is yes, this increase in requirements will deter some new construction. Will it eliminate it? No, but it’s becoming death by 1,000 paper cuts. It’s no surprise that Texas is leading the nation’s growth and is not burdened by many of these initiatives.

On today’s show we’re talking about the office real estate market. And no, we’re not talking about WeWork. I had the opportunity to take over a co-working space that had been operated by an accountant. they had the master lease for about a 7,000 square foot office space that had been divided up into small offices ranging in size from 100 square feet up to about 800 square feet. There were a total of 25 separate spaces, of which all but three were leased. The accountant who owned the accounting firm died, and the wife of the accountant didn’t want to manage the real estate. In fact she was also in the process of trying to sell the accounting firm. The owner of the building was a major national landlord with billions in assets. The offices were renting for $500 to $800 per month for the smaller ones capable of housing one to two professionals. The accounting firm had fallen behind on its rent payments to the building owner was in default under the terms of the lease. The owner had since engaged with another company in the co-working space who ran the floor for a year and they too had fallen behind on their lease payments. The building owner had finally taken over operation of the floor, but in reality didn’t want to be dealing with 25 individual tenants. I already was running another small shared office rental business and the building approached me to take over the running of this 7,000 SF space. I reviewed the financials and the master lease agreement. The tenants were paying below market rents. The expenses were pretty simple to analyze. There was the rent for the entire floor, a few miscellaneous expenses for the photocopier and printer, insurance, and the salary for the receptionist for the floor. The two major expenses were rent at $14 per SF NNN, about $28/SF gross, and the receptionist. The rent wasn’t a bargain, but it was certainly quite fair for a modern B-Class office building. As the business was currently operating, it would break even at 95% occupancy and would generate about $40,000 a year at 100% occupancy. I might be able to raise the rents over time, but it wasn’t clear how many tenants would seek alternatives if I increased the rent. The business would generate a profit if I eliminated the receptionist, but then there would be nobody apart from myself actually working inside the business. That was not something I was prepared to do. It was an inexpensive way to expand in the co-working business. I would inherit all the furniture, all the equipment. It was an instant revenue stream. As is, the business represented too much risk. There was no way I would sign a 5 year lease complete with personal guarantees when I had no guarantee that the tenants would stay with me at a higher monthly rate. So I decided to decline the opportunity. In the latest co-working news, WeWork competitor RocketSpace is pulling the plug on its operations. RocketSpace is a San Francisco-based coworking startup founded in 2011. If RocketSpace files for bankruptcy, it will join another San Francisco coworking company called Sandbox Suites, which filed for Chapter 11 bankruptcy reorganization in April. The prices at Sandbox are pretty attractive if you’re a tenant. An office with two desks costs $1,000 per month. That includes 10 hours of free use of a meeting room each month. I’m talking about an office in San Francisco or in Silicon Valley. That’s incredibly cheap. The problem with these co-working businesses is that the labor costs are high for the number of tenants. A co-working space doesn’t really function properly with zero staff, and the front office staff doesn’t offer enough perceived value for the tenants that the customers would be willing to pay a premium for it. None of these companies have a profitable business model. I couldn’t even make the numbers work with zero capital investment, taking over an existing business.

On today’s show we are talking about elementary school arithmetic. It seems to me that elected officials should be able to perform third or fourth grade arithmetic. Multiplication and division would be a bonus, but we will settle for addition and subtraction. Amazon announced last week that it had leased about 335,000 SF of office space in the Hudson Yards project on Manhattan’s west side. Hudson Yards is the project that was built on the old rail yards that bordered the shipping piers along the Hudson River. That was back in the day when shipping came directly into Manhattan. Today, most shipping commerce comes into much larger container ship terminals in Newark NJ. The Hudson Yards project was the brainchild of the Trump Organization and was more than 20 years in the making. The space will house some 1,500 employees. This despite the earlier Amazon announcement to pull out of locating the so called HQ2, satellite headquarters in Long Island City. The original plan would have brought 25,000 direct jobs and nearly double that number in pull-through employment. In response to the Amazon announcement, senator Mike Gianaris issued a press release on Friday declaring victory over Amazon. He said, “Amazon is coming to New York, just as they always planned. Fortunately, we dodged a $3 billion bullet by not agreeing to their subsidy shakedown earlier this year. Now, we must enact reforms to our economic development programs to ensure no company can seek to take advantage of the public again.” Since Amazon’s decision to leave New York in February, Senator Gianaris introduced legislation to ban secrecy clauses in economic development agreements, de-link state opportunity zone tax breaks from the federal tax code. I don’t have a political axe to grind in any of this. I do have a strong opinion that arithmetic has no political affiliation. One plus one equals two. 25,000 jobs is a lot larger than 1,500. A tax reduction is not the same as a government grant. In order for Amazon to benefit from the reduction, they would have to pay taxes, more taxes than NYC and NY state are collecting today. The addition of 1,500 jobs is positive. But it’s really a loss of 23,500 jobs, instead of a loss of 25,000 jobs. The loss of 25,000 jobs was entirely the work of a few politicians actively doing the unfathomable. New York has lost considerable population and considerable tax revenue in the past few years. One million people have fled New York City and the tri-state area—which encompasses New Jersey, Connecticut and Long Island—in the last nine years. According to Bloomberg, almost 300 people are moving out of the area per day. When politicians make patently false statements in order to aid their narrative, they erode the political system as a whole. Perhaps senator Gianaris would not mind a system whereby his income would be reduced every time he utters falsehoods. He probably would declare that consequence to be a victory too. He could use the same math that argued Amazon was fleecing the taxpayers of NY. Reduction of revenue for the state of NY and NYC is hard for the city to tolerate. NYC has gone through considerable resurgence since the 1970’s and 1980’s when the city was on the verge of bankruptcy. They could not repair the crumbling infrastructure. The had 1.3M people on welfare at that time. After Mayor Giuliani took office, that number was reduced to 500,000. Nearly 800,000 people went back to work under Mayor Giuliani. The fact is that business leaders know how to do math. The issue is not just with Amazon. NY has sent a signal to the business community that it is no longer open for business. When the most basic arithmetic is distorted to reflect a particular narrative, every business leader can see it for what it is.

Dr. Jeff Anzalone specializes in helping doctors and dentists navigate the complex world of main street investments. In this episode we discuss some of the challenges unique to these investors making good investment decisions. 

On today’s show we’re talking about the complexity of agreements with contradictory language. One of the realities of the real estate investment business is the need to pay close attention to all of your contracts. There are construction contracts, lending contracts, purchase contracts, letters of intent, employment contracts, insurance contracts. Contracts, contracts, contracts. It’s often the case that contracts are put together using a template that has standard terms, and then the contract is modified by terms in attachments, or in some cases subject to the terms of other agreements that are referenced in separate documents. A simple example of this is the standard AIA construction contract. This standard form is used extensively in the construction industry and is widely accepted as fair to both owners and general contractors. But even a straightforward item like a construction contract is far from straightforward. There are the general terms referenced in the AIA 101 template. These terms are then modified by the AIA 201 contract. These documents then refer to the architectural drawings. The architectural drawings then refer to the architectural specifications. The AIA documents also refer to the general contractor’s schedule, and the General Contractor’s Basis of Estimate document. It’s common to require five documents open at once to get a complete picture of what the document is actually saying. It’s pretty common for the base contract to say that it is subject to the terms of the schedules and attachments. That means that if the base contract says the building is going to be painted blue and the architectural drawings say it is to be painted brown, then the drawings will take precedence. Where it really gets complex is if one of the other attachments says the building is to be painted yellow. Which of the contradictory attachments will apply? It’s not immediately clear in all cases. You might read the contract one way, and the builder might read the contract another way. I’ve heard many investors say that contracts are not their strong suit and they rely upon the advice of their legal counsel to keep them out of trouble. That’s all fine up to a point. The lawyer will probably do a good job of keeping you protected against the risks and pitfalls of legal challenges to your contract. What they can’t possibly know is whether you want the building painted blue, brown or yellow. Only you know that. You can read the architectural drawings and see that there is an Ethernet connection in every room on the drawing. But there may be a line item in the basis of estimate that limits the number of Ethernet connections in the building. These need to be taken together. The complexity of not seeing the entire picture in a single place adds considerable risk of misunderstanding. Legal documents are not drafted with hyperlinks to enable quick and easy reference to items that may affect the meaning. So how do you make sense of this? Unfortunately, there’s no shortcut, no easy button. It requires all parties of the contract to read and understand what the contract says. Reading and understanding the contracts is incredibly detailed and painstaking work. We have a recently completed building design where the specification document alone that clarifies the architectural drawings is 650 pages. Attention to detail may not be your thing. It might not be your strong suit. But there had better be someone in your team whose job it is to pay attention to the details and make sure they reflect what you want the contract to say, not just the legal risks. Your lawyer often won’t look much past the legal aspects. Put on a big pot of coffee, get a comfy chair and prepare to dig into the details.

On today’s show we are talking about a specific case study of a property that has been on the market for nearly 5 years. This story is a cautionary tale of what can happen if you choose a property in the wrong location. This property is a gorgeous 7,000 square foot home, that’s about 650 square meters for those of you who measure in metric. This home is located just outside Portsmouth NH in a beautiful residential neighborhood where all the homes are on large estate lots of about 2 acres. All of the homes in the area range in price from about $800,000 to about $3.5M with numerous homes in the $2.5M range. It is located less than a mile from the ocean. The interior of the home features an extraordinary kitchen with a granite island that is large enough to play ping pong on it. This exceptional property is architecturally driven at every turn. Walls of French doors lead to the deck from the dining room, living room and entry hall. Magnificent center hall invites you to the rest of the house. Master suite includes bath with Rare Egyptian Alabaster counter tops, custom designed mahogany vanity, Onyx tile floor, oversized walk in shower, 18X13 walk in closet and access via rear stairwell. The solarium is a beautiful space with a spectacular view of the garden. The entire back of the home is a wall of windows. The area is a bedroom community for the wealthy who may have built businesses in the Boston area. This is a truly gorgeous home. It was built in 1997. It was purchased in 2003 by a friend of mine who owned several luxury properties in the northeast. He was an investor in several of our projects over the years and sadly he was diagnosed with cancer and died a couple of years ago. His lovely wife still lives in the home, and quite frankly they’ve been trying to sell it since 2014 to enable them to focus their energies on their homes in Martha’s Vineyard. They bought the property in 2003 for $1.65M. They listed the home for the first time at $2.3M back in 2014. It was not selling and in fact was only occasionally getting showings once every couple of months. They lowered the price to $2M back in 2015. Then they lowered the price another 5% in 2016, and then another 10.5% later that year. The home is currently for sale at $1.6M,  $50,000 less than the purchase price in 2003. The property has been on the market for 144 days and it’s still not selling. Let me put this in perspective, if you bought this home today at $1.6M, this 7,000 SF home would be selling at $233 per SF. You could not build the home in today’s market at that price. With the level of custom finishes in the home you would spend easily $250 per SF in hard construction. If the add the cost of the land, the design, the permits, you would be well over $350 per SF to build a comparable home today. On the surface, at $233 per square foot this looks like the very definition of a bargain. So why has the home sat for 144 days on the market and not sold? It turns out that the property taxes in this community are a bit high. In fact the current property taxes back in 2017 were a little above $31,000 a year. Even if you buy the house in cash with zero debt, your monthly home ownership cost is over $2,500 a month just in property taxes. I believe that the high tax environment is what is keeping buyers from jumping onto this bargain. You know that if the value goes up, which is something that almost every home owner wishes for, the property taxes will go up too. There is nothing physically wrong with this property. It’s a gorgeous home in a beautiful location. It’s been impeccably maintained, and the buyer could buy it below replacement cost. Unfortunately the cost of ownership is off the charts because of the property tax structure. I don’t know of any people who would willingly move to take on that high a property tax burden.

We just spent 3 intensive days on the beach in Mexico working on goal setting for 2020. It was not exactly on the beach. We set up our conference table inside a straw hut called a palapa that was situated at the end of a pier out over the water. The pier was surrounded by schools of fish, needle fish, barracuda. It was a pretty magical and inspiring place to do this kind of deep work where there was a panoramic view of the beach to one side and the ocean stretching to the horizon You can’t improve something you are not measuring. The business world is filled with performance metrics. Revenue, profitability, efficiency, return on investment, gross profit margin, inventory turns, cash flow, vacancy, delinquency rate, accounts receivable aging. The list goes on and on. We establish these measures to improve business performance. It’s said that anything which is actively measured has a general tendency to improve. The simple act of measuring brings focus and attention to that metric. Sometimes businesses get off track by focusing on the wrong measures. You only need to look at companies like Sears, Macy’s and General Electric to see examples of companies that did a great job of optimizing the wrong metrics. Today’s show is about setting expectations, not so much with others, but with yourself. How often we as humans latch on to measures that we use to define our own sense of self worth. For some people their sense of worth is attached to their career, perhaps their title. A lawyer who needs to make partner before the age of 40. For some it’s the house they live in, the car they drive. How much money they have in their bank account. There are so many metrics that we unconsciously track on a daily and weekly basis. Some people measure their weight, the number of hours they sleep, the number of steps taken each day, the number of likes on a social media post, the miles per gallon they get in their car, the percentage increase in their stock portfolio in the past year, the value of their home. How many people wished you happy birthday on Facebook? How much did your spouse spend on your birthday gift? How big a discount did you get when you went shopping for holiday gifts? Think about it. In each one of these measures, there is an entire story wrapped up in what a good number means. More importantly, there’s an opportunity to feel bad about yourself if the number isn’t what you hope it to be. What does a number actually mean? And who decided what a good number or a bad number means? Do any of these measures have any real meaning that reflects truly upon your worth as a human being? How many people measure the quality of the time spent with their children, the hours spent hugging a loved one, the time spent laughing per day? So often people lose their way by focusing on measures that are not truly in alignment with the core values that will bring fulfillment. In the same way that companies can go bankrupt by optimizing the wrong measures, individuals can become emotionally bankrupt by focusing on the wrong measures. Sometimes things get measured simply because they’re easy to measure, not because that measurement is truly important to improving my life. The fuel efficiency of my car is not going to fundamentally change the quality of my life for better or for worse. But it is easy to measure. So many people find themselves climbing the ladder of success only to find when they get to the top that they leaned the ladder against the wrong wall. I’m going to be taking three days in the next week to complete the work on my goals for 2020 and beyond. But before I can start working on my goals, I need to get clear on my values, what’s important to me. Once I have that clarity, setting the goals becomes obvious.

Kevin from California asks, I currently live in California and would like to know which other states are good for investments within the next 5-10 years and why? Kevin, This is a great question. The first thing to remember is that real estate is hyper local. We will come back to discussing the hyper local aspect of investing in a minute. The direct answer to your question. Generally speaking I’m looking for areas where there is influx of jobs, and influx of population. That increase in demand in the presence of modest supply means that we should experience increasing prices with all other things been equal. I like to pay attention to demographic trends. I like low tax states where both residents and corporations pay a minimum of tax. I also like states where there is a demonstrated flow of both jobs and population. This means places like Texas, North Carolina, Florida, Nevada, Arizona, and Alabama. You want to choose places where there is an already an established flow of migration. But in each of these states there are locations that are not suitable. So if you choose a state like, say, Florida, there are local areas that are great investments, and others that aren’t. I might be much more interest in Fort Myers than, say, Ocala. There is a clear migration flow to certain locations in Florida from cities in the North East like New York and Boston to communities like Boca Raton, Jupiter, West Palm Beach. There is a clear migration flow from California to Texas, Nevada, and Arizona.  In fact, Some 660 companies moved 765 facilities out of California in the past two years, and Dallas-Fort Worth has been the beneficiary of many of the relocations, according to a recently published report. Discount brokerage Schwab is among the latest announcements. The company has already moved several hundred roles from its San Francisco location to Dallas. The latest announcement will move about 400 jobs to Dallas to be housed in a new campus being built in Westlake Texas. Even Uber is moving it headquarters to Dallas from the SF Bay area. One of the culprits that is often cited is the increasing regulation that is making it difficult to do business in California. One of the latest is a law in California that was passed in September that requires companies to hire workers as employees, not independent contractors, with some exceptions. The law is intended to give basic labor rights and benefits to hundreds of thousands of California workers now classified as independent contractors. This is a major shift that fundamentally alters how businesses conduct themselves. So you want to pay close attention to the specific moves that are taking place. You want to look at the migration of several hundred jobs to a specific office location and then draw a circle of a few miles around that office and see what the dynamics are within that radius. You want to see where the shortage is. There might be a surplus of 3-4 bedroom residential properties and a shortage of one and two bedroom properties. You also want to look at asset class. Maybe the shortage is in single family residential, perhaps apartments, or maybe self storage. There are other dynamics affect the value of property. Specifically the distance from a major airport affects property values significantly. The further you get from a major airport, the more prices drop generally. If you look along the Gulf coast, you would find that properties in towns like Englewood are very inexpensive, including waterfront properties. These towns also lack major industry. As you get closer to an airport heading North to Sarasota, prices increase. Higher prices are not something to shy away from. They’re a reflection of higher demand. Even in those higher priced markets, there are opportunities to acquire bargains and create tremendous value. Again, these moves are subject to the local supply and demand balance.

On today’s show we’re looking at why prices for real estate in Australia fell by 8.4% in the past two years and we’re answering the question as to whether what happened in Australia could happen elsewhere in the near future. Australia’s median house price dropped 8.4% between July 2017 and May 2019. With only a handful of larger price dips during the late 1800s, the slump surpassed the recession of the 1990s and 2008 financial crisis, making it the worst ever recorded in recent decades. markets in Sydney and Melbourne were hit the hardest during the downturn, which lasted from mid 2017 until earlier this year, with an average price drop of 22.5% in Sydney and 32.1% in Melbourne. Following a boom that peaked in mid-2017, prices began to fall due to tighter lending conditions, low buyer confidence and changes to Chinese investor loan limits. The government launched a Banking Royal Commission inquiry into lending practices, which commenced in late 2017 and concluded earlier this year, resulting in a crackdown on lending practices by big banks in Australia. This government-led inquiry, triggered by reports of misconduct by certain Australian banks, was a major reason house prices began to fall.  Much like the 2008 crisis, the downturn in Australia was the result of significantly reduced availability of credit in the market. At the same time, demand from Chinese buyers, Australia’s largest offshore property investors, also slowed in 2017 and 2018. We’ve seen the same dynamic in the US and Canada. China’s government has imposed tighter capital controls, making it harder for residents to move money out of their own economy. There is still money coming into the market from China, but the numbers are down significantly. Chinese buyers have a cap of A$50,000 (US$33,903) they can take outside the country. Much like the 2008 downturn in the US, the availability of credit is more important than the interest rate. When financing is hard to come by, the balance between buyers and sellers changes dramatically. If the only buyers are cash buyers, sellers will drop their price in order to sell. Proof that the problem is a credit problem rather than a real estate problem is the fact that since May, lending has opened up and prices in Sydney and Melbourne have risen almost 6% in both those markets since May. It’s fair to say that the issues in Australia were unique to that country. But it goes to show that something as simple as an investigation into banking practices can, at least temporarily crater the real estate values in an entire nation. So the question is, could we see a credit crunch again in the US, in Europe, or in Canada? If so, what could be the cause? We often think about the levels of sovereign debt that so many countries around the world have signed up to. This includes every major economy in the world. We’re talking about the US, China, Japan, the UK, Canada, Italy, and yes, even Switzerland. So far the problem in Australia was limited to a regulatory issue. There was no domino effect. There was limited counter party risk. You might be wondering, what is counter party risk again? Well, I’m glad you asked. Counter Party risk happens when an asset on my balance sheet appears as a liability on your balance sheet. If you fail to pay me, then I’m at risk of defaulting on my obligations to the liabilities on my balance sheet and the dominos start to fall. Clearly the political will does not exist for any one country to trigger the next financial crisis. The point is that this time the problem was localized to Australia. No dominos fell, except in Australia. Once the dominos start to fall, there is almost no stopping it from happening.

Welcome to December. This is the last month in the current decade. Hard to believe that the 2010’s are almost over. Today is the book of the month episode. On the first day of each month we review the book of the month. In order to be considered for a book of the month the book has to meet a very simple criteria. It has to be impactful enough that it will change your life or your perspective on the world. Whether it does or not is entirely up to you. You might read the book and comment on what a great book it was. But if you don’t internalize the book and make a part of you, you’re missing the point. The author of this month’s book is none other than Malcolm Gladwell. He has written several other ground breaking books including Outliers, Blink, David and Goliath, The Tipping Point, and What the Dog Saw. Each of these books would have easily met the book of the month criteria. Malcolm Gladwell is also host of the Revisionist History Podcast in which he goes back through history and looks at something that happened and examines underneath the covers. At heart, Malcolm Gladwell is a journalist. He’s a Canadian from Toronto and currently lives in NYC where he writes for the New Yorker Magazine. Our book this month is called Talking with Strangers. Like his previous books, Gladwell takes real life stories and tries to dig beneath the covers to find insights, to find common threads of new learnings and to illuminate the blind spots that are hidden in plain sight. The premise of the book is that communication happens easily with people whom we are familiar with, whom we understand The authors examples are diverse. The book is framed around the story of a woman from Chicago who moved to a small town in West Texas to restart her life in a new setting. She had secured a new job, and on her first day in town was stopped by a police officer for a questionable traffic stop. The sequence of events that unfolded found this innocent woman being dragged from her car, handcuffed and brought into custody, and eventually dead three days later in a jail cell, never having committed a crime of any sort. The author looks at how we process communication. A case study of the TV sitcom “Friends” showed that viewers of the show were able to follow the story line of the show with the audio completely turned off simply by watching the body language and facial expressions of the actors on the show. The accuracy of the interpretation was incredibly high. It shows that many of us rely upon these cue far more than we know. But this is a TV show and the actors are paid to do a great job of acting.  In the real world, a smile isn’t always a signal of happiness. There are those people who make up a small percentage of the population who have learned to disconnect their emotions from their body language. Some go on to become criminal masterminds like Bernie Madoff. Others go on to become championship poker players. It is full of case studies that individually can lead you astray. Taken together they reframe the way you will look at interactions. Malcolm Gladwell isn’t shy about confronting difficult topics. He chronicles the case study of the negotiations between Prime Minister Neville Chamberlain of the UK and Adolf Hitler in 1938. Chamberlain’s negotiations with Hitler are widely regarded as one of the great follies of the second world war. Chamberlain fell under Hitler’s spell. He was outmaneuvered at the bargaining table. He misread Hitler’s intentions. In the book Gladwell argues that something is very wrong with the tools and strategies we use to make sense of people we don't know. The idea of the book of the month is to change your life or change the way you see the world. Talking with Strangers by Malcolm Gladwell will definitely deliver on both those promises.

Logan Freeman is based in Kansas City where he helps out of town investors with their portfolios large and small. 

Today's show is part 2 of a question from yesterday's show.  Anthony and Julia from Brooklyn ask. Hi Victor. I’ve been listening to your podcast for about a year now and appreciate what you’re doing!  I have my wife, who is an architect, listening in now too! We want to invest in other real estate but with two young boys we don’t have a lot of disposable income to work with. We own and live in a double duplex in Brooklyn. We bought in 2013 and after significant work and neighborhood development its has more than doubled in value. On our block alone there is a lot of studio and one bedroom apartment development going on.  We’d like to access some of the equity we have built up in our property.  We’ve been renting the lower unit short term for about 4 years, but that business is getting less attractive.  We are considering condominium conversion and selling half to capture money to buy other property or renting out both units and taking out a HELOC or do a Cash Out Refi. Ideally we’d like to hold because the neighborhood has a lot of growing yet to do.  Our interest rate seems kind of high at 4.875%. What are your opinions of Helocs vs Home Equity Loans for less experienced eager to grow investors? Thanks for taking the time and we look forward to learning more from your show! Anthony and Julia On yesterday’s show we talked about the differences between the types of debt offerings that could be used to invest in more income properties. On today’s show, we’re going to focus on what to do with the money when you have it. You’re probably thinking the same way that most DIY investors do, save up some money for a downpayment, put down 20% in equity, borrow 80% and add one more property to the portfolio. That’s definitely one way to do it, and in one sense there’s nothing wrong with it, depending on what your goals are. In this context I”m going to speak directly to your wife Julia. Julia, you’re an architect. My mom was the second woman in history to graduate in architecture from Cornell University back in 1945. She has her stamp on several landmark buildings in NYC. You entered university to get your degree in architecture, knowing that it would be a huge commitment of both time and money in order to get that degree enabling you to practice as an architect. You didn’t say to yourself, I want to be an architect, but it’s hard so I’ll take a small step and get a degree in drafting. Just like someone wanting to be a doctor doesn’t say, that’s hard so I’ll go to nursing school instead. So I want you both to look at your investment goals with a longer view. If you truly only want to own a handful of apartments in the NY market and you are willing to get there slowly over the next 20 years, then the approach you’re taking is perfectly fine. The number one mistake I see rookie investors make is to run their project with too little capital. You want to make sure that in addition to raising the money to purchase the property, you maintain a healthy reserve fund to handle any surprise that the market might throw at you. You might have a water heater fail, or an air-conditioner fail and all of a sudden you’re digging deep into your pocket for a capital repair that wasn’t in the budget. Spend time with other experienced investors in your area and learn from their mistakes, rather than going and making the rookie mistakes yourself. It’s much cheaper that way. Like I said, investing in small properties is a perfectly viable strategy, if that’s in line with your ultimate goal. But if you want to create a stream of residual income that can provide multi-generational wealth for you and your family, then you may want to think bigger. If you’re thinking bigger, then you may want to jump to the next level and skip the time wasted on small stuff.

This question is from Anthony and Julia in Brooklyn. Hi Victor. I’ve been listening to your podcast for about a year now and appreciate what you’re doing!  I have my wife, who is an architect, listening in now too! We want to invest in other real estate but with two young boys we don’t have a lot of disposable income to work with. We own and live in a double duplex in Brooklyn. We bought in 2013 and after significant work and neighborhood development its has more than doubled in value. On our block alone there is a lot of studio and one bedroom apartment development going on.  We’d like to access some of the equity we have built up in our property.  We’ve been renting the lower unit short term for about 4 years, but that business is getting less attractive.  We are considering condominium conversion and selling half to capture money to buy other property or renting out both units and taking out a HELOC or do a Cash Out Refi. Ideally we’d like to hold because the neighborhood has a lot of growing yet to do.  Our interest rate seems kind of high at 4.875%. What are your opinions of Helocs vs Home Equity Loans for less experienced eager to grow investors? Sorry for the sprawling question but I hope you can speak to some of these issues. Thanks for taking the time and we look forward to learning more from your show! Anthony and Julia Let’s look at the condo conversion option. While it’s certainly possible to do a condo conversion, it’s not very practical for such a small condo project. The overhead of managing a condo corporation for the rest of time quite frankly is hardly worth it for two units. The shared common elements between the two units can become a source of friction between unit holders. For a small property you’re better off keeping it all together and not subdividing it in my opinion. A sale of the lower unit that you don’t occupy would free up some equity, but it might also be considered a taxable event.  A refinance on the other hand isn’t a taxable event. It offers you a lot more flexibility in terms of what to buy, and when to buy it. Let’s start by describing the difference between a home equity loan and a home equity line of credit. A home equity loan would basically be a refinance of your existing two unit property. It would be for a fixed amount of money and rates these days a pretty good. You have a couple of choices in this. If you work with your existing lender, they may be willing to put a second loan on the property while maintaining the original loan. That way, there’s no pre-payment penalty for refinancing the old loan. The second choice is to replace your existing financing with a new loan up to the new loan amount. Remember, at this stage, the lender assumes that the path to repaying the loan is primarily from your employment income for both of you. They will generally give you credit for the rental income in the second unit, but they will typically want to see a 12 month lease. Short term rentals usually don’t fit with most bank’s lending model. The third choice is the home equity line of credit. The difference between the line of credit and the home equity loan is the way the funds are advanced, the way the interest is calculated and the way the loan is repaid. The loan is an amortized loan which means that the monthly payments include both principal and interest. A line of credit simply requires that the interest be paid monthly. If you’re using the equity in your home to buy another property you probably want to use the equity on an ongoing basis without being forced to repay it on a monthly basis. For that reason, the home equity line of credit might be a better fit. The home equity line of credit also has the advantage that you’re not paying interest on monies you don’t use.

On today’s show we’re talking about one of the latest disruptions to come into the retail industry. This is from the guy who brought us Uber, Travis Kalanick. His latest venture is called Cloudkitchens. The company is currently live in 3 markets, Los Angeles, San Francisco and Chicago. The idea behind cloud kitchens is to break apart the traditional food and beverage model associated with a bricks and mortar restaurant. The trend toward delivery meals is growing and is being serviced primarily from the traditional bricks and mortar restaurants. The vast majority of food delivery currently takes place in traditional brick and mortar restaurants, but these locations are not optimized for delivery. Today, online delivery is a high priced luxury product with a very poor experience. Everything about the restaurant experience is designed for walk-ins and reservations. And while delivery is an increasing percentage of the business, many operators are forced to trade-off the dine-in experience with a booming delivery business. Cloudkitchens has designed a commercial kitchen along a formula that allows for the basics and at the same time allows for customization of work flow. It’s a turnkey solution to opening new locations for those who want to be in the food and beverage business, with a focus towards building a delivery oriented brand. The delivery channels like ubereats, grubhub, doordash, each have their own platform. There’s a problem of integrating the data from each of these disparate channels into a single accounting system. Cloudkitchens has completed the integration so that audited financials are a breeze. The workflow in a restaurant is optimized towards the front of house dining experience. The workflow for a delivery model is completely different. When you are operating a restaurant kitchen with two competing workflows, you end up compromising both. Kitchens in a restaurant are built to support table capacity. You now have a full set of tables and now additional demands on the workflow for which the kitchen was never designed. This forces food operators to compromise on both the dine-in and delivery experience. When workflows operate above 80% of their capacity, queueing theory says that the delays grow exponentially. A simple example of that is rush hour traffic. When the number of cars exceed 80% of the designed capacity of a road, the delays multiply. The same thing happens in a kitchen. So what does this have to do with real estate? The traditional bricks and mortar restaurants are located in the most expensive commercial retail real estate. A commercial kitchen can be located in the least expensive industrial space, lowering the operating cost of being in the food business dramatically. So how is Cloudkitchens capitalized? Well, they recently secured a $400 million dollar round of financing from the Saudi Royal family. You might be wondering why on earth would Cloudkitchens need that much money as a startup? The technology component of their offer wouldn’t cost more than a couple of million dollars to develop from a software perspective. Even the marketing might stretch into a few tens of millions, but not much beyond that. Well, it turns out that CloudKitchens is a real estate company that provides smart kitchens for delivery-only restaurants. They provide infrastructure and software that enables food operators to open delivery-only locations with minimal capital expenditure and time. They enable food operators to get into business within weeks instead of months or longer in the traditional restaurant model. I know of several investors in the retail space who have argued that retail investments are safe as long as you are focused on businesses that cannot be satisfied by Amazon or other cloud based businesses. You can’t get your hair cut online. I see that the CloudKitchens model has the potential to upend prepared food.

Today’s show is a continuation on the topic of demographics. Yesterday, we talked about the reduction in mobility that has taken place over the past decade. The least mobile group of people are those above 65 years of age. The move less frequently than any other group. But eventually they move, usually because they have to. Either due to health or because they die, one way or another, they will eventually move. A number of communities have been built around the country specializing in retirees as the target client. When Sun City, a suburb of Phoenix Arizona opened on January 1, 1960, it was billed as the original retirement community. It was the first of its kind in America. On the weekend Sun City opened, cars were backed up for 2 miles as some 100,000 visitors waited to gawk at a village built specifically for adults over the age of 50. But the same demographics that propelled Sun City’s rise now pose an existential risk to this suburb as baby boomers age. More than a third of Sun City’s homes are expected to turn over by 2027 as seniors die, move in with their children or migrate to assisted living facilities. The big question looming in this neighborhood—and dozens of others like it around the country—is what happens to everything from home prices and to the local economy when so many homes post ‘For Sale’ signs around the same time? The very same tidal wave of people expected to enter senior housing, whether it’s independent living, assisted living, or skilled nursing means that same wave of folks are exiting their homes. This second but related tidal wave of homes will be hitting the market on the scale of the housing bubble in the mid-2000s. This time it won’t be driven by overbuilding, easy credit or irrational exuberance, but by an inevitable fact of life: the passing of the baby boomer generation. It’s estimated that one in eight owner-occupied homes in the U.S., or roughly nine million residences, are set to hit the market over the next 10 years as the baby boomers start to die in larger numbers. That is up from roughly 7 million homes in the prior decade. By 2037, one quarter of the U.S. for-sale housing stock, or roughly 21 million homes will be vacated by seniors. That is more than twice the number of new properties built during a 10-year period that spanned the last housing bubble. Most of these excess homes will be concentrated in traditional retirement communities in Arizona and Florida or parts of the Rust Belt that have been losing population for decades. A more modest infusion of new housing is expected in pricey coastal regions of New York or San Francisco where younger Americans are still flocking in large numbers. The Gen Xers, as a generation are a smaller in numbers than the boomer generation and more financially precarious. They have different preferences, posing a new kind of test for the housing market. They don’t necessarily want to live in the same types of homes that their parents did. One problem is that the bulk of the supply won’t necessarily be in places where these new buyers want to live. Gen Xers and the younger millennials have shown thus far they would rather be in cities or suburbs in major metropolitan areas that offer strong Wi-Fi and plenty of shops and restaurants within walking distance In case you think I’m being overly alarmist, you just need to look to Japan to see the impact of demographics on the housing market. With the aging population, Japan now has 11 million vacant apartments across the nation. This was in a place where real estate was once in such demand that people were signing multi-generational loans in order to afford the property. As you make investments, you definitely want to look at demographics in your local market and fast forward a few years to make sure you’re going be in a good spot when the elderly exit the market.

On today’s show we’re talking about where your future tenants are going to come from. Last week the US Census Bureau published new data on migration across the US. It shows some new trends that are quite frankly a reversal of some long term historic trends. If you think back to the time of your grandparents or great grandparents, they probably grew up in the family homestead community and they married and started their own family in the same community, probably the same neighborhood. My father’s family lived in the same community on an island for nearly 400 years. They were displaced by the Second World War. Were it not for that, my father probably would have ended up taking over his father’s Pharmacy and continued the family business. As modern transportation increased and mobility became easier, so too did migration of people. Migration, that is the percentage of people who move their primary residence has been increasing generally with each passing decade. That is, until now. In the latest census report, we’re seeing a reversal of migration trends in the past decade since the start of the Great Recession. But I don’t think you can blame this on the Recession itself. Because even as the economic recovery has taken hold, migration has continued to decline steadily across the US. If you have a brand new vacant apartment ready for someone to rent, or a recently renovated property for sale, people have to be willing to move in order for you to rent your apartment, or buy your house. If the mobility in the population is declining, it stands to reason that there will be fewer people looking to move into your property. So let’s look at the data. The Census Bureau looked at a data set of 263M people over 15 years of age. Of those, 238M didn’t move in the past year and about 25M people did move. That’s about 10.5% of the population. That sounds like a lot. But it’s a significant decline compared with the previous decade when In 1985, nearly 20 percent of Americans had changed their residence within the preceding 12 months, but by 2018, fewer than ten percent had. That’s the lowest level since 1948, when the Census Bureau first started tracking mobility. The largest group of movers by age are in the range of 15 to 24 years of age where 17% of people in that age range moved in the past year. This makes sense. College choice is a big driver of that need to move. The older you get, the less people move. Only 4% of those over 65 years of age moved in the past year. 11% of those between 25 and 64 years of age moved. Your inclination to move also depends on where you live. The lowest mobility part of the US is the NE where less than 8% moved in the past year. 10.73% moved in the midwest and 11.2% moved in the South and the West. Income also seems to be a factor. Those with no income had one of the highest inclinations to move with 11.55% of those people moving. The lowest percentage of movers were those having incomes above $100,000 with only 8.5% of those people moving. Only 3.7% of the people who moved in 2018 came from outside the country. Of those coming from abroad, men were more likely to move than women, with men making up 3.9% of those who moved compared with 3.4% who were women. 81% of people who moved stayed within the same state and 15.5% of those who moved went to another state. So if you’re looking for new tenants and you can target your product offer or your marketing message, it pays to take a closer look at the demographic information in the census data.