The question of the legal treatment of short term rentals has been contested in multiple communities around North America. Earlier this week, a legal challenge that had been underway for the past two years has finally come to a conclusion. The City of Toronto enacted new rules in December of 2017. Almost immediately, these rules faced a legal challenge from a consortium of hosts and short term rental platforms. The government's Local Planning Appeal Tribunal (LPAT) announced this week that it had ruled in favour of the City of Toronto, effectively allowing the city to crack down on short term rental landlords for the first time since approving new bylaws in December of 2017. It's a major blow to people who have invested in properties for the sole purpose of putting them in the short term rental market. It is estimated that as many as 5,000 units could return to the long-term rental housing market thanks to the city's new rules. Whether that happens remains to be seen. The definition of a short term rental is any rental of 28 consecutive days or less. The new short term rental regulations, which include capping the number of days anyone can rent out a single property for, were originally supposed to have come into effect over the summer of 2018. A person needs to live in an Airbnb property, either as owner or tenant, under Toronto's new regulations, and is also now required to register with the city for an annual fee of $50. The rules also restrict the number of days any resident could rent out their space on a short term basis to 180 nights per year. So what is going to happen? There are 4 possible outcomes for any given property. 1) Property prices in Toronto have risen dramatically in recent years. Some owners will simply choose to sell their properties on the open market, and take advantage of a capital gain, rather than experience the negative cash flow from renting at lower prices in the long term rental market. For those properties, it will return some inventory to the long term housing supply. 2) Some will convert their properties from short term rental to long term rentals. They will experience lower income and the city will achieve it’s objective of returning more housing to the long term housing supply. 3) Some may choose to continue to operate, but outside the rules and hope that they don’t get caught. We’ve seen this kind of activity taking place in New York and other cities where short term rentals have been regulated. It’s hard to say how much of that will go on. 4) I think there is a market nuance that many have completely overlooked. There are a number of clients of the so-called short term rental platforms that actually rent on the medium term basis. We’re talking stays of 1 month, 3 months, 6 months. There are all kinds of reasons for these rentals. Sometimes it’s dealing with a repair situation where some people need to vacate their home because of an emergency like fire or water damage. Some people have purchase a new home and their builder is running late and they need a place for a few months. Many are corporate contracts. In fact, the net income for a medium term rental is not that much different compared with a short term rental in my opinion. While the nightly rate is lower, the management costs and maintenance costs for a medium term rental is also much lower. For these clients, a 12 month unfurnished lease is of no use. If I was an owner of a short term rental, I’d certainly be looking hard at the corporate medium term rental market as a viable alternative to the short term rental market. I spoke with a representative from AirBnB last week and she told me that approximately 20% of their traffic are for stays of more than 28 days. That’s already a substantial proportion of their existing business, a proportion that I predict will grow substantially.

Vishal from Ottawa asks, “I listened to your interview with Aaron Chapman on the weekend. You were both talking about how inflation can benefit investors, and I didn’t quite follow how that works. Can you explain it in a little more detail, maybe with an example?” First of all, let’s start with a definition of inflation. Inflation means the growth of something. Often we think of inflation of prices as being the issue. In fact, increasing prices are not the actual inflation. They’re a symptom of inflation. The true underlying inflation is the inflation of the money supply. Prices rise for one of two reasons. Sometimes they rise against our will, but more often than not, they rise because people are willing to pay more. The only reason they’re willing to pay more is because they have more disposable cash available. I’ll give you a simple example. A cup of Starbucks coffee costs about 25 cents if you buy the big bag of Starbucks coffee at Costco. That same cup of coffee costs $2.45 if you buy it read made at Starbucks. People are willing to pay almost 10 times the price of a cup of coffee, not because Starbucks is forcing them to pay more, but because they’re willing to pay more. It’s the availability of that extra cash that enables Starbucks to charge 10x the price of a cup of coffee. So let’s extend that concept to real estate. I think we would all agree that most people have not saved up enough money to buy a house. That’s why they go to the bank and borrow heavily, some as high as 97% of the purchase price. It’s the availability of that extra cash at low interest rates that enables people to offer higher and higher purchase prices in the market. It’s not that prices are being driven by the sellers asking too much. When sellers ask too much, houses don’t sell. If they sell quickly or homes sell over asking price in multiple offers it’s because the buyers have access to more cash. So where did all that extra money come from? It was loaned into existence. We think of central banks calling down to the printing presses in the basement and asking them to start printing some more sheets of $100 bills. That’s not really how governments print money these days. It’s simply the addition of a line item on a general ledger on the central bank’s balance sheet. So now let us look at how an investor can use inflation to their advantage. In our example, you’re going to buy the home with conventional financing. You’re going to put $200,000 in equity and borrow $800,000. In our example, let’s say that inflation is 10% per year. At the end of year 1, your property that you purchased for $1M is now priced at $1.1M. The principal owing on the bank loan is still very close to $800,000. For the sake of simplicity we’ll say you still owe about $800,000. But now you have a property worth $1.1M and your equity in the property has increased by $100,000. It’s not truly $100,000 because the increase in price is only an illusion. What’s happened is the value of the currency has fallen by 10%. So that $300,000 gain is really 10% less because the currency is worth 10% less. You gain is really $270,000 in last years dollars. If you then fast forward one more year your property would be worth $1.21M at the end of year 2 and your equity would have increased from $200,000 to $410,000. Again that $410,000 measured in dollars from 2 years ago is more like $332,000. At the end of 10 years of 10% inflation each year, your property would be priced at about $2.6M in the market. If you didn’t make a single principal pay down on your loan in 10 years, you would still owe $800,000. But your equity would have grown from $200,000 to nearly $1.8M in just 10 years. If you had never borrowed the money, and without inflation, you could never have made that rate of return.

On today’s show we’re running what seems like an almost annual episode. The pain in retail real estate continues with little signs of slowing down. According to a new report in Business Insider this week, Retailers closed a record 102 million square feet of store space in 2017, then smashed that record in 2018 by closing another 155 million square feet, according to estimates from the folks at CoStar. We can expect similar numbers in 2019, with more than 9,000 stores expected to close this year. Some of these announcements are from earlier this year, but several are as recent as this past week. Back in February, Payless shoes abruptly announced it was closing all 2,500 of its stores in what may be the largest inventory liquidation in retail history. Gymboree filed for bankruptcy protection for the second time. The first time was back in 2017 when they closed about 400 stores. This time, they’re closing all 805 outlets, never to return. The company’s remaining 140 stores under the Janie and Jack brand. Dress Barn is closing 650 stores after 50 years of operation. Discount Chain Freds announced that it was also closing 520 stores. Dollar Tree plans to convert 200 Family Dollar stores into Dollar Tree stores and close another 390 Family Dollar stores. The Gap announced the closure of 230 stores and announced intention to sell its Old Navy stores. Womens clothing retailer Avenue is closing all 222 of its stores. Walgreens continues to rationalize after its acquisition of Rite Aid. Following the acquisition, they announced the closure of about 600 pharmacies. This year they announced the closure of 200 Walgreens locations. Forever 21 is closing 350 stores globally and about 178 locations are in the US. Sears department stores have been the walking dead for years now. They announced the closure of another 175 stores in a series of announcements that have trickled out over the past three months. Lifeway is closing 170 stores. Kmart is closing 160 stores. Performance Bicycle filed for bankruptcy protection this month and is closing all 102 stores. Bike shops around North America have been struggling. Cyclists would go to a local performance bike shop, try out a bike, get a feel for exactly what they want and then find the same product, or the brand name components to assemble a performance bike online for less and order it online. This story is playing out over and over and over again. Olympia Sports was purchased earlier this year by Jack Rabbit. Following the acquisition, they announced the closure of 76 stores. CVS Health is closing 68 stores. Bed Bath and Beyond is closing 60 stores. Pier 1 Imports is closing 57 stores. Party City is closing 55 stores. Agaci is closing all of its 54 stores. Victoria’s Secret is closing 53 stores. JC Penney is closing 27 Stores. Womens retailer Christopher & Banks is closing 40 stores over the next two years. Lowes is closing 20 stores and even retail giant Walmart is closing 17 stores. Macy’s is closing 9 stores. There are more retail closures that I could tell you about. I don’t know about you, but after listening to that partial list, I’m pretty numb already. I firmly believe that the strategy for dying shopping malls is the redevelopment of mixed use planned communities that have a combination of residential, parks, amenities, and a modest amount of neighborhood retail including groceries, and food and beverage. These distressed assets will increasingly appear on the market in the coming year and years to come.

Brendan from Pennsylvania asks: I bought my first commercial rental a few months back using seller finance and it was a breeze since the property was off market and I could talk to the seller directly. The seller and I haggled it all out based on their retirement needs and since it was still a good deal the interest didn’t matter much to me since it was an excellent cash on cash return. I am currently searching for my next deal and have found one that interests me on the MLS but the price doesn't make sense as-is. The realtor is telling me the seller will entertain owner finance offers. Without being able to directly contact the Seller without realtor involvement I’m stuck as to how to build my offer. Brendan, This is a great question. Congratulations on your first successful deal. There’s no question that seller financing can be a great financial tool. The thing to remember is that seller financing is still financing and you are still the owner of the property after the transaction closes. The property should still be a property you want to own, not just because of the financing structure. That means that the property is in the right area from a management point of view. You want to know that you are invested in an area where you will see an ongoing stream of investment. You want to make sure that the investment meets your criteria in terms of supply and demand. For example, you may choose to invest within a radius of a major hospital and target health care workers as your ideal tenant. Or you may choose to be within a radius of a major university and target students as your ideal client. You want to be in an area where there is inflow of population, and inflow of jobs. I will never invest in properties in a shrinking market. At the end of the day, properties are simply part of the inventory of your business. You really want to find out from the broker why the seller is selling the property. You are correct in saying that the negotiation will need to be direct with the seller. Some realtors are uncomfortable with a direct discussion with the seller. Offer for the realtor to be present in that discussion. Your strategy of offering a lower purchase price and a larger overall deal value makes sense. But in reality you could actually be offering more than the asking price, but then choosing the payment terms. Let me give you a simple example. Let’s say that the seller is asking $100,000 for the property. You want to purchase the property for $50,000 up front and then $10,000 per year for the next 8 years. You could tell the seller that you’re offering them $50,000 up front which they may find alarming. Another way you can write the offer is to set the purchase price at $120,000 payable as $50,000 on closing, followed by annual payments of $10,000 for the next 8 years. Such an offer will certainly get the seller’s attention. Note that a realtor is legally obligated to send any offer to the seller. The realtor can’t hold onto the offer, even if they don’t like it. Once you are in the dialog with the seller, you can have the discussion about what is more advantageous from a structural point of view. The seller may desire to have the payments secured on title using a collateral mortgage until the property is paid in full.

On today’s show we’re talking about environmentally sustainable buildings. These are part of a growing trend of buildings globally and in North America as well. A new report published by CBRE details what’s happening in the multi-family asset class. The buildings that have traditionally been energy hogs have been in the office and industrial asset classes. Most of the work in environmental sustainability started in that asset class. In fact, much of this work dates back to the 1940’s and 1950’s. My mother was an architect in NYC and she used to design mechanical systems in those buildings that would use the air conditioning to manufacture ice during the night-time hours when the outside air was cooler. During the day, the air conditioning systems would melt the ice and heat the water in huge tanks. These systems used much less energy than the traditional air conditioners that we know and love today. Some of these systems are coming back into fashion. I recently visited the JC Penny headquarters building in Plano Texas. This 500,000 SF building is LEED certified and uses the same technology that my mom was working with in the 1950’s. The only difference is that they think it’s new technology. Historically, energy efficiency hasn’t been a big factor in multi-family construction. Increasingly though, while the number of green apartments remains small as a percentage of the total inventory, it is a growing proportion of new construction. To help the commercial real estate market measure and understand the adoption and prevalence of green buildings across markets, CBRE and a consortium of Maastricht University and the University of Guelph developed the Green Building Adoption Index (GBAI) in 2014. The index tracks the adoption of green building certifications across the largest U.S. office markets since 2005 and this year has been extended to the 30 largest U.S. multifamily markets (measured by number of units) in collaboration with Yardi and supported by the National Multifamily Housing Council. Three of the main certification programs for multifamily buildings in the U.S. are the EPA’s ENERGY STAR rating, the National Green Building Standard and the U.S. Green Building Council’s LEED certification. The 2019 Multifamily Green Building Adoption Index shows that green building certification is on the rise in the multifamily market. A total of 251,763 units, representing 3.3% of the 7.7 million multifamily units across 39,071 investment-grade properties (i.e., those with 50 units or more) within the top 30 markets, have already been certified as “green.” The top 5 markets for green certification are Denver, where 7% of multifamily units are green certified, followed by Washington DC / Suburban Maryland (6.9%) and Seattle (6.5%), Northern Virginia with 6.5% and Chicago at 5.9%. Green building adoption rates vary widely among the 30 largest markets, which could be related to the differing green building mandates and incentives for each of these markets. For example, some cities now require green building certification for all new construction. Just in case you’re thinking these efforts are in the traditional tree hugger communities, even cities like Austin and Dallas that have a reputation for high energy consumption made the top 10 list for new Green buildings.

All the way from Mesa Arizona, Aaron Chapman specializes in helping investors finance properties. He won't finance a residential condo for an owner occupant. On today's show there are some powerful nuggets that could really impact the way you look at business. 

Mark Owens has been a fixture in real estate investing in the Baltimore area. He knows the local market and has figured out a niche that is solid and repeatable. He's not after home run deals, but lots of consistent growth using simple proven strategies. 

The City of San Francisco continues to be one of the most sought after places to live in the nation, and also boasts some of the least affordable places to live. San Francisco is a notoriously difficult place to have any project approved. The process allows for community input on virtually any application. San Francisco’s general plan makes new development difficult. Approximately 74% of the land is zoned for no more than three-unit homes, with the majority dedicated to one- or two-unit homes. Most of the city has a maximum 40-foot height limit for all new development. Unfortunately, even the city’s general plan downplays the difficulty of building in the city. The ever-proliferating bureaucratic documents underpinning this plan muddy whatever potential clarities developers could glean from the plan itself. A typical example is the Planning Department’s area East and South of Market Street. This has been a rough area for years. The city drafted a neighborhood plan back in 2008. The plan lays out 42 separate “objectives” the city wants to achieve through development in the area, with no ability to rank them in case they conflict, as many clearly do. Now somehow there has been some redevelopment, but it hasn’t been easy. Developers Prado Group and SKS Partners first submitted their proposal close to five years ago. The developers originally aimed for 558 homes and an office component that was since axed to make room for the senior housing, After years of planning — and battling neighborhood opposition — a proposal to build 744 homes on California St. in San Francisco is finally moving forward. Earlier this week, the city’s Board of Supervisors voted unanimously Tuesday evening to approve the project, which represents the largest new home development in the city’s northwest quadrant in decades. There are so many competing interests, that every project has to have features that will satisfy every special interest group that wants to have a voice at the table, even though they have no cash invested in the project. It’s amazing that people with no ownership get to dictate what happens on a property. The project includes 186 homes for low-income seniors, a childcare center, five acres of public open space and 35,000 square feet of retail. Even after the approval, the ground breaking is still more than a year away in 2021 and complete the first phases of homes two years later. Overall, the project will cost more than $600 million. During a three-and-a-half hour hearing on Tuesday, opponents said the project’s environmental impact report was flawed. Many speakers opposed a plan to cut down existing trees on the site and destroy what they called a swath of natural open space. The trees became a point of contention. One special interest group claimed that the city doesn’t have enough senior housing. So now the project includes a senior housing component. If you are contemplating undertaking a project that requires community input, make sure you understand the process that you might be subjected to. The process on paper might only be a few months. But the process in reality can stretch into years if the community opposes your project.

On today’s show we’re talking about one of the most important questions when evaluating a potential project. You’ve received the executive summary. The glossy pictures are great. The pro forma looks enticing. If the project is so amazing, then why would the seller be selling? If it’s so great, why would you ever let go of such an amazing asset? Or maybe its not an amazing story and the seller clearly has a problem that they need help solving. Whatever the reason, the answer to this question affects two things. Your potential interest in the project at all. You approach in negotiation So why are they selling? Are they selling because the owner is in their 80’s and the kids don’t want to own it, and the owner is tired of being an active business owner? Are they selling because the property is distressed and the owner doesn’t have the financial resources or resourcefulness to solve the problem on their own? Are they simply trying to take some profit off the table to reposition their portfolio for the next downturn? How motivated are they as a seller? Do they need to sell, or do they merely want to sell if the market delivers their price? Now of course the seller might not be 100% truthful in the reason they give for selling. But it gives a clue as to how you might negotiate the purchase. For example, if the seller is aging out of the market, but they still want the income from the property, there might be a case to be made for seller financing a portion of the asset. Seller financing, if properly structured can result in some tax deferral for the seller, and a continuing source of passive income for the seller without the hassle and responsibility of ownership. The seller may simply be tired of the active side of managing a business and want to spend some time on the beach with their grandchildren without having to check in on the property on a periodic basis. If the seller is in a distressed situation, you can be helping the seller solve a problem. Often times, the property can be a good asset, but the seller is dealing with a problem elsewhere in their business. The sale of a performing asset can bring much needed cash to strengthen the balance sheet of a seller and solve a problem they may be facing elsewhere. The seller may be on a fishing expedition and looking to see if they can get someone to offer them too much money. Maybe they’ve heard that properties are selling for high prices and want to use the opportunity to take some profit off the table on an opportunistic basis. If that’s the case, I can tell you that I won’t be the buyer, unless I see something in the property that the seller doesn’t. That would mean changing the property substantially to add significant value to it. Maybe it means demolishing what’s there and building something new. Perhaps it’s a land assembly with a property next door. There are so many different ways to add value to a property. I make sure to ask the broker for the seller why the seller is selling. I then ask the same question directly of the seller. It’s amazing that sometimes that fundamental question gets answered two different ways, by the broker and by the seller. There are so many answers to that simple question. Knowing the answer guides your interest in the property, and certainly guides the approach you’re going to take in the negotiation.

On today’s show we’re talking about another aspect of short term rentals. I’m in the short term rental business. My partners and I operate our units legally and at a very high level. The consistent 5-star reviews are not an accident. They’re the result of hard work by our team and our staff on a daily basis. Now, I don’t know about you, but my social media feed is filled with advertisements for training classes that advocate getting into the short term rental business. The headline reads “Everything you need to become a property investor without owning any properties” The ad goes on to say This Exclusive Webinar will Show you how to RENT Properties, Not Buy them, and List them on Airbnb™and other short terms Rental Platforms, Just Working Part-Time. Step by Step Blueprint, Easy to Follow Instructions on How to set up this Incredible Business with One Rental Property at a Time. So I clicked on the ad. The webpage invites you to an exclusive webinar. It’s amazing, the webinar starts in just 7 minutes from now. It’s my lucky day. The web page invites me to Join hundreds of people worldwide making money using other homes as short-term rentals. Many property owners earn up to five times the profit of traditional rental properties. Sign up to this exclusive FREE training webinar today! The company claims to have cracked the code on how to rent properties and make money with them by listing them on Airbnb and other short rental websites. In less than six months, Jimmy was earning 15,000 pounds per month (around $20,000 US Dollars) with just five rental properties and he was able to quit his job for now, Jimmy teaches other people how to do the exact same thing. The web page has a live chat window. So I clicked on the live chat window. Sarah in the chat windows asked me if I had any questions. I asked Sarah how their system works around one small issue. You see in many jurisdictions, not all, but many, there are laws that prohibit subletting a property for more than you rent it for. So I asked Sarah how they get around the law that prohibits subletting a property for more than it is rented for. The chat window confirmed that my question was delivered to Sarah. At that point, I’m guessing there must have been a technical issue, because I still have the chat window open and have not received any further correspondence with Sarah. I wonder what the problem might be. Now I know that subletting an apartment on a short term rental platform has been a common practice a few years ago. In fact, there was a rash of these units appearing on the market in New York City. There was one unit in particular, located near Union Station and close to NYU in lower Manhattan. That property is owned by someone who is from out of town. The tenant never occupied the property. They set themselves up as an AirBnB host and despite the monthly rent of $3,500 per month, they were able to get a monthly profit by using someone else’s asset. This particular host had done this with nearly a dozen properties in NYC. When NY instituted the new rules prohibiting short term rentals for an entire apartment, the host continued to operate. When the city went to enforce the new bylaw that prohibits rentals of entire homes, the unsuspecting owner of the property received very hefty fines for the violation. The key is for operators who want to get into the commercial end of the short term rental business to be aware of the marketplace they operate in. You need to understand the supply and demand dynamics of the market. What is the barrier to entry? And what are the regulations? Nobody ever built a sustainable business that operates outside the law. You might not like the law, and you might want to influence changes in the law. But the law still is the law.

On today’s show we have an update on a story that we’ve been following for some time. The topic is short term rentals. The staff at the City of Ottawa completed their public consultations on the short term rentals and have issued their recommendations to a committee of City Council which I will be speaking at this coming week. At the end of 2018 there were an estimated 6,278 listings. Listings include individual rooms and complete dwelling units. It’s estimated that the number of investor owned commercial short term rentals in the market is approximately 1,236 units. These properties have been put in the short term market and serve purely a commercial and no other purpose. This is an issue to which there are two sides and quite frankly I see both sides of the argument. As an investor, I fully support the notion of investors making an honest dollar by providing a product for which there is real demand. I live in a lovely home backing on park land and a lake. If my neighbour decided to move to the Caribbean and put their home into the short term rental market, I’d be pretty upset. The transient nature of the traffic next door would negatively affect the value of my property. So I fully understand the issue from the perspective of residents who bought residential property in a residential area, never expecting a hotel product to open up next door. I own several short term vacation rentals in an another community that is heavily tourism centric. The properties that I own are zoned for tourism and for short term rentals. There’s no conflict between the intended use and the actual use. In response to this shortage, the city is hoping that by regulating short term rentals, they will eliminate some of what they see as problems with short term rentals, and that these second homes will appear in the long term rental market to help address the shortage of properties in that segment, or sold outright in the open market to help address some of the shortage there. The new rules provide for residents to benefit from the sharing economy while attempting to establish appropriate regulations that minimize the negative consequences of short-term rental activities that impact the availability and affordability of housing, generate community nuisances, and disrupt community cohesion. Where the problem lies is with those investors who purchase properties for the sole purpose of entering the short term rental market and are now facing a dramatic drop in income as their properties will no longer be allowed to operate as a commercial short term rental. The city has been incredibly slow to act on this, compared with other communities around the world. Platforms like AirBnB have been around for more than a decade. The city has the right through their zoning policy to dictate what types of businesses are allowed in a given area. But the city hasn’t used the zoning code to guide the current proposed bylaw. My comments to the city will be to amend the zoning definitions to specifically include short term rentals within the zoning. That’s the mechanism that currently governs the use of properties in the city. If all of a sudden chicken farming became really popular, we don’t need a new set of special chicken farming regulations. The use is governed by zoning, and this is no different. I have no issue with the city charging hotel tax. That’s a level playing field. I’m going deep on this situation because it’s a dialog that is happening in cities around the world. If you’re an investor in your local market you definitely want to understand what is happening within your city’s government and their bureaucracy so that you can influence the

On today show we are talking about conversations with potential funding partners. If you are in the marketplace for capital, you will invariably meet new people and develop relationships that a long way down the road could become a source of capital for your future projects. The initial positioning of the person you meet might be unclear. Are they an individual investor who has capital to deploy? Are they a fund manager who places capital into projects using their funds? Are they a mortgage broker who simply wants to get another loan done? Are they an amateur who fancies themselves a connector of people? Are they a project sponsor who is out there in the market trying to raise capital just like you are and will never be a source of capital for your projects unless you join forces to work on a project together? In my conversations I’ve encountered all of these. It’s sometimes difficult to tell them apart. The problem is that people like to make a good first impression. They will talk about their recent projects with the same level of ownership as if they were the principal in the project. Sometimes they were a broker on the deal. Sometimes they were a partner. Sometimes they were a principal. And then there are those who merely have friends who are principals in the project, but were not directly involved themselves. I’ve even had situations where I’ve been talking to someone who is clearly not the money, but they tell you they are connected to the money. So after several lunch meetings and phone conversations an introduction is made, only to discover that the new player in the conversation is not the money either. They have some amazing relationships and can talk at length about the projects they have been involved with and how they placed $30 million in a project, or how they have continual deal flow. They’re a real player. So a few conference calls later it becomes clear that these folks don’t have the money either. If the deal meets their criteria, they might be willing to go out into the market and help you raise the money. If you are listening to this, perhaps you have encountered the same situation yourself. These types of daisy chains are incredibly common. I find that nothing happens in terms of a funding commitment until I’m speaking directly to the decision maker who has the funds and the authority to make the decision. Anyone else is just a connector. If they are not the decision maker or part of the core team that makes the decision, they are a connector. So the question is, if you are dealing with a connector and not the money directly are you wasting time?

Sterling White is based in Indianapolis, Indiana. He grew up in a tough part of town without the advantages of connections or capital. Sterling's story is highly inspirational.  You can reach out to Sterling at sterlingwhiteofficial.com.

On today's show I'm talking with Billy Keels from Barcelona about the specifics of the Buy on The Line, Move The Line Strategy. 

On today’s show we’re talking about the predicted extinction of realtors and mortgage brokers. It used to be the case that in the old days, knowledge was power. In many ways it was perceived that in order to complete a real estate transaction, or a real estate financing, you needed access to someone with inside knowledge of the process in order to navigate the complexities of a transaction. It used to be the case that information about a specific property was hidden in a database that only the brokers had access to. Today, almost any information can be searched online. Some of it requires paying a small fee in some areas, but most is freely accessible. So if the real estate broker or the mortgage broker isn’t required for your to get information, why do you need them? Information falls into two categories. Information about a property that is either timeless or has happened in the past Information about what people intend to do in the future. Info in the first category doesn’t require a realtor. You can find the legal description, the assessed value, a property’s dimensions, any liens on title all using online resources. If there’s lots of choice out there, investors can often do the research themselves using online tools. But if you’re looking for something specific, the proverbial need in a haystack, that information is unlikely to be contained in searchable form online. The goal of a broker is compress timeframes, to lubricate the relationship building process between buyers and sellers, between landlords and tenants. Many people approach these types of business transactions with a healthy degree of skepticism and mistrust. But if the seller has a relationship of trust with their broker, and the buyer has a relationship of trust with their broker, the amount of time spent in due diligence can be reduced significantly. Some people think that what is being brokered is the property. But in many ways, what is being brokered is trust, and the relationships. The same is true on the lending side. Lenders can easily waste lots of time with borrowers who won’t qualify. By requiring the broker to qualify the borrower before bringing the file to the lender, the lender can save lots of time. The borrower too saves a lot of time by increasing their chances of having a successful financing. Lenders often decline a loan that for reasons that have nothing to do with the borrower. They may be facing other constraints in their business that cause a loan to be declined. Simply having a business card that lists a license to operate in an area isn’t enough. The true value of a broker is the relationships that they have developed over time. This takes the broker a long time to develop and doesn’t happen overnight. That’s why the more established brokers get the lion’s share of the business. They have the strongest relationships, and they’ve established the longest track record in the marketplace. After all, that’s what is really being brokered, not the property. So when you go out into the marketplace and look for a broker, whether you’re looking to transact real estate or complete a financing, the track record and reputation of the broker in the community and the quality of the relationships are the first two things I believe you should be evaluating.

On today’s show we are talking about the meaning of investing versus speculating. In 2017 the global value of all bitcoin in existence soared from $20B to about $320. Bitcoin was making headlines all over the world and it seemed like crypto currency had transitioned from the technology world into the mainstream. One of the benefits of cryptocurrency is that the transaction history is fully contained in each transaction. Theoretically someone could analyze the transaction history and perform an audit of all transactions. Practically speaking, nobody’s ever done it because it is a huge amount of work. That is, until recently. But before we dig into that, a little more background is needed. There’s another cryptocurrency called Tether. Tether’s main feature is that it is tied to the US dollar. For every Tether coin in existence, there is supposed to be a US dollar in a bank account backing that coin. Since most cryptocurrency at that time were quite volatile, cryptocurrency investors overwhelmingly would purchase Tether with US dollars and then buy another cryptocurrency with Tether, whether it was bitcoin or Etherium or another currency. The makers of Tether insist that new tether are created by demand with the backing of purchases in US dollars from end users. Researchers at the University of Texas conducted deep research on the influence of Tether on the price of bitcoin. They loaded all of the bitcoin transactions and all of the Tether transactions into a single database and started looking for patterns in the data. They developed a thesis that Tethers had a regular pattern of coming into the market whenever the price of bitcoin dropped. They also noted that the pattern of buying was much more orderly and consistent than other market activity. They also found that after this surge in Tether buying, the price of bitcoin went up. All of these market moving transactions went through a single exchange called Bitfinex. It turns out that Bitfinex is owned by the same three people who own Tether. Bitfinex is an exchange that offers its users complete anonymity. You don’t need to provide any identification to open a Bitfinex account. The researchers found that almost half of the $300 billion of price increase in bitcoin was linked to these suspicious transactions involving Tether , Bitfinex and bitcoin. That’s a $150 billion dollars of profits that have a cloud of suspicion over them. The NY attorney general has started investigating these transactions as well. The folks at Tether have been asked to prove that there is in fact a paper trail showing 1 US dollar backing every token that was minted. Now I want to be clear. Whenever money is involved, you will find fraud lurking in the shadows. The financial world has seen fraud in banking, price fixing in Libor, fraud in construction, the list goes on and on. Cryptocurrency is not the problem per se. But it takes a deep investigation to uncover fraud in cryptocurrency especially when it is an inside job. There is no way that a single individual could manipulate the price and value of hard assets like gold or real estate. There is no single marketplace for trading in those assets. Moreover, the intrinsic value of hard assets is based on broad market fundamentals and not minute to minute or second to second price arbitrage. The underlying problem of course is that bitcoin has no intrinsic value. There are no market fundamentals that make bitcoin or any cryptocurrency more valuable a minute from now, or a week from now compared with today. So the arbitrary assignment of value is pure speculation which in my mind is very distinct from investing. In order to be considered money it has to perform two things It has to be a store of value It has to be a means of exchange Today bitcoin is neither a store of value nor a means of exchange.

Conclusions based on flawed assumptions are ultimately flawed conclusions. That makes sense. But when governments are involved, they don’t seem to adhere to that basic law of nature. Real estate developers will soon have to create or fund social and affordable housing if they want to build in Montreal. Projet Montreal passed a new housing bylaw in June of this year, following through on a campaign promise to give Montrealers more affordable housing. The new bylaw aims to regulate the real estate market and improve upon its current vacancy rate of 1.9 per cent, the lowest in years. Developers would have to enter into an agreement with the city to build affordable and social housing units, and family housing units, or give land to the city or make a financial contribution in lieu of building the finished units. The Mayor is hoping to get land for free out of the new rules. On a big project for example in downtown Montreal, The Mayor hopes it's going to be more interesting financially for developers to give the city land so the city can develop social and affordable housing. The number of units required to be social, affordable or family will depend on how many are being built overall and the location in the city. For example, for a building with 50 or more units downtown, a developer would have to build: - social housing equal to 20 per cent of the project -  affordable housing equal to 10-15 per cent of the project -  family housing equal to 5 per cent of the project The city expects condo prices to rise by 2 to 4 per cent because of the bylaw. I have to tell you that as a developer, it’s increasingly difficult to make the numbers work in today’s environment. This is simply based on the rising cost of construction, increased taxes and levies from government. For example, the development charges from the city have been steadily increasing and growing much faster than the rate of inflation. Only a few years ago, the federal government significantly reduced the value added tax rebate on new construction. This means that a developer needs to charge a 13% sales tax on the sale price of a new property. There is a small rebate, but most of the tax gets passed onto the end-buyer. Since the resale market has not gone up by 13% to compensate for this, it has had the impact of reducing or outright eliminating the profit margin for developers who build new housing. The industry still has not fully absorbed the additional tax. Many builders have exited the business entirely because the numbers no longer make sense. The smaller number of builders has created increased competition for fewer resources in the construction industry, which in turn has increased labor costs for construction. If we now have to build a significant proportion of the project that will introduce a loss and negative cash flow, the number of viable projects will decline. What government officials fail to recognize is that investment money has no geographic restriction. People who live in a geographic area don’t want to move. They are often anchored in their community. Money has no such restriction. The greater Montreal area is made up of several municipalities. If prices in the downtown are going to go up by 5% to accommodate this new bylaw, some will simply choose to live in one of the neighbouring communities. The truth is that if you take 1/4 of a project and make it unprofitable, you need to compensate for that in other parts of the project. My financial models show that the real impact to maintain parity would require a price increase of 10% on the remaining units in order to make a project viable with the loss of profit from the affordable units. This is yet another example of government using flawed math to justify their position. Conclusions based on flawed assumptions are ultimately flawed conclusions.

On today’s show we’re going to be doing some math. That’s right. The real purpose of today’s show is talk about the importance of financial education. Some people, notably lawyers, mathematicians, accountants, engineers and statisticians will find this math fairly simple. But for the general population, the inability to perform basic financial math is one of the reasons that wall street and the major insurance companies are able to exploit their customers and quite frankly give them a bad deal on their money. On today’s show we’re going to look at what some life insurance companies are quoting for income annuities. These financial instruments are often used by people later in life to guarantee an income stream in their later years. Some of you might be wondering what an income annuity is? Quite simply an annuity involves paying a fixed lump some of money into an insurance company. The insurance company in turn guarantees you a regular monthly income for the term of the annuity. There are a couple of different types of annuities. Some are somewhat like a life insurance policy in the sense that the insurance company takes the risk on how long you’re going to live. You might purchase an annuity that has a 10 year minimum on it. But if you live, say, 20 years, the insurance company will take the risk and pay the monthly amount for life. The second type of annuity is simply a guaranteed income annuity for a fixed number of years without taking life expectancy into account. So if you call up your friendly insurance company and ask them for a quote, how do you know if you’re getting a good deal? This is where the ability to perform basic financial math is vitally important. What we’re talking about is the ability to move seamlessly between the present value of a lump sum of money and the future value of an income stream. The most important variable in this instance is what is called the discount rate. That’s essentially equivalent to the interest rate that is being charged for that money into the future. Now let’s be clear, the calculations to perform this math are extensive if you’re doing it in long hand on a piece of paper. Fortunately,  programs like Excel have a function embedded in them that makes this math quick and easy. But before you can use the function, you need to understand the concept. What I’ve discovered is that a lot of people don’t even understand the concept. For an investment of 100,000, the insurance company will guarantee you $893 a month for 10 years. If you multiply $893 a month times 120 months, the total comes to 107,160. So in 10 years, they’re giving only an extra 7,160 for the benefit of holding your money for that length of time. If you kept the money in your bank account and earned zero interest, simply withdrawing the same $893 a month, the money would run out after 9.3 years instead of 10. If plug these numbers into Excel, you will find that the insurance company is essentially offering you 1.4% growth of your money on an annual basis. Is 1.4% a good number? I guess it depends. Is it good compared to what? Compared to the 10 year US treasury yield of 1.549%, it’s a little better, but not by much. The same money invested in 10 year treasuries would give you $900 a month instead of $893 a month from the insurance company. Generally speaking, US Treasuries are considered the safest form of investment. If you were to invest the money at 6% instead of handing it over to an insurance company, you’d earn a monthly income of $1,110. This is clearly a lot better. But here’s the sad thing, there are lots of people out there handing their money over to an insurance company to guarantee them an income for life. They don’t have much money to begin with, and the lack of education on how to perform the math is ultimately going to cost them even more money.

Alexandra asks: “I’m considering investing in the Toronto market that has an extremely low rental vacancy rate. Since the demand is so high and Toronto is a growing city, do you think this is a good idea?” Alexandra, this is a great question. It is true that vacancy in Toronto is extremely low. The city continues to add about 125,000 population each year, and there are about 35,000 units of new construction added to the market each year. Clearly there is a gap between demand and supply for housing overall. If you break down the vacancy by type of property, you can see even more granularity. For example, Bachelor apartments have the highest vacancy at 1.6%. This data comes from the Canada Mortgage Housing Corporation. This is Canada’s quasi government back mortgage insurer. One bedroom apartments have a 1.3% vacancy rate, two bedrooms have a 1.1% vacancy rate, and 3 bedrooms are 0.9% vacancy rate. Rental rates increased an average of 4.9% from 2017 to 2018. The shortage of housing in Toronto isn’t new. That’s been happening for years. So the real question is “Why is the vacancy rate so low?” If the opportunity is so amazing, why do we not have more people flocking into the market to invest in rental properties? It doesn’t make sense that the vacancy rate remain so low for such a long time. In my opinion, there are four factors that contribute to making rentals in the Toronto market a mediocre investment. Properties are very expensive to purchase. We’ve seen sale price increases over the past several years in the double digits. When the purchase price increases much faster than the rent, it’s hard to make the numbers work. You won’t see the market support an 18% increase in rents, whereas in 2016, market prices increased an average of 18 across the entire Toronto market. That’s a huge shift. You end up tying up too much equity in a property for the rent that you can collect. Toronto has instituted rent controls which limit the amount of annual rent increase that a landlord can demand from tenants. Constructing new dwellings in Toronto attracts very high development fees to the city to pay for the increased load on infrastructure, whether we’re talking about water, sewer, electric, roads, public transit and so on. When you have to write a cheque to the city for $84,000 to build a new single family home, and you have a choice to sell that home in the open market where you have no cap on the sale price, versus putting it into the rental market where your rent increases are capped, it’s an easy choice. The landlord tenant laws in Ontario are heavily skewed in favour of the tenant. Toronto is a wonderful city. It’s clean, safe by World or American standards, multi-cultural, and there is an abundance of commercial and employment opportunities. But it’s increasingly one of the most traffic congested cities in North America. They haven’t been able to build enough road infrastructure to keep up with the population growth. Some investors have bought into the market, accepted the fact that there is very small cash flow, and in many cases negative cash flow. They’ve justified the investment by saying that they make it up in appreciation. For investors, it has worked out. But you don’t control what the market will do in the future. For that reason, it’s a risky strategy and one that I don’t recommend. I personally favour markets where the rent to purchase ratio is much better.

George Ross is my guest again today and we're talking about the opportunity that may exist in the aftermath of the disaster at WeWork. 

Adam Taggart is one of the founders and principals at Peak Prosperity, an organization dedicated to helping people build a sustainable life. The headwinds and dislocations facing us as a society are numerous. On today's show, Adam gives a first hand account of what it was like to evacuate from the fires in Sonoma County in Northern California earlier this week.  To learn more, reach to Adam at www.peakprosperity.com They also have an actionable plan which can be found at www.peakprosperity.com/wsid (What Should I Do?)

The book this month is Getting Things Done: The Art of Stress Free Productivity by David Allen. This is not a new book. It was first published in 2001, with numerous revisions. The most recent edition is 2015. Since technology and tools are moving so quickly, the most recent edition removes a lot of the tech tools that have a short shelf life and what remains is a timeless edition the focuses on the techniques needed to This book is about how to manage the overwhelm that represents the reality of modern life. The author David Allen has been called one of the world’s most influential thinkers on productivity. As I was reading the introduction of the book, it’s like the author was inside my head. He was articulating many of the struggles that I faced on a weekly, if not hourly basis. I experienced the stress of having too many things to remember, too many things to do, and too many priorities to ever feel like I’m keeping ahead. While the title of the book seems to imply that it’s all about accomplishing more, it’s really a book about how to engage appropriately with your world. In some cases, it’s about doing less, about focusing, and about eliminating the overwhelm and distraction that is associated with what you are not doing. When I’m sitting at my desk working on a focused task, I’m often distracted by the nagging knowledge of something that is overdue, that someone is expecting me to do and isn’t complete. The mental juggling of tasks is overwhelming and causes distraction and loss of focus. Even writing down the tasks into a to-do list doesn’t solve the problem. Some people simply write down their focused task list of the 8-10 items they plan for that day. But the problem with this approach is that it neglects the dozens of other items that are not on the list. Those items are still stuck in your head and occupying mental storage. Writing them all down seems overwhelming and not the way to go either. Unless you have a method for decision making, you will quickly get overwhelmed. The method presented by David Allen is based on three decades of experimentation and refinement. It’s based on three fundamental practices: 1) Capturing all the things that might need to get done or have usefulness to you in the future 2) Directing yourself to make front end decisions so that you a workable inventory of “next actions” 3) Curating and coordinating all of that content utilizing the recognition of the multiple levels of commitment with yourself and others at play. A paradox has emerged in our lives. We are bombarded with choices that far exceed our capacity. We have an enhanced quality of life, and at the same time we have been adding to our stress levels by taking on more than we have the resources to handle. The fact is the edges of work have blurred. In the old days, you could tell when the work was done. The field was plowed, the room was painted. These days, there is no real boundary. Writing another blog article, ten more social media posts, updating the images on the website, reviewing the google Adwords campaign, checking that the lawyer has completed the title work, reading the financial statements and ensuring that expenses were properly categorized as part of the construction inventory and not operating expenses. The list goes on and on. David Allen’s book was all the rage in Silicon Valley for a number of years after it was published and several of my colleagues used its method religiously. I’ve been adopting it into my work flow. While the system required a large commitment in time to implement, the benefits are self evident.

On today’s show we’re talking about interest rates again. Yesterday, the Federal Reserve announced another 0.25% drop in the benchmark lending rate. A number of listeners are wondering what the Fed rate has to do with every day lending rates. Some consumer credit card rates have increased in recent months at a time when the Fed rate was falling. So on today’s show we’re going to read directly from the Federal Reserve’s prepared statement, and then give our interpretation of what it means. In his prepared remarks, Federal Reserve Chairman Jerome Powell refers to the committee that governs the Federal Reserve. The Federal Open Market Committee (FOMC) consists of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. So these 12 people have more influence on the financial world than perhaps any other non-elected officials on the planet. So what does this all mean? In my view, we can expect interest rates to remain low for some time to come. While there has been stimulus in the economy since the summer, it’s not uniform. We are seeing increased demand in real estate, which is very sensitive to interest rates. Real estate refinance activity in July and August was up 75% compared with June. Manufacturing numbers are down. Some are blaming it on the trade negotiations. But in truth, I believe the inventory numbers are the real reason. We’re seeing troubles in the automotive sector. When I drive past car dealerships, whether it’s in rural upstate New York, or in the core of a major city, dealership lots are literally bursting at the seams with inventory. I haven’t seen dealer lots this jammed with inventory in a long time. I’m seeing manufacturers offering very aggressive deals in order to move inventory off the lots. So back to real estate. As a real estate investor, your borrowing cost is usually tied to one of two indexes. Most short term loans, like home equity lines of credit and other revolving credit lines in real estate are tied to Libor. That is the London Interbank Overnight Rate. This is the lending rate that banks use to pay for money that is stuck between accounts on an overnight basis. Long terms lending rates for permanent financing tend to be indexed to the 10 year treasury bill rate. So if you’re looking for long term permanent financing, whether it’s conventional, or an insured non-recourse loan When the Fed sets rates, they’re really setting the rate at which the US government borrows money. Ultimately that trickles through to the T-Bill rate, both short and long term US government bonds. As a real estate investor, you’re in a great position to lock into some great terms on long term financing, and even some strong terms on short term financing.

On today’s show we are answering a question that I receive frequently. The question is how I spend my time. What is an average day? So today I’m going to do a deep dive on what I did yesterday. My day started at 6:15. First thing, my wife and I spend about 20 minutes together. We have a meditation practice that we do. We have a couple of different ones that we use. We sometimes use an app called Calm. Today we used another App called Oak. It’s a very simple app to use and the guided meditation is very simple and easy to connect with. We start our day with the meditation practice lying in bed and holding hands. We both had a quick shower and got dressed for work. In our family we made the decision this year to go from two cars in our family down to one. Some days my wife takes the car to the office and other days I will drive her. In fact many days she will walk because the office is walking distance from our home. But today she had a little too much to carry for that distance. It gave us a few extra minutes together during the drive. On the way to her office we stopped at the fresh vegetable market to buy something for her lunch. I was back home in time to start organizing my day. I usually reserve my morning with a minimum of meetings. That is when I get my focus work done. On Monday morning I have two short meetings. At 9:30 I have a call with my partner John in Dallas for a quick update on status. Then at 10 I have a quick daily call with Patrick in my team where we reviewed the negotiations on a project. From there I started drafting the podcast for the next day. Some episodes are recorded well in advance and others are only one or two days ahead. Every Monday morning at 11:00 I have a brief phone call with a lender to update the status on one of our projects. My son reported that he had tooth pain and might have cracked a tooth. He would need to get to the dentist and find out what was going on. Recording the next podcast episode completed my morning. My afternoon was focused on another condo development project in my local market. We had a meeting scheduled at the law offices of the land owner to review a number of details on the file including a number of complex structural problems with the investment. On the drive to the meeting I made a quick stop to grab a salad from the salad bar at the local market. I made good use of the drive time to have a call with an investor. The owners of the property are a lovely family who are very close knit. We spent nearly two hours at the lawyer’s office discussing various aspects of the project, solutions to the existing problems and estimating the costs associated with the next phase of the project. After that our team found a Starbucks and we strategized how we would structure the deal. By this time it was deep into rush hour and it was going to take me an hour to get back to the west end of the city. During the drive, I figured out how to register as a delegate for an upcoming city council committee meeting. I also called a friend who had been struggling in the past year to see how they were doing. I arrived at my wife’s office just in time to pick her up. We only had about 20 minutes to have dinner, so we grabbed a sandwich on the go and went together to a community meeting organized by our local city council representative to discuss the proposed development of a golf course that is not far from our home. Several other developers were in attendance and the Mayor came to speak as well at the meeting. There were about 500 people in attendance and the meeting ran late into the evening. I finally wrapped up my day by reading part of a sailing magazine that I had picked up about 3 weeks ago and had yet to crack the cover open.

James from British Columbia asks: I have been scouring a lot of Canadian town and cities and have not come across any properties that rent at 1% of houses value let alone 2%. What do you recommend for Canadian’s and am I focusing my search in the wrong areas? I live on the west coast, so I have been primarily looking in the interior of British Columbia and Vancouver Island. James, that’s a great question. There is sometimes a paradox when it comes to making the numbers work for rental properties. The one percent rule, or the 2% rule are a proxy for not paying too much for your income stream. It’s not exact math by any means. Properties that tend to adhere to the 1% rule fall into one of two categories. 1) Working class, C Class housing in areas where there is steady employment and houses are quite inexpensive to purchase. This happens usually in mature markets. I’m thinking of pretty industrial towns like Sudbury Ontario where there are large Nickel Mines and Smelting operations. But Sudbury isn’t growing like a major Metro like Toronto or Vancouver or Nashville. You need growth to drive up the price. Areas that are more rural like Vancouver Island and the Interior of British Columbia have very high infrastructure costs. The cost of building roads and bringing electricity is high. A good US example where you can often meet the 1% rule is in Indianapolis, Indiana. Boise Idaho would be another. 2) The second area where we often meet the 1% rule is by building new apartments in markets where there is strong demand. This is what my company does. We don’t set out to adhere to a 1% rule. We use more sophisticated measures, but when we look in the rear view mirror, we often discover that we indeed did meet the 1% rule. When we purchase vacant land in the core of the city, next to a great area, we often purchase the land at a deep discount to the market. This is our buy on the line strategy that if you’ve been listening to the show for a while you would have heard me talk about. We consistently build new apartments in Philadelphia that meet the 1% rule, even though we’re not actively setting out to meet that metric. It’s absolutely true that properties in many markets in British Columbia are expensive. There has been a tremendous amount of immigration and homes that were once very affordable are now out of reach for many average people with real working class incomes such as you would have in those communities. The growth in the cities has had a spill over effect and now even outside the major cities, prices have increased considerably. Sale prices have increased much faster than rents. I find that the opportunities in many expensive Canadian markets is to focus on very specific under-serviced needs. For example, there may be a shortage of student housing next to a growing community college. There might be a need for luxury rental apartments for senior citizens who are downsizing and don’t want to tie up a lot of equity in their home.

On today’s show we are talking about cyber security. October is the annual cyber security awareness month. As more and more of our lives seem to have an online connection, there is a tug of war between convenience and security. Our mobile devices are always listening. My phone using location information tells my thermostat when nobody’s home so that we save energy on heating or air conditioning. We may think that our phone is only listening when we issue a voice command. But that is not the case. My latest car has a smart phone app that allows me to read the current status of the vehicle. It tells me if the windows are open. It tells me if the doors are locked. It tells me where the car is located. It even tells me what my mileage was on my last trip. But if my phone were to become stolen and compromised, someone with my phone can unlock the doors, and even start the engine from the app. Practicing online safety takes on so many new angles that didn’t exist even a few years ago. These days it means so much more than making sure your password isn’t something simple. If your password use simple words that are in the dictionary you’re vulnerable to a computer program guessing your password by brute force techniques. The intruder simply makes enough guesses over a long enough period of time that it eventually will guess the password. The shorter the password the quicker the computer will guess your password. Let’s imagine that your password is the word “sand”. At only 4 characters, it will take no more than a few minutes to guess the password. If you extend the password to an entire sentence, something like “Sandisonthebeach” the password has a lot more characters. It’s going to take a lot longer for a program to crack that password. Now if you start including special characters. Let’s say that you replace the S in the word sand with a $, and you replace the letter B with the number 8 which looks a little like a capital B, you’re making it much harder for a computer program to guess the password. When we talk about cybersecurity, people tend to think first and foremost about password security. That is certainly important. Another technique called two factor authentication brings an added layer. For example, if in addition to having the correct password, you also had to type in a time sensitive code that is only valid for a short period of time, you make the chances of a password breech incredibly small. But there’s another few areas that can create vulnerability. The first is to never click on a link that’s been sent to you via email. If the link isn’t going to the place you think it is, the act of clicking on a link can initiate the download and installation of software on your computer that might exploit a security vulnerability in your computer’s operating system. Once the hackers have installed software on your computer or your phone, that software can monitor your keystrokes and memorize your passwords. At that point, no amount of passwords security will help because they’re literally eavesdropping on all of your keystrokes. If you’re in business, your website is a point of vulnerability. It’s not often talked about, but commercial websites are under assault virtually all of the time. For example, every day of the week, I receive notifications from my website and from the website for my wife’s business every time it receives a barrage of attempts to attack the websites security. I can tell you that I’m seeing hundreds of attempts to crack website security each and every day. We also make edits to the website on a staging site that is not publicly visible. So if the production website was ever to be compromised, we can replace the production website with the staging website with the push of a button and in about 3 minutes, the entire production website has been replaced with a fresh website that could not have been compromised.

Tamera comes all the way from Stockton California where she has mastered the art of remote lifestyle investing. 

Anne Amagrande hails all the way from Pasadena California. She can be reached on LinkedIn or on her website at Amagrande.com.

On today’s show we are talking about how to speak to bureaucrats. This past week I attended a public consultation meeting with city officials. They are trying to gather community input on the question of housing quality, availability and affordability. Tenant advocacy groups showed up at the meeting in force. They had lots of stories of problems with their property that quite frankly should not have happened. I have a tremendous amount of empathy for the folks in the room who have endured hardships. It’s true that not all landlords are educated on how to run a quality rental business. People had stories of molds being hidden behind a coat of paint. They had stories of recurring pest infestations. They had stories of broken elements that had not been repaired despite numerous requests. The city has a mechanism for enforcing property standards. It involves a simple phone call to a 3 digit hotline and any resident can report a problem to city bylaw enforcement officials. The most common complaint at the meeting was that residents either didn’t know about the hotline or were too shy and intimidated to call. The proposed solution would be to institute a landlord licensing scheme that somehow would improve the quality of the rental properties. The cost of implementing such a system would inevitably be passed onto tenants, making housing even less affordable. One of the proposals is to levy an administrative charge against landlords that face repeated complaints requiring repeated visits to the property by bylaw enforcement officers. The funds collected from the administrative fees would funds proactive enforcement. Let’s unpack what this really means. I stood up at the meeting and made the case for properly addressing rental affordability. The root cause of affordability is that the underlying cost of properties in the city is high. When a basic commodity 3 bedroom townhouse costs $450,000 to purchase, the cost of owning that property is going to be somewhere in the region of $2,500 a month. It doesn’t matter who owns the property. If the property is owned by the landlord who rents it for zero profit, it’s still going to cost $2,500 a month. That’s out of reach for many in the community. We discussed many ideas for creating affordable housing. But at the end of that discussion city officials said they weren’t really trying to create affordable housing. They were simply trying to make sure that in the process of implementing any new rules, they didn’t make the situation any worse. So the study was really about what if any new rules would be implemented to govern rental housing. The city does maintain statistics on where they get complaints. Of the 133,000 units in the market, only a small number are the subject of property standards complaints to the bylaw enforcement hotline. In fact 233 units are responsible for 23% of the complaints in the city. We’re talking about some 233 units that represent 0.17% of the total inventory in the city. That’s less than 2 properties in 1,000. In my view, the city knows exactly where to focus its attention. It’s on those 233 properties. The second major question was on the topic of proactive enforcement. City staff mentioned the concept of proactive enforcement on several occasions. That’s a word that is code for going on a fishing expedition to find problems. You can't get the police to respond to reports of drug activity at a property, real criminal activity. City staff seemed to accept my argument that the bigger picture priorities needed to be examined. The point of today’s episode is that you absolutely can influence recommendations made by city staff to city council. You can absolutely influence decisions that are made by politicians. But you have to get out from behind your desk, you have get off your sofa on a Tuesday night and go down to city hall and engage in the dialog directly, face to face.

Entrepreneurship is a hot topic these days. The story of the startup founder turning a great idea into a thriving business is the raw material of modern urban legend. Then there’s the dark side. There’s the stories of greed, of jealousy, and of insecurity. These are all human traits that make up part of the human condition. Movies like the Big Short have documented the headwaters and the aftermath of these human characteristics. In the latest news, Business Insider is making a WeWork documentary with a hit Netflix producer about the unraveling of the world's most valuable startup. Since its inception in 2010, WeWork has amassed more than $12 billion in investment from some of the world's smartest business leaders and venture capitalists, including JPMorgan's Jamie Dimon and SoftBank's Masayoshi Son. At its peak, the coworking company commanded a $47 billion valuation and set its sights on a public offering of up to $100 billion. Today, Business Insider and Campfire announced they are making a documentary about the rise and fall of WeWork. The tagline for the documentary is that It's the story of what happens when Silicon Valley greed goes haywire and the idea of building a big business becomes more important than the fundamentals. I actually take exception to the Silicon Valley reference. WeWork tried to associate itself with Silicon Valley as if to imply that it could play by a different set of rules. The company was a real estate company and it clearly didn’t play by the rules of any sane real estate investment. It's really the story of a charismatic leader who both hoodwinked investors and was enabled by them as they tried to drive returns on their investments. Thousands of employees are now paying the price. The latest news from WeWork is that they intend to lay off thousands of employees in order to reduce their cash burn. But they had to delay the layoff notices because the company didn’t have enough cash on hand to pay the severance. The company’s board of directors had set a deadline of October 22 to review two proposals for taking the company forward. The first proposal is from Softbank who would take over the company with the injection of another $5B in cash over the next several years and ultimately steer the company to profitability. The company would be valued at $8B after the transaction and would leave Softbank deep underwater on its investment, but at least offer the possibility of a profitable outcome at some point in the distant future.  The second offer from JP Morgan is a $5B debt deal that would further leverage the company. That deal would offer up to $5 billion in secured and unsecured bonds that, unlike SoftBank’s proposal, wouldn’t dilute or devalue the stakes of WeWork’s existing investors. It all would have the effect of pushing WeWork’s equity investors further down the capital stack, standing in line behind bondholders whose high-interest debt positions would take priority. I don’t want to see a Netflix documentary on WeWork. We’ve already seen that movie before. It’s been playing out in the newspapers over the past month. In fact Business Insider has written over 255 pieces on WeWork in recent months. It’s been regular front page news in the Wall Street Journal for much of this year. What I want to see is Adam Neumann appear as a contestant on Shark Tank. That’s right. I want to see him sell his idea to Barbara Corcoran, the maven of NY Real estate where Wework has 53 locations. I want to see him sell Mark Cuban on a billion dollar investment in exchange for 3% of the company. I want to hear Kevin O’Leary’s eloquent signature sound bites. I want to hear Mr. Wonderful say “The purpose of being in business is to make money.” I can’t stand to watch people murder money. I want to hear the closing statement “and for that reason, I’m out”.

On today’s show we’re going to run a small experiment. Let’s imagine that you went into the casino in Vegas wearing a baseball cap that says Federal Reserve. You sit down at one of the card tables and start playing. But one player, the one with the baseball cap has some special powers. They can print cards at will. Moreover, they don’t exactly deal out the newly minted cards uniformly at the table. What do you suppose would happen? They’d be hauled out into a back alley behind the casino and some thugs would probably break their knees. But that’s just a hypothetical situation. Let’s get back to the real world. The year was 2008, there was a real banking crisis underway. Some of the largest financial institutions in the US and in fact around the globe were at risk of collapsing. President George W. Bush signed the $700 billion bank bailout bill on October 3, 2008. ... $700 billion was a shockingly large number. It made headlines around the world for weeks. It was the subject of books and movies. The situation was truly a crisis and it called for desperate measures. By implementing these emergency measures, Treasury Secretary Henry Paulson wanted to take these debts off the books of the banks, hedge funds, and pension funds that held them. His goal was to renew confidence in the functioning of the global banking system and end the financial crisis. The economy was in uncharted territory. Government was in uncharted territory. It needed a new vocabulary. The term quantitative easing was brought into the financial lexicon. This fancy term was much more palatable than the crass synonym of printing money. Thankfully, today the economy is healthy. Unemployment is near 50 year lows. Inflation is low, worryingly low according to some government officials. We have a US federal election coming in a little over a year. So then why would the Federal Reserve be printing, um, I mean quantitative, no that’s not it, Why would the Federal Reserve be buying US Treasuries? The Federal Reserve began buying short-term Treasury debt Tuesday at an initial pace of $60 billion a month, but officials say these purchases are nothing like the bond-buying stimulus campaigns unleashed by the central bank between 2008 and 2014 to support the economy. When private investors buy bonds, they use cash, borrow funds or sell assets to raise money to fund those purchases. The Fed is different. It doesn’t have to do any of that because it can electronically credit money to the bank accounts of bond dealers that sell mortgage and Treasury securities. The Fed gets the bonds, and the sellers’ bank account increases by the same amount as the bonds’ value. Banks keep deposits at the Fed, known as reserves, and when the Fed buys bonds from banks, their reserves rise by an equal amount. They’re like that special player at the card table. The Fed bought bonds to stimulate the economy between 2008 and 2014. Isn’t this the same thing? Not according to the Fed. The central bank has taken pains to emphasize that these purchases don’t represent a return to what is known as quantitative easing. We’re not allowed to call these purchases QE, but they look exactly like the QE bond purchases of 2008. Now at $60 billion a month, that comes to $720 billion a year. But wait a minute, the Fed printed $700 billion in the middle of the biggest crisis in decades. Now 10 years later, with no crisis, they’re going to print $720 billion a year.

Yesterday was the Federal Election in Canada. The incumbent Liberal Party under Justin Trudeau had a majority prior to the election with 177 out of the total 338 seats in Parliament. At total of 170 seats are required to form a majority. There were 6 parties vying for position in the election. The two major parties are the Conservative party which is a little right of center, and the Liberal party which sits left of center. The third party is the New Democratic Party is decidedly left wing in their policies. There are a few wild cards. The Bloque Quebecois, is a party based in the province of Quebec and they are exclusively focused on furthering the interests of Quebec, Canada’s only French speaking province. Historically, the Bloque was furthering the agenda of Quebec independence. These days they don’t talk about separatism and are focused on protecting Quebec’s interests at the Federal level. The Bloque Quebecois could hold the balance of power in a coalition government with either the Liberals or the Conservatives. The Green Party, the People’s Party, the independents, and a few other fringe parties make up the balance. When you look at what each party is proposing on their election platform, there are supposedly about a dozen election issues, at least according to the media. Then there’s the big issue that really decides the votes. Do voters like the candidate who is was elected as leader of the party who would ultimately be named Prime Minister. Do they conslder the politician to communicate in an authentic way, or do they find them manipulative? Justin Trudeau who has held the role of Prime Minister for the past mandate narrowly won enough votes to form a minority government. That means that any major legislation will require a coalition with at least one other party and possibly more. The popular vote separating the Liberal and conservative parties was less than 2% different. Neither party managed to secure more than 33% of the popular vote. So it’s really surprising that any party was able to form a government with such a low percentage of the popular vote. The US has a decidedly 2 party system. You either get a democratic congress, a democratic senate and a democratic white house, or a republican congress, a republican senate or a republican white house. But in Canada, there are multiple parties. There are two major parties that seem to capture the majority of the votes, but there’s nothing enshrined in the system that limits the number of parties. Minority governments are traditionally unstable. They also tend to gridlock and don’t get much done. Countries that have an electoral system based on proportional representation have a very hard time forming a majority governments. You only need to look at Italy and Israel for examples of the pitfalls of a proportional representation electoral system. After several weeks since the last general election in Israel, Prime Minister Benjamin Netanyahu came forward today to concede that despite having the most votes, he has not been able to put together the democratic coalition needed to from the government. Minority governments have a history of not lasting very long in Canada. They often fall within 18-24 months and the country goes back to the polls. This particular election was one of the most divisive in recent memory. There were numerous personal attacks and issues where the candidates themselves became the issue. Much like in the US, the political division is regional. Canada tends to see a stronger base of support in the Western provinces for the Conservative party, and a strong based of support for the Liberal party in Ontario and Quebec. I found there was little to vote for, only things to vote against.

Today’s show is a case study of a specific project which my wife and I visited this weekend. It seemingly has all of the right elements. The location is one of the best in the city. It’s directly across from the Rideau Canal one of the most historic and picturesque waterways in North America. During the winter months, the canal is the site of the world’s longest 7 mile skating rink. The property is walking distance to restaurants, shops, two universities. It’s in the heart of the community and still has lots of green space right outside your doorstep. The location counts some embassies in the same area overlooking the canal. The project is being developed by an experienced development team who have completed several other successful projects. The architect is one of the premier architects in town. The general contractor is one of the largest and most established contractors in building concrete structures in North America having built numerous high rise buildings, government office towers. They have over 14,000 employees and have been in business over 100 years. The showroom and sales center is situated in an old church that resides on the site of the future condo tower. The developer took the project through the entitlement process and the project is approved. The six story building has a few technical challenges. It’s across the street from the Canal which means that the water table is going to be extremely high. The underground parking will have to be protected from water intrusion that will ultimately be present. This will increase the cost of construction. The site is not that large. The original plan was for 32 units on 6 floors. The floorplans are large and spacious. The terraces and balconies are luxurious and spectacular. Once you have a project that is entitled, that process defines the envelope of the building. It defines the setbacks from the property line, from the street, and the height. In some cases, if buildings are going to be higher than other properties in the area, the city will require the upper floors of the building to be set back and have a smaller footprint so you don’t have a huge rectangular block. This creates tremendous opportunities for roof-top terraces on the upper floors. But there’s one small problem. The units are not selling. Why? Because in my opinion they’re too expensive. In fact the developer has pulled all the pricing from their marketing materials and have stated that they’re in the process of redesigning the interior. They plan to increase the number of units from 32 to 40 without changing the exterior envelope of the building. There simply isn’t that large a market for apartments at the 2.5M price point. Underground parking spaces are going to be priced at $45,000 each. At the end of the day, the target clients are going to be people who are empty nesters who want a property in a premier walkable location combined with the security of a lock and leave condo. They want to know that the maintenance of the building is handled and that they can spend a few months away in the winter without having to worry about taking care of their property. The problem is that the price point is too high. As developers we tend to think in terms of price per square foot. But retail buyers don’t think in those terms. Retail buyers think in terms of price point, of affordability. Tenants don’t think in terms of rent per square foot. They have a monthly budget of so many dollars per month. They might want a large two bedroom for that price, but if they can’t get it, they’ll accept something smaller that fits within their budget. If you’re choosing to develop a premium product, pay very close attention to your market demand and be prepared that it could take a lot longer for your project to sell than you imagine.

Hayden Crabtree is based in Atlanta Georgia and he owns and operates storage facilities in multiple states. On today's show we do a deep dive on a specific case study that I think you'll find fascinating.

Our guest today is the host of the Thought Leader Revolution Podcast. Nicky specializes in working with business leaders, olympic athletes, and authorities who are looking to establish themselves as thought leaders. You can reach Nicky at http://ecircleacademy.com. He is also offering to ship you a free book written by Matt Church called the Thought Leader's Practice. https://www.thethoughtleaderrevolution.com/free-book/

On today’s show we’re going to do a deep dive into a city consultation process as they grapple with the question of how to manage what is perceived as a problem with affordable housing in our city. To that end, they’re holding a number of public consultations including a public survey. Over the course of this past year, the City has met with and received input from multiple community and business organizations to discuss rental housing regulations. The purpose of going into this much detail is for you the listener to become involved in your own municipal consultations and for you to recognize that you have a voice. Tenants have shared a range of experiences related to housing quality, from very poor to excellent. While there is significant support within the community for a licensing/registration system for rental housing, the majority of tenants do not support these measures. In approximately 9 out of 10 cases, landlords make repairs when required and there is concern about the increased rental costs that would result from licensing and inspection fees. However, when problems do occur, both tenants and neighbours want to see a more robust response from the City. There is strong support for proactive enforcement as well as enforcement targeted towards properties with a history of violations. From landlords and the real estate industry, the city has heard that over-regulation will deter new construction and could also result in current units being taken off the market. This will likely result in higher rents and more residents living in unaffordable housing. However, it is important to note that the majority of landlords and tenants both agree that enforcement should target specific problems when they occur rather than taking a broad “one size fits all” regulatory approach.

In the good old days you went to the big box store and purchased a software application in a large cardboard box. The software as contained on a CD and you installed the software on your computer. These days, software is rarely a product any more. It’s increasingly cloud based and sold on a monthly basis as a subscription. That is what we now know as software as a service. The latest is something called banking as a service that aims to disrupt the world of banking much life the sharing economy has disrupted taxi services, hotels, and even the dining experience. On today’s show we’re going to do a deep dive on some of the innovations in banking that fall into the open banking and banking as a service initiatives that abound in the industry. These days a lot of the literature focuses on the mechanics of gaining access to bank data through defined software interfaces. These Application programming Interfaces (API’s) define how a third party software company can access customer data, or bank functionality or both. It’s important to make a distinction between these two because the security of your money is at stake. Unless you are in the business of banking, a lot of this can sound like technical jargon. On today’s show, we’re going to break it down so that you can understand what it means to you as a user of banking services. First of all, we need to spend a little time on definitions. Platforms break down into four main areas: Identity Verification Move Money Account Origination Design and Manage branded customer debit cards There are a large number of startup companies developing products in the financial technology space. They’re called fintech companies. So what do fintech companies do? They offer services that previously were not possible in the market. An example is a solution for taxis and public transportation: In this service, the bank's customers can send for a taxi from the bank's own app and identify all of the charges; and the bank gets payment fees and offers the service itself. Intuit, the maker of Quicken, Quickbooks, and Turbotax has a new product called Mint. Mint makes it possible to get a consolidated view of all your accounts, credit cards, loans and so on across multiple financial institutions on a single dashboard. You can see your entire financial life in one place. As you can imagine, that requires that each of those institutions provide secure access to your accounts so that you have the benefits and convenience of a single dashboard without the security risks of opening up your financial records to any unauthorized access. The mint offering includes a bill payment tracker, a budget goal tracker, an investment tracker, and an integrated credit score tool. You also have access to services and products including insurance quotes, loans, and 401K to IRA roll-overs. Another one of the recognized leaders in the open platform space is BBVA from Madrid in Spain. The opening of these platforms would enable banks to play more directly in services like peer to peer payment which up until now have been in the exlusive domain of companies like Paypal. The European Union has set clear rules in place for interchange of bank information and for open banking standards. These rules have put European banks well ahead of banks elsewhere in the world in terms of adopting open standards and more advanced service offerings. One of the major frontiers in fintech is the interchange between traditional bank accounts and various blockchain technologies and crypto-currencies.If and when that happens, it may revolutionize electronic commerce on a global basis and change the relationship between you, your smart-phone, your bank, and virtually every aspect of your financial life.

On today’s show we’re talking about the race to the bottom. You have to admit, it’s hard to compete with “free”. There are numerous examples of products and services that used to cost money, that all of a sudden are “free”. If you were in business relying upon service revenue and one of your competitors up-ends the market by offering your service for free, what are you to do? Are you out of business? Earlier this year, Luxembourg decided to make its public transit 100% free. Luxembourg City, the capital of the small country, suffers from some of the worst traffic congestion in the world. It is home to about 110,000 people, but a further 400,000 commute into the city to work. A study suggested that drivers in the capital spent an average of 33 hours in traffic jams in 2016. While the country as a whole has 600,000 inhabitants, nearly 200,000 people living in France, Belgium and Germany cross the border every day to work in Luxembourg. Annual revenue from fares – 41M Euros – covers less than 10% of the network’s 491M-Euro operating costs. When you consider how much labour and expense is spent collecting money, counting, sorting, enforcing payment, it actually made sense to eliminate the fares. But think about the impact to the other forms of transportation. If you’re a taxi driver in Luxembourg, you’re probably unhappy about the new free alternative. Will taxis go out of business? Probably not, but free doesn’t help bring more business. If you’re in the online dating business like match.com, e-harmony, tinder or bumble, you were probably unhappy to hear that Facebook was going to enter the market with a free offering. The service has been live in 20 countries for a while and is now live in the US over the past few weeks. The service aims to put a dent in the $2.5B dating market that is aimed at the 200 million Facebook users in North America who identify as single. In other news, Charles Schwab began offering commission-free online trading for U.S. stocks, exchange-traded funds and options on October 7. Previously, each trade cost investors $4.95. Commission fees are charged by a brokerage when you buy or sell a stock, ETF or other type of investment product. So far, one area that has been defended strongly from “free” services is real estate commissions. The standard model of 6% commissions being split half way between the buyer and the seller side hasn’t budged in a few decades, even though much of what a realtor does has changed significantly. Finally, specialty news services, Cable TV, and subscription radio are struggling to survive in the era of YouTube, online news sources like Business Insider, and of course the entire podcast movement. I’ve had several people who want to start a podcast ask me how to monetize a podcast. The simple answer is that you don’t monetize a podcast, at least not directly. So the question is, why would anyone provide something for free? Why would a broker provide free brokering? Why would Facebook provide a free platform? So why would someone host a podcast for free? In the case of the podcast, it’s a fair exchange. I provide you with something valuable each day for free. My message will connect with some of you and some of you will want to reach out to me and propose doing business together. That doesn’t mean that every one will be a match, but a subset could be and that’s enough for me.  Some people view free as a race to the bottom. Some free offerings are just click bait. I view free as an opportunity to engage in a conversation and develop a relationship that may turn into something more in the future.

Pam in New Orleans asks: Harry Dent recently published a view that says “The Biggest Stock Market Bubble In History Set To Crash.” What are your thoughts on what Harry has to say? Pam, this is a great question. Harry Dent is an economist who specializes in using demographics to predict economic behaviour. He is also known for having some controversial views. All controversy aside, I agree mostly with Harry Dent’s perspective that the market is going to face some significant headwinds. If you think about what drives up prices in the stock market, it’s more buyers than sellers. Buyers of stock are people who are in the workforce who put some money aside and invest some of those savings in the stock market, the bond market or in real estate. People who are of retirement age take their life savings out of the stock market and put them into more fixed income securities and use the income to fund their retirement. When you look at the number of people in the workforce compared with the number of people in retirement, we see an inversion. When the baby boomers were all in the workforce, they were saving for retirement and investing in the stock market. With about half of the baby boomers now retired, and the remainder to retire over the next decade, that large generation will be pulling money out of retirement accounts and out of the stock market for the next 30 years. The generation of people who came behind the baby boomers, the so-called Generation X is a much smaller population who are still in the workforce. All other things being equal, we’ve gone from a period where there were more investors in the stock market to a period where there are now more people withdrawing form the stock market. All other things being equal, this redemption of funds form the stock market is putting downward pressure on the stock market. It’s hard to see that right now because we’ve just gone through a few years of asset price inflation in the stock market. The valuations we are seeing in the market don’t make sense on a fundamentals basis. We’ve seen insane valuations being attached to companies that are losing money. The examples are rampant from WeWork to Uber, Lyft, Tesla and Netflix. The valuation multiples being attached to these companies are decidedly in bubble territory. So at some point, when the markets wake up and sanity prevails, we can expect to see a dramatic drop in stock prices. I think we’re starting to see the tip of that iceberg with the failed IPO of WeWork. So when will this happen? I’m not sure about the timing. The difficult thing to predict is how much longer governments can inflate the bubble by printing more money. These hits of heroin (cash) being injected into the economy do have a stimulative effect (less and less), and they definitely inflate asset prices. The patient is now resistant to the drug. That’s why negative interest rates in Europe for over a decade have done nothing to stimulate the economy there. You want to get your money into assets that are an effective hedge and you want to do it before the precipitous fall in prices. Harry also predicted a precipitous fall in real estate prices. When he says that, I believe he is talking about residential real estate. There is no question that demand for 5 bedroom houses in the suburbs is falling. Demographics says that the demand isn’t there at those price points. So we will definitely see homes at the top end of the market fall in price, even as homes at the bottom end of the market increase in price. He did say that cash flow positive real estate is a good hedge (I agree). He said long bonds are a good hedge, but I don’t agree. Paper assets get devalued too much over the long haul. Savings get wiped out. Debt gets wiped out, and people on fixed income get wiped out. A destruction of wealth in the stock market will make less equity available for investment. 

On today’s show we’re coming to you live from Annapolis Maryland. Annapolis is the capital of the state of Maryland. It’s also the home of the US Naval Academy. This is where the US Navy trains its officers. It’s also home to the world’s largest in the water boat show. It’s an important town because it is a state capital. But it is a small town. Total population is only 39,000. It’s small because it is geographically constrained. On today’s show we’re going to do a small walking tour of Annapolis from a real estate perspective. This town is decidedly anti development. It’s a vey quaint seaside town with historic homes set on narrow streets with cobblestone sidewalks. Many of the narrow century old townhouses have a flag pole jutting out from the side of the house. You won’t have to go very far to be reminded which country you are in. Most of the streets are one way streets and many of them are dead end streets. They’re dead end streets because in Annapolis it’s common to run out of land and come across the Chesapeake Bay. The many inlets, rivers and coves make for a very intimate and extensive coastline. Many of the waterfront homes have a boat docked in front. The idyllic setting is one of the most picturesque coastal towns in all of North America. Real Estate is expensive here. Waterfront homes are priced usually between $2-3M. Development in Annapolis is difficult because any development that falls within what is called a critical area must be sent to the State of Maryland Critical Area Commission for the Chesapeake and Atlantic Coastal Bays prior to receiving local zoning approval, or a building permit. Generally speaking any property within 1000 feet of a waterway falls into the critical area overlay. In this zone, a whole bunch of extra rules come into play. Most of these rules are designed to protect the sensitive waterways of the Chesapeake and coastal regions. For example, there are vegetation requirements. There are restrictions on waste transfer. You are unlikely to get a septic system approved on a property in the critical area overlay. This is not an easy town to be a real estate investor. We saw an old townhouse in very poor condition. It had a public notice posted in the front window. The owner of the home was seeking to make improvements including new siding, new windows, and a small addition in the rear yard. The entire process had been opened up to public review. That home, is directly across the street from the courthouse and has been in distressed condition waiting for the application process to complete. A review of commercial listings in Annapolis shows only a single 5 unit building for sale. The next closest listing is a commercial property for sale in neighbouring Parole which is one exit away on the freeway. Annapolis is a difficult place to get anything approved. Residents are decidedly anti-development. This is why you see very few new structures in the town at all. Older structures are governed by the Annapolis Historic Preservation Commission which has final say on any changes to properties within the historic district. For example, the Annapolis Waterfront hotel recently wanted to update the Awnings, fence and landscaping. This too had go in front of the Historic Preservation Commission for comments and approval. We’re not even talking about any permanent structures. We’re talking about awnings, fence and landscaping. As you think about undertaking projects, pay close attention to the rules in your municipality.

Joe Quirk is President of the SeaSteading Institute. On today's show we're getting an update on the advancement of the technology of life on the high seas. Listen to this fascinating conversation.

Peter Conti is the author of "Commercial Real Estate For Dummies" and lives with his family in Annapolis Maryland. Six years ago, he survived a devastating motorcycle injury. As part of his rehabilitation, he walked the entire Appalachian trail from Georgia to Maine. Listen to this fascinating conversation with Peter Conti.

On today’s show we’re talking about another of the many distortions that exist in our world. I’ve been to Greece many times. I love the food. I love the weather. I love the islands, and the rich ancient history. My father was born on the island of Rhodes and he was born in a home inside the old walled city in Rhodes. The fortifications date back to the time of the Knights Hospitaler and were built in the 1300’s. My fathers house was built in the 1400’s. Prior to 1910 the island was under Turkish occupation. Then from 1910 until the end of the second world war it was under Italian occupation, before finally being returned to Greece after the war. I love going to Greece. But Greece is a chaotic place. The culture in Greece is one of rebellion. It’s common for traffic violations to happen directly in front of police officers with zero consequence. Greece also struggles to have strong enforcement of tax collection. The underground economy is alive and well. Not surprisingly, Greece is also mired in debt. One sovereign debt crisis after another has befallen the country. The country has struggled to pay its bills. The solution? Each and every time, its creditors have loaned it more money even though it was obvious that they didn’t have the political will to implement the austerity required to improve their balance sheet. But since a default was too distasteful for the creditors, it was easier to loan them more money and kick the can down the road. By the time the next crisis hits, hopefully the decision makers at the bank will be retired and it’s no longer their problem. This week, Greece entered the Negative Club. What is the negative club you ask? Greece sold debt offering less than 0% for the first time on Wednesday in the latest sign of how far investors will go in a hunt for returns amid a global slump in yields. The Greek government issued €487.5 million ($535.31 million) of three-month debt at a yield of minus-0.02%. At a previous auction for bills with similar maturity on Aug. 7, the rate was 0.095%. The move reflects a broader shift in European bond markets in recent years, with investors paying governments from Germany and Switzerland to Italy to hold their money as the European Central Bank cuts borrowing costs to bolster economic growth in the region. That also means investors are being forced to take on more risk to generate returns, with Greece long considered the final frontier. The nation, which emerged in August 2018 from an eight-year international bailout program following a prolonged debt crisis, has been welcomed back into the bond market with strong demand for its debt.  While the Greek government so far has issued only very short-term debt at a negative yield, other European governments are borrowing through longer-dated debt that pays no interest. Germany, for example, sold 30-year debt at a negative yield for the first time in August. The yield on the government debt has tracked improvements in the Greek economy, suggesting that debt holders are “not as worried" they’re going to lose money as they were in the past. So the question is would you be willing to lend money to the Greek Government for 90 days and make the bet that they won’t default in the next 90 days? But more importantly, would you be willing to lend money to the Greek Government at negative interest rates, even if it's for only 90 days? Perhaps purchasing a 90 day bond from the Bank of Canada at 1.75% would be a better bet. I know, I know, you would face costs associated with the foreign exchange that would negate any earnings. Europe is a family. Within every family, not all members are an equal credit risk. The very idea of lending money to my cousin who has a spending problem because I don’t know what else to do with my money seems a little crazy.

The idea behind today's episode came to me from one of our listeners. Hayden in Atlanta share some details on the topic of today's show. So thank you to Hayden for keeping your eyes open to what's happening in the marketplace. The latest of these is a new company called Why Hotel. Apartment developers often have a number of vacant units upon completion of the building. The developer ultimately wants to sell these as soon as possible. But these vacant units are costing them money each and every day. The developers are not in the nightly property management business. They don't want to put tenants into vacant units they intend to sell. They certainly don't want to be in the hotel business. It is far too labor-intensive. The folks at Why Hotel will partner with a developer to take a percentage of their vacant units and make them available in the short term rental market. Why hotel manages the furnishing of the units. They handle the nightly rentals, and they handle the day to day cleaning and management of the customer experience. The value proposition to the end customer is it that they get to stay in a brand-new luxury building with modern amenities. By establishing a brand and setting a high standard for quality of finishes, they address the very common customer objection over the wide variation of accommodation quality that you find on platforms like AirBnB and VRBO. Why Hotel solves a problem for the developer, by giving them a stream of income during a period where they have vacancy and holding costs. They solve a problem for the end customer by delivering a high quality finished product. So far the company has locations in Seattle Washington and Arlington Virginia. They have a third location schedule to open shortly in Virginia as well. So far why hotel is a small player. But it is a unique and innovative business model. The folks at Why Hotel are obviously making a capital investment in the furniture and fittings. The developer is contributing to vacant units on their side of the deal. The profits get split between the developer and why Hotel according to a formula that is negotiated between the two parties. The first property opened in the Inner Harbor area of Baltimore, the result of a partnership with Monument Realty for 158 of the building’s units. The 347-unit property offers a custom mural, apartments with private balconies, an outdoor rooftop pool, a rooftop lounge, game room, theater room, 5,000-sq.-ft. fitness center, and business center. Today, that property is no longer part of the hotel portfolio and has been fully leased. One of the criticisms of short term rentals is the increased traffic of hotel guests mixing in with permanent residents. Residents often raise concerns about security. Why hotel has full-time staff on site, just like a regular hotel. But these pop-up hotels also offer an additional benefit to residents. Permanent tenants of the building can have access to the hotel cleaning staff services at very reduced and competitive rates. If you have a building that is going to be leasing 20 or 30 units a month, the developer can be secure in reserving a portion of that inventory for a pop-up hotel. While each pop-up is expected to typically last between eight and 16 months, the company expects to remain active in a single market over a sustained period of time in multiple properties. On the podcast, we keep our eyes and ears open to innovative ideas. Again this one came to us from Hayden in Atlanta. Thank you Hayden. Perhaps this gives you ideas on other ways you can create a master lease agreement with an under-utilized asset to solve a business problem.

Governments all over the world have resorted to FIAT currencies that are no longer tied to the value of a hard asset. The word FIAT comes from Latin and simply means “by decree”. The fact is, both gold and silver have been money for centuries. It’s only in the last 50 years that the US stopped using Gold and Silver as the basis for money. For a while, it was illegal for US citizens to hold gold. There was a shortage of gold to fund the war effort around the second world war and the US government didn’t want to be competing with private citizens for access to gold reserves. Fortunately that ban was lifted and we can all buy gold coins or bullion. So what is gold worth today? It’s a little like asking how fast you’re going? It all depends on your point of reference. You might be standing perfectly still right now. But the earth is spinning on its axis and if you were standing on the equator, you would be traveling at a speed of roughly 1,000 miles per hour. But wait, the planet itself is rotating around the sun once a year. Maybe you’re really traveling at a much faster rate of 30 km per second or about 67,000 miles per hour. You get the idea. So what is the value of gold? It depends on your point of reference. Is the measure of value in US dollars, in Euros, in Chinese Remnimbi? Maybe when the price of gold is going up, it’s really the value of the currency that is going down. Perhaps you should be measuring your net worth not in dollars, but in ounces of gold? Why is it that both China and Russia are amassing gold at furious rate? In fact, China is growing its gold reserves at a rate that is equivalent to the annual global mining volume. Whatever gold is being pulled out of the ground today, China is buying virtually all of it. I know of a few contractors who have been working in the oil field in Saudi Arabia. They get their pay check in gold bars. So today the price of gold, as measured in US dollars has gone up by nearly 20% in just the past couple of months. Is that a reflection of the weakening of the global economies and an anticipation that governments will start printing more money again as the economies show signs of weakness? So why does the price of gold as measured in US dollars fluctuate so wildly? Should the price of gold not be more stable? In the end, gold is a hard asset with intrinsic value. It’s value should be very stable over time. It’s one of those references. So are other hard assets. That 11 unit apartment building we built last year will not change in value from week to week based on whether the President sent a controversial message on twitter or not. It’s still the same 11 unit building where a two bedroom apartment rents for $1,650 per month. It will be worth about the same in a year, plus a little bit of appraised value growth as our currency devalues. The rents will increase a bit, so will the expenses. In 10 years, it will still be the same 11 unit building, generating strong income and cash flow each and every month. We tend to think of our net worth in dollars. But what if we thought of our net worth in apartments, or in ounces of gold? What if we measured our net worth in acres of agricultural land, or number of beds of dementia care in assisted living? Each one of these offers a hard intrinsic value based on the underlying physical assets and value to the marketplace. The benefit of holding a hard asset is that devaluation of the currency has three effects. It wipes out purchasing power for those on fixed income. It wipes out savings, and it wipes out debt. You don’t typically borrow money at low interest rates to buy gold, although I suppose you could. It wouldn’t be terribly responsible because gold doesn’t generate positive cash flow.  But real estate can carry the debt service plus a bit and provides a highly effecting hedge on inflation.

On today’s show we’re talking about how to measure the financial merit of an investment. How do you compare two investments that pay the investor according to differing formulas? Some investments pay greater cash flow. Others have more aggressive loan principal pay down schedules. Others still are creating equity through forced appreciation. We’re not going to even touch the topic of risk, since that’s an entirely other subject. So how do you compare these dissimilar investments? Yesterday we talked about the equity multiple as a metric for evaluating the merits of an investment. It’s a simple metric to calculate and involves adding up all the cash flow from an investment and dividing by the initial investment. It has the major drawback that it neglects time. Getting a 3x equity multiple in one year is clearly a better investment than one that takes 50 years to achieve a 3x multiple. Perhaps a rate of return calculation would be more meaningful. But here too, there are multiple calculations that you can perform. The most comprehensive is the internal rate of return. The simplest investment to understand is a fixed income security. Think of a certificate of deposit with your bank. You put in $100. A year later the bank allows you to redeem the certificate and you get $103 back. The annualized rate of return is a simple 3%. The math to calculate the rate of return for that simple cash flow is about as simple as it gets. But if you have a real estate investment that is appreciating 2% per year, with 4:1 bank leverage, paying out a 5% preferred return, and has a one-time forced appreciation of 30% in value in year 2 of the investment which you predict to hold for 5 years. What’s the rate of return now? If your head is spinning, you’re probably not alone. Enter the Internal Rate of return metric. Calculating the internal rate of return involves quite a bit of complex math. It’s a time value of money calculation for a stream of cash flows over the life of the investment. Payments happening now are considered to be worth more than payments in the future. For the pure mathematicians in the audience, I’m not going to go into all the math that the internal rate of return calculation entails, nor the related net present value calculation. I can assure I’ve done all those calculations many times as part of my engineering degree. Fortunately, most spreadsheet programs including Google Sheets, Microsoft Excel, and Apple Numbers have a built in function that calculates the internal rate of return without requiring you to do a ton of math. The IRR function assumes that you have a stream of cash flows that occur on a regular schedule. So for example if you expect regular monthly payments from a project, the IRR function can handle that with no problem. The payment amount can vary each month, and as long as the time element remains regular. If you have a month with zero cash flow, that’s no problem. If you have a month of negative cash flow, that’s no problem. If you have a large lump sum payment upon the sale of an asset or a cash distribution in the middle as the result of a refinance, that’s no problem. The IRR function is one of the most powerful tools for measuring financial rates of return. In order to assist in that process, I’ve created a simple Excel tutorial which you can get for free. Simply send me an email to [email protected] with the word IRR, just three letters in the subject line. I’ll send you a copy of the Excel file and a short two minute youtube video that walks you through the Excel file.

I often have both investors and consulting clients ask me about various metrics contained in the executive summaries we prepare. In order to maximize the benefits, investors need to know how to effectively compare opportunities. That’s often easier said than done, because the entire concept of valuation is often highly subjective. So while it’s certainly possible to gauge the potential returns, security and performance of any given property, investors need to know how to use the right tools to do so. A lot of investors use the cap rate as a measure of the attractiveness of an opportunity. But the cap rate really only talks about the profit potential for a project, independent of how you might finance a project. Clearly the operating performance of an apartment complex at a 7% cap rate is not going to depend on the financing. But the rate of return to the investor will depend heavily on the financing structure. If we’re paying a 9% interest rate for debt versus a 4% interest rate, it makes a big difference. In order to capture that, we use two metrics. The Internal Rate of Return is the most often used metric. On today’s show we’re focusing on the equity multiple. In fact, along with Internal Rate of Return, we believe equity multiple is one of the most effective ways to compare the attractiveness of specific real estate investments. Here is what you need to know in order to effectively use this metric. Equity multiple is a metric that calculates the expected or achieved total return on an initial investment. It’s calculated by dividing the total dollars received by the total dollars invested. Equity multiple is an easy comparison tool because it provides a quick glimpse into the total profit investors can expect to earn on a particular investment, if successful. However, while equity multiple is important when analyzing deals, it is by no means a one-size-fits-all solution because it ignores one critical factor — time. To thoroughly evaluate a potential investment, investors should pair equity multiple with other industry metrics — particularly the Internal Rate of Return (IRR).

Jens Nielsen came to the US from Denmark. He now resides in Durango Colorado and invests in New Mexico. Like many, he made the transition from corporate life to full-time real estate investing.