Manhattan is one of the most dense markets in the world. Over the past 7 years there have been more than 16,200 units completed in New York in 682 new buildings. But today, roughly one in four of these remains unsold. This is astounding when you consider that the traditional model for condo development is to have a high percentage of units pre-sold prior to breaking ground on the project. Some lenders require 80% of the units must be pre-sold. Clearly that hasn’t happened. Prices in some of the newest towers are being reduced. At the same time we hear continually that there is a lack of affordable housing in the New York area. It’s true, housing in NY is hard to come by. Many people who have a six figure income will rent, others will have a room-mate in order to make ends meet. Much of the vacancy is in the luxury and ultra-luxury segment. Manhattan, like some other gateway city markets, notably Miami and San Francisco have seen a boom of investment from outside the US. Much of this has come from mainland China and Hong Kong. Today, there is a significant slowdown in money coming from abroad. While the US remains one of the most desirable places for global investors to park cash, various headwinds have made the flow of money slow to a trickle. According to a report in the New York Times this week, there is also a shadow inventory of units for sale. This inventory is held by the developer and doesn’t appear on the market. If you include these units, local experts estimate that there are as many as 9,000 unsold units. Across New York City, the rental vacancy rate was most recently recorded at 3.63 percent, which translates to about 79,000 units. That is much lower than the national vacancy rate, which was last recorded at an average of 6.9 percent. The vacancy rate is the highest in Manhattan at 4.73 percent and the lowest in the Bronx at 2.71 percent. The NYC vacancy rate varies greatly by price with higher vacancy rates among more expensive apartments and lower vacancy rates among less expensive apartments. The vacancy rate for apartments over $2,500, for example, is 8.74 percent. New York continues to add a lot of high quality jobs. Despite Amazon’s announcement to pull out of its planned expansion into the Long Island City location, several other tech businesses are expanding their presence in NYC including Google, Facebook, Twitter and salesforce.com. So what does this have to do with supply and demand? We are seeing the top end of the market as being over-supplied and the middle of the market and below as dramatically under-supplied. There’s no really good reason for New York to be that much more expensive than the rest of the country. Building materials cost the same pretty much regardless where you put them. But the underlying land is incredibly expensive and the cost of labour doing construction in New York is much higher than the rest of the country. I’m definitely in favour of development. Probably 90% of our business consists of new construction. But I’m not in favour of building in areas where the delay between concept and completion is so large. There’s simply too much risk that the economic conditions, specifically the balance of supply and demand can change dramatically over that time period. Make sure you segment your market to understand the balance of supply and demand within a market segment. The averages don't really exist. 

Robert from Detroit says, ”Victor, I love how you talk about real estate from a business perspective. It’s fresh, clear and its devoid of the industry jargon. The question was if you’re in an area where there is a lot of new investment going into an area, such as downtown Detroit. This large scale development seems to be attracting new residents. It seems like the new development is creating new demand. Is this an area that would be a candidate for your buy on the line, move the line strategy?” Robert, thank you for the kind words. This is an outstanding question. There are a number of forces at play here and we need to take all of them into account. You are correct in noticing that real estate is hyper-local. The revitalization of the downtown in Detroit is an ambitious project and I truly hope it is successful. As you’ve hear me say many times, successful business always follows the laws of supply and demand. The revitalization project is creating new supply. What I want to see before I would invest in an area is the demand that will absorb all that new supply, plus a bunch more excess demand left over that didn’t get satisfied. What I’m worried about in Detroit is that it’s a shrinking city. There is not the inflow of jobs that is creating additional demand. So this new supply will compete with existing supply in the market. It will steal market share from other properties and you will likely see other areas become run down as residents leave those areas. It becomes a game of substitution for one product over another. Some people think that lots of brand new supply can stimulate demand. Here’s how I think about it. Imagine if you were a city planner and you were tasked with creating a public transit system. It might be light rail, or busses. Imagine for a moment that you decide to start small and you are going to put one bus per hour on each bus route throughout the city. Even though you added supply, I don’t believe it would get used very much. People would still use other forms of transportation. The new busses would be too inconvenient. If you realized that insufficient frequency of service was the problem and you decided to invest very heavily and now you have a bus or train coming every three minutes like they do in Tokyo. You would get a lot of riders using public transportation. It would be way more convenient, it would cost less than driving and parking your own car, and it would be faster because you would avoid all the rush hour traffic. More people would use public transit than ever before. But notice, nowhere in this example did the demand for transportation increase. What happened was a substitution of public transit over other modes of transportation. Investment in a new product and bringing a lot of new supply of that new superior product can cause substitution. But it’s not creating additional demand that didn’t exist in the first place. So if your city has a shrinking population, the need for housing is actually going down. In a shrinking market, prices will eventually fall. They have no choice but to fall. That’s why you can buy houses in Detroit for under $20,000. Yes, eventually over time these houses become distressed, the city forecloses on them for unpaid property taxes and the homes become condemned and eventually disappear from the market. Now you’re left with vacant land in the core of the city. It’s a modest improvement, but not much. You can get some local market effects happening when there is development in an area. I would definitely look for those types of conditions to see if there truly is demand. Otherwise it’s just a bunch of developers who have too much money on their hands and they don’t know what to do with it. The landscape is littered with major projects that have resulted in over-building. The problem is a failure to properly assess the demand.

On today’s show we’re focused on the book called PRE-Suasion by Robert Cialdini. Now it’s not persuasion, it’s a made up word pre-suasion. The main idea behind the book is that we as humans are often easily swayed by momentary framing of attention. That framing seems to have a disproportionate importance in how we make decisions in the moment. The author spent many years understanding the process of influence, attending training classes on sales technique, shadowing sales professionals on their sales calls and observing what made some sales people disproportionately more successful than their peers. His research uncovered a massive blind spot that most of us humans possess. What happens In the moment before we are asked to make a decision has a disproportionate impact on the decision. In a very simple example from the book, researchers looked at the problem of getting consumer survey data. Most consumers are overwhelmingly very reluctant to respond to surveys. In an effort to get better data, or in fact any data at all, you sometimes encounter people in the shopping mall or a supermarket who are holding a clipboard asking for a few minutes of your time to answer a quick survey. Some surveys offer a free gift, what is essentially a bribe, albeit an ethical bribe to get you to answer a few questions. A bigger more enticing gift surprisingly has little impact on the response rate to the survey. Researchers found that about 29% of people approached would agree to participate in the survey. This is a significantly higher response rate than you might get if the request for a survey came by email. But here’s the surprising fact. When shoppers in the supermarket or the shopping mall were asked a simple question. “Do you consider yourself a helpful person?”, almost all respondents said “Yes”. When they were asked a second question to help with a few minutes to respond to a survey, the percentage who agreed to respond to the survey jumped to 77%. That’s a remarkable outcome. What is it about the question “Do you consider yourself to be a helpful person?” That compelled the majority of people to respond to the survey compared with those who were asked to participate in the survey directly? When people who were asked to participate in a taste test of a new product, the affirmative response rate jumped dramatically when shoppers were asked another simple question. Not only that, 2/3 of respondents declined to give their email address. But when asked a simple question. “Are you an adventurous person?” 97 percent said they were adventurous! That’s clearly a ridiculous response, 97% of the population are not adventurous. But after answering yes to are you adventurous, not only did the number of people who participated in the product taste test jump, the number of people willing to give their email address jumped from 33% to 75.7%. Think about it, some stranger walks up to you in a mall and asks for your email address. Are you going to give out your email address? The data says that 75.7% of the time you will igive your email address f you are asked if you are adventurous as a framing question. You probably have no idea that you were even open to being influenced in that way. For the ethical business, the ethics versus effectiveness question must be asked. But for the unscrupulous business, you are open to being manipulated, unless you have a high degree of awareness. If you haven’t read Pre-suasion, you I would recommend that you read it and wake up to how you are being influenced in ways that you may not be aware of.

Today is Rosh Hashana, Jewish new year. Happy New Year to all our listeners of the Jewish faith. Today is also International podcast day. Today is a great time to celebrate the podcast medium, which is really quite new. Think about it. The entire genre was invented by Apple with the advent of the iPodThose large clunky music players that had a tiny 1” spinning hard disc in order to get the storage density. I still have one of those ipods and it holds my entire music library. You had to plug it into a computer via USB cable in order to download your music or your podcasts. Today it streams wirelessly onto my phone, computer or tablet. Some of the first podcasts I listened to back in the day were the Entrepreneurial Thought Leader Series, live recordings of lectures co-produced by the business and engineering schools at Stanford University. Producing a daily show is a massive commitment. But it’s one that I take seriously. This weekend I was speaking at an event in Dallas hosted by the Real Estate Guys Radio Show. There were about 300 people in the audience and at the end of the talk I received a strong round of applause that lasted about 15 seconds. When you have the opportunity to speak in front of a live audience and they laugh at your jokes and they’re nodding in agreement with what you’re saying is a wonderful experience. As a speaker you get to know that your words were having an impact. With a podcast, there are no applause. There is much less in the way of interaction. I will get a half dozen emails a week from listeners who let me know that a particular episode had a real impact on them. I’m truly grateful to receive these messages. I’m also mindful to visualize the audience out there in cyber space. I see you all seated in a large auditorium of a few thousand seats, five or ten times the size the room that I spoke in on Friday in Dallas. I visualize every seat is taken and even a few people are standing in the back. The room is full. When the room is empty, there is an echo off the back wall. But when every seat is taken, the room absorbs the sound and there is no echo. I visualize people in the first few rows nodding in agreement as I’m speaking. Just like in the large room, I recognize that not every episode will penetrate and connect with ever member of the audience. If your interest is self storage and on a particular day I’m talking about senior housing, I recognize that that particular episode may not be perfect for you. That’s OK. The purpose of each episode is to enter into a conversation. A conversation that stimulates thought. In each episode there ideally is something that is simultaneously both specific and universal. You may not connect with the specific example, but perhaps you will connect with the concept. Perhaps the idea has a parallel application in your domain. The podcast medium is changing. There are more shows than ever before, and professional media companies have expanded their investments in podcasting. Celebrities from TV are also getting into the podcast game. Some of the most widely followed podcasts offer very little in the way of education. Some are purely entertainment. They may be story telling, mystery, comedy, drama, a love story, or perhaps something a little more racy. If you’re listening to this show, you probably are interested in business, entrepreneurship, personal development, social psychology, and of course real estate. The average new show fizzles after only 8 episodes. When I do speak at live events, I get to connect with many of you in person. It’s through that personal connection that it becomes a two way conversation. It’s through the AMA episodes, that we have a two way conversation. When a listener asks a question, I can guarantee that others have the same question too.

George is a frequent guest. On today's show, we're getting George's thoughts on the responsibility for sponsors and syndicators to disclose news. This was driven by news this week that securities related charges were levied against three top executives at VW.  

Barely a week ago, Adam Neumann was sitting atop the most valuable startup in the U.S. and getting ready for a blockbuster initial public offering. Now he’s out of a job. Back in April of 2018 I dedicated an episode to WeWork and the problems that I saw with their business model. I currently run a shared office rental business consisting of 5 offices. There is no comparison between what I’m doing and WeWork. They are operating on a much larger scale. But for someone who is actually in the same business, I understand the risks and pitfalls of what WeWork is doing, including staffing, master lease agreements, and how to position different product offers in the space. I’m coming to you live from NYC where WeWork has their largest presence and 55 WeWork locations in Manhattan alone. If you want to rent a dedicated office in NY, it will cost you about $1,100 a month. A dedicated desk will run about $750, and a hot desk will be able $500 a month. All pretty reasonable prices. I think these low prices are both the reason for its widespread adoption, and one of the causes at the root of its financial problems. The biggest problem with the WeWork business model is that they have signed multi-year master lease agreements and their customers only have a 30 day obligation. The buildings that are owned outright have long term debt. Again, their customers only are on the hook for 30 days. But here’s the kicker. As if these risks are not enough, the company has never turned a profit. The S1 filing for the IPO was done back in August. A study of their S1 shows that not only were they losing money, they were also losing money from operations. That means that the startup costs for expansion of the business were not the only reason the company was losing money. The company was losing money in their day to day operations. If they stopped their rabid expansion immediately and spent nothing on growth, they would still be bleeding red ink from operations. They brought in $1.8B in revenue. For every dollar they brought in, they spent $2. So their very survival is predicated on the assumption that they continue to get cash infusions until some point in the future when they might someday, who knows, turn a profit. Their principal funder was Softbank, the Japanese cell phone carrier who opened an aggressive fund several years ago that was being managed by the founder’s son. But in the past week, the governance at Softbank seems to have stepped in and put a stop to the craziness. Particularly egregious was the lavish spending by the founder on things that bring zero shareholder value. This included lavish parties, a private jet, and many other expenses. How is it, that these situations that seem so obvious take months or even years to play out? Now it looks like JP Morgan and Goldman Sachs are in discussions with the company to lend about $3B, and the company will need to tap the private markets for a couple of hundred million in additional equity. Given that equity investors just took a 66% haircut on the valuation, I personally think this is going to be a difficult sell. This is a $3B loan to keep the company afloat. It’s not to grow the company to profitability. So far, the larger the company has grown, the faster the losses have multiplied. As a minimum, the new leadership will need to demonstrate to investors that they can manage the company’s finances. That’s going to mean significant headcount reductions and a steep cost cutting program. I personally can’t imagine myself speaking to investors with a straight face and proposing a money losing proposition. Yes, there can be periods of negative cash flow during the construction and lease-up of a project. That’s different. But this company hasn’t turned a profit since its founding and the founders have sucked out hundreds of millions of dollars to fund their lavish lifestyle. It's the shareholders money!

The US is very concerned these days with the balance of trade. But the US has successfully exported one thing more than any other country on earth. It has exported elements of its culture world-wide. I’ve traveled all over the world and heard American music. I’ll never forget the day I was in Dusseldorf Germany. In the central square was a guy with blond hair, a guitar and a cowboy hat. He had the leather vest, the glasses, everything. He was singing one John Denver tune after another. He looked and sounded exactly like John Denver. Except he didn’t speak a word of English. I’ve heard American music in small family run restaurants in Japan and Taiwan. American fashion has been exported to all corners of the globe. It started in the 1960’s with denim jeans. The latest thing to be exported to China is American design in senior living, of course, adapted to the unique needs of the Chinese market. Even the concept of senior living communities, whether they be independent living, assisted living, or skilled nursing, the concept originated in the US. If you look through most parts of Europe, Asia, the Middle East, multi-generational housing is the norm. Kids take care of aging parents. In particular, single income households made this the norm. As the societal changes have taken place first in North America, then Europe and now increasingly in Asia, most households are dual income households. There isn’t the flexibility for one member of the family nucleus to remain at home and care for aging parents. The entire senior housing industry owes its existence to the shift from single income to dual income households. We now take senior housing for granted as part of the societal norm in North America. But it’s relatively new elsewhere. For example, the cost of a paid full-time in-house care-giver is very high in North America. Enabling a senior citizen to remain in their own home with help is by far the preferred solution. But when the labor cost is high, it makes senior housing seem like a relative bargain, even though this too can be expensive compared with just renting an apartment. Several premier US architecture firms are taking part in exporting the senior living concept around the world. The more ambitious Chinese senior communities are giant resort-style campuses, connected by a centralized, amenity-rich building offering near-seamless integration between interiors and exteriors. Los Angeles-based architecture firm Steinberg Hart is another active firm in the Chinese market. The firm has designed over 10.6 million square feet of senior housing in China since opening an office in Shanghai in 2000. But not everything American is the way to go. When we spend time in Europe we love the community feel that is at the heart of virtually every town in Europe regardless of size. People live, work, dine and shop in walkable neighborhoods. I love the feel of these communities. It exists in the smallest villages of a few hundred people, or in cities of millions. In response to this, many new development projects in North America have embraced the mixed use concept with planned retail, residential, hospitality, office and dining all within a walkable distance. The most famous of these trend setting communities was Santana Row in San Jose California. The success of that project spawned numerous projects around North America that attempted to recreate that town center feeling. Today you see town center projects like this in communities like Plano Texas, West Palm Beach Florida, and more recently in my home town of Ottawa Canada. They lack the centuries of history around a medieval town square. But they are often able to recreate the vibrancy and sense of community that many sterile American cities have lost. This blending of culture is the result of globalization, but not in the sense of trade. It’s the result of the exchange of ideas.

What is a Repo Rate and why did it jump to over 5% in just one day? The newspaper headlines were stating that the last time this happened the economy was in 2008 and was on the brink of collapse. The implication being that perhaps the economy is much weaker than the government is telling us. In my research, there is a much simpler explanation. Listen to today's show.

Coming to you live from NYC where we have the UN General Assembly in session. Today is the official first day of debate. According to UN rules, the debate is to last 9 days, although in recent years, they’ve managed to wrap things up usually in about 7 days. It’s a crazy time to be in NYC. There is intense security everywhere. Traffic is gridlocked. There are private security firms guarding entire floors in the hotels that are housing visiting delegations. Hotels are incredibly expensive. Restaurants need to be booked well in advance. There are lots of stories catching headlines, everything from protection of our environment to sustainable development. This year brings new challenges overshadowing the international dialog. We read stories in the news, we see images on television. They’re a world away and it’s hard sometimes to connect the dots. The central part of any economic development involves energy. Overshadowing the talks this year is the nuclear negotiation with Iran, and the bombing of Saudi oil production facilities that both UK and the US intelligence have connected directly with Iran. Earlier this year, President Trump seemed ready to try a negotiated approach to dialog with Iran. These drone strikes have cut Saudi Arabia’s oil production in half, representing about 5% of the global production of oil overnight. Iran has also re-started enriching weapons grade materials in contravention of their nuclear treaty. These signs of aggression from Iran are attracting widespread condemnation in the West. As India’s economy has grown, so too has their appetite for energy. There is a clear and direct linkage between economic activity and energy consumption. For every unit of economic output, there is consumption of an equivalent unit of energy. India traditionally has been a major buyer of Oil from Iran. If you want to see what is happening in the world economy, have a look at what is happening in the energy sector. That’s where the real stuff is happening. Prime Minister Modi of India was in Houston this past weekend. This is not a traditional place for an Indian Prime Minister to visit while he is in the US for the UN General Assembly. In fact, Houston is really the center piece of his visit. In addition to a rally that he held for a packed house of 50,000 attendees, he visited with Houston based oil and gas companies. One of those companies is Houston based Tellurian. Tellurian just signed a $7.5B pact with India’s Petronet. The agreement was signed in the presence of Prime Minister Modi. Under this agreement, Petronet will initially spend $2.5 billion for an 18% equity stake in the $28 billion Driftwood LNG terminal. India will have the right to purchase 5 million tons of gas per year under this agreement. To put this in perspective, the US exported 22 million tons of LNG last year. So the deal with India is a big deal. This is a real estate podcast. Why on earth would I be talking about natural gas? It turns out that I have 4 real estate projects within a 20 minute drive of the future site of the Driftwood LNG facility. When there is economic development on this scale, the people who work there need housing, they need retail, they need hospitals, they need storage, they need workforce housing. They need everything. As a real estate investor, choosing where to invest is influenced by a number of factors. Some people like to invest close to where they live. If you happen to live in an area where the numbers are compelling for now.  But the second you step outside that tiny radius around where you live, why would you go anywhere less than excellent? Why would you choose just good, or decent? When we look to see what is happening at the UN General Assembly, we want to see what deals are being struck outside the UN headquarters.

Today is another Ask Me Anything episode. Mike asks, I love the podcast. Quick and packed with good info. I have around 75 single family rental houses and recently it seems that people are applying more and more with emotional support animals. Apparently I can't say that I do not allow pets in my rental if they have an emotional support animal. Also, it's my understanding that they don't even have to tell me they have a pet, and they can just bring an animal into the house when they wish and claim that it is an emotional support animal. I have done quite a bit of research on this and am concerned with my lack of rights as the property owner. It seems as if I can't charge any pet fees or pet deposits as well. I can't really even ask any questions related to the animal at all once its in the house. I know its been a problem for airlines and college campuses and seems its increasingly become one for us. I would love to hear your thoughts on this! Thanks again for a great podcast! Mike this is a great question. There are multiple sources of tenant damage that can happen. Pets for sure can be a source of damage. But they’re only one of several possible sources. Some of the literature I’ve read on the topic suggests that pets are nowhere near the top of the list in terms of sources of damage to a property. The number one cause of property damage in terms of cost is children. There’s no way you would tell a tenant that they can’t have children on the property. That would violate every landlord tenant rule anywhere in existence. The second highest cost in terms of damage is smoke damage from smokers. The reason is that a coat of paint won’t solve the problem. In the case of chain smokers, I’ve experienced having to put multiple barrier coats of sealing primer, and then finally two coats of finish paint. The smell infiltrates the carpets, and I’ve had to replace carpets. I’ve also had to replace laminate flooring that had absorbed a smell. Pet damage usually falls into one of three categories: Pet waste. If a cat or a dog urinates on a carpet, carpet cleaner is often not enough to solve the problem. It can soak into the subfloor and can often require cutting out the subfloor and replacement of the boards. While the scope of that kind of fix can seem large, the actual cost is not really that high. Scratches on doorways and hardwood floors. Here too, the cost of these repairs is not usually that high. While the damage is very visible, the damage is usually confined to a few small areas. In my experience these repairs are much less than the spills that children can cause repeatedly. Landscaping. Some pet owners have a bad habit of letting their pet out into a fenced back yard to do their business. After a couple of years these yards look like a mine field of dead grass and craters where pets have been digging. The effort to repair a yard and re-do a lawn can be considerable. As part of your lease negotiation, you should definitely detail a schedule of costs for damage repairs, regardless of the cause. Some tenants with pets will simply choose to go elsewhere. Make sure you’ve taken thorough photos and send copies of the photos of the property condition as part of your move-in inspection with the tenant. These photos must include details of windows, doors, doorframes, screens on windows, kitchen appliances, blinds, carpet condition and so on. These photos will be your best defence when it comes time for the tenant to vacate. You can make an argument that they were delivered an apartment in pristine condition and that the damage experienced represents more than normal wear and tear. My personal opinion is that pets have earned an unfair reputation for property damage compared with some of the other leading causes. They usually don’t do as much damage to a property as the urban legends would have you believe.

Today's episode is an excerpt of a Q&A session with Mayor Jim Watson. We grapple with questions on affordable housing and short term housing. 

This episode is an excerpt of my conversation on The Real Estate Experts Summit where we're discussing my origin story and some of the fundamentals that I believe should underpin every investment strategy. 

If you listen to some of the election rhetoric coming out of the most left leaning candidates, you might be alarmed. And you should be. I don’t have any party affiliation. I don’t even get to vote in the US election. I’m not a US citizen. I’ve read through Bernie Sander’s election platform to understand what the core items that are being proposed. I don’t want someone else’s interpretation or spin. I wanted to read the document first hand and make my own assessment. If you’re going to be opinionated, I encourage you to form your own opinions. Sure it’s easier and less effort to adopt someone else’s opinion. After all, they’ve gone through the effort to form an opinion. There are a lot of elements and it’s hard to determine which parts he would ultimately be successful in implementing. Politicians rarely get the chance to fully implement their agenda. Bernie's entire platform contains too many items to cover in a 5 minute podcast. Of particular interest to real estate investors are some of the items related to housing. He says in his platform and I quote: “In America today, corrupt real estate developers are gentrifying neighborhoods and forcing working families out of the homes and apartments where they have lived their entire lives and replacing them with fancy condominiums and hotels that only the very rich can afford.” He then goes on to say several paragraphs later.. If we are serious about addressing the affordable housing crisis, we need to build millions of apartments and homes throughout the country that will remain affordable in perpetuity to prevent displacement and serve future generations. And when we do that, we will create millions of good-paying jobs in the process. These are in no particular order. Invest $1.48 trillion over 10 years in the National Affordable Housing Trust Fund to build, rehabilitate, and preserve the 7.4 million quality, affordable and accessible housing units necessary to eliminate the affordable housing gap, which will remain affordable in perpetuity. Units constructed with this funding will be eligible to be located in mixed-income developments. Use federal preemption laws to ensure these new units are not segregated or excluded by local zoning ordinances. Invest an additional $400 billion to build 2 million mixed-income social housing units to be administered through the National Affordable Housing Trust Fund, which will help desegregate and integrate communities. Bernie proposed a 25 percent "House Flipping tax" that would be levied against people who sell a non-owner occupied property at a profit within five years of purchase. OK. There’s a lot to discuss in his platform. Way more than we could realistically cover on today’s show. Here’s the thing. Property pricing follows the laws of supply and demand. When a property is listed for sale on the market, there is nothing compelling a buyer to pay the asking price. It is being offered for sale at that price. If there is no demand at a given price, then those properties don’t sell, they don’t rent and they remain vacant. When someone who makes it their business to renovate homes and put them back into the market, they’re improving the housing stock. They’re taking the risk that there will be demand at a profitable price point. They’re taking properties that in many cases were not in livable condition. The only solution would be to demolish them and start again. If a 25% flipping tax were to be instituted, I can predict with great certainty that historic buildings in low income areas would not be repaired. I’ve personally played a role in salvaging some beautiful buildings. Saying that it’s the fault of the flippers that we don’t have affordable housing is a failure to understand the cause and effect relationships that are at play in our markets. Reducing the price of Tylenol won’t eradicate head-aches.

In this special bonus episode, I'm answering the question - "What does the quarter point cut in interest rates mean for your lending rates?"

Today’s show was inspired by a number of emails I’ve received over the past month. I’ll get to that in a minute. In reality, today’s show is about the myth of real estate. There is a Giant myth and it’s perpetuated by the people who promote the free evening intro to real estate investing workshop and the weekend bootcamp for $199. That myth is of passive income. Become a real estate investor and you’ll never work another day in your life. Last month I was a guest on the Rich Dad Radio Show with Robert and Kim Kiyosaki. On that show we talked about senior housing as one of the best investment asset classes. Robert and Kim are great people and they’ve managed to put together a great deal with a senior living operator. Robert and Kim are pure investors, and they also run an active business. Their active business is education. They write and sell books and they have speaking engagements. They manage a portfolio of investments of about 8,000 multi-family apartments. They are hard working people. They also happen to have mastered the art of maximizing their assets. For example, they have a parcel of land on Camelback Road in Scottsdale. It’s a prime location that had a fitness club on it. Then one of the new fancy fitness clubs opened with two swimming pools and everything was bigger and better. Their fitness club could not compete. They could have chosen to improve the fitness center, but that would not have been the right choice for Robert and Kim at this stage in their lives and careers. Instead, they negotiated a 99 year ground lease with the builder and operator of a senior assisted living business. Smart move. They get to maximize the value of their land and the investment appears as a passive investment to Robert and Kim. Since the show aired, I’ve been inundated with offers for land to build assisted living projects around the country. The email is usually something like this. Hey Victor, I loved your episode with Robert and Kim. I have an idea for building an assisted living project on this parcel of land that’s near my house. Would you be interested in discussing this opportunity further? I’m flattered that they appreciated the conversation with Robert and Kim. I’m flattered that they would love to work with me. But here’s the thing. Imagine if I came to you and said. Hey, I’ve got a piece of land that I think would be great for a restaurant. I can point you to the land, and you worry about the restaurant, building the building, paving the parking lot, hiring the executive chef, hiring the staff, hiring the guys to valet park the cars, the marketing, the supply chain for fresh ingredients. We could be partners. The land is perhaps expensive, but clearly contributes a very small percentage to the success of a restaurant. The same is true for assisted living. Nobody would ever mistake a restaurant business for a real estate business. Assisted living is also a service business, just like the restaurant business. It has a real estate component, but the real estate is a small fraction of the value creation. It’s first and foremost an active business. It’s a service business. Yes, the business might get structured so that it looks like a piece of real estate for the purpose of having a tax advantageous structure. But it’s not a passive business. Yes, you can invest passively in an active business. But don’t confuse being an active real estate project sponsor with being a passive investor. They’re vastly different. Many businesses have a real estate component to them, but that doesn’t make it a real estate business per se. A restaurant isn’t a real estate business. A hotel isn’t a real estate business, and an assisted living and memory care business isn’t a real estate play either. They all reside in a piece of real estate, and there is definitely a real estate component to those businesses.

On today’s show we’re talking about how Assumptions create the mother of all catastrophes. The latest case of this is in California where they just implemented rent cap legislation. It’s no secret that the tenant population in California is swelling. California is trending to the lowest levels of home ownership in the country. If you’ve been listening to the podcast for a while, you will know that I’m a believer in two of the fundamental laws of economics. The first is the law of supply and demand. The second is a close cousin to the law of supply and demand, and that is called the price elasticity of demand. Price elasticity affects both the supply and the demand side of the equation. The lack of affordable housing is not because greedy landlords are lining their pockets at the expense and exploitation of poor tenants. It’s because government has made it difficult to add new supply to the market. The excess demand has pushed purchase prices up to the point where the economics of buying or building new product and putting it in the rental market doesn’t work. So when the conditions are not conducive to investment, investment won’t happen. The latest ill-conceived policy from California is a statewide rent cap. The rent cap is in addition to any local rent controls that may have been implemented at the local level. So if a local ordinance is in place, the local ordinance takes precedence. If there is no local rule, the new statewide rule is there as a backstop. Why are economists so overwhelmingly against rent controls? One reason is that they mistake the symptom for the problem. We must ask ourselves why prices are high. They are high because the demand for housing in California is high relative to the supply of it. And why is that? California has a wonderful climate, lots of great cultural things happening. It has strong employment overall and is a vibrant place to live. People love the outdoors, the mountains, the sea.  They have also made it more difficult to build new construction. The poster child for that is the bizarre story of Bob Tillman’s five-year, $1.4 million legal battle to turn his coin-operated laundromat into an apartment building shows how regulations constraining supply coupled with rising demand have driven house prices ever higher. Bob wanted to redevelop his laundromat into residential housing. Opponents of development argued that new development was forcing lower income people out of their neighbourhoods in favour of high income earning people. Here’s the problem with that argument. Unless you increase the supply, you never have a chance of lowering prices. Moreover, nobody ever lived inside the laundromat. But, wacky as it might sound, the supply of housing is responsive to price changes—it is “price elastic,” in the jargon. As profit increases, so does the supply. When the supply increases, prices fall. If you want proof of that, just look at the explosion of properties for rent on AirBnB. If landlords can make more money in short term rentals, they will do so. Regarding the second problem, the “swelling homeless population,” rent control will do nothing whatsoever for these folks. The problem, remember, is too many people wanting to live in a given stock of housing. Capping the price of that housing by government decree will do nothing to solve that problem. What would help is getting rid of the government regulations that restrict the supply of housing. Prices are not problems; they are signals of problems. Trying to solve the problem by treating the signal is like trying to slow down your car by fiddling with the speedometer.

Today is another AMA episode. On today’s show Richard asks “I have a seller who is in their mid 80’s and has been a little difficult to work with. He has a development site that is zoned R3 and we can build a profitable project on it. We can get 5 units by right, and maybe 6 if we are granted a variance. The land is expensive and therefore that sixth unit really makes the project profitable. I’m wondering if I should try and negotiate seller financing so that the borrower contribution is fully funded by the seller financing. What are your thoughts on the strategy?” Rich, that’s a great question. Seller financing can be a great way to raise capital for a development project. It can also be the undoing of a development project. I’ve seen both happen. It all comes down to convincing yourself that you have a reliable partner in the development. Understand that the seller is going to be required to sign virtually every piece of paper that affects the title. The debt structure is going to look something like this. You will have your senior construction lender in first lien position, and the seller financing will be in second lien position. But if the construction financing isn’t secured prior to purchasing the property, the seller will actually be in first lien position. They will need to sign mortgage subordination agreement in order to allow the construction lender to assume first position. When you transition from your construction financing to your permanent financing, you will need to go through that process again. The seller’s signature will be required. Any time the seller’s signature is required in order for you to make progress on the project, it represents an opportunity for someone who is not in control of the project to exercise a full veto on your project. That’s a risk. You mentioned that the seller is in their 80’s. You are probably not 100% up to speed on their health. They could have a health condition and may be unable to sign when you need them to. They may have granted a power of attorney to a family member, and now all of a sudden you’re dealing with a family member who you’ve never met and who knows nothing about the project. They might be unwilling to take the risk of signing anything. If the seller dies, you have the same issue. The alternate approach is to raise the capital to make a clean purchase of the land. Yes, when you raise money, that often means giving up an equity share to your investors. But here too, you may be better off than dealing with someone who you said could be difficult. When you raise money you have a few choices. The first is equity. You’ll need to decide how much equity you will need to give up in order for the project to make sense for you and for your investors. If you can secure a loan from the seller in second lien position, you could secure a loan from someone else in second lien position. The source of funds will be different, but the security would be the same. It won’t be as lucrative as the 100% financing you’re contemplating with the seller financing. Understand that your risk with the seller is higher that if you bring in investor funds. The construction loan will have a finite time period. This is usually less than 2 years. If the second lien mortgage holder delays you for whatever reason, you could face the problem of running out of time on your construction loan. The construction loan is in first lien position, but most construction lenders require the sponsors to sign a personal guarantee, or as a minimum they would require a completion guarantee.  A default on a construction loan with personal guarantees could effectively end your career as a developer. So in my opinion, it’s not worth the risk. Your description of the relationship sets off some flags for me that suggest you look elsewhere for the money in this instance.

Lee from Michigan writes. Hello, I really enjoy your podcast.  Met you briefly at the Real Estate Guys Syndication conference in Sept. 2018. Here's my question: My real estate partners and I have the opportunity to purchase a great 14-acre parcel of vacant land in the best demographic area of our community.  The land borders a freeway on the south, a highly-traveled secondary road to the east, and single family subdivisions on the north and west. There are existing roads that dead-end into the land from the north and west.  The city would like us to develop the land and connect these two roads, which would be a benefit to the community in the sense that community services (school buses, garbage trucks) could navigate within the community more efficiently. To make this project economically feasible, we would have to develop some multi-family properties.  Currently, the entire 14 acres is zoned R-1, or single family residential. Our group is proposing that we rezone only part of the property, the part that is contiguous with the freeway and the highly traveled secondary road, to R-3 to allow multi-family construction.  Of note, 4-plexes would be our largest footprint.  Further, ALL the land that borders existing single family homes, we would propose to leave R-1 single family zoning. We have a preliminary meeting with the local planning commission in the next couple weeks to discuss our intentions.  The mayor informs me that there are already 1 or more NIMBYs that plan to show up to discourage our proposal. Previously, a production builder wanted to purchase the land and put up 200 low income housing units.  The city basically laughed at the idea. In the 14 acres, we propose 19 single family building sites and only 8, 4-plex sites along the designated roads. If multi-family development is impractical, our interest in the land will plummet. With all this in mind, how would you proceed at the planning meeting? Lee this is a great question. There are generally three types of approvals that could apply. I don’t know the rules for your specific community. What I’m describing is what I see most often. The first is a minor application. In the case of a minor application, you don’t require community input. The second is a major application, and in this case, residents within a radius of the property (usually 500 feet of the property) are given the opportunity to comment on the application. This is a very public process. The third involves a change to the zoning. The first thing I would do is get my hands on the minutes of the planning commission or the city council meeting minutes. In almost all communities, these are a matter of public record. In some towns, you can listen to an audio recording of the meetings, or in some cases watch a video recording of the meeting. In your case, you’re talking about 19 single family homes and 32 units of multifamily. This is pretty low density for 14 acres. A general rule of thumb is that you can get about 8 single family homes per acre and perhaps 12 units per acre if you build town houses. Apartments could be much higher density of course. If you built the 19 homes on half acre parcels, that would consume 9.5 acres. That would leave 4.5 acres for the higher density product. I would actually advise against building 4-plexes and suggest you consider townhouses that might fit the R1 designation better. Since all the homes are co-located at the same site, they’re no more or less difficult to manage if they were apartments, townhouses or single family homes. But before going into a public meeting, you want to make sure you’re really well informed of what each of the planning commission members feelings are. There may be consultants such as an urban planner, or an architect who knows the decision makers and can predict what will be accepted.

Ali Boone is the CEO of Hipster Investments. She got her start as an aerospace engineer and a pilot and quickly discovered that she was an entrepreneur at heart. Loved this conversation with Ali. 

Dallas based Omar Kahn got his start in Investment Banking in Canada. Today he puts together large projects around the nation. We had a wide ranging conversation on the skills needed to make the transition from corporate life to being an entrepreneur.

Have you ever wondered how the hard core drinker can pound back a six pack of beers and not seem the least bit intoxicated? In the meantime, your tea toddling aunt gets silly after half a glass of wine? It’s because the addict becomes resistant to the drug. On today’s show we are talking about the latest mainline injection of hard core drugs into the economy. I’m not talking about actual drugs of course. The drug in this case is cash. The European Central bank announced its most aggressive stimulus package in a while: interest rate cuts, money printing, quantitative easing, the whole nine yards. It’s pretty amazing when you think about it: interest rates in Europe are already NEGATIVE. They’ve been cutting rates for years, and it hasn’t worked. Back in July 2008, the European Central Bank’s main interest rate was 3.25%. By the end of 2008, it was clear the global economy was slowing down, and the central bank had slashed interest rates to just 1%. But they kept going. By 2013, the ECB had reduced its primary interest rate all the way to zero. And in 2014, they took the unprecedented step of cutting rates even further into negative territory. European rates have been negative now for FIVE YEARS. Yet Europe’s economies are still a mess. These results completely defy prevailing economic wisdom. According to the playbook that nearly all central bankers use, cutting interest rates is supposed to stimulate economic growth. It’s not working. Why? Because another six pack of beers won’t work for the addict. Another trillion Euros won’t work either. So if it’s not going to work, why would they do it? After all, these economists have a lot of university degrees. They’re pretty smart men and women. If I can see it, then surely they can see it. So why? It doesn’t make any sense. Or does it? What if the lower interest rates made the Euro even less attractive to bond investors than it is today. We could see a flight of capital from the Euro to the US dollar, or to Japanese Yen. That would cause the price of the Euro to fall against the US dollar. When that happens, the exports from Europe all of a sudden look like a better deal. They’re less expensive and all of a sudden Europe looks a lot more competitive. A fall in the price of the Euro would definitely have a stimulative effect on the European economy. Those Mercedes, Fiats, BMW and Porche’s will be more attractively priced than ever before. Vacationing in Europe would be less expensive. Perhaps planeloads of Americans will line the cafes in the south of France. Here’s the scary part. The US is going to feel like they need to respond to this silly financial arms race. You can bet that with an election looming in Washington, there will be tremendous pressure to stimulate the American economy. After all, this White House ran on a platform of economic boom, and to a large extent they’ve managed to ride the wave of economic expansion and declare victory. But if that economic success story shows signs of weakness, and by the way it is showing signs of weakness, you can bet that the printing presses in Washington will be warming up for the biggest stimulus package we’ve ever seen. The President is already pushing the Fed to lower interest rates and to weaken the US dollar. We live in a funny world right now. It’s a place where good is bad, and bad is good. Where weak is strong and strong is weak. You can bet that if the natural market forces don’t work, then that new Mercedes will probably come with a tariff in addition to the alloy wheels and a sun roof.

On today’s show we’re talking about the difference between a commodity and a home. From an executive summary, or an Excel spreadsheet, multi-family offerings look pretty much the same. They have lovely photos, and the numbers look compelling. I find that newer investors are consumed with making sure they have a profitable project. It captures almost all their attention. But there is a level above that primitive profit motive. When you have truly mastered the game of real estate development, you realize that creating a profitable project is simply part of the process. The true differentiator is community building. When you create an experience for residents where they truly love to come “home” at the end of each day, then you’ve mastered community building. It’s not just one thing that accomplishes that. It the sum of a whole bunch of details. It means paying attention to the experience of living in a space. It requires forethought. Now you might be saying, Victor I’m not a developer. I simply buy existing assets, reposition them and create value for investors that way. I’m stuck with the hand I’ve been dealt on a given property. I’d like to challenge that way of thinking. Whether you are building new from scratch or repositioning an existing asset, the development I’m talking about it the delivery of a finished product. That finished product has a specification that you can achieve with a new building, and in most cases within the envelope of an existing asset. But it requires you to think about it. It’s small details like, what is the assignment of parking spaces? Does it make sense for your tenants? What is the experience of coming home with 4 bags of groceries and walking the path from the car to your front door? What is the work-flow in the kitchen? Does it make sense? Is there a spot on the counter for the blender, within reach of the outlet and is there space for a cutting board and a bowl. Have you designed the balcony so that a morning coffee on the balcony is a great experience. Perhaps a glass panel on one side would provide a bit of wind shelter and make the space usable. Do the front office staff make it their business to know every resident by name and greet them in a warm and welcoming way? The Excel spreadsheet doesn’t capture any of what I’m talking about. Now if your investment is in workforce housing and C-class apartments, you might be thinking, Victor you are so out of touch with the reality of our tenant population. That means that some amenities are out of the question at some of the lower price points, and I get that. But thoughtful design doesn’t cost more than thoughtless design. Simply giving thought to flow and the end customer experience can result in design changes that cost nothing more. Does the refrigerator door swing in the best direction for flow in the kitchen? That decision is free. It costs nothing to get it right. But when things are awkward and cumbersome, those irritants contribute to a feeling that this place isn’t home. It’s not enough to complain about. They might not even be able to articulate the awkwardness, but they can feel it subconsciously. Your tenant might be staying there for now, but it’s not home. Is the thermostat placed in a location that makes sense? Or does it get influenced by a local temperature shift so some of the apartment is too hot and the rest is too cold? These decisions cost nothing to implement correctly, but they require thought, they require attention to detail, and they require that someone in your organization feels a strong sense of ownerships and responsibility for the customer experience. When they walk into the property for the first time, is there something that you’ve intentionally designed to create a spontaneous “Wow” reaction. It doesn’t have to be huge. Think about how you transform the end customer experience.

Mobile home parks have long been a part of the senior living landscape, and they have emerged as one of the most in-demand product types in recent years. They offer investors stability and steady returns, and they provide older adults amenities found at other senior housing communities at more reasonable price points. In fact, senior mobile home communities can be an affordable alternative to the ongoing trend of luxury active adult construction, and offer amenities and a sense of community on par with — and in some cases exceeding some of the new age-restricted housing offerings. My friends at 4-Peaks Capital Partners have been investing in mobile home parks over the past several years. Today they own about 2000 pads. Mike Ayala from FourPeaks Capital Partners was a guest on episode 149, on June 16 of 2018. In spite of the many misconceptions associated with mobile homes, the housing type has a long and rich history in the U.S. The first mobile homes in the country were built in the 1870s, and mobile home construction saw a boom period after World War II. Today, 22 million people live in mobile homes in the U.S., according to data from the Manufactured Housing Institute. In 2017, 93,000 mobile homes were built in the U.S., accounting for 10% of new single-family home starts. As more baby boomers enter retirement failing to fully recover the wealth they lost during the Great Recession, well-managed senior mobile home communities are viable options to extend quality of life and financial nest eggs. Investors and major brokerage houses have taken notice. For example, I’m on a mailing list from Colliers International that is focused only on mobile home park and manufactured housing opportunities across North America. We just completed our own new RV Park last year. When the original purpose of that park reaches its end of life for workforce housing. It has been designed to convert to a mobile home park with the full infrastructure already in place for that conversion. Demand for senior mobile home communities is also driven by how few opportunities there are in the market to acquire a quality community. There are some value add deals, and in my opinion a property should be somewhere near 50% occupancy to offer an effective value add opportunity. A lot of investor interest is being driven by real estate investment trusts and private equity money seeking to build large portfolios, from which long-term value can be created via solid management and economies of scale. Equity Lifestyle Properties is real estate mogul Sam Zell’s publicly traded mobile home REIT. It is the largest owner of U.S. mobile home communities in the country. Equity Lifestyle is also Zell’s best performing REIT in recent years, increasing in value from just over $40 per share in 2015 to a current 52-week high of $128.43 per share. Like their brick-and-mortar counterparts, senior mobile home communities often offer extensive amenities packages to attract residents. Some of the more common amenities include swimming pools, fitness centers, softball fields, and golf courses and boat docks at more upscale communities. Some of the communities are keeping current on trends for amenities. Shuffleboard courts, once common and prevalent, are being repurposed in favor of other sports such as bocce and newer trends like pickleball. For those of you who don’t know, Pickle ball is an extremely popular form of tennis that is played on a much smaller court. It involves less running, but still requires great racket skills. Supply and demand dynamics also favor the investor. Sun Communities has wait lists across its portfolio; its internal data revealed that the REIT accepted 50,000 applications for housing last year, for 5,000 available homes. When seniors do eventually age out, they hold the values of their homes, as long as they’re well maintained.

On today’s show we’re talking about a niche within senior living, and that is coop housing. It’s a small and slowly growing segment. For some, it has become a competitive option in some markets, and may gain further traction by addressing several pressures facing the industry. Co-ops account for a fraction of senior housing inventory, but there are signs that they are growing in popularity. The number of senior co-ops has grown from 103 in 2013 to 125 in 2019 totaling 7,700 units and about 10,500 residents nationwide. So their penetration of the market is still quite small. But first, let’s define what coop housing is in the context of senior housing. Buying into a cooperative is a cost-effective way to enter senior housing, and can be an alternative to independent living and active adult communities. In coop housing, residents purchase “shares” in a corporation that owns the building. These shares entitle stakeholders to lease a specific unit within a building and utilize common areas. Additionally, there is a monthly charge for assessments, maintenance and repairs. Co-op living also gives residents a stake in how a community is managed, similar to a traditional homeowners association. Each co-operative has an elected executive board and members have a vote in how buildings are managed and operated. Co-op shares appreciate in value incrementally — usually 1% to 2% annually. This maintains affordability and marketability for new residents, and because members are responsible for the monthly fees on empty units until they are occupied. Due to the financial structure of co-ops, they tend to be overlooked by profit-driven investors, but they do offer consumers a more affordable living option. Members looking to exit a co-op can see a small return on their investment, or they can hold on to their shares and rent out their unit to another tenant. Residents who buy into a community can pay anywhere from 20% to 95% of their 40-year mortgage upfront. Now a 40 year financing can mean low monthly payments, and is a reflection of the kind of favourable financing that is possible in this asset class. There are also monthly fees to cover building maintenance and basic operations. The payment plans are designed to be flexible for seniors with more equity or higher personal income. Where are they? Minnesota, where the first senior co-op opened in 1978, is home to 82 communities, and the Twin Cities area is a competitive market. Ebenezer, the largest senior housing provider in the state, manages 38 co-ops, most of them under the Applewood Pointe and Realife Cooperative brands. Last year, Ecumen launched a senior cooperative brand, Zvago, with the opening of a $20 million, 54-unit community in Minnetonka, Minnesota. Ecumen has also opened 5 more Zvago co-ops. At Zvago, buy-in payments can range from more than $31,000 to nearly $500,000. Monthly fees can range from more than $500 to almost $3,300. Another developer — Real Estate Equities Development of Eagan, Minnesota — focuses on building and managing senior co-ops under the Village Cooperative brand, and has a pipeline of 34 cooperatives completed or under construction in Colorado, Iowa, Kansas, Minnesota, Missouri, South Dakota, Wisconsin and Washington.

Late last week, The White House released its long-awaited plan to reform the nation’s housing finance system and privatize Fannie Mae and Freddie Mac, calling it the "last unfinished business of the financial crisis.” In the report, they call these mortgage insurers who are currently under government conservatorship, government sponsored enterprises or GSE for short.  In the good old days, Fannie and Freddie operated with different models. Freddie would sell its loans on the open market using mortgage backed securities as the vehicle. Fannie on the other hand kept the loans on its balance sheet.  The really high interest rates of the early 1980’s pushed Fannie Mae to the brink of insolvency, after which they adopted the same approach as Freddie Mac. In the middle of the credit crisis of 2007-2008, the Government stepped in and bailed out both Fannie and Freddie in the middle of 2008, although it was apparent by early 2008, that some drastic steps would be required to save the financial system. I’m quoting from the report issued by the Treasury Department to the White House late last week. “The housing finance system is in serious need of reform. The GSEs remain in conservatorship more than 10 years after the financial crisis, and they continue to be the dominant participants in the housing finance system. Although they remain critical to the functioning of that system, they are not yet subject to capital and other regulatory requirements tailored to the risks they pose to financial stability. This lack of reform has left taxpayers exposed to future bailouts. The lack of reform has also prolonged the Federal Housing Finance Agency’s (“FHFA”) management of the GSEs through the conservatorships, perpetuating far-reaching Government influence over the housing finance system. The idea is that a conservatorship is temporary and therefore there should be a timetable and a framework for returning these enterprises to the private sector. Most of the recommendations in the 53-page plan, released to the public on the eve of Friday's 11th anniversary of the government takeover of Fannie Mae and Freddie Mac, don’t require input from Congress. Predictably, the Democratic Congress members were quick to denounce the plan. The largest impact of the privatization is likely to be on the underwriting rules which would affect loan eligibility for borrowers. The second would be the cost of the mortgage insurance premium. Today in the multi-family market, that insurance premium varies according to the ratio and the risk factors calculated by the underwriters. It’s possible that under the new regime, once these enterprises are privatized, that insurance premiums increase. However, I personally don’t see these premiums being much higher than the actual government backed guarantees under the HUD and FHA programs. I expect the newly privatized offerings to be price competitive. They are, after all offering the same service. While I do expect that privatizing these entities will reduce the taxpayer exposure to future bailouts, it won’t eliminate the exposure. Since the offering will need to be price competitive with the government offerings, I don’t anticipate major changes to the cost of these offerings.

Jim Murray is based in Rhode Island. He's a professional property manager who got his start in real estate through house hacking. Listen to this entertaining conversation about house hacking. Jim can be reached on Instagram at REICashFlowKing. 

On today's show I'm talking with Ottawa investor Rich Danby about some of the painful real-life lessons earned from working with contractors. This is an important show that every investor needs to hear.  

On today’s show we’re continuing our series on digital marketing. A few of my consulting clients have asked about SEO. So on today’s show we’re going to cover some of what’s new in search. It’s no secret that the majority of the business goes to the businesses that appear on the first page of Google’s search results. By some accounts, 50% of the business goes to the first organic search result. By the time you’re on page 2, your market share will be in the single digits. So ranking highly for your specific keyword search results is important if you rely on digital marketing for your business. Search engine optimization is all about appearing on page 1 of Google’s search results. Search engine optimization is not one thing. It’s a menu of like 50 optimizations that each by themselves can improve your ranking. These optimizations break down into two major categories. Eliminating the errors that are penalizing your ranking with Google. Making sure you have the elements that will have you rank well against your competition. Before you spend any time competing for ranking, you need to fix the errors that are pushing you underwater. First of all, Google’s algorithms have improved dramatically over the past few years. If the address for your business isn’t verified, then Google will deem that you’re not serious about being in business. If the address for your business is at a UPS Store or a residential address, Google will deem that you’re not serious about being in business and will push you down in the search rankings. If your website has pages that have an un-natural use of certain keywords, then they will assess that you’re not actually speaking to your customers. They will assess that you’re using language for the sole purpose of fooling the search engine. That’s called keyword stuffing and they will penalize you accordingly. In the past, one of the measures that featured heavily into a website’s ranking was how popular the site is. One of the principal measures of that popularity was how often the site appeared elsewhere on the internet. The more links to your site, the more popular it was deemed to be and therefore you would appear higher in the search rankings. That gave rise to an entire industry of people offering to create links to your website. Link-building was one of the great artificial manipulations that web designers used to try and fool Google. Today, Google is a lot smarter.  In the good old days, search was very literal. For example, if your search included the word color, and you spell the word color the American way, COLOR, that would be a different search than if it was spelled with British way COLOUR. Google did not distinguish between those two. This often created some very awkward wording on your website. You would often see the same word spelled different ways on the same page so that Google’s search algorithm would see both spellings. The fact is, most real estate investors don’t know about this. You can’t be an expert at everything. Many of the low cost SEO companies that are based offshore will make large promises for a low price. For $500 a month, they will get you on the first page of Google. All too often, these companies are not current with the latest Google algorithms, and they advocate tricks to try and fool Google. These tricks are increasingly caught by Google and will only hurt your search ranking. It’s important to find the right digital marketing agency who can first, help you establish the right goals for your website, and then execute on those goals. The key to finding the right partner is, like many things to get referrals, and to conduct a detailed interview.

We are continuing our deep dive on digital marketing. If you’re in business, you need to make sure your clients know what you have to offer. The most valuable pile of gold bars hidden in the middle of the Sahara desert is worthless if nobody knows about it. As real estate investors, too often the importance of marketing is overlooked or outright ignored. Let’s start with a few definitions. I’m going to make a distinction between advertising, marketing, and publicity. They sound similar, but they have vastly different meanings in my world. The purpose of marketing is to generate interest, to tap into curiosity. It’s not to manipulate or convince, or even sell. In my world, the most preferred form of marketing today is educational marketing. People are willing to be educated. Very few people want to be subjected to a sales pitch. Advertising is similar to marketing, but the main distinction is that it’s paid for. With advertising you pay a platform owner for the right to present your stuff to their audience. The platform might be something like Facebook, or it might be the conference organizer giving you the right to include your material in the conference registration kit. Publicity is the by-product of getting visibility in the media. That could be radio, TV, a podcast, or a magazine article. Generally speaking, publicity is free. If you’re paying for publicity, I call that advertising and it’s very distinct from publicity. So with those definitions, This podcast is a form of marketing. When I appear as a guest on someone else’s show, then it’s considered publicity. The purpose of the podcast is to generate interest, to trigger curiosity, to start a conversation. For a subset of you, that conversation may somewhere in the distant future translate into doing business together in some fashion. I truly have no idea what that will ultimately look like. Google remains at the top of the heap as the most visited website. Its position as the search king is well established. Number two is Youtube, and Facebook is number three. 73% of Americans use Youtube on a monthly basis, 68% use Facebook, and 35% use Instagram. However, it’s important to know that less than 50% of millennials actively use Facebook and the vast majority are on instagram. LinkedIn, Twitter, Snapchat, and Pinterest are all hovering between 25%-30% penetration of the US population. Each of these platforms serves a different purpose and has a different target audience. Too often we tend to use the tools that are interesting to us. But that may not be where your customers are hanging out. For example, if I’m looking to advertise student housing, then Google and Instagram are the platforms of choice. I would not waste any time with Facebook. Conversely, Facebook once gave me the option of including Instagram users in an advertisement for one of our RV Parks. When I said yes, I didn’t expect 96% of the ad revenue to be spent on Instagram and only 4% on Facebook. That week’s worth of ad spending was completely wasted. Fortunately, I ran it as a small experiment. If your content has a “how to” element, then Youtube can be the preferred search engine. If your customer is searching for how to market student rentals, then a video that speaks directly to that topic might be the perfect piece of content. Successful businesses invest somewhere between 12%-20% of their resources, that’s both time and money on marketing.

The year was 1888 and Almon Strowger was the local undertaker. The phone systems of the day were answered by human operators who would make the physical connection for you using a giant patch panel. In his home town of La Porte Indiana, one of the telephone operators was the wife of another undertaker and his competitor. He felt that phone calls requesting to be connected to the undertaker were going to his competitor, the operator’s husband. So in 1891, Strowger introduced the first mechanical automated telephone exchange. It was installed in 1892 in his home town with 75 subscribers and a capacity for 99. The rotary dial phone was triggering a series of connections that informed the network of relays and switched how to route the call. It was adopted in the UK in 1912, and over the years, the Strowger Step by Step exchange became the global standard for the phone system for over the next 70 years. It levelled the playing field and took away the potential bias that an operator could exert over your phone connections. This week we’re going to do a deep dive mini-series on digital marketing. If you’re in business, even as a real estate investor, knowledge and expertise in digital marketing is an essential element to your success. Today, in 2019, we’ve gone backwards where the owner of the communications platforms are increasingly competing with their customers. We’re back to the days when a call to the undertaker was not being handled in a fair manner. I believe, you need to be the gate-keeper to the information that enters your brain. But increasingly in the world of social media, many have abdicated that responsibility to the gatekeepers of various social media platforms. Today, 43 percent of Facebook of Americans get their new from Facebook. That’s a scary number. Moreover, 57 percent of Americans who get their news on social media say they believe that news is largely inaccurate. Even among the people who prefer to get their news on social media, 42 percent say that news is, again, largely inaccurate. With that great power comes great responsibility. I might becoming cynical in my middle age, but there is increasing evidence that these decisions are self serving for the platform owners and not for the benefit of the end consumers. A case in point, Facebook clearly wants people to spend time on their platform. The more time spent on platform, the more ads they can present to you, and the more they can charge for ads. This maximizes their ad revenue. When Facebook launched their own video platform, they prioritized video content on their own platform ahead of youtube. I’ve run a very simple experiment. I uploaded the same video content onto Facebook and onto Youtube. I created two identical posts in Facebook, one had the embedded video, the other was a link to Youtube. The native Facebook video received 10x more views than the exact same content hosted by youtube. So if you’re using social media to promote your business, this is something you should take note of. Facebook wants to keep you on their platform and they don’t want to link to content outside their platform. The latest change in the Facebook algorithm is to actually ban any link to an Apple hosted Podcast. That’s right, I can no longer post an update with a link to an episode of the podcast. That is considered a link to banned content. The same is true on Instagram, which is owned by Facebook. So far, if the show is distributed through another platform link, like say, Castbox, the link to my show displays with no problem. About 80% of US podcast traffic is going through the Apple platform, even though Apple only represents 39% of the overall phone market in the US and 22% of the phone market globally. This is Facebook asserting control over how you access information. They are clearly targeting Apple as the enemy. But not only that, they’re targeting all the users of the Apple products as the enemy.

On today’s show we are talking about one of the factors that can be at play in a tight market. We have just gone through a period of more buyers than sellers, of rapidly rising prices and of multiple offers. That’s not all markets or sub markets. But many major markets including New York, Toronto, San Francisco, Seattle. My home town right now has less than two months of inventory in the market and frankly when you conduct searches in individual neighborhoods it’s pretty common to find only two or three homes for sale in the area. People looking for a larger home in the same area or those looking to downsize who want to remain in the same area have very little choice. So why are there so few homes on the market? People clearly want to move. The most common response is that they won’t sell their house because there is nothing to buy to replace it. It’s like that puzzle game with the squares whereby moving one square at a time you can rearrange the squares to match up and form an image. But that puzzle only works if there is an empty square. Otherwise there is no mobility possible for the squares. If there isn’t inventory for sale in the market, there is no mobility. If you take my home city of Ottawa Canada, the inventory in the rental market is less than 1%. So even saying that you can rent temporarily until you find a new home doesn’t work. Most landlords are demanding a 12 month lease  So if you find the perfect home in month 4 you can still be on the hook for a 12 month lease which means double the home ownership cost for an extended period of time. In that situation the seller faces a dilemma. Do they sell now when they know they can get top dollar? Do they wait for better inventory conditions in the future? When will that be? Will prices fall at that point? What will be the interest rate at that time? Will prices continue to go up? Will you get priced out of the market? When the market conditions change, will there be some warning? What will the warning signs be and will you even notice before the change has fully arrived? What we see from looking at other markets across North America is that when changes occur, they occur quickly. But the market is actually several markets that don’t change in unison. For example when you segment the market by price, you discover that you might have 2 weeks of inventory at the entry level of the market and six months of inventory at the top end of the market. Some homes are sitting on the market for 18 months.  Let’s look at the San Francisco Bay Area and Silicon Valley in particular. That market boasts some of the best paying jobs in the technology sector. It’s no secret that homes are expensive in Silicon Valley. That’s been the battle cry for 30 years. But about 9 months ago, the market dynamic in Silicon Valley changed in a matter of weeks. The market was expensive before the shift. Taxes were high. Interest rates increased a quarter point. Hardly enough to fundamentally change affordability of a property. Today, prices have moved down 4.3% since the high last fall. It’s very tempting to believe that hot market conditions will continue. If the demand was being driven by foreign investment, and all of a sudden that source of capital coming into the market dries up for whatever reason, the market can turn very quickly. One such market is Miami where a high percentage of buyers come from outside the US, and South America in particular. Argentina just instituted capital controls after 4 years of eliminating capital controls. So it’s probably a safe bet that the number of Argentinian buyers in the Miami market is going to drop significantly. A few years ago there were a number of buyers from Venezuela trying to escape the economic malaise. Today, that wave has passed and Miami developers who assumed the demand would continue were caught off guard with excess supply.

Patrick from Austin Texas writes. Hello Victor. Congrats on all of your success. I have followed you for years now. Do you suggest any good masterminds. I currently own 110 single family homes for rentals. I have them professionally managed so I only spend 15 minutes a month on my real estate and I’m looking to expand. Patrick, thank you for the kind words and that is a great question. Masterminds are an amazing way of elevating your life to another level. While the concept of a mastermind has been around for a long time, the greatest modern day articulation was in the book Think and grow rich by napoleon hill. In that book Napoleon Hill describes the masterminds of Henry Ford and Andrew Carnegie. I’ve participated in many different types of masterminds over the years. I actively participate in them even today. For example, I have a call every Sunday morning at 9AM. That conference call is an integrity mastermind. About 4-5 of us get on the phone each week and share what we have discovered in the past week about integrity. Now when I talk about integrity, I’m not talking about the honesty definition of the word. I’m talking about workability. For example, if you have a bicycle wheel with broken spokes, then that wheel is lacking in integrity. The wheel isn’t bad. The wheel isn’t dishonest. It’s just lacking integrity and more importantly, it’s possible to restore integrity. So we look at where things are breaking down in our lives and brainstorm structures that can be put in place to permanently restore integrity in that area. There are larger masterminds that are run as a business. For example, I used to participate in a mastermind which had about 30 members. The price of admission was $25,000 a year. The host would bring in various speakers to share their wisdom. We had an Entrepreneur who built and sold a business for $800M. We had the CEO of Krispy Kreme donuts. We had a senator. All kinds of incredible people who we probably would not have been exposed to were it not for the mastermind. My friend Kyle Wilson was Jim Rohn’s business partner for 18 years. Jim Rohn is considered the father of the modern day seminar industry. He mentored Tony Robbins, Zig Ziglar, and countless others who today have established themselves as thought leaders. Kyle has several mastermind groups that he leads across the country. There’s one in Dallas, Los Angeles and Philadelphia. These meetings are monthly and usually take place over two full days. The thing to remember is that there is no one way to do this. I host a monthly mastermind conference call with George Ross. George is 92 years old. He has over 60 years of business experience and he just recently retired at age 89. We record the calls and even if a member of the mastermind can’t make the live call, they can listen to the replay and still get huge value from the conversation with the participants on the call. Here are a few best practices that in my experience make for a successful mastermind. The members have to commit to absolute confidentiality. If you don’t trust that you have a completely open non-judgemental environment, it’s going to be very difficult to have open honest conversations. You need to be very mindful of who is participating in the mastermind. Don’t admit new members without the unanimous consent of all the members. Keep the mastermind small, usually under 10 people. There are some examples of successful masterminds that are larger, but they’re harder to manage. Unless they’re a “for profit model” and professionally managed, keep them under 10 people (I find that 4-6 is ideal). Start each session with a round-table sharing of wins since the last session. When people commit to be part of the mastermind, they commit to protect that time slot and be a regular participant.

The book of the month this month is “Never Eat Alone” by Keith Ferrazzi. This book is all about relationship building and the business and life success that comes from building relationships. When I wrote the book Magnetic Capital, I realized that there were 5 principles that are essential to raising money. Briefly, the 5 are: Relationship Trust Results Compelling Opportunity Alignment between the goals for the money and the goals for your project. I chose this book for the book of the month because raising money and real estate investing is a relationship business. It’s one of the 5 principles and if you don’t master this one, you’re going to struggle as an investor, as a developer, as a syndicator. Never Eat Alone is not a new book. It was first published in 2005 and I think I read it around 2010. But it’s one of those books that continues, even 15 years later to be selling well, and to have impact. I know this because I recommend to all my consulting clients and they tell me how much of an impact the book has had on their approach to relationship building. The author comes from humble beginnings. His father was an iron worker and an immigrant. All his father knew was hard work and low wages. But his father also knew there was another system at play that he wasn’t part of. He asked one day to speak with the CEO of the steel company, a pretty audacious move. But the CEO was so intrigued with the request that Keith’s father was granted the meeting. The result of that meeting was an opening that forever changed the course of the author’s life. Keith went to the most prestigious private elementary  school in the area and then ultimately to Yale University and eventually Harvard Business School. The success that becomes available from a school like Harvard has more to it than the quality of the information. The real differentiator is the relationships that come from being in that environment. The author has developed global relationships that include the corridors of power in Washington, Hollywood’s A-list, and eventually led him to being elected as a global leader for tomorrow at the World Economic Forum in Davos. Keith Ferrazzi distinguishes genuine relationship building from the crude desperate business card dealing networking we so often encounter at conferences. The core of the book is a shift in mindset. Some people immediately are looking for something. True relationship building means never keeping score. It’s never simply about getting what you want. It’s about making sure that people who are important to you get what they want too. It’s about maintaining presence in people’s minds. It’s about connecting with people in your circle of contacts all the time, not just when you need something from them. In today’s world of social media connectedness, this is both easier than ever, and in some ways more difficult than ever. It’s easier because the effort to reach out has never been easier. The environment has become so much noisier than ever before. So your interactions have to add more value to stand apart from the rest of the pack. The author addresses the difference between a cold call and a warm interaction. People are bombarded by so much content these days, that most of it gets ignored. Interruption marketing worked 20 years ago, not any more. People are tired of being interrupted. If you’re going to get someone’s attention, then you need to be interesting. That sounds obvious, but people rarely examine what comes out of their own mouth and ask the question “Is this interesting?” That means it needs to sound fresh and different. If you’ve struggled to build the quality of relationships with the kind of people who could make a meaningful difference to your business, the book Never Eat Alone is for you.

How often to marketers create artificial scarcity and tap try to manipulate their prey through fear of missing out or the acronym FOMO for short. This kind of manipulation is repulsive, see-through and yet we’re subjected to it time and time again. It’s like the store that has a one day sale in the window. Today and today only. But the sign has been in the window so long, it’s been bleached by the sun. You’re not off to a good start when the very first interaction is based on a lie. If they’re willing to lie to you to get to you to come into their store, what else are they willing to lie about? Last year, my wife and I spent a couple of weeks at a resort in the sun. It was one of those resorts that gives you a bracelet so that the staff can easily see if someone if on the property who should not be. I was walking through a crowded market and a man walked up to me and started chatting me up. He said that he was my waiter last night at the resort. So I asked him. Oh really? Where was I seated and what did I have for dinner? Of course he couldn’t answer correctly. So I asked him if he thought lying to me would somehow induce me to buy his stuff. It’s uncomfortable to confront someone who lies to you. Now most manipulations are not as crude as the one I just described. But we’re still subjected to them on a daily basis. One of the fundamental principles underlying investing in real estate is the psychological contract of trust. Trust is not just whether you dealing with an honest person. That’s an absolute must. Even that can’t be taken for granted. But it runs much deeper. It’s a layered nuanced complex relationship. It involves asking a number of questions. Can I trust you to put together a solid plan? Can I trust you to execute the plan Can I trust you to hire the right team? Can I trust you to communicate in an open and transparent way? Can I trust you to communicate when there is a problem? Can I trust you to keep small commitments? Can I trust you with my money? Can I trust you to be resourceful enough to solve virtually any problem that might come your way? Can I trust you to manage risk in a prudent manner? And on and on. If any one of these items is missing, it starts to chip away at the trust. The final element of trust is your track record. What have been your results? Have you lost money for investors? If so, what was the reason and what did you do about it? Now I know what you might be thinking. You might be new to raising capital and wondering how can I raise any money if I don’t have a track record. How can I get. Track record if I can’t raise any money. I’m stuck in a circular argument. But here’s another way to think about it. So when a deal sponsor says, boy do I have a deal for you. That’s the last thing you should be considering. Consider first, who are you doing business with. I have no idea what the street vendor in the market was trying to sell me. I paid no attention to that. I needed to know first if this is someone I could do business with.

On today’s show we are talking about the impending recession. Yes, that’s right, the impending recession. I believe that both Europe and the US are facing recession later this year if they are not already in an economic downturn. What is the reason? Bloated inventories. Recessions happen when companies end up with bloated inventories. Most of the time, those inventories are the result of growing production in anticipation of continued demand growth. That’s the classic cause of inventory growth. Sometimes companies experience delays in delivery of parts because the supply chain is running at capacity. Inventory of materials or components can cushion and protect against those delays. But when the delays disappear, the excess inventory will be drawn down to normal levels before ordering more. That sharp halt in orders when it happens across a wide swath of the market is what we call an economic contraction. So let’s take a look at inventories and see if there are situations where inventories are being built ahead of demand. If we see enough of them, and we don’t see a corresponding increase in demand to absorb those inventories, we can easily conclude that a recession is not far away. I’m going to build the case for recession in three parts. For exhibit A I give you Brexit The UK has a deadline of the end of October to leave the European Union. But the terms of the departure haven’t been worked out and the risk is high of a no deal exodus. If there is no deal, there is a great deal of uncertainty about what that could mean for the flow of goods and commerce. Will goods be delayed at the border? Will customs inspections increase and materials be held up? Will there be new tariffs? British companies have responded to these uncertainties by building inventories to make sure their supply chains are not disrupted. For exhibit B, I give you the European counterpart of Brexit. Companies on the continent that do business with the UK are also stockpiling in order to handle any possible supply chain disruptions. For exhibit C, I give you the US China trade negotiations. Many companies in the US have ordered extra material in order to avoid the impact of tariffs on goods coming from China. So here we have three significant places in the economy whereby there is an artificial increase in inventory ahead of demand. We know that when that happens a stop in orders to draw down that inventory is not far away. When companies slam on the brakes and stop ordering it sends a negative shock wave through the economy. Customers who were placing steady orders week after week, suddenly stop ordering. Revenue from that customer drops to zero while the excess inventory is consumed. The supplier has no idea when orders will resume. So they respond the only way they can to protect the business. They send people on forced unpaid leave, or institute layoffs altogether to reduce expenses and protect the survival of the company. When recessions happen, businesses fail, banks suffer losses in their commercial loan portfolio. Commercial real estate suffers as commercial vacancies increase. Some of these companies will not survive. That puts further pressure on lending institutions. Banks today are better capitalized than they were in 2007, but still, they need to pay attention to their balance sheets. In recession times banks become more risk averse and have little choice, but to tighten their lending practices and only a fraction of the loans get approved that only months earlier would have been easily approved. So pay close attention to your portfolio and use the current window of opportunity where loan interest rates are lower than they’ve been in a while, coupled with the favourable lending environment to lock into as long a fixed rate term as possible.

Kara from Ottawa Canada asks. I have a firm agreement with a buyer for the sale of a property. Two weeks before closing the lender for the buyer indicated that they want to order a new appraisal and therefore the closing date cannot be met. The Buyer is proposing that we close the transaction with seller financing, or that we simply extend the closing date. I have very real carrying costs for the property and I don’t like the idea that this delay could cost me money. What do you suggest? Kara, this is a great question, and an extremely common situation. You’re based in Canada and closings generally happen on time. In the US, it’s much more common to have delays on closing. A failure to close on a transaction in Canada usually results in litigation. In the US, delays are part of the fabric of real estate investing. In my experience, more than half of the transactions I’ve witnessed over the past decade have been delayed for one reason or another. Sometimes the cause is a delay with the title insurance. Sometimes it’s a delay with the lender. I’ve even seen delays at the closing table when the lender for the buyer requests additional documentation on closing. You’re correct to be concerned about carrying costs. The daily and monthly carrying costs are real, and you should be compensated for the delay. The agreement for purchase at this point is not conditional. So it stands to reason that the buyer should pay for those carrying costs because they were going to own the property from the closing date anyway. I don’t know exactly how much extra time the buyer will need, but let’s say for the sake of argument that they need an extra 30 days to close. Let’s imagine that those costs are $2,000 a month. I don’t know the exact numbers so I’m making them up. You have a couple of choices. You could increase the purchase price to compensate you for the added costs. But that runs the risk of causing the buyer to prequalify for a new loan amount. That could introduce even further delay. But you would be within your rights to ask for that. The second option, which I prefer is to ask for an increased deposit. You could agree to, say, a 30 day extension under the following conditions: If your carrying cost is $2,000, I would as for a little more because you’ve probably forgotten something. I would ask for something between $5,000 to $10,000 in additional deposit monies. The Buyer should increase their deposit amount. But in this case, unlike the original deposit that was placed in trust with the real estate agent, this deposit will be non-refundable, and released immediately to the Seller. The purchase price won’t change, but you will get a chunk of cash immediately. The added deposit will be deducted from the cash the buyer needs at closing since it was pre-paid. But it is reducing your risk. I’m not a fan of closing with Seller financing. It puts too much of the risk in your hands. Let’s say that the lender for the buyer backs out of the deal. Now you’ve conveyed the property and you would need to go through a huge and expensive legal process to get the property back. This would involve a foreclosure or a power of sale, depending on where you live. In Ontario this would be a power of sale, but could only happen after the Buyer is in default on the terms of their Seller financing agreement. Meanwhile you’ve got a ton of cash tied up and you’re working with a buyer who is not capable of closing. You don’t have the flexibility to simply put the property back on the market. I want to thank you Kara for a great question. I hope this gives you some ideas on how you can negotiate the situation.

On today’s show we’re looking at another economic indicator that might signal a weakening economy. Truckers have for months been sounding the alarm about a "bloodbath" in their $800 billion industry. This year alone, some 2,500 truck drivers have lost their jobs as trucking companies large and small declare bankruptcy. That is a small number considering the scale of the industry. However, major public carriers like J.B. Hunt, Knight-Swift, and Schneider have been forced to cut their annual outlooks. Trucking is often looked at as a leading indicator of where the rest of the economy is headed. As 71% of America's freight is moved on trucks, companies foreseeing needing fewer trucks is typically an omen of an economic downturn: If manufacturers are producing less and people are buying less, there's less of a need to move goods. Trucking participates in all phases of commerce, everywhere in the supply chain. It increases as manufacturing starts to ramp up, giving it leading indication on economic growth. When the rest of America is headed for a downturn, freight usually dips first, a new published report from Convoy's economic research division said. The industry went into a recession in April 2006, more than a year before the rest of the economy was clobbered by the Great Recession, starting in January 2008. Rail and air cargo are also suffering. Air freight has declined year-over-year for eight consecutive months, according to the International Air Transport Association. The IATA head has said the China-US trade war is dragging down business. Fuel is a massive expense for truck drivers — and the companies that employ them. Fueling up a truck fuel costs can easily total thousands of dollars per month; truckers are driving up to 11 hours a day in vehicles that get at best 6 miles per gallon.  So, most companies give their employees gas cards to pay for the diesel fuel. Unless, of course, that company can't afford the fuel. The internet is full of stories of truckers who were laid off and their employer owed them for fuel. In the first quarter of 2019, 100 more trucking companies failed compared to the same period in 2018. Truckers large and small are likely to continue to feel the pain of bankruptcies. Diesel rates are expected to surge following IMO 2020, a new set of environmental standards slated to have "large and disruptive effects" on the oil and gas industry. We did a segment on the impact of new sulfur emission standards that are due to come out on January 1. If you missed that show, it was episode 462 on April 23 of this year. According to the FreightWaves report, the surge in trucking bankruptcies has been historically linked to a jump in diesel prices. For smaller trucking companies, such increases in cost can't be passed down to their customer base of retailers and manufacturers - who can just go to a cheaper trucking company in the ultra-competitive space. And now it appears clearer than ever that the economy is headed for a slowdown if not an outright recession. Remember, the definition of a recession is two consecutive quarters of negative growth. Only a few years ago there was a shortage of independent truck drivers in the US, and they were being imported from India to make up the shortfall. Now that trend appears to be reversing. On Wednesday, investors everywhere were spooked by an inverted yield curve, in which the spread between two- and 10-year Treasury yields fell below zero. We have had a few yield curve inversions over the past couple of years. They can sometimes accompany economic slowdowns, but not always.

Realogy Holdings Corp the largest full-service residential real estate services company in the United States, announced a couple of weeks ago a collaboration with Amazon. The new program is called TurnKey, a new homebuying program that simplifies the process of finding and settling into a new home. Now available in 15 U.S. cities, TurnKey combines Realogy's real estate expertise across its brands, including Better Homes and Gardens Real Estate, Century 21, Coldwell Banker, ERA and Sotheby's International Realty, with the ease and convenience of Amazon's Home Services and smart home products. The program has two parts. The first is the connection with a real estate agent who is one of the designated TurnKey agents, and who are affiliated with one of Realogy's trusted residential real estate brands. The second part of the program involves a free move-in benefit for the customer. Upon closing on a home, Amazon connects the buyer with services and experts in their area to help make the house a home. Amazon is playing the long game. Imagine for a moment that Amazon is actually registered as a Real Estate brokerage that is entitled to the broker referral fee. Let’s imagine for a moment that Amazon credits 100% of that referral fee back to the customer in the form of Amazon credits that the home buyer can use to furnish their new home. What they’re building is a new set of habits. Imagine, you’ve got $5,000 to spend on new stuff for your house. What are the chances that you’re only going to spend $4,999 dollars and stop, never to spend money with Amazon again? Chances are good that you’re going to establish a new set of buying patterns at a time when you are already facing disruption and need to establish a new set of buying patterns. You’ve moved into a new area and will probably change grocery store, hardware store, furniture store. Imagine that Amazon is disrupting that process and you’ve got $5,000 to spend. You’re probably going to continue to use Amazon beyond the first wave of spending to use up your credits. Amazon wants you to think of Amazon first when you need to buy something. By sending you on a shopping spree, they’re helping establish a new habit. There is a fundamental conflict when a platform owner competes with its customers. Some people think that the end consumer are Amazon’s customers. But the users of its platform who sell through the amazon marketplace are also its customers. Competing with your customers can be considered an anti-competitive activity because it not a level playing field. Numerous companies have encountered this problem over the years and this has been the subject of numerous justice department probes into anti-competitive practices. When a single company becomes dominant in the marketplace, it becomes a target for accusations of anti-competitive behaviour. This happened to IBM when it dominated the computer industry. Microsoft has been the target of a probe. Now Google, Facebook and Amazon are increasingly under the microscope. Certainly, the EU has put the dominant platforms under the microscope and they are in jeopardy of facing billions in fines from EU regulators. So what does this mean for us as real estate investors? The most difficult part of any marketing funnel is the wide part of the funnel. It’s not the fulfillment end of the process. Those who control the widest part will achieve dominance, since that’s where the majority of the eyeballs are looking. For now, Amazon is not at all involved in the world of commercial Real estate. They’re focused on the retail consumer end of real estate. But this is a shift of massive proportions that stands to tip the balance in the world of real estate brokerage. You can assume that Amazon will bring a lot in the way of consumer analytics that few other companies can match.

Today’s show is a very special edition where I came across a lesson in marketing that was simply too brilliant not to share with you. We’re talking about taking a commodity, a commodity that is traditionally sold by the pound, and elevating it to another level, by wrapping a few key concepts into it. I’m coming to you live from Portugal where the economy here has been through its ups and downs over the years. This is my third trip to Portugal. My father owned an apartment here and spent the winters for a number of years. The roots of this story started in 1926 with a military coup d’etat that resulted in a fascist dictatorship in 1933 under the direction of Antonio de Oliveira Salazar. Life was difficult under the Salazar regime, and many local people turned to the sea to find food and economic survival. It was during these years that the sardine fishery expanded dramatically. At the peak, there were 400 canneries in operation. Canning of fish started in Nantes France in the year in 1824. By the 1850’s Portugal too had started canning fish and the abundant supply of high quality sardines combined with the extensive coastline and rich fishing tradition eventually turned sardines into one of Portugal’s main exports. But folks, we’re talking about Sardines. They’re sold by the pound. We’re talking about $3-4 per pound. Let me introduce you to Il Mundo Fantastico De Sarindha’s Portuguesas. Translated it means the Fantastic World of Portuguese Sardines. But the name itself doesn’t convey the image. Imagine a store where the motive is the brightest circus tent colors and the decoration is like that of the flashiest carnival or perhaps even Willy Wonka’s Chocolate Factory. Inside the store, tins of sardines line the walls from floor to ceiling. There is an entire wall of sardines organized into columns where each column consists of a birth year. The tins are all painted in a period design and there is a custom design for each decade. There is a wall of tins with different types of fish including tuna, Octopus, smoked salmon, mussels, and eels. The sardine cans have dates since 1916 until present day, with a relevant event from the year in question and signalling the birth of the most prominent personalities of that year. For example, in 1927, the very first motion picture movie to have sound “The Jazz Singer” was released. Each of these tins are a work of art. I can imagine people buying a tin and never opening it. It’s almost too beautiful to consume. Now I have no interest in buying a can from 1931. That date bears no significance to me. But I might consider buying a can for the year I was born, or perhaps a gift for someone for their birthday. When you go into the store, the staff tell you the story of the cannery, and how even today, all the cans are packed by hand, the same as when the factory was founded in 1942. They tell you about how the generations of people have made the sardine cannery their livelihood. Understand, it’s not about the sardines. I don’t even eat sardines. But my wife and I were so taken with the store that we had to go inside. My wife informed the shop keeper that we would love to hear the story, but would not be buying anything since we have a Vegan diet. You’ll never guess what happened next. The shop keeper showed us two cans with Vegetarian and Vegan contents. Of course we purchased a tin. I don’t even know what’s inside, but I paid 7 Euros for a hand painted tin with some kind of edible contents. So as you think about your real estate offerings, what are you doing that connects uniquely with your clients that makes them feel special, like the product was designed specifically for them? If it can be done with a commodity like sardines, you can customize anything to fit your client.

Chris is based in Newport Rhode Island, where he runs a family business investing in single family homes across four states. His recession proof strategy has positioned him extremely well for any economic conditions. He also has a free book for our listeners at freesrecbook.com. Mention that you heard him here on this show. 

Linda from Katy Texas asks: "I’ve been considering buying an apartment building in a depressed area with the hopes that I can fix it up and increase the value significantly. Even at today’s rents, the property is being marketed as a 10% cap rate property. I can’t seem to find properties that deliver that kind of rate of return in a more desirable area. Why would I pay that much more for a property in an expensive area and get a lower rate of return?"

The year was 211BC and ancient Rome introduced the denarius as its money. The coins were nearly pure silver and the coins had a theoretical weight of about 4.5 grams.  The standard, although not usually met in practice, remained fairly stable throughout the Republic, with the notable exception of times of war. The large number of coins required to raise an army and pay for supplies often necessitated the debasement of the coinage. An example of this is the denarii that were struck by Mark Antony to pay his army during his battles against Octavian. These coins, slightly smaller in diameter than a normal denarius, were made of noticeably debased silver.  The denarius continued to decline slowly in purity, with a notable reduction instituted by Septimius Severus. By the year 274, the denarius contained virtually no silver.  On today’s show we’re taking a closer look at the latest collapse of the Italian Government and what it might mean in the future.  Now I know what you’re thinking, I’m investing in real estate in the heartland of America. What does the resignation of an Italian Prime Minister have to do with my life? Italy has had 61 governments since WW-II, more than any other nation on earth. Part of the problem is that Italy’s electoral system is based on proportional representation. That means that if there are a large number of parties, which there are, it’s virtually impossible for a single party to get enough votes to form a majority government. They almost always end up being a coalition government between parties with differing ideologies.  Italy is the 8th largest economy in the world and they rely heavily on exports for their economic sustenance.  Now Italy has had numerous failed governments in the past. Their electoral system appears a bit dysfunctional.  Prime Minister Giuseppe Conte resigned on Tuesday after Matteo Salvini, leader of the League Party withdrew support for the government.  Now none of this matters to real estate investors in North America. This is nothing more than a power struggle. But the issue runs a bit deeper, and here’s why we care. Italy is part of the European Union, one of 28 countries, soon to be 27 after the Great Britain exits later this year.  The European Union is like a family where each member of the family has their own personality and values. Oh, and like a lot of families, they fight about money. Italy has never really recovered from the 2008 financial crisis. When I was there a few weeks ago, the news media were still talking about the financial crisis like it was something new. But we’re 11 years later. It’s no longer a crisis. It’s the new normal and the Italian people have not yet woken up to the fact that they need to adapt.  Italy is trying every trick in the book to try and jump start their economy. They haven’t realized yet that some of their policies are in fact responsible for the anemic economic growth. It’s easier to print money. But wait, that’s in contravention of EU rules.  You probably remember a couple of years ago when all the financial markets were spooked over the possibility of Greece defaulting on their national debt. Greece is one of the smaller members of the EU. They only have 12M people. They’re a rounding error on the side of Europe.  I’ve been saying for some time that the next financial crisis is going to be a sovereign debt crisis. I still stand by that. I just can’t tell you which country is going to be the trigger. Will it be Greece, Turkey, Italy, Argentina, or the good ol US of A.  The headwaters of the next financial crisis are wrapped up in governments that believe spending their way to prosperity is the path to economic growth. 

Today’s episode comes to us directly from Simon Black. If you don’t know Simon Black or know of him, he publishes the wildly popular Sovereign Man Newsletter.  Today's episode is the story of Tom's Diner in Denver, Colorado. It's about how some local activists nearly stole $5M in real estate value from the owner of a piece of real estate.  I want to thank Simon Black for writing today’s piece. If you don’t subscribe to Simon’s daily newsletter, I highly recommend it. He offers a perspective that few other in the world have. Simon’s a smart dude. He’s a former US intelligence officer and he served his country in Iraq during the Iraq war. Given his role in sending military intelligence information back to Washington, he was naturally surprised to see the news about Weapons of Mass Destruction. Simon and his colleagues looked at each other and said “What are they talking about? What Weapons of Mass Destruction?” That seminal moment put him on a quest to dig deeper and find the real story behind the story that is so often glossed over in the media, or mis-reported altogether. 

On today’s show we’re talking about one of the hidden costs, and therefore one of the hidden values of a parcel of land. This has to do with access to fresh drinking water. Water is emerging as the master resource that will determine the very survival of the human species. We tend to think of our water needs in terms of drinking water for human consumption and for washing and bathing. That for sure is a very real need. What we don’t see is the water consumed to produce the food we eat.  Some forms of food production consume incredible amounts of water. For example in the state of California, 15% of the state’s water consumption goes towards the cultivation of almonds. That’s a huge number.  We are seeing erosion of the water table in many parts of the country. When Las Vegas was founded about a century ago, it was a valley in the desert. The people at the time drilled relatively shallow wells that seemed to flow without limits. The early users of that ground water did not pay any attention to conservation. Today, most of those wells are dry and the city of Las Vegas gets its water from the Colorado River. The water level in the Colorado River has fallen steadily over the years and today, the final stages of the Colorado river that flow into Mexico no longer reach the ocean. The river bed is bone dry. There have been multiple diversions of the mighty Colorado river to service agricultural and municipal water needs of the communities along its path. The Central Arizona Project diverted the river into the city of Phoenix to provide fresh water for a metro of over 4.3M people.  India is running out of water. Saudi Arabia is out of water. They have used their oil wealth to build the most elaborate desalination systems in the world. There’s no question that the cost and efficiency of desalination have come down dramatically over the past 50 years. The older evaporation based systems were the most power hungry of all. Today’s modern multi-stage reverse osmosis systems use 1/10th the energy of those original systems. Depending on the salinity of the source water, you’re looking at somewhere between $0.75 per cubic meter of water to $1.30 per cubic meter of water, that’s about 250 gallons. That assume that you have a large capacity municipal grade system. When you look the breakdown if these costs, about 45% of the cost of producing the water goes to direct energy costs. The remainder is tied up in the life cycle costs of the equipment and the operation of the plants.  Let’s look at how much water it takes to produce food. It takes 15 gallons of water to produce a pound of lettuce and about 22 gallons to produce a pound of tomatoes.  At the other end of the spectrum, it takes about 3,000 gallons to produce a pound of beef. So when you have that 8 ounce filet mignon steak, you should be mindful that you’ve just consumed about 1,500 gallons of water. If you have steak 7 days a week, and I know a few people who do, you’ve just consumed 10,500 gallons in a week for just your steak. That’s half a million gallons of water a year.   I’m not telling you this to advocate a vegetarian or Vegan diet. That’s entirely up to you. This is just the hidden resource consumption that goes into our personal consumption of the one master resource in the world. So when you purchase a parcel of land, you want to pay close attention to the water rights and responsibilities that come with that parcel of land. In North America, the water rights generally date back to British common law and are based on the concept of riparian water rights. Generally speaking, you own the ground water under your property. You have no ownership of water that flows across your land and you have significant responsibility to protect and maintain the water that flows across your land.

On today’s show we are examining the difference between two prefixes  A prefix is the start of a word that modifies the meaning of a word. In the word anti-septic, anti is the prefix that changes the meaning of the word septic.  In today’s show we’re examine the prefixes Inter and Extra. These prefixes are used to create the word interpolate and the word extrapolate. Both involve predicting a point on a graph. But the math behind these two is different.  When you take an existing set of data points and you lack data in the middle of your data set, you can use interpolation to determine where on the graph this data point would reside. It generally results in a pretty good prediction of the outcome. For example, if you know what your profit was a 5% vacancy and at 10% vacancy, and you now have 8% vacancy, you can predict with a high degree of accuracy what the property performance will be at 8% vacancy. You have good data on either side of 8% with which to predict what the result will be at 8%. Mathematically, interpolating is pretty safe.  Extrapolating on the other hand is fraught with risks. Take the example of Social media side tumblr. At the peak, they had more users than Instagram and Pinterest. In 2013, they sold to Yahoo for $1.1B.   They were just sold to the owners of Wordpress for less than the price of a modest home in silicon valley.  The problem isn’t that Tumblr is only worth a couple of million dollars today.  Tumblr was inherently ill-suited to advertising. Today, Google and Facebook suck up 57% of all the digital ad spending. Back in 2013, social media advertising was not well understood, even though most financial analysts knew that the path to revenue would be through advertising.  Tumblr’s billion dollar plus valuation was based on a forward looking financial model of the kind of income it might be able to generate in the future.  That meant that the valuation was based on another metric which doesn’t correlate directly to revenue. In those days, the number of users or eye-balls was the metric of choice. But you can’t extrapolate eyeballs into dollars directly.  Interpolation is using past and present day information to calculate things in the present. Extrapolation involves predicting the future. 

Yes, today is my birthday and I’ve been thinking about what I might like for my birthday. We’re coming to you live on location in France.  If you’ve been wondering where you might want to retire, living the dream of owning a large, spectacular and historic building in many countries can often be somewhat difficult to realise. Not so, in France. Many people thinking about retirement consider selling the suburban home and finding a place in the warm south where they don’t have to shovel snow or deal with the impersonal nature of most big cities.  Almost every region om France has its share of imposing tower-topped chateaux dominating the landscape.  French chateaux for sale encompass all states of preservation. From windowless shells requiring total renovation, to those requiring light decoration, to immaculate 19th century bourgeois stately homes, the amount you will need to spend will depend on how much work you are willing to undertake. Being large properties, renovations can be very costly and time-consuming but need not be outside the budget of most serious buyers if planned correctly. Typically, to arrive at a habitable building you will need to spend around a total of around 500,000 Euros, whether you opt to renovate or buy an already renovated example.  That’s really quite a bargain if you think about it.  If your taste goes toward a little grander property, there is a lovely 33 bedroom chateau in the Aquitaine region of France that is currently operating as a 3 star hotel and restaurant business. It’s currently for sale for the relatively low price of 5.7M. It sits on a total of 49 acres, and the buildings have about 40,000 square feet of living space. A property like this, properly marketed could be the perfect venue for destination weddings.  If you’re on a bit of a budget, then perhaps the 8 bedroom chateau located just 35 minutes from Toulouse in the South of France might be more your style. It has 9,000 square feet of living space and is located on 43 acres of land.  If you want to keep things below $1M, then perhaps you would be interested in an 11 bedroom chateau in the Burgundy region of France, just near a town called Nevers just 2 hours from Paris and currently used as a home and full chateau rental business, this property is being sold fully furnished and would offer a great family home or an investment business currently generating 5,000 Euros per week as a full chateau rental, would also be an ideal luxury and themed bed and breakfast business.  If that’s too rich for you, then perhaps you might consider an 11 bedroom, 7 bath manor house in the Pyrenees Atlantique region. This is close to the Basque region which means you are close to skiing, and not far from Spain. You have the coast and the mountains all within a very short drive.  So I’m thinking about what I might like for my birthday. I can’t wait to see what my wife has bought me. 

Mike Lloyd is a specialist in business branding based in Silicon Valley. He started his career as a photographer and has translated that skill into having a broader impact. 

The changing face of retail means that retailers don’t need as large a footprint as before. As more and more business shifts online, delivery is often cheaper than prime real estate.  But secure delivery is still one of the friction points that is affecting the adoption of e-commerce in a lot of cases. The reports of stolen amazon packages from door-steps has caused some customers to avoid ordering items online. The solution? The Amazon locker. This is a locker bank like you might find at a train station for storing your luggage. But the boxes are generally much smaller. There are some boxes in the bank of lockers for large parcels, and a whole bunch of boxes for small parcels.  This past week, I saw a bank of these lockers in every major train station in Paris. These train stations are also major subway stops. So those who are on their way home can stop and pick up a package on their way home with complete confidence that their package has been securely delivered with no risk of theft, or problems with getting past building security.  Success in business is all about removing friction. My 94 year old aunt orders her groceries over the internet and they come delivered to her home.  This past week in Paris I used many of the hundreds of electric bikes and scooters that litter the city and can be picked up for 1 Euro plus 15 cents per minute. They travel 20 km per hour and you can use the bike lanes, and the bus lanes, even on a one way street. I was able to make multiple stops on my trips, something that would have been more difficult in a taxi or on the subway. In total, I spent less than a taxi and I had the flexibility of going where I wanted, when I wanted, without the investment or responsibility of owning a bike or scooter. It’s all about removing friction.   So these lockers solve a problem. They remove friction. They make receiving a parcel from Amazon easier than ever before. Amazon has even started putting lockers in Whole Foods stores which it now owns.  So why does this matter to a real estate audience? If you live in NYC, chances are that the door-man in your building will accept an Amazon order for you and keep it secure until you get home. But that’s a feature that’s unique to luxury buildings in major cities like NY. If you live in most other cities, the parcel will be left on your doorstep or in the lobby of your building. Hundreds or thousands of people could pass in front of your package before you lay hands on it. The problem is so common that there is a new term for it. If you are a victim of a stolen package, then a porch pirate was to blame. That’s right a porch pirate.  As more and more commerce shifts to online, the problem of package theft has been growing.  Business is all about solving problems. So the question is, could you as a real estate investor, solve a problem for your tenants, or perhaps solve a problem for Amazon? What if you own a multi-family apartment complex. Could you add a secure package drop off so that your tenants would be confident their parcels don’t go missing? If you have property across from a major public transit stop, would it make sense to rent a few square feet of space to Amazon so they can install a bank of lockers? If you own a drug store that also has a post office kiosk, would it make sense to rent a few square feet to Amazon? The purpose of today’s episode is to get you thinking, to get you to see opportunities that were not obvious before today. What if you have a store front in a strip mall that gets a lot of traffic, but for whatever reason that store front just isn’t renting.