Julien in Cambridge Mass asks, "Should I get a real estate appraisal or a comparative market analysis?" Julien, that’s a great question.  The simple answer is it depends on what you need it for. A comparable market analysis, or what is sometimes called a broker opinion of value is a quick and simple approximation of the market value of a property. However, it’s not of high enough quality for some purposes. Nor will it give you an accurate enough answer in all cases. Let’s look at the different types of appraisals that can be ordered. Depending on how you constrain the appraisal, you can get a dramatically different result. So it’s important to understand the details of what you are getting.  Generally speaking, appraisers determine the value of a property using one of three methods. Replacement Cost Comaparable Sales Multiples of net income The problem exists when the three methods don’t agree, which of the three do you select? Generally, the appraiser will choose the lowest of the three. But here too they need to apply judgement and discard the one that doesn’t apply.  The biggest problem in particular for commercial real estate is that in many cases there are no truly comparable properties in the same area. In those cases, a like for like comparison is truly impossible.  If your property is a 10 unit building, there may not be any other 10 unit buildings in the area. There might a 12 unit, a 16 unit, a 20 unit. So what do you compare? Do you compare price per unit? Do you compare price per square foot? Are the properties truly comparable meaning are they of a similar vintage with similar levels of finish and attracting a similar tenant base? If not, then they’re not true comps.  The appraiser will then look at replacement cost. They will look at the finishes of the building, and make a cost per square foot estimate construct the a new version of the same building today. Often times, buildings are trading below construction cost because they might have been built some number of years ago and the increase in value has not kept pace with the rising cost of new construction.  Finally, the third method is multiples of net income. This is where a property is valued on its ability to generate profit. That is, after all why we real estate investors are in this business altogether. The appraiser will look at what, say, B class apartment buildings are trading for in the area. It might be 6.5% cap rate. They will then analyze the financials for your building and determine the income and the expenses for the property based on a bank approved model for properties in the local area.  But here is where things get tricky. Not all appraisals are created equal. They’re not equal if they serve different purposes.  Imagine if a bank asks for an appraisal to value a property under fire sale conditions. What would this property sell for if the bank had to dump it and get its money in under 30 days? That would be a very different result than if the bank asked the appraiser to allow it to list for 6 months.  Sometimes the appraisal is to justify the purchase price for a lender who is about to lend against a property. In that case, the buyer may have got a real bargain. But the appraiser will likely list the purchase price as the appraised value even if the market value was higher than the purchase price. Why would they do that? You guessed it, the client for the appraisal was the bank, and that’s what the bank instructed the appraiser to do.  By now you’re probably getting the idea that the process of determining value is somewhat fluid. If that’s your conclusion, you’d be correct. 

Farhana asks, “Given the real estate prices in big cities are skyrocketing, which small city would consider investing?” Farhana, this is a great question. But before I answer the question directly, let’s ask another question. “Why would prices be skyrocketing?” The housing market is a free market. That is to say, prices are subject to the laws of supply and demand. Excess demand and prices rise. Excess supply and prices fall.  Furthermore, Is it actually true that prices are skyrocketing? First of all, Real estate is a business like any other business. That means that its about solving problems that real people have, that they’re willing to spend money to have solved. If housing is scarce and people have high paying jobs, then the price of housing gets bid up. You want to be able to solve those problems.  When cities are generating new jobs, once the unemployment is absorbed, new housing is needed. The tightest market for housing in the nation is the SF bay area. In the past couple of years that area has generated 3.5 jobs for every unit of housing created. This has resulted in longer commute times and even greater demand for housing in San Francisco itself. So are these markets skyrocketing? Well, they were for a while. Today, the price growth in a lot of these hot markets has levelled off and in some cases we are starting to see prices dip a little. But the fact remains, these markets are expensive. If your goal is to be a buy and hold investor, I would not recommend San Francisco, just to pick an example of an expensive market because the numbers don’t work. The underlying assumption in your question, is that expensive markets don’t work from a rate of return perspective. You have to spend too much money to acquire a property compared with the rent you can get in the market. It comes down to the ratio of net income to your total investment. In other words the capitalization rate.  So the question then becomes which markets make sense?

Today's show is recorded live in front of Notre Dame Cathedral which suffered a devastating fire back in April. Check it out. 

Several listeners have asked me what it's like living on board a boat. Today I'm taking you on a mini tour of the boat and what it's like living aboard.

On today’s show we’re talking about one of the other impacts of the 2008 recession. A decade later we are seeing a significant difference between the number of single family homes being built versus multi-family.  Multi-family is growing in share of new permits across the nation. But in select markets that already had a substantial footprint of multi-family, that growth has accelerated. So let’s go back to 2008. As the national housing market collapsed amidst the subprime mortgage crisis, new construction ground to a halt, with building permit issuance bottoming out at the lowest level ever recorded in 2009. At the peak, there were nearly 1.7M single family homes permitted in 2005. By 2011, that number had dropped to 418,000. If you were working in single family home construction 75% of the nation’s business evaporated. No surprise there were many business failures in that industry.  In the recovery years that followed, multi-family housing construction rebounded fairly quickly, driven by a trend toward urbanization that increased demand for housing in and around city centers. The number of multi-family units permitted surpassed its pre-recession peak in 2015 and has since maintained that pace. In a balanced market, a new housing unit should be built for every two new jobs that the economy adds. Markets that add more than two jobs-per-permit are considered to be undersupplied.  In Philadelphia, pre melt-down, the city was permitting about 15% of all units in the multi-family category. In the past decade, more than 45% of all units are multi-family. That statistic mirrors what I’m seeing on the ground in Philadelphia as well. Philly is one of the few coastal markets that is actually balanced. The job growth and housing growth have been pretty well balanced.  Since 2008, the San Francisco Bay Area has added 3.45 jobs for every new housing unit permitted, more than any other large metro in the nation. Furthermore, when we zoom in to the county level, we find that this housing is not being built in the same locations where jobs are being created. In fact, many smaller metros throughout the country are actually building more new housing than needed based on local job growth. As the knowledge jobs of the modern economy cluster in a shrinking set of “superstar cities,” job growth has lagged in many other parts of the country. In these regions, it seems that struggles with housing affordability may have more to do with household income than with housing supply.  Even some major cities like Dallas, Charlotte, and Atlanta and Phoenix are adding enough units according to employment metrics. This analysis of course neglects migration due to retirement.  Pay close attention to permit activity. That will give you visibility of the market conditions 2-3 years from now when those units are in the market. 

On today’s show we are going to reveal information that could dramatically alter your rental marketing. This is all about knowing your customer. You wouldn’t advertise pencils to someone searching for a fountain pen. If you know what your customer is looking for, connecting them with the right product is relatively easy. Sending the right message to the customer who is looking for what you have to offer has a 36 times greater chance of success than blind random advertising. The vast majority of paper flyers that come in the mail at my house are wasted. They’re all promoting things that I’m not interested in. And if there was something of interest, it’s so buried in the noise of things I’m not interested in, I’m not willing to go through the effort to check and see if its there. Website Apartment List recently published something called the Renter Migration Report. This report analyzes millions of searches to see where users are preparing to move. So why does that matter? If you have apartments for rent, and you are competing with all the other apartments in the market for attention from prospective tenants, you are stuck in the sea of sameness. You are in the same pond as everybody else. But what if you knew that for whatever reason, 7% of people moving to your city are coming from New york, and 5% are coming from Washington, and a similar number from Miami, that’s useful information. How is it useful you might ask? In today’s world of digital advertising, users compete for ad placement with the search engines, whether it’s with Google, Yahoo, Facebook, or Bing. All these search engines treat the process like an auction.  Now imagine if you were, say, in Atlanta and you are competing for ad placement for apartments for rent. You would pay a lot to have that keyword search present your advertisement. In the world of pay per click advertising, you bid for each keyword that you want to present an ad for. Let’s say for example your keywords are Atlanta Apartments for Rent. You select your audience to be people in the Atlanta and surrounding area. You usually exclude everywhere else. There’s no reason for people in the Philippines, Russia or in India to be presented with an advertisement for Atlanta Apartments for Rent. It doesn’t make any sense and it would be a waste of money. Conventional wisdom is to exclude those advertisements from outside the local geography.  In the Atlanta area, there are hundreds or even thousands competing locally for those precious keywords.  But if you knew that 7% of the people moving into Atlanta came from New York, then it would make sense to present an advertisement to New Yorkers for Atlanta Apartments for Rent, when that search term appears. Instead of paying a really high price for those keywords, you would pay mere pennies per click. Why because there aren’t a lot of people bidding for those keywords in the New York market. New Yorkers expect to see ads for other New York apartments for rent, not Atlanta. There’s very little competition for those Atlanta keywords in New York, so they are very inexpensive.  You can use this information to better optimize your ad campaigns.  Advertising that is targeted at a specific customer is always more effective than random ads that don’t speak to a specific individual.  You wouldn’t present an ad to locals from Atlanta that says “Escape the snow” in this beautiful swimming pool. But it makes complete sense to present that to a New Yorker looking to relocate to Atlanta. 

On today’s show we’re talking about what to do when subcontractors are too busy. The front end of a project contains the most uncertainty. This is when you are perpetually in waiting mode. Waiting for engineering drawings, waiting for permits, waiting for lenders, waiting for inspectors, waiting for quotes, waiting, waiting, waiting.  The process that was supposed to take only a few months. Just when you think everything is ready, one of your chosen subcontractors says that they’ve taken other work and can’t do your job after all.  What are your options? Accept a higher priced bid? Restart the bidding process all over again?  In today’s market conditions, many subcontractors are busy beyond their capacity. The folks who are good are busy. The ones who aren’t busy don’t meet your quality criteria. They’re not the ones you want. These are the ones who will accept the work and then not deliver. They’re the ones where materials will go missing.  It’s easy at moments like this to feel trapped. Your general contractor has certain subs that they prefer to work with. Do you defer to your GC and accept anything they recommend? Do you search for another GC? At the end of the day, it’s difficult to over-rule your GC, because as soon as you do, they start to shift responsibility for decisions to you, and that’s not what you want.  You’ve negotiated a guaranteed maximum price contract with your GC, but that contract won’t be firm until the construction loan is funded and the contract is signed. Until then, it’s merely a draft. The draft is based on quotes that were valid for 30 days and more than 30 days have passed since the quotes were submitted. The subcontractors put a time limit on these quotes for a number of reasons.  They know that material prices can change. A severe weather event like a hurricane can cause a local material shortage that can cause prices to jump. The current trade negotiations with China have caused material prices to fluctuate.  They know that delays can happen. They know that new projects can show up. They don’t want to have to keep their crew in a holding pattern for months until your project is ready to break ground.  Unless you are large enough that you have complete control over your subcontractors, or can maintain some of the highest value subcontractors in-house, you are always going to be negotiating both pricing and schedule with subcontractors. When you’re bidding a project, the key item is price. But when you’re finally in construction, the key item is schedule. 

On today’s show we are talking about the importance of checking an often overlooked item when purchasing a property.  The question is, does the structure have all the required permits? Did it ever get a building permit? Were all the permits ever closed out? When you consider making improvements or additions to your home, it can be tempting to try and skirt the permit process. In some cities and towns, the cost and hassle of getting a permit can seem unnecessary, especially if you are handy and like to do the work yourself.  Some buyers don’t do the proper due diligence and confirm that the permits were issued and property closed. This can significantly affect the marketability of a property.  The financial motivation for many homeowners to avoid permits is the re-assessment of property value that would result. Nearly every city and town in America collects taxes bases upon the assessed value of a home. Assessed value is calculated by looking at the size and characteristics of property. What is the gross living area? How many bedrooms does it have? How many bathrooms? These are all factors in determining an appropriate assessed value. Guess what happens when the tax assessor knows about the luxurious new finished basement with home theater, wet bar, home gym and beautiful bath you just added. If you guessed your taxes are going up, then you would be right. Homeowners can save thousands of dollars over the course of owning a home when permits are not pulled. When selling a home, this becomes very problematic. If and when the town or city finds out about it, the new owner is the one who will bear the brunt of the increased taxes. So how do you know if you need to pull a permit?  The simple answer is to call your local building department and review the scope of work with them. They will let you know what requires a permit. Generally speaking, anything involving safety will require a permit. This includes electrical work, plumbing work, or anything structural, or anything that will significantly alter a property. Simple repair work should not require a permit.   Many homeowners who are undertaking a renovation will start the process with good intentions and apply for a permit. It’s often the case that they forget to call the city for a final inspection to close out the permit.  This can create a liability for you. For example, if you are performing electrical upgrades and don’t complete the final electrical inspection, you can bet that your insurance company will argue that the unauthorized and incomplete electrical work was to blame for your insurance claim, and therefore the insurer is exempt from paying the claim.   One of the most famous examples is the Sagrada Familia cathedral in barcelona. This famous Cathedral is still under construction after 137 years. This landmark gets about 4.5 million visitors a year. It’s a breathtaking work of art. Back in the day, the year was 1882, the then designer of the Cathedral was Antony Gaudi. Gaudi’s architecture is all over Barcelona, famous for his unique style. At the time, he asked the city for permission to build the church.   But the city can’t find anywhere in its records that Gaudi was ever given a response to his request to build the church. The initial permit fee imposed by the city included penalties and interest dating back 137 years. Needless to say, the price tag was enormous. That was eventually negotiated down to $4.5 million Euros, still a huge price to pay.   One of the other risks of not pulling permits is getting sued later on down the road by the buyer who purchases your home. Unfortunately, we live in a litigious society. When you don’t pull a permit, and something tragic happens years down the road, who do you think they are going to come after?

As real estate investors we are very familiar with the difference between good debt and bad debt. Good debt is debt that is used to purchase income producing assets. Bad debt is merely for consumption. That’s the debt that is used to buy everything from your car to your home renovation.  A recent story in the Wall Street Journal illustrates how bad things have become, with bad debt. Families across the country are going deep into consumer debt to maintain a middle class lifestyle, even if they can’t afford it. Cars, College, homes, medical care have all gone up in price over the past two decades, while incomes have not changed very much at all in that time frame. Increasingly, consumers are turning to credit to fill the gap.  Student debt has ballooned to $1.5 trillion last year, taking second place behind mortgages. Automotive debt has increase 40% in the past decade, adjusted for inflation and is now at 1.3 trillion. Alarmingly, the default rate on automotive debt is way up. Unsecured personal loans are up.  The simplest and easier form of consumer debt is the household refinance. Many people are continuing to bury consumer borrowing in their residential mortgage.  Inflation is an average. As always with an average, some items rise faster than inflation, and others rise slower than inflation. Wages are up 135% in the past 3 decades neglecting inflation. When you take the government reported numbers for inflation into account, incomes have not moved. College tuitions have increase 540% in the same time period, without adjusting for inflation. Health care costs are up 276% over that time period. The middle class is shrinking, and they don’t know it.  The Trump administration is reducing how much home equity mortgage borrowers can withdraw through cash-out refinances.   Starting Sept. 1, the Federal Housing Administration will limit the money available for cash-out refinance activity to 80% of the home’s value or less. Previously, borrowers could take out up to 85% of the property’s equity. The new loan amount limit is in line with the limits already in place at Fannie Mae and Freddie Mac.

Al Williamson is based in Sacramento California where he has focused on medium term rentals. This strategy is filling a gap in the market between short term rentals, hotel rooms, and long term rentals. Very smart approach. Check it out. 

Pete Barrow is based in Indianapolis Indiana where he maintains a high volume business in wholesaling and redeveloping single family homes. Some real nuggets in this conversation. 

The Fed lowered interest rates for the first time in a decade citing lower global economic activity.

Ray Dalio is the founder and co-chairman of Bridgewater Associates, which, over the last forty years, has become the largest and best performing hedge fund in the world. Dalio has appeared on the  Time 100 list of the most influential people in the world as well as the Bloomberg Markets list of the 50 most influential people. The first part of the book reads like a biography. It outlines the events that shaped this thinking including both his failures and his successes.  In the second part of the book, the author gets into the stuff that's incredibly important, but difficult to implement. In short, he provides a roadmap and tools (via algorithmic means) to accomplish anything you want in life. There's a ton of substance, definition, & practicality on how to action your objectives. He has a five-step process to achieve what you want out of life, and it couldn't be more understandable and reasonable. The tricky part for most people (in my humble opinion) is finding a goal or objective that they can focus and remain passionate about for an extended period. If that's not your problem, then Mr. Dalio's advice in the second part of the book is significantly profound. In the third section of the book, the author teaches you how to build the mastermind group/organization that's going to achieve the goals/mission you outlined in the second part of the book. The knowledge and thought that went into these 300 pages of the book are quite impressive. In short, the reader needs to get the culture right, get the people right, and then build and evolve the protocols that run the organization at a fundamental level. There's so much granularity behind those core concepts that it'll keep you busy trying to absorb everything. This book is not an easy read. It requires deep thinking. It's perfect for a summer holiday read when you have the time to integrate the lessons into your own life.

Today’s show is inspired by a conversation that I had with an investor about a project that they were undertaking.   The situation should never have happened and that is the purpose of today’s episode. The construction budget was based on a quote from a contractor, but unfortunately it was riddled with problems and the investor didn’t see it. As soon as I looked at the numbers, it was obvious that the budget would never work in the real world. I was able to see it instantly and the investor didn’t. I don’t have any special super powers. A few simple calculations immediately showed the problems. The goal of these calculations is to quickly answer a simple question: “Do these numbers make sense?” The first thing I look at is the allowance for interest reserves in the project. I start with the loan amount and calculate the interest for the construction period, and then make a guess at how long it might take to lease the property followed by how long it might take to complete the refinance into permanent financing. I then compare the interest that would be due over that entire time period and compare to what is in the budget. In this particular instance, it looked to me like the budget took the time for construction into account, but not the period for leasing or refinance. I would even add a buffer to that of 50%. So the interest reserve in the budget needed to triple compared with the amount in the budget.  Next I look at the allowance for appliances. You can easily drive down to your nearest Best Buy and price our an appliance package for a single apartment. Choose items on sale and you will get s pretty good estimate. We are usually talking about 6-7 appliances. A good estimate is somewhere between $3500-$4000 for a class A apartment. In this particular instance, the budget was a little over $2000 per apartment. It was easy to see that the estimate was not close to where it should be.  Hardwood flooring costs about $3 per square foot to purchase the material and about $2.50 to install in large quantities. You are looking at about $$5.50 per square foot for hardwood. Ceramic tile starts at $1.00 per square foot and cost about $3.50 per square foot for installation. The cheapest tile will cost $4.50 per square foot installed. I usually budget $2.00 for square foot for the material which brings me total cost to $5.50 per square foot. It means that the price for ceramic versus hardwood is virtually the same and in this instance I didn’t have the breakdown of the different flooring types. Vinyl plank flooring is less expensive and can be done for about $2.50 installed on the best day ever.  My friend had received a budget allowance of slightly above &1.00 per square foot installed. If doesn’t require a huge skill to see that there is no flooring on the planet that would fit within that budget number. The estimate was off by anywhere from 250%-550%.  These are simple rules of thumb. But they can quickly show when a budget has problems.  Being in this business requires a high degree of diligence every step along the way. 

Jonathan from Arlington Virginia asks, The Fed signals of an imminent rate cut made me eager to consider how I can take advantage of reduced rates through additional real estate purchases and other business acquisitions. Then, the announcement from Deutsche Bank that 18,000 employees will be let go stunned me. The two seem eerily (albeit tangentially) connected - I can’t ignore the timing. Should one be bullish toward leveraging  cheap debt to buy sensible assets with the real possibility of another financial crisis around the corner? Pursuing these acquisitions now can seize access to capital that likely won’t be available in tighter times, but the risk of holding such highly leveraged assets is intimidating. Jonathan, this is a great question. My reading of the situation is a little different. I’m not saying that Deutsche Bank is the only major bank that is struggling, but the company had ambitions to compete in the world of investment banking along with Goldman Sachs and JP Morgan Chase. They made substantial investments to grow those operations to compete with the Wall Street heavyweights. This is an area of the business that earns a lot of its money on the basis of corporate financings, bond issuance, brokering mergers and acquisitions, and initial public offerings. The trading desk for stocks, bonds, commodities, and currencies is also included in this business unit. The number of large corporate transactions have reduced significantly in recent years, even though the bond market remains highly active in terms of new offerings. This division turned a profit last year, but had lost money every other year since 2014. Most of the volume of the trading desks is increasingly being done by computer with no human intervention. You simply don’t need as many people to execute the trades as you once did. While the volume of trades is up, this is a misleading statistic. The number of computer trades is up, while those initiated by paying clients is down.  The bank hasn’t disclosed where all of the 18,000 layoffs will occur. But they have said that their brokerage and investment banking business will be among the heaviest hit areas. The company has about 9,275 employees in North America, most of them in the NewYork area, and about 800 in Cary North Carolina.  About 150 software developers in the Cary North Carolina office have already received their layoff notices. Investment banking is not at all like general business banking or personal banking. Investment banking relies upon large commissions. I’ve seen these negotiated down to 1.5% in some cases. This too has an impact on profits at the investment banks. The cuts are not limited to Deutsche Bank. Goldman Sachs, Citi Group, BMO, and in fact most of the European banks have announced substantial headcount cuts at their trading desks. Citigroup has announced a cut of 10% of their equity trading desk, and large numbers at their bond trading desk.  There is no question that the business of banking is changing across the board. The number of reasons for me to physically enter a bank branch continues to decline. I can now perform the majority of transactions from a web client or an app on my phone. I can now even make deposits using the camera on my cell phone which is integrated with the bank app. The one thing that kept me going to visit the branch every month will eventually disappear entirely. Banks across the country are reducing headcount and closing lower volume branches.  Borrowing money is not just about interest rates. A number of lenders have become more conservative in terms of underwriting rules and have tightened their lending criteria, even if money is cheap. They too are worried about making investments late in the business cycle. Continue to take advantage of the low interest rate environment and secure debt under the best terms, for as long as you can. 

Today we're coming to you live from the Village of Montefollonico in Tuscany. This medieval village dates back to the year 1202. The richness of history here is incredible. If you haven't visited, I highly recommend it.

Our guest today is from Team Malizia (team-malizia.com), one of the IMOCA 60 racing boats scheduled to compete in the Vendee Globe single handed round the world sailing race in 2020. 

My guest today is the skipper of Initiatives Coeur. You can find out more at https://www.initiatives-coeur.fr

On today’s show we are coming to you live on location in Italy. We are about an hour outside Rome at a seaside town called Santa Marinella. I come to Italy regularly and in the past decade, not much has changed. In this idyllic seaside town there are numerous properties for sale, many of which have been on the market for two years or more. In fact, they’re still talking about the financial crisis as the reason why things are so bad economically. When I was here in 2009 and 2010, I totally get why they were talking about the global impact of the financial crisis. But a decade later, I don’t think you get to use that excuse anymore. A decade later it’s called the new normal and there needs to be an acceptance of the situation and the that it will take bolder steps to create more economic activity.  Many of the properties we looked at were either waterfront properties or across the street from the sea. These are either single family homes or multi-family buildings facing the water. Many of them are distressed properties with visible signs of deferred maintenance. Sellers seem to be reluctant to reduce prices and the emphasis seems to be on the asset price and not the cash flow generated by the asset. This stands in stark contrast to the more fluid notion of valuation that we have in North America that values an asset as a business and that valuation is based on multiples of net income, or what we call the cap rate.  This week, the local news in Italy is talking about the widely anticipated interest rate cut in Europe. This would be the first interest rate cut since 2016 and outgoing ECB chairman Mario Draghi’s final move before he steps down in October.  But it also raises practical questions about how much more the ECB can accomplish with its current toolbox. The bank’s key interest rate is already below zero and its balance sheet has swollen to around 40% of eurozone economic output, double that of the Federal Reserve. I believe that with interest rates already so low, the economic stimulus that would result from a lowering of rates is unlikely to have any measurable impact. Accompanying the rate reduction it is widely anticipated that the central bank will also participate in another round of bond buying. That’s code for printing more money and then buying the bonds. Printing money could have a stimulating effect, but here too it’s like a drug addict who becomes addicted to the drug and eventually develops a tolerance to the drug and needs more and more each time in order for the drug to have an impact.  So what does this mean for us as real estate investors? If Europe lowers interest rates, that could put pressure on other central banks around the world to do the same. The US news media have been reporting that the Federal Reserve is predicted to drop rates somewhere between a quarter point and perhaps as much as half a point at the July meeting coming up in a few days.   For us, as real estate investors, lower interest rates are a good thing. They make the cost of doing business lower, and we can ultimately translate that into higher profits.

On today’s show we’re talking about several bids that were out of whack. You’ve sent the drawings over to three subcontractors and the numbers comes back with a wide variation. One of the bids is quite low and seems attractive. The other two are from subcontractors that you know better, but the numbers are much higher. What do you do? Do you take the low bid? You go back to your tried and true subcontractors and ask them if they can do better. The answer is no, that’s the best they can do. You’re left scratching your head, wondering why such a large variation. Contractors have a lot of experience with negotiations and they experience being played against each other on a daily basis. As a result, they tend to become less transparent in their bidding process in order to maintain their negotiating leverage. But that lack of transparency actually hurts the negotiation because you can’t tell why they bid what they did. You can’t tell whether they misunderstood the scope of work, whether they’re greedy and uncompetitive, or whether there is a structural problem that is causing the bid to be out of whack. We had a situation with an electrical contract and all the bids came in much higher than we had ever expected. The numbers were truly out of whack. The numbers were truly double what we had expected. But they were consistently high. All three bids were high.  Only when we brought in another subcontractor who knew and understood our architect’s drawings did we get a bid that made sense.  So in that instance, the scope of work was not well understood. The contractors had misunderstood that the allowance for fixtures was not to be added on top of the specific fixtures that had been specified in the design. There was an absolute double count on the cost of the materials. But unless the contractors are willing to be transparent, you have no way of knowing why they bid what they did.  It would be too easy to point the finger at the contractors and say these guys are way too expensive.  In another instance, the engineer had specified items that was not what we had asked for. They specified surface mounted transformers which would require multiple levels of conduit buried in the ground at our expense. Instead, we requested that they change the design to incorporate pole mounted transformers from the electric utility and the final service from the transformers to the buildings would be buried in the ground resulting in a much shorter cable length and much less conduit in the ground. The bids from the contractor were high, but its because the specifications from the engineer were forcing much higher costs than were necessary in the project.  So how do you manage to get competitive bids that you can have confidence in? You focus on developing relationships of trust with a small number of subcontractors who you commit to give regular business. You will treat them fairly if they commit to treat you fairly. Once that relationship of trust exists, you can create the transparency that is necessary to uncover problems in a bid. It starts with a conversation with the contractor whereby you let them know that transparency is required in the bidding process. You promise not to use the transparency against them. Hiring a contractor isn’t just a matter of getting the lowest price. It’s a matter of getting the job done reliably and with quality at an acceptable price. 

Apple is in the product business. But before they can manufacture a product, they need to design it. There was a time when Apple Computer used to rely upon components supplied by outside companies to incorporate into their products. The Mac first used a microprocessor based on the Power Architecture developed by Motorola and IBM. Then in 2005, Apple announced the decision to switch from the Power Architecture to processors from Intel Corporation. Shortly after that, in 2006 they made the change.  At around the same time, they aquired a company called PA-Semi that had a microprocessor development team in silicon valley. That team had been working on a low power consumption microprocessor for the notebook PC market using the Power Architecture that Apple had just abandoned. They clearly didn’t need the product that PA-Semi had been building. They spent $75M to buy a company with 150 talented engineers who knew how to build low power chips. Now in the US, it’s against the law to buy people. You can only buy a company and hope that enough of the team decide to stay together at the new company. Apple bought the company in order to buy the team. In order to build the next generation of products, they needed a crack microprocessor development team. But for what?  Then two years later, Apple announced the iPhone, a product that would transform the company and propel it from just a desktop and laptop computer company to one that would blur the lines between a phone and a computer and a camera, forever changing the landscape of mobile computing in the industry. When I was in the microprocessor development business, I had hired a design team in Austin Texas of about 75 people at a small company called Intrinsity. They had developed a method for building high performance low power circuits and were among one of the better processor development teams in the world. They were used to augment my own processor development team that had staff in San Diego, Austin, Silicon Valley and France. Then in 2010, Apple announced that they were going to acquire Intrinsity. Today, most of the guys who used to work for me are now at Apple. Their first project was a power reduction for the graphics subsystem in the iPad. Getting higher performance graphics on the iPad with a 10 hour battery life was one of the goals for the iPad and this team delivered on that promise. They’ve gone on to work on other elements of the processor for both the iPhone and the iPad.  Most recently, it was disclosed that Apple is in discussion with Intel to acquire their mobile handset modem chip business. Here too, Apple might be buying a business where they have little interest in the actual products that company was making. They would be buying the business for the team. The acquisition has not been completed as of yet and will probably take a few months to complete. There’s a pattern here. Before Apple can bring a new product to market, they need to have the right people on board. Not just any people, the right people, the best people.

On today show we're talking about the incremental changes that if taken slowly enough can lull a docile population into submission. Opposition happens slowly at first and then all of a sudden. The current crisis in Hong Kong is a case in point.  The handover of Hong Kong, occurred at midnight on 1 July 1997, when the United Kingdom ended administration for the colony of Hong Kong and passed control of the territory to China. Hong Kong became a special administrative region and continues to maintain governing and economic systems separate from those of mainland China. The protests have been large and vocal with anywhere from 200,000 people participating to 2M people depending on who is counting. Police estimates put the largest protest march at about 338,000 people. Let’s be clear, these are large protest marches.  Protests in more recent days have turned to vandalism and the Chinese government is signalling that they need to restore order and the rule of law. So now the concern is that Hong Kong experiences an escalation of violence involving the police or perhaps the military.  This could result in an ideological flashpoint between China and the West where the assertion of China’s muscle over Hong Kong creates a values based confrontation between China and the US.  The global economic impact of a confrontation over Hong Kong could be far greater than the current negotiation over trade practices. Global supply chains could be disrupted and we could experience significant price increases. This is something to pay attention to and ensure that alternate supply sources can service your business in the event of disruption.

On today’s show we are talking about the importance of digital marketing. Regardless what business you believe you’re in, today’s market requires an expertise in digital marketing. As real estate investors we are marketing products digitally as well. Whether it’s a vacant apartment, an empty pad in the mobile home park, lockers and eight self storage facility, or even listing a multi family apartment building for sale. Every single one of these, in someway shape or form are vying for attention from the target audience. But here’s the problem, all of us are overwhelmed by the number and quantity of people, advertisers and opportunities that are vying for our attention. we have tune the vast majority of it out as a matter of simple survival.  So if we want our opportunity to be noticed, we need to go where people are looking. When we think of search, the name Google usually is the very first to come to mind. The problem is the Google searches the entire universe. It is too big. We’ve all experienced the case where we conduct a search and Google reports that there are 3 million instances of our keyword search results. But the fact is, most people rarely search beyond page 2. In fact, 50% of the search traffic goes to the first one or two listings on page 1 of the search results from Google. Google is great at indexing keywords. But they are not great at determining search criteria that are not purely keyword-based. For example, if you are looking for apartment complexes for sale of more than 100 units, and a cap rate of 6% or higher, google will not give you any useful search results. There are more specialized market places , and search engines that are specific to those market places. For example YouTube is another powerful search engine. If I am looking for instructions on how to do something like maybe repairing a fitting in my dishwasher I will use YouTube as search engine to find an instructional video. If I’m looking to buy or sell something locally, maybe a piece of furniture or some sporting equipment, then I would use craigslist or perhaps the Facebook marketplace as the search engine for something like that. If I am looking to hire a keynote speaker for an event, I would look to the national speakers Association as my search engine for finding a great keynote speaker. If I am looking to purchase a specialty item or a gift, I might choose Amazon as the search engine. If I am looking for a place to stay in the city on visiting I would choose Priceline.com, or Airbnb as my search engine. Every single one of these search engine’s use a different method, a different algorithm, for presenting their search results. If I’m looking to hire a virtual assistant, I would use up work as the search engine. So when we think of search, there is much more than just Google we need to focus on.  Each one is different. To be successful, we need to find someone who is a specialist in that specific search engine so that we get the best possible results from our initiative. How do you stand out and get noticed on each of those platforms? You might have the best offer in the world, but it’s irrelevant if people don’t know about it.  One of the common mistakes is for someone to copy what is common on a given platform and make their listing looks like all the others. We often get trained at school to act like the other students, just like the other children in the classroom, and conform to the norms that society sets for us. We need to fit in. We need to act and look like we belong. That when you do that you get stuck in the sea of sameness. It’s virtually impossible to get noticed when your offer is unremarkable. 

We're talking about market cycles this weekend. Love what Marco has to say, To connect with Marco, go to NoradaRealEstate.com or listen to the Passive Real Estate Investing Podcast. 

Today's show is coming to you live on location from the French Island of Groix. If you've ever wanted to know about what owning a piece a paradise off the Atlantic coast of France, this show is for you.

On today’s show we are talking about a growing trend in retirement or pre-retirement living. A number of people are selling the family homestead and opting for life on the high seas. I’m not talking the billionaire mega-yachts. I’m also not talking about slumming it on a 25 foot wooden boat either. There is a large spectrum of options in the middle and I personally know of many people who have made this lifestyle choice.  In some cases, they maintain a land based option but often as a second vacation home. One story is of a friend named Ian, a former executive with the Nielsen Group of Companies. These are the folks who are responsible for the Nielsen TV ratings and all kinds of other statistics that businesses have come to rely upon. Ian retired sooner than most. He was in his mid fifties, a little unsure about whether he had enough saved up to last the next 40 years.  He sold his home in New Jersey about 5 years ago and bought a 45 foot yacht. He and his wife spend the winter months in the Bahamas, sailing from island to island.  When it’s too hot in the South, the boat gets pulled out of the water in Florida and spends the summer in a cradle. From there, it’s off to another vacation home in the Azores. This vacation property was purchased for about $45,000 dollars and is a small piece of paradise overlooking the other islands and the Atlantic. A large expat community means that finding English speakers on this Portuguese island is not difficult at all.  Modern navigation and communication equipment has come down in price in recent years. The latest systems use a collision avoidance system similar to what aircraft use in the skies. It’s now possible to get real time weather updates on your electronic charts. These systems are so much more sophisticated and have increase boating safety dramatically.  My wife and I are routinely spending time aboard our boat in Europe. Marina fees average about $500 per month, and it’s an extremely affordable way to keep a home base. Daily rates can run anywhere from $40 a day to $300 a day depending on the size of your vessel. We feel extremely secure on board everywhere we go. Living on board means careful planning. Things like getting a haircut, or a large laundry requires more time than at home on land. We have a washing machine for clothing on board, but it lacks the capacity and features of the land based counterpart. On those days when we are not connected to shore power, we have a large solar panel that keeps the batteries topped up. Our largest electricity draw is refrigeration, and we can go several days on battery power alone without having to run the engine to charge the batteries. One of the latest trends in boats for retirement is the popularity of catamarans. The two hull vessels are very wide and stable. They don’t roll in an anchorage. The downside is that they are a bit more expensive to purchase. They are also more expensive to own since they occupy the same space as two boats in a marina, the marina’s charge double the price of a monohull boat. In some cases, finding space in a marina can be more difficult because not only do you need two spaces, you need two spaces side by side which is more difficult to find. So your operating costs can be much higher. Some areas are experiencing a significant increase in permanent live-aboard residents. One of the larger marinas we recently visited in Europe has over 4,000 boats. I can tell you from walking the docks, you can tell which boats have live-aboard crew. If there is a small herb garden of basil and mint, chances are high that the owners live aboard.

On today’s show we are talking about something that is rarely talked about. Entrepreneurship has been put up on a pedestal and it cool to be an entrepreneur. Today’s show is about the inner struggle of being an entrepreneur. It’s about handling the negative self talk that can surface when things don’t go as planned in your business. It’s when an employee or partner doesn’t fulfill their commitment. It might have been you. Maybe you made a mistake that needs to be corrected. Every one of these events results in managing an exception. It means having to work extra hard to fix something that should never have happened. Even if it wasn’t your fault, you, as the business owner feel responsible. It’s that sense of responsibility that is healthy for the business and heavy for you as the business owner. It’s a weight that you carry with you all the time. It’s an extra sack of potatoes on your back all day long, all night long, even when you sleep.  The amount of effort that goes into managing exceptions is many times the effort associated with managing routine items. I’ll give you a simple example. If a tenant pays their rent on time, the money appears in the bank account, the book-keeper records the entry. All is good. But if a tenant vacates early, or if they fail to pay the rent, the amount of energy expended in managing that exception is many times what it would be in the normal case. The effort to manage an eviction is orders of magnitude more than the effort to receive a rent deposit.  When something doesn’t go as planned there can be emotional baggage that makes the task much heavier emotionally than the task itself.  In many cases, you don’t leave enough slack in the system or the calendar to handle these unplanned events. The effect is that other commitments are delayed. Here too, the cascade effect can result in more missed expectations. The feeling of overwhelm can be paralyzing.  But the fact is, every single one of these issues can be solved. All too often, entrepreneurs fall back on the skill-sets that have made them successful in the past. It’s true, that this approach will fix the immediate issue, but it won’t solve the underlying problem. In fact, it is really perpetuating the problem. It’s instinctive to ask “What should I do?” But the better question is “Who do I need to be?”.  Sure things need to get done, but they also need to be done the right way, by the right person in the organization.  Michael Gerber in his ground breaking book called “Emyth” talks about the three roles in the organization. There is the technician, the manager and the business owner. If your instinct is to do the work, then you’re being the technician. If you are the manager, then you are assuming responsibility for the task, and often delegating the task, but not the responsibility. Sometimes, that’s who you need to be. But if you’re truly the business owner, you will find the right people in the organization to own the responsibility for getting the job done, and for getting the problem solved. When I say solving the problem, I’m not just talking about the immediate issue, I’m talking about the underlying issue. Your role as the business owner is to make sure the systems are put in place to make even these exceptions part of the standard operating procedure. When you engage with your team, the conversation should focus on the systems, and not the specific emergency. Yes, the emergency needs to be solved, but not at the expense of the systems. Otherwise you’re not solving a problem, it’s simply a bandaid and the problem will resurface. 

On today’s show we are talking about erosion. But not the usual form of erosion that happens when it rains. I’m talking about the factors that erode your business. When we encounter erosion, the natural reaction is one of dismay of disappointment. This shouldn’t be happening.  So what could erode your business?  These are the small things that you hardly notice. These are the inefficiencies that individually are hardly noticeable.  On today’s show we are covering the top 5 sources of erosion for many businesses.  Contractor theft. This is when your subcontractors order a little extra material. It’s natural that you need a little extra tile to handle the waste that results from cuts at the edge of the room. But general materials like lumber and drywall, fasteners, that you purchased often aren’t returned at the end of the job.  Subscriptions. These are the software services that might have been ordered a few years ago. Today you would not subscribe to that same software. I’m actually guilty of this one. I have several examples of staff that are no longer part of the organization. But it’s important to keep an archive of their email. Our email is hosted by Google. The cost is $6 per month for their business suite. It would take about 15 minutes to shut down that specific user account and create an archive file. But before you actually delete the account and save the $6 per month you want to make sure that the archive is readable in the future should you need to access it. That process takes about another half hour or more. As you can imagine, saving those $6 hasn’t come to the top of the priority list this month anywhere in the organization. It wasn’t a priority last month, and it probably won’t be a priority next month either. So we have $6 of erosion every month. It’s been over a year.  Increasing your tenants rent. In some cases, if your property is rent controlled, you might only be able to increase your rent by 2-3% per year. Sometimes, I’ve seen property management fail to increase the rent because it’s only an extra $22 a month, less than $1 a day. Increasing the rent isn’t urgent. You’ve got other more important things to work on. You have investor reports and accounting deadlines and the lady in unit 30 who wants her blinds repaired.  Property tax appeals. Everyone who owns property needs to pay their fair share of property tax. But the property tax assessment process is not perfect and there are numerous examples of assessments that are out of whack with other comparable properties in the area. I know one investor with a large portfolio. The savings in property taxes are sufficient to justify a full time employee salary in his case. That’s all that person does. They appeal tax assessments.  Insurance. Insurance prices and coverage vary widely. The easiest thing to do is to pay the same insurance company upon renewal. I have several recent examples where by shopping around I was able to save anywhere from 25%-65% on my insurance bill. I’m not talking about reducing coverage. I take the time to read the insurance policy and understand the coverage. In fact, many brokers are surprised when I request a copy of the policy. I’m told that I can get the policy after it is issued. But that’s like buying a brown paper bag and the salesman tells you that you can only see the contents of the bag after purchase. But trust us, you will like it.  All of these things are small on their own. But when your cash flow is a subset of your profit margin after debt service, that 1-3% erosion of the gross revenue can over time accumulate into wiping out a large percentage of your cash flow. Cash flow is the most important metric for a real estate investment business. It means that you need to pay attention. 

This question is about Killeen Texas, just North of Austin Texas. 

When governments print money, where does it all go?  Imagine if you went to Las Vegas to play a game of blackjack, but there was one player at the table who had a very special ability. That one player could print more cards at will. the game would not seem very fair now would it? If the player got found out they might justify that special ability as having a benefit to the game. It’s really just to stimulate the game and make it more interesting. Today, half of all European government bonds have a negative yield, with the total amount outstanding at €4.4 trillion. At the end of May, 20% of European investment-grade corporate debt had negative yields. In the latest case of things that don’t make any sense, more than a dozen companies with bonds having junk status, which usually carry high yields, now trade in Europe with a negative yield. These same bonds that have a coupon of 6-8% are now trading in the open market at or below zero. 

Brett is a specialist in a tax deferral mechanism called the Deferred Sales Trust. For US investors, this is one of the most important episodes so far this year. Check it out. 

Karen Briscoe is based in Washington DC. We had a great conversation about the market dynamics in Washington and the impact of Amazon coming into the market. She's the author of two books and host of the "5 Minute Success" podcast. You can reach Karen and learn more at 5minutesuccess.com. 

On today’s show we are talking about a problem that many real estate investors experience. It’s also rarely talked about. We’re talking about solitary confinement.  A large number of real estate investors spend a large percentage of their time working on their own. For many investors, the list of solo tasks seems endless. The bill payments, reviewing leases, reviewing construction reports, posting updates on social media, responding to email, completing the application for a building permit, reading the latest update to your insurance policy. The list is endless. It all feels like busy work. This was not the carefree life of passive income and financial freedom that was talked about in the weekend seminar when you got into real estate at the very beginning. Well folks I’m here to tell you that there is no such thing as passive income. Real estate is an active business, just like running a service business. It is like running an engineering firm, or an airline. Real estate is a capital intensive business and therefore a disproportionate amount of emphasis is placed on the capital aspects of the venture.  There is a problem with the do it yourself model of real estate investing. It means that you are doing it all yourself. It means that you have not hired the staff needed to build a sustainable business.  I was talking earlier this week with an investor who was struggling with this very issue.  The key is to hire. But before you can hire, you need to be working on projects that have sufficient scale to afford hiring. Your first hire absolutely should be a professional book keeper.  After that, you want to hire someone who can truly step into your shoes and perform just about any task that you might do yourself. Your goal is to replace yourself.  If you hire a virtual assistant, you can definitely get some help. But in my experience, the caliber of work you can delegate is limited. In most cases you end up delegating tasks, but not the responsibility. The delegated task even when completed, come back to you. If it comes back to you, then the leverage you get from hiring is dramatically diminished.  The next issue with hiring is whether to hire full time or part time. You might not have enough work, or even enough money to afford full time.  In my experience, part time employees have a number of things going on in their lives. It can be difficult to count on deliverables when you only have a part time commitment.  In particular, I find that part time arrangements are rarely long term arrangements. You are likely to get into a cycle where your employee gets a full time job elsewhere and then you are hiring again, training again, and in the transition all of the work come back to you. Whatever help you had in the past vanishes. Whatever life balance had been restored, disappears. 

On today’s show we are talking about what it’s like to stand on the other side of the fence.  Last week my wife and I stayed in a short term rental. The location was amazing and the price was low. The reviews were good but not great. The property manager put out three bottles of wine for the guests, and they were prominently on display as we arrived. Nice touch.  The property advertised free parking included. But what that really meant was that street parking exists in the area, if it’s available.  The interior featured high speed internet, and the performance was excellent.  The air conditioning was limited to the bedroom.  The beds were two single beds side by side. The sheets were old. The mattress was old. The towels were old.  The soap rack in the shower was rusted and hazardous.  Here we were, in the most amazing location, paying only $110 per night in the height of the tourist season.  On our last morning I spoke with the property manager as we were leaving. He manages 44 units.  I told him about the short term rentals that I own and how we are commanding prices of over $700 per night in peak season.  He seemed to dismiss what I was saying by positioning my property as a luxury property.  What is the difference between cheap towels and expensive towels?  Does it really cost that much more to put proper chefs knives and everything you need to prepare a meal?  Does it really cost that much more to provide salt and pepper and the essentials?  When you assume a perspective that every dollar spent on the customer experience is a dollar less in profit, you may not be focused on what it takes to maximize revenue.  In a market where there is a lot of supply, it’s important to make sure that your product offer is differentiated in the market. Even if you’re convinced that you will be full in the high season, you will experience vacancy during the low season. If you want to get more than your fair share of occupancy during the low season, you want to have the best possible property reviews, The best photos, and be positioned as one of the premier offerings in the marketplace. You always have the choice of lowering your price at a later time. If there’s going to be vacancy, do you want the vacancy to go to the junk in the market not your property. 

Today is another AMA episode - "Ask me anything". Reed from Indianapolis asks.  “One of the things that I don't like about the class B and C multifamily syndications that I'm in is that it seems like at least somebody is having or has had a problem with cockroaches per google reviews.  Maybe you could do a podcast related to pest control in real estate?  Are cockroaches something one just has to live with at some level or can they be completely eradicated?” Very few things spark as much fear into both landlords and tenants than the spectre of an insect infestation.  There have been widely publicized reports of bed bugs in New York to cockroaches in Hong Kong.  So what do you do if you get that phone call from a tenant reporting a bug problem?  You have spent considerable time, money and effort to make your property desirable. The occupancy is high. The property has never looked better.  News of bug problems can spread like wildfire. A bug infestation can cause tenants to abandon a property and break their lease. Things can get unpredictable fast.  Bug infestations can be incredibly difficult and frustrating for landlords and tenants alike. Some warmer climates are known for having active insect populations, whether its ants, termites, or cockroaches. Termite control is often done proactively with perimeter spraying of buildings on a monthly basis.  Cockroaches are much more difficult. First of all, a thorough cleaning is essential. The insects need to have their source of food eliminated. This can be a difficult conversation with tenants. Many take offence at having their landlord accuse them of being dirty.  I recommend having a document for your tenants that describes the process for eliminating the pests, which also details their responsibility in the process.  Spraying alone to eliminate cockroaches is difficult. They have a way of hiding and avoiding exposure to the insecticides. If you only spray the affected apartment, chances are that the cockroaches will move next door to safety and then come back at a later time. Sometimes the only solution is to notify all residents and perform a coordinated spraying campaign in the entire building.  Understandably, landlords are reluctant to raise an issue with tenants who have not experienced a problem. In some cases, such a notification can create more of a PR problem than the spraying would solve.  Bedbugs require a completely different approach to eradication. Bedbugs tend to hide in the stitching of mattresses, sofas, clothing, they tend to hide in the baseboards of a room, or the electrical outlets. Bedbugs also lay eggs. Getting rid of them requires spraying at specific intervals in order to intercept the reproductive cycle of bedbugs. Here too, you need to spray the affected apartment and the neighbouring apartments on either side, above and below.  This is not a job for the do it yourself landlord. Always hire a professional and make sure that your tenants are fully on board with the process for getting rid of bedbugs. That means they must give you access to the apartment on a timely basis. They also need to do their part by bagging and washing all of their clothing at a laundromat utilizing hot water, And the heat of the dryer to make sure nothing survives the washing process in their clothing.  Some apartment buildings and hotels in New York City have earned a reputation for having problems with bedbugs. Once that reputation is embedded in the community the reputation may live long after the bedbugs are gone. It’s your job as a landlord to attack the problem aggressively and proactively. Most importantly, your tenants need to feel as though you are taking action and communicating with them on a regular basis.

Today's show is a real life personal story about fire fighting and what it means. What areas of your life are you fire fighting?

On today’s show we are talking about reading between the lines. This is the ability to fill in the blanks when the seller of a property provides incomplete information. Any professional real estate investor has the full information about their own property. If the seller truly lacks the information, then that’s a sign that they have been grossly mismanaging the property. But then you may already know that by now.  When the seller only provides a partial picture, we are left wondering what it means. The fact is, it could mean one of several things.  Some sellers use the shortage of information as a way of signaling to the buyer that they have the upper hand in the negotiation. This is one of those misguided knowledge is power plays.  I will ask the seller if they are interested in selling the property. That usually brings a response like: “Yes, but only at the right price.” To which my response is, “Great. We are on the same page. In order for me to buy the property, I need to complete my due diligence to justify your price. I will send you the list of minimum information I need to make an offer, and a second list of what I will need to complete due diligence.” Sometimes, the seller is using incomplete information information as a way of hiding something about the property. By hiding the truth, they believe that they are not lying.  At the end of the day, I rarely rely upon the seller’s information in due diligence. I construct a new financial model that is based on how the property would operate in my hands. After all, I’m going to be using my systems to operate the property, not the seller’s. They are the one selling the property, which means they have a problem. It’s not the buyer who has a problem.  The due diligence falls into a few categories. The physical asset.  Anything recorded on title  The tenants.  The operating history.  Land use restrictions 

On today's show I'm coming to you live from the WW-II submarine base in Lorient. 

Today I take you on a short walk in the ancient walled city of Valletta, a UNESCO World Heritage Site. Enjoy...

I’m coming to you on location from the island of Malta. This small island country joined the European Union back in 2004.  Since then it has seen tremendous population growth as the open borders of Europe has allowed the free movement of people.  Malta has always been a natural hub for relocation. Ever since the 1994 Malta Permanent Residence Scheme and more recently the renewed schemes, Global Residence Programme and the Malta Residence Regulations 2014, the country has seen a steady interest in purchasing real estate in Malta as one of the criteria to obtain the residency status. By 2014, the number of properties in the country exceeded the local population by 65,000 units. In the past few years that excess has been absorbed, and the entire island is undergoing an unprecedented construction boom. There are construction cranes everywhere.  One of the drivers for immigration has been the rules in Malta which permits businesses which operate in the online gambling arena. These gaming companies are everywhere and real estate agents report that 30% of tenants looking for rental accommodations are employees in the gaming industry.  Rental rates have increased about 40% over the past 5 years. Some rental apartments that opened with starting rents of 600 Euros a month only a few years ago are now charging 1000 Euros a month. Some tenants have seen increases of 200 Euros a month in a single year.  The country’s lower cost structure has attracted retirees from all over Europe, including the ultra wealthy.  Malta offers an advantageous tax structure for those who have large capital gains and the island offers greater anonymity than, say Monaco.  Depending on the investment one takes, cap rates range between 4%-7% and according to the folks at Remax and historical capital appreciation has been between 2% and 6%. Home ownership rate in the country is 81.9% which is high by global standards.  The current construction industry accounts for 7% of the economic activity in the country. In historical terms, that’s a very high percentage for any market.  In my estimation, the market will reach a point in the near future where the market will appear overbuilt. In the high summer season, short term rentals are numerous and the nightly rates rival hotel rates. But in the low season, vacancies can be extremely high and number in the tens of thousands.  Malta recorded a government budget surplus of 76.5m Euros in May of 2019. The government debt to GDP ratio was at 50% a couple of years ago. Today the debt to GDP ratio is at 46%. This compares with over 100% of GDP in the US.   Tourism is one of the main drivers of the economy and makes up 16% of the country’s GDP.  Tourist Arrivals in Malta increased to 250,000 in April, 2019. Considering that Malta’s permanent population is 433,000, a monthly tourism arrival rate of 244,000 is significant. If you consider that the island is a top destination for cruise ships in the Mediterranean, about 35,000 of the visitors come by ship and stay less than one day. The remainder stay longer with more than half staying a week or longer. 

Today’s episode is a companion to yesterday’s show. If you haven’t already listened to yesterday’s podcast, I suggest you listen to that one first. Today’s show will make so much more sense if you do.  On yesterday’s show we talked about the promise of 5G wireless technology and the fact that having good internet access is a component that affects property value. But in order to achieve the advertised performance you need to be much closer to the cell tower than in previous generations.  The number of cell towers is expected to more than double from the 323,000 in 2017 to over 750,000. Not only that, a 5G base station uses so much bandwidth that the network infrastructure to power it must be upgraded to optical fibre.  So the real cost of deployment for 5G is far greater than for any previous wireless generation.  If you are adding nearly 400,000 cell sites across the nation, and you need to get optical fibre to the cell site, then multiple utilities will need to negotiate easements to bury conduit and optical fibre on potentially millions of properties.  So let’s dig into the implications of an easement. An easement gives the right to the holder of the easement to access the property within the boundaries of the easement for the purpose of maintaining or upgrading their services.  These rights are often located along the edge of a property where they do no harm. For example, most zoning codes do not permit building structures right up to the property line. Easements are usually located in the setback where you can’t build anything anyway.  But easements can also cloud title and negatively affect the value of a property.  If a cell site is needed every 800-1000 feet in order to achieve the benchmark 5G performance, there is hardly a property in the country that won’t be affected in some way.  Now let’s be clear, many properties today carry utility easements. This isn’t a new concept by any means.  The cellular towers themselves are actually easements where the cellular carrier pays a monthly rent to land owner for the right to use the easement.  There is no doubt that the economic model for 5G cell towers will have to change compared with previous generations. Cell carriers cannot afford to pay as much as they have in the past for a cell tower.  Cellular towers are income properties that essentially trade in the cell tower market. Once a tower has been installed, it’s common to have several carriers share the same tower infrastructure. They would each pay rent to the property owner independently.  Cellular towers generally are valued at a 7% cap rate.  You can sell that easement on the open market and truly collect a check. That’s the upside. But there is a downside too. An easement on your property could ultimately negatively affect the marketability of your property. Before accepting an easement on your property, get a legal opinion from a competent land attorney. 

Today’s question comes from Natalia in Toronto.  Could 5G wireless impact the value of my property, and if so how? That’s a great question. This is a large topic with several elements to it. In fact, so much so that we’re going to answer it over two days.  On today’s show we are talking about the wireless technology itself and how it works. On tomorrow’s show we will address the specific impacts that the infrastructure related to the wireless technology can have on your land.  There is no question that having internet service available at your property definitely affects your property value. It’s right up there with water and electricity. Very few people would buy a property without electricity. The cost to add it is high and very few people want to install and maintain their own diesel generator. High speed internet service ranks high on buyers list of requirements.  Traditionally, high speed internet service has relied upon wired service to your home and more recently, optical fibre. Fiberoptics can deliver extremely high bandwidth and experiences very low signal degradation. It’s not subject to interference and you can easily have a fibre cable of 60 miles or 100km without needing a repeater.  Today mobile devices have become extremely powerful. I’m able to do most things from a mobile device that used to require a desktop computer. 5G wireless technology offers the promise of wireless performance that is similar to today’s wired solutions. Wouldn’t it be great if you didn’t have to worry about that and you could roam freely and get great service everywhere you go. How can one radio technology be faster than another? The secret lies in the encoding and in eliminating noise.  The first idea that I’d like to introduce is the coding scheme. Most people know that computers use binary math to make decisions. The individual transistors inside a microprocessor are only capable of counting from zero to one, and back to zero.  But in the world of wireless where we have limited spectrum available, the key is to pack more info into the same airspace. We as humans rely mostly on more complex coding schemes. Each character on a written page represents one of 10 numbers or one of 26 letters, plus all the different punctuation symbols and a space to separate words from each other. But not only that, we have upper case and lower case characters which are distinct. Add all that together and we have about 100 times more information in a single character than a computer does.  Each new generation of wireless technology has introduced a more complex coding scheme in order to pack more information into the same airspace.   But the airspace is a noisy environment. The ability to have so many simultaneous conversations is a function of the signal to noise ratio. This is the difference between two people having a conversation in a quiet room and a crowded cocktail party. In order to have a meaningful conversation at a cocktail party, people need to stand close together and speak very loudly. You can’t hold an effective conversation across the room. There is too much interference from the other conversations for you to be understood. In technical terms, we call that the signal to noise ratio.  In order to achieve the benchmark performance, these cellular towers in 5G will need to be spaced much closer together than today’s 3G and 4G towers. The number of cell towers will need to approximately double compared with today. In fact you will need a cell tower every 800 to 1000 feet.  Areas which have lower population density will not be worth the investment by the carrier.  In the world of 5G, you can expect much more sporadic coverage than we have today with 4G

Today's show is a specific case study of a building permit refusal and how we ultimately prevailed. It's a powerful lesson in how a well crafted argument can sometimes win the day. We have the utmost respect for the government officials who work tirelessly to be good stewards of public safety. Our appeal process was respectful, and utilized the tools made available by government to influence a different interpretation of the rules.

  On today show we are featuring the book of the month. In order to be considered for book of the month, a book has to meet a very simple criteria. Work must be impactful enough to change your life or your perspective on the world. Whether it does or not of course is up to you. You might consume the content, remark on how good it is, and continue your life as before. But if you do you’re missing the point. Our book this month is by two brothers who are both university professors on opposite sides of the country. Chip and Dan Heath are professors at Duke and Stanford University. They have written several books together and the book I’d like to showcase is called “Made to Stick: Why Some Ideas Survive and Others Die”. It examines why some ideas are highly memorable and others are completely forgettable.  If you want your words to be remembered, and if there exists a formula for why some things are memorable, would you want to know that?  For example, the sentence “ A bird in the hand, is worth two in the tree.”   That sentence is nearly 1000 years old. Why is it that sentence has been repeated time and time again and has lasted nearly 1000 years? Of all the other sentences that have been uttered in the last thousand years this one has been repeated billions of times. Not only that, the same sentence also exists in multiple languages almost Word for Word. I’ll give you a simple example from modern day politics. I have no political affiliation in the US. I live in Canada. There’s lots going on in US politics on both sides of the aisle that I disagree with. If you go back to the last presidential election, Donald Trump’s slogan was “Make America Great Again “. Even democrats remember that slogan.  But if you were to ask any American what Hilary Clinton’s slogan was, the vast majority have no idea. Even most democrats can’t remember Hillary Clinton’s slogan. Speaking in a way that is memorable is vitally important.  Robert Kiyosaki is another person who has mastered the art of memorable communication. Rich Dad, Poor Dad. Savers are losers. Your house is not an asset. The central ideas of a book published 20 years ago are easy to remember and repeat.  Oh, I almost forgot to tell you. Hillary Clinton’s slogan was “I’m with her”. That’s right, “I’m with her”.  The book's outline follows the acronym "SUCCES" (with the last s omitted). Each letter refers to a characteristic that can help make an idea "sticky": Simple – find the core of any idea Unexpected – grab people's attention by surprising them Concrete – make sure an idea can be grasped and remembered later Credible – give an idea believability Emotional – help people see the importance of an idea Stories – empower people to use an idea through narrative As scriptwriters have learned, curiosity is the intellectual need to answer questions and close patterns. Story tellers oppose this universal desire by doing the opposite, posing questions and opening situations. So, they key is to open gaps first in presenting your ideas, then work to close them; the tendency is to give facts first. The local news uses this technique very well: They might use a hook like  Coming up after the break, Real estate expert Victor Menasce will be here to show you that if you can’t afford a house, you should buy two.  That’s an example of a hook that has a surprise twist to it. The idea is simple. If you buy a duplex, you can use the income from renting the other half to subsidize your home ownership.  If speaking in a memorable way matters to you, "Made to Stick" could change your life.

Paul Moore is the principal at Wellings Capital. He can be reached at WellingsCapital.com. Join me for this wide ranging conversation on market sentiment and investment strategy. 

DJ Scruggs spent most of his career in the tech industry, much like myself. On today's show we talk about making the transition from startup corporate life into real estate investing. Join me for this insightful and wide ranging conversation.

Everyone needs a place to live, right? That’s one of the arguments that underpins the demand for real estate. But in some markets, that is not an appropriate statement.  Let me take you back to the financial crisis of 2008 and it’s aftermath. There were a few counties in the US that stood out for the very high rate of foreclosures.  Two markets that come to mind are Florida’s Dade county and Arizona’s Maricopa County. Miami is in Dade County, and Phoenix/Scottsdale is in Maricopa County. In fact it’s a long list of communities including Mesa, Tempe, Chandler, Glendale, El Mirage, 24 municipalities in total.  Let’s be clear, a lot of people lost their primary residence to foreclosure in the financial crisis. The scale and human impact of that hard to comprehend.  But both Miami and Phoenix have a few things in common. They are both sun destinations, and a lot of people own second homes in those markets.  Given a choice, people overwhelmingly chose to protect their primary residence and allow their second home to fall into foreclosure. There was a much stronger attachment to the primary residence than a second home. At the peak, there were 42,000 brand new vacant condos in Miami. Most were pre-sold in 2005-2007. When the financial crisis hit, buyers chose to walk away from their deposits rather than get financing on a property that would be underwater. That was then.  Eventually, over time those units got absorbed by the market and new construction resumed.  When I was in Miami a few months ago, I was struck by the large number of construction cranes. It felt like the market was becoming overheated again. Back in 2015, some 80% of condo purchases went to foreign buyers. Today that number is about 20% of buyers come from outside the country.  Again, one of the reasons I believe the demand is highly variable, is the high proportion of second homes. A second home is a luxury. It’s an investment. But it’s not essential to everyday living.  Developers often don’t seem to realize the difference. When units are selling quickly, It’s too easy to assume the demand will persist.   Unlike in past cycles, this time around, developers have been asking buyers for a 50 percent deposit to purchase a condo. Those funds have helped developers pour more equity into their projects, which meant they didn’t have to borrow a lot of money from banks. As a result, their leverage is a lot less than in the past cycle. Back then, projects were over-leveraged and developers had no room for sales prices to drop because they needed every dollar to pay back the construction loans. Also, back then, developers only required a 20 percent down payment, so it was easier for buyers to walk away from the closing table when the market turned. Now, buyers are motivated to close because they already paid 50 percent of the purchase price.

On today’s show we’re talking about a couple of widely publicized articles on the state of the oil and gas industry. Oil and Gas are major drivers of the economy, and as such, the cascade into real estate is inescapable.  The first was a presentation by Steve Schlotterbeck, who led drilling company EQT as it expanded to become the nation’s largest producer of natural gas in 2017, arrived at a petrochemical industry conference in Pittsburgh Friday morning with a blunt message about shale gas drilling and fracking. “The shale gas revolution has frankly been an unmitigated disaster for any buy-and-hold investor in the shale gas industry with very few limited exceptions,” according to Schlotterbeck, who left the helm of EQT last year. Schlotterbeck is not the first industry insider to ring alarm bells about the shale industry’s record of producing vast amounts of gas while burning through far more cash than it has earned by selling that gas. And drillers’ own numbers speak for themselves. Reported spending outweighed income for a group of 29 large public shale gas companies by $6.7 billion in 2018, bringing the group’s 2010 to 2018 cash flow to a total of negative $181 billion over the past decade. Schlotterbeck is right in saying that the price of gas has to rise in order for the industry to survive.  The main issue is that natural gas needs a way to get to market. If not, then there will be local excess of supply and prices will fall. That’s exactly what has happened.  The payback on the investment is often happening far past the initial gusher of oil or gas. Shale wells have a steep production decline curve where production flows fall by 85% in the first year. A well might produce for 20-25 years, but the volumes will be low. About 50% of the well’s lifetime yield is given up in the first 18 months. Since Wall Street always expects revenue growth, companies need to expand drilling operations in order to show revenue growth. But if a well doesn’t achieve break-even in the first 18 months, the only solution is to invest ahead of production. That results ultimately in negative cash flow. The local glut of gas has caused prices to fall which has killed the financial model.  Only when global distribution is in place, prices for US production will normalize. Prices vary widely around the globe and it all has to do with distribution. The end buyers of natural gas will pay the cost of the gas, plus the cost of transportation. The sum of those two is the real cost to the end-customer.  The major investments in infrastructure in Lake Charles are taking advantage of the pipeline infrastructure that is already in place. Tellurian is also adding another 120 miles of pipeline from Texas to Lake Charles. The other plants like the Ethane Crackers are producing the end-product (plastic) without any further transportation. So yes, infrastructure investments like in Lake Charles are key to solving the problems that are referenced in both articles.  If your real estate is dependent on the economics of a major industry, it’s vital that you understand that industry. Otherwise you’re taking a major risk that your revenue projections may not come true.