Securities law is one of the fasted moving areas of the law. In fact, even lawyers who practice regularly in this area often have to check on items they may have completed even a week ago.  For example, the SEC had numerous exemptions under regulation D. Exemption 505 was repealed, and as a result we have seen a significant increase in use of exemption 504 and 506.  The Securities and Exchange Commission published a release earlier this week to solicit comment on several exemptions from registration under the Securities Act of 1933 that facilitate capital raising. Over the years, and particularly since the JOBS Act of 2012, several exemptions from registration have been introduced, expanded, or otherwise revised. As a result, the overall framework for exempt offerings has changed significantly. The SEC believes capital markets would benefit from a comprehensive review of the design and scope of our framework for offerings that are exempt from registration. More specifically, the commission also believes that issuers and investors could benefit from a framework that is more consistent and eliminates gaps and complexities. Therefore, the commission is seeking comment on possible ways to simplify, harmonize, and improve the exempt offering framework to promote capital formation and expand investment opportunities while maintaining appropriate investor protections.  The SEC seeks to explore whether overlapping exemptions may create confusion for issuers trying to determine and navigate the most efficient path to raise capital. At the same time, they seek to identify gaps in our framework that may make it difficult, especially for smaller issuers, to rely on an exemption from registration to raise capital at key stages of their business cycle. If you go back to 2011, there were approximately 1T in registered offerings. At that time there were about $1.6T in exempt offerings. In 2018, there were about $1.5T in registered offerings and nearly 3T in exempt offerings.  There are a number of areas where the SEC is looking for input. Here is one of them.  In light of the fact that some exemptions impose limited or no restrictions at the time of the offer, should the SEC revise our exemptions across the board to focus consistently on investor protections at the time of sale rather than at the time of offer? If exemptions focused on investor protections at the time of sale rather than at the time of offer, should offers be deregulated altogether? How would that affect capital formation in the exempt market and what investor protections would be necessary or beneficial in such a framework? The questions they are asking are really great questions, and frankly are not what you typically expect from governments. Which conditions or requirements are most or least effective at protecting investors in exempt offerings? Are there changes to these investor protections or additional measures we should implement to provide more effective investor protection in exempt offerings? Are there investor protection conditions that we should eliminate or modify because they are ineffective or unnecessary? One of the main areas the SEC is looking at is to expand the definition of accredited investor beyond just a net worth test. The report also discussed whether individuals with certain professional degrees or licenses or financial experience, or who are advised by professionals, should be considered accredited investors.  You can find out more about the process by visiting the SEC website. The link to the document is contained in the show notes for the podcast.  https://www.sec.gov/rules/concept/2019/33-10649.pdf

Edna Keep is based in Regina, Saskatchewan. Regina isn't on the radar as a top market, but Edna has built a portfolio of over 500 units over a period of time with an emphasis on cash flow. You can learn more about Edna at ednakeep.com

On today's show I'm talking with George Ross about managing your loan portfolio and negotiating with lenders. 

Wednesday, Federal Reserve Chairman Powell announced the outcome of two days of meetings of the Federal Reserve. The Fed is a board of the heads of each of the regional Federal reserve banks and their board of Governors. The focus is often on the Chair of the Federal Reserve. But the board is really made up of a committee who vote on the policy.  Interest-rate projections released Wednesday showed eight of 17 officials—the reserve bank presidents and board governors who participate in the Fed meetings—expect they will cut the benchmark rate by year’s end from its current level in a range between 2.25% and 2.5%. Seven of those officials see lowering the rate by a half percentage point by the close of 2019, and one expects just a quarter-percentage-point reduction. Eight officials projected the Fed would hold rates steady, and one projected a rate increase. The Fed this week announced that they were holding interest rates steady at this meeting, but signalled strongly that we can expect a rate cut at the July meeting, about 6 weeks from now. The guidance is for a half point reduction between now and the end of the year, based on economic indicators. The fed is seeing a slowdown in economic activity, party due to global economic slowdown, and some linked to the current trade discussions between the US and China.  The central bank’s rate-setting committee on Wednesday dropped language from its policy statement describing its stance as “patient”—which implied rates were on hold. Instead, it said uncertainties about the economic outlook have increased, a phrase it has used during past periods of rate cuts. “The committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion,” the statement said. That’s code for they plan to reduce rates on signs of economic weakness.  So this is a strange situation where no change in interest rates is actually news worthy. In response to the announcement, the stock market seems to have responded positively. But the real news is that low interest rates mean that the government’s out of control spending is going to continue to enjoy low interest rates making their over-spending less unaffordable. I’m deliberately using a double negative here because the spending isn’t affordable at all, it’s less unaffordable with lower interest rates.  For us as real estate investors, short term loans are typically linked to short term rates like LIBOR, and permanent financing is typically linked to the yield on the 10 year treasury. That’s why Wednesday’s news is actually news for real estate investors. Yields on the 10 year treasury fell to the lowest level since November 2016. The rate now stands at 1.98%. That means that the rate for most HUD and agency loans will be solidly below 4% for the first time in a couple of years. Now is the time to position your portfolios to take advantage of the lower interest rates. If you start the process in June, by the time you exit the underwriting process in July, you will likely see an even lower rate locking into your permanent financing.  These financings take considerable time. The lender has to underwrite the deal, the market conditions, and the borrower. The commercial appraisal won’t be ordered immediately. That’s typically one of the last steps in the underwriting process and typically takes several weeks to complete.  So if you want to take advantage of lower interest rates that are here now, and in our near future, now is the time to start the process to rate lock for the long term.  

  June 1 marks the start of hurricane season in the Northern Atlantic. Some years are incredibly active like 2017. By comparison, 2013 had no hurricanes make landfall at all. While there were several tropical storms, none developed into full blown hurricanes. The names for the storms in 2019 have already been established, and the first few will be called: Andrea Barry Chantal Dorian Erin Fernand On today’s show we’re talking about the kinds of fraudsters that crawl out of the woodwork whenever a natural disaster strikes. This can be an earthquake, a hurricane, a tornado, any major natural disaster.  There are numerous scams out there. Some of them target unsuspecting property owners. Others target assistance programs and insurance companies. These are the top 5. While many individuals respond to natural disasters with kindness and generosity – opening their hearts and their wallets to those in need, providing aid and assistance when it is needed most – some unscrupulous individuals will take advantage of the situation to line their own pockets through fraud. Here are the top 5: 1) Benefits Fraud 2)  Charities Fraud 3)  Cyber Scams 4)  Loan Modification Scam 5) Repair Scam

There’s no question that beautiful homes are just that, beautiful. As always, fashion and tastes are always changing. Like clothing, homes make a fashion statement. They have a life span. The gold door knobs of the 1980’s and 1990’s are replaced with the cleaner look of brushed stainless steel.  Colors like hunter green are out, and white subway tiles are in. Colonial style mouldings and trim are out, and clean lines are in. Thick pile carpeting is out and hardwood is in. Warm tile colours are out and cool colours like grey are in. But fashion goes far beyond finishings. The large mansions of the 2000’s were in hot demand. Today, there simply are not as many buyers for those homes. It’s partly demographics. But it’s also tastes that have changed. The 5,000 square foot home on acreage is not selling as well as the more modern, smaller home in a walkable community with access to the local coffee shop, the art gallery, and the neighborhood gourmet establishment.  One of my clients is building two residential subdivisions in Asheville North Carolina. This area in North Carolina’s Buncombe County, draws retirees with its mild climate and Blue Ridge Mountain scenery.  Homes under $800,000 have been selling quickly. So much so, that there is a shortage at that price point. Many are electing to custom build. Mountain gated communities like Ventana are doing really well. Homes below $500,000 are flying off the shelf. Homes over $2M are sitting on the market. Last year, there were 32 homes in Asheville over $2M on the market, and only 16 of them actually sold. Asheville is a wonderful community. It’s very artsy with great restaurants. The town has earned a reputation as a food lovers haven. There are lots of craft breweries and converted industrial buildings. This is a story that is playing out all over the country.   A lot has been written about the growth in senior housing as baby boomers are aging. But the thing to remember is that all those people going into senior housing are coming from somewhere. What properties are they leaving behind? Boomers currently own 32 million homes and account for two out of five homeowners in the USA. The picture is pretty similar in Canada and other western nations.  The problem is expected to worsen in the next decade, as more baby boomers advance into their 70s and 80s, the age group where people typically exit homeownership due to poor health or death.   The problem is particularly acute at the high end of the market. About a year ago, Fannie Made published a report which takes a deep look at the problem from a demographics perspective. But you don’t need to be an economist to see the problem.  That brings us back to talking about fashion. Even assuming that there were enough buyers, which there aren’t. Even assuming that younger home owners could afford these larger home, and many of them can’t. Even if you update the home and get rid of the dated finishes and colours to match modern tastes, these homes are not in the most desirable locations for younger home buyers. Most younger home owners are not looking for such a large home. They want to be closer into the city. They want to spend their money on experiences, not accumulating possessions. The 1980’s and 1990’s were all about material possessions. Social values are changing and younger people would rather create memories than buy more stuff. 

It is said that real estate investing is a mental game. But what does that really mean? It means having the discipline of investing and managing projects overcome your emotions. It’s been said that most decisions are made emotionally, and the logic to support the decision is then brought to the forefront to bring justify the emotional decision. On today’s show we are talking about deal momentum. Let’s say that you have your eye on a property that you think has potential. The initial analysis looks favourable. You manage to get it under contract with all the usual due diligence conditions.  You have a term sheet from the lender and you have several investors who like the deal.  You have completed your due diligence and everything seems ready to go. But late in the game a week before closing an issue arises on title.  In addition, just one week before closing you’re starting to see signs regarding your property manager that are alarming. You don’t live in the same city, and you don’t have time in the next week to fly and recruit a new property manager to replace the one you’ve got. The title issue will not affect your use of the property but might affect the salability of the property in the future. You have spent two months working on the project. You have spent money on appraisals, phase 1 environmental, legal fees reviewing documents, and countless hours putting the whole deal together. In one week time you will get all of those fees reimbursed and you’ll earn The acquisition fee that you put in the offering memorandum with your investors. Most purchase contracts include a clause that is an open condition requiring the transfer of marketable title. That condition does not expire right up until the time of closing. Even though you have waived conditions, the title condition remains in full force and effect. If you had known the issues with title and the issues within your team at the start of the project, you probably would have chosen not to proceed with the deal. But here you are, a week before closing and all systems are go. This is clearly a case of deal momentum. I remember watching the launch of a NASA rocket. The countdown was well underway and 10 seconds before launch mission control scrubbed the launch. Every single project requires a continuous risk assessment. In the case of a space launch the consequences are clear. Like a rocket once fully launched, a project becomes like a one way street. There is no backing up. You can only go forward.  But when you have a deal that runs into problems, the correct solution is to stop, inform all the stake holders of the issue and then negotiate accordingly with the seller. They’re the one with the problem. By taking the more conservative stance, you are letting your stakeholders know that you take their money seriously, that you won’t skip steps and take risks with their capital.  They will respect you for it. It builds trust.  That doesn’t mean the deal is dead. It means that there are some problems that must be resolved before you can move forward. If there is an issue with title, perhaps it can be cleared up prior to closing. If it’s a problem for you, then it could be a problem for virtually any buyer. The problem is not a buyer problem. The seller owns the problem and they have significant incentive to resolve it prior to closing. After closing, your negotiating leverage has evaporated.  Now I’ve outlined an fictitious example here. Deal momentum comes in many shapes and sizes.  As a deal sponsor, you have the same responsibility as the launch director for a rocket. That doesn’t mean the entire mission is scrubbed. It means not today. It means we need to make the deal safer.    If real estate is a mental game,  be mindful of deal momentum. 

Warning. Today’s show contains a real life story that some listeners may find disturbing.  On today’s show we are talking about how to maximize your profit. Profit, simply calculated is revenue minus expenses. You can increase profit by increasing revenues or by reducing expenses. Often it is tempting to reduce expenses. When something needs to be done on a project you can hire an expert, which can be costly, or if the work is simple, do it yourself.  I’m here to tell you that doing it yourself is the path to ruin.  On today’s show we have a cautionary tale about Tony, a pilot with 21,000 hours of flight experience. Tony had a number of trees on his property that needed pruning. But the tree cutting service was going to charge $600 per tree. He did the math and decided to rent a professional cherry picker. These are one of the machines that hoists you high in the air in the safety of a basket with a railing. Most of the controls are at your fingertips. Joystick control makes it quite easy to position the basket exactly where you need it.  At one point, the cherry picker detected the beginning of instability. When that happens, the joystick controls are disabled and the cherry picker stops working. The only problem is that Tony was by himself. The only way to fix it is to use the manual crank on the base of the cherry picker. But Tony was 30 feet up in the air and he was by himself. Rather than call for help, Tony decided to try and jump onto the roof of the house which was nearby. Only he missed the house and fell to the ground. Sadly, Tony did not survive the fall. Now folks, this is a real life story about a man who made a series of bad decisions, about a wife who lost her husband, about children who lost their dad.  There is so much do it yourself mentality in our culture. We are thought to do it yourself at school. We are taught to get a job. On the job we are to do the work.  Even if you didn’t do something involving heights, I’m sure you can relate to Tony’s lapse in judgment. Maybe you decided to do a quick and easy plumbing repair rather than call a professional. Maybe you cut your own grass.  Overwhelmingly, when I think about increasing profits, I don’t think about reducing expenses. I think about increasing revenue. You can hire the skills to do the work. You can increase revenue to pay for the work. You can’t recover the time it took to do the work. 

Billy Keels is based in Barcelona, Spain, but invests in the USA. You can learn more about long distance investing from Billy at billykeels.com or at  keeponcashflow.com. He has a free e-book for our listeners at growyourmoneythesmartway.com.

Justin and Keisha Brooks are based in Kansas City where they own and operate assisted living assets, and multi-family. They are also hosts of the Real Life Real Equity Podcast. They can be reached at realliferealequity.com.

On today’s show we’re talking about professional tenants. These are the ones who present well during the screening process, who fabricate elaborate stories, and who encourage landlords to skip steps in their due diligence. Ultimately, the professional tenant has one goal, to squat in your property rent free for as long as the legal system will protect them. They use every trick in the book to delay proceedings.  On today’s show we hi-light the top 5 tricks that professional tenants use to cheat a landlord.

On today’s show we are talking about the process of finding life balance, while living in several different time zones concurrently.  We have spent the past two weeks living on board a boat in Northern France, all the while working to repair things on board, maintain client meetings by phone, keeping in mind the time zone differences with home.  Everything seems to be a little off balance.  On the west coast of France, we are actually further west than much of the UK. But we are on Central European time and an hour ahead of Britain. As a result, it’s daylight here until well after 10:30 PM. We are eating much later than normal, often having dinner at 9PM.  Our phone calls with North America start at 3PM, which is the start of the business day in eastern and central North America.  The mornings are spent working on the boat and doing paperwork. Fortunately our internet access has been excellent which has made getting work done much easier.  Many of our meetings are held by video conference using either Skype or Zoom.  Structure is vitally important in maintaining a sense of organization and order. Without that structure, life seems chaotic. Our business day has been shortened to only a few hours of time zone overlap. It would be too easy to allow meetings to go on until 11PM at night. That actually happened once this week already. 

On today’s show we’re talking about the lowest and best use of a property. Traditionally, we are trained as real estate investors to seek the highest and best use for a property. This might be a high rise building, or a hotel.  But sometimes, the best use is the one that buys you certainty. That may not necessarily maximize the revenue. Sure you want to build that hi-rise condo tower on the property. But you won’t know for some time if the zoning is going to be approved. In the meantime you need a way to carry the property during that period of uncertainty.  For some properties there might be an existing single family home on the property. But the rent for a single family home probably won’t generate enough income to cover the costs of a property that is valued for development of a major property. You don’t really know how long it will take to get the entitlements. On paper the city might say its a four month process. But by the time the concept is developed, the required traffic studies are completed, public consultations, submission of 15 copies of the drawings 30 days in advance, you could easily be facing a six month process before the zoning board. Chances are, there will be some objections to the minor variances. If you require an appeal or a resubmission, then you could be easily facing another 3 months delay. Once you pass the zoning board, then you might be facing another delay to get the project on the agenda at city council. All of this uncertainty means carrying a property without the knowledge that you are gong to be approved. OK, so now you’ve got zoning approval to build the project. From here you can start the detailed design of your project, the full construction drawings will take several months to complete with all of the engineering aspects including civil, structural, mechanical, electrical, plumbing, acoustic. Once that’s all done, you need to satisfy the long list of deliverables for the actual building permit including the demolition permit, the stormwater runoff permit, the road closure permit, the sign-off from the fire Marshall and so on. That entire process can take several months. Then you’ve got to get firm construction bids from all the subcontractors. That entire process can take a year. So now you might be two years into the process and you haven’t broken ground. What do you do? How do you carry a multi-million dollar piece of land with no income? How do you raise the capital for the entire project before you even know if its going to be approved? You don’t even know what its going to cost to complete the project.  So what is the answer? Parking.  If your property is in a desirable area with a shortage of parking, you can create a surface parking lot. A surface lot is relatively inexpensive to build. I’m not talking about a monthly parking lot. I’m talking hourly parking. You install a payment machine and you have a security company visit the property on a regular schedule to enforce the parking. If your area has a shortage of parking, you should be able to charge $3-4 per hour for parking during peak times. You should be able to average $20 per day for a parking space in a downtown location. Parking spaces consume an average of 320 square feet including the parking spot at 200 square feet, plus the space for the laneway.  The beauty is that most zonings do allocate for parking. Getting a parking lot approved is relatively easy in most cases. A property that is actually an income producing property like a parking lot is easier to finance than vacant land. This can be one of the least expensive ways to land bank during the entitlement process.  

It’s no secret that Italy is running out of cash. Much like in the US, some US states are in better shape than others financially. The US federal government has one extra trick up its sleeve. The feds can go to their friends at the federal Reserve and ask them to print more money. The individual states can’t do that. So they are under much greater pressure to live within their means.  In the European Union, individual countries that had control over their currency could print money at will and inflate their way out of their short term financial troubles.  Italy’s populist leaders are discussing paying public-sector suppliers with IOUs instead of Euros. Some who oppose European controls have proposed this as the starting point for a new currency in case Italy has to leave Europe’s currency union. The heads of the League Party and the 5 Star Movement, which make up the governing coalition in Rome, want to assess the idea of paying off government arrears using IOUs with denominations as small as €50 ($56), dubbed “Mini-BOTs” after Italy’s BOT treasury bills. BOT is an acronym that stands for BOT (Buoni Ordinari del Tesoro, or loosely translated Ordinary Treasury Bonds.  “One can debate the instrument…it’s a proposal. But the urgent need to pay the tens of billions of euros of public-administration arrears to companies and families should be clear to all,” Matteo Salvini, head of the far-right League party, said Sunday. Italy’s finance minister, Giovanni Tria, has tried and failed to stop the discussion, arguing that the IOUs would be either an illegal parallel currency, or they would be extra government debt at a time when Rome is struggling to rein in its deficit. So the question simply is, when is a piece of paper considered currency?  Is a US T-bill as good as cash? What is the difference between a one dollar bill that is essentially a government IOU. It says on the front face of the dollar bill, “Federal Reserve Note”. It then goes on to say “This note is legal tender for all debts public and private “. It used to say “This certifies that there is on deposit in the treasury of the United States of America one dollar in silver payable to the bearer on demand. But that was when our currency was actually money and backed by tangible hard assets. That’s an entirely separate discussion.  So let’s go back to Italy. Italian government bonds currently have a yield of 2.35%. This compares with US treasuries at 2.15%. Considering the additional risk associated with fiscal management in Italy, such a small risk premium seems inappropriate to me.  Claudio Borghi, chairman of the budget committee of Italy’s lower house of parliament, has said such small-denomination IOUs could be a fallback instrument for Italy’s economy in case of a clash with eurozone authorities. Mr. Borghi tweeted on Sunday that the European Central Bank forced Greece into submission in 2015 “in a shameful humiliation of democracy. I would like to avoid this to my country.” European officials last week called for disciplinary proceedings against Italy for flouting fiscal rules. Italy’s national debt stands at 132% of gross domestic product and is projected to rise above 135% next year. Among developed countries, only Greece and Japan have higher government debt ratios. Unlike euro members, Japan borrows in a national currency that it can print. Japan’s debt is currently priced at negative 0.11%. Here too, the pricing seems out of whack.  I’ve been predicting for some time that the next financial crisis will be caused by a sovereign debt crisis that spills into the global financial markets. The signs will appear slowly at first and then quickly when the realization kicks in that the problem has no solution. 

On today’s show we’re talking about a debt bubble. There have been numerous debt bubbles over time. There was the sub-prime debt bubble. There’s clearly a sovereign debt bubble in many countries around the world including the US. There is arguably a debt bubble in automotive loans as the number of auto loan defaults in the US is skyrocketing. But we’re not going to talk about any of those. The debt bubble that is going to have a ripple effect throughout the economy is the student housing debt bubble.  You might say that students are making an investment in themselves. We’re not giving a bunch of 18 years olds $40,000 in debt to go buy large screen TV’s. We’re investing in our youth. They are our future. A university education is essential to succeeding in this increasingly competitive world. I’m extremely grateful for my degree in engineering. It has served me very well.   There are some degrees that lead directly to a career. We’re talking about degrees in medicine, law, engineering, physics, chemistry, psychology. These degrees have commercial value because they are valued in the marketplace. But then there are Students are spending tens of thousands of dollars on degrees that frankly have questionable value in the marketplace.  I believe 100% in making an investment in yourself. Like any investment, there should be a return on that investment. What exactly does a bachelor of commerce prepare you for? What would a degree in European and Russian studies prepare you for in the marketplace? I have not come across any job descriptions that call for a bachelors degree in humanities.  Now I’m not degrading any of those fields of study. I’m just not buying into the idea that students take on thousands of dollars of debt where there is zero ROI. If you grew up in a wealthy family and they can fund your degree in philosophy, then great. But the idea that you borrow tens of thousand for a degree in Linguistics seems questionable to me. So what does this mean for you as a real estate investor?  Universities are anchors in many communities. Housing is built around them. Commercial amenities are built around them. Public transit infrastructure is built around them.  We know from demographics that University enrolment is scheduled to decline starting in 2025. There simply are not as many young people graduating high school over the next several years. Naturally, you can expect that universities will aim to offset the decline with foreign students. But that too will eventually be limited by the number of student visas. Some Universities will do a better job than others in marketing to and attracting foreign students. This means that we will see a number of outright university failures. Some of these schools will be absorbed by nearby schools resulting in a consolidation. Others will simply go into bankruptcy.  A good example of that was Mount Ida College, a private college in Newton Massachusetts. It closed its doors about a year ago. Some of the assets of the school were purchased by the university of Mass. The students were given automatic admission to UMass Dartmouth, even though their academic programs are different. Student’s were also given the chance to join Newbury college which is also closing.  If you are investing in a community that has a university as one of the economic anchors, there is additional due diligence necessary. One of the measures is how many scholarships are the school offering to students? Scholarships sound like something that student’s have earned. But in the business of universities, a scholarship is nothing more than putting the tuition on sale. It’s a discount, designed to induce students to choose this school over then next one.  If you see tuitions rising, and the number of scholarships increasing, that may be a warning

AJ Osborne was paralyzed from head to toe and on life support. He used real estate to carry his family during those difficult times and today manages a portfolio of 14 storage facilities across several states. You can learn more by reaching out to AJ at cashflow2freedom.com.

This week we've been talking about golf courses and how the landscape is changing. Today's guest has owned and operated 36 holes for the past 19 years. Listen to today's conversation about what it means to own a golf course from someone who is deeply immersed in the business. You can also get in touch with Deb directly at Greensmere.com.

On today’s show we’re talking about what happens when a neighborhood goes downhill. As real estate developers we’re always thinking about improving things. But what happens when things go bad in a neighborhood, and quickly? When you hear something like, there goes the neighborhood, many people think that some undesirable people have moved in. That’s not what we’re talking about. People are people, and they all have the right to live on this planet. We are talking about the abrupt destruction of property value with the death of area amenities. There is actually an extremely common case of a neighborhood taking a significant hit.  Throughout the 1970’s, 1980’s and 1990’s, there were many residential communities planned around a golf course.  The residential properties backing onto the golf course were sold at a premium. They had large back yards and the large open spaces behind those homes were a beautiful thing to look at. Golf courses were being built at a feverish pace. We now have an oversupply of courses fueled by the infamous National Golf Foundation’s edict to “Build a course a day to keep up with demand.” Fast forward to today, and that demand isn’t there. Oversupply causes price drops and business failures in any industry. Golf is no exception. As some private clubs have faced declining membership,  many started opening their door to daily play some changing entirely to a semi-private model. This has had the effect of increasing golf course availability 20-30% overnight. Much of that latent over-supply was hidden behind private memberships.  As we’ve talked about on the show previously, some courses are being sold and redeveloped as development land. But in reality, many golf courses go through a period of decline, long before being redeveloped. How many?  About 2,000 golf courses across North America have closed down in the past 12 years to put a number on it. That’s a lot of golf courses. In fact, with that many closures, these courses fall quickly into disrepair. The once beautiful view out your back window is now replaced by a weed infested, swampy mosquito pit.  The impact to your property value is swift and steep. Any buyer for your home will want to know what’s going to happen to the golf course. In the meantime, if there’s uncertainty, the resale value of your property is impacted. If the golf course is sold for redevelopment, then your property is going to be negatively impacted. Some of these courses are very large and span hundreds of acres.  When you’re looking out your back window at the beautiful green fairways, it’s easy to think it would be great to get outdoors and take a nature walk. But the business of golf is not very environmentally friendly. The perfectly green short cut fairways are the result of some pretty harsh and toxic chemistry.  New environmental regulations have also increased costs for some operators. Some chemical treatments have been outright banned, leaving only costlier and sometimes less effect alternatives.  Let’s be clear, I’m in favour of a clean environment. The point of this, is that if you’re in the business of golf, your job just got harder and more expensive at a time when you are experiencing falling revenue.  So what does this mean for you as an investor? It means that buying an operating golf course for its value as a golf business could represent a very low cost land bank. You would be buying development land with a modest income stream to carry the land during the entitlement process.  Once your project is entitled, you can build the infrastructure including roads, and utilities. From there you can sell the parcels of entitled land to home builders who will do the heavy lifting.

Today is June 6, The 75th anniversary of D-Day. We are coming to you live from northern France. D-day was the coordinated assault by Allied forces on the beaches of Normandy. It was the beginning of the liberation of Europe from Nazi occupation. The assault on the beaches of Normandy had several coordinated steps. The first involved a diversion to draw the attention of the German forces away from the intended landings. The second what is the landing of paratroopers behind enemy lines to secure several key bridges that would prevent the Nazi army from bringing in reinforcements. Finally there was the simultaneous landing on several beaches. Those beaches were given codenames like Juno Beach, and Omaha Beach. Those code names have become so important to world history, that in many ways they have replaced the actual names of the beaches that preceded that day.  Immediately behind the beaches were steep cliffs that were heavily fortified with gunners and infantrymen holed up in concrete bunkers.  The casualties suffered by Allied forces on that day were significant. But eventually with the help of artillery from the ships offshore pounding the cliffs, the troops eventually made a successful landfall and managed to secure the beaches.  The very first troops to come ashore came in amphibious landing craft and had to wade through waist deep water with heavy equipment all the while making sure to keep their weapon dry.  Many soldiers perished in those last few feet before reaching the beach. Once the beaches were secured, the allied forces brought floating docks that could facilitate the process of bringing thousands of trucks, jeeps, tanks and artillery ashore. Eventually, the allied forces under the command of General George Patton, were able to secure the liberation of Western Europe. Today is a day much like the recent memorial day holiday in the US to remember those who sacrificed so that we could regain freedom through much of the western world. There are very few families who were untouched by the calamity of the second world war. Both of my parents escaped Europe in 1939. My father boarded a ship from Italy and landed in New York City. His name is among the millions who are listed in the registry at Ellis Island. My mother boarded a ship bound for Argentina. They sought refuge in Buenos Aires for about six months before making the journey where she too came through Ellis Island. Sadly hundreds of members of my extended family grandparents, aunts and uncles, and cousins never made it to freedom. The entire community on the island of Rhodes perished in concentration camps in 1944. I am enormously grateful to be alive today and do you benefit from the freedoms and liberties that we enjoy. I also recognize that my parents would never have met had it not been for the war. My wife and I would never have met had it not been for the war. In the years that followed since 1945, The world has seen countless other conflicts. My wish and prayer is that we see a future world devoid of ego driven conflict. 

Joseph asks: “My wife and I are getting ready to move into rental properties and we are at a sticking point of what a rental should be like inside. I’m okay with things being clean, unbroken, & liveable; she is more of the opinion of caring about the person renting and providing them something new or like new, as she wants to care about them as a person. We are stalled in moving forward as we can not agree.  How say you? What is the right amount of quality and care for a rental vs. your own home. Is there a difference?” Thank you Joseph for a great question. In order to answer the question, I think it would be helpful to reframe the question. I’ll start by saying that you’re both right. But ultimately the finer points of what to upgrade versus what to repair will depend on the answer to the following questions.  A very important question to answer whenever you are looking to market any product is: Who is your target customer ? Who is your ideal client? In virtually every industry there are products positioned at different segments of the market at different price points. For example you would not expect the same amenities at eight Fairmont hotel compared with Motel 6. Everything about those two product offers is different.  The Motel 6 is going to be right off the exit from the freeway. The Fairmont hotel will be an amazing location, will have striking architecture, and will offer luxury services that are simply not of interest to a trucker looking for a place to crash for the night.  They are also priced very differently. The motel 6 might be $60 a night and the Fairmont could be over $300.  While a beautiful plush terry cloth robe is lovely for just about anyone, you won’t get a higher nightly rate at Motel 6 if you put a terry cloth robe in every room. In fact, it would be out of place. But if there wasn’t a terry cloth robe for each guest in the closet at the Fairmont, you would be disappointed. It would be conspicuous by its absence.  It all comes down to knowing your target client and positioning your product to that target client.  So back to your situation with a rental property. Who is going to be your target client? Are you targeting young families, students, senior citizens who are on their own, army veterans with disabilities, young professionals, tenants with rent subsidies, or workers at a nearby hospital or factory? All of these ideal clients will be looking for a different product with different amenities.  Some may want interesting spaces to showcase their collection of trophies. Others will want a space to hang a 60 inch TV. Some may want cloth drapes, versus aluminum blinds. You may want two sinks in the bathroom instead of one. You may want a standing shower versus a tub/ shower combination. All of these decisions start with knowing your target client.  Look in the local market and see where the shortage is. There almost always is a shortage. For example, we noticed that in Philadelphia, there was a shortage of parking. Whenever possible, we build our new apartment buildings with ground level structured parking and we elevate the building on top of the parking. Dedicated parking is so rare in Philadelphia that it would take decades for enough parking to be built to satisfy the demand. We are hugely confident that we will almost never experience vacancy in a building with parking. Even if the market went through a huge downturn, a building with parking would be in high demand.  Figure out what will differentiate your product in the market and more specifically speak directly to your target client. 

On today’s show we’re talking about what happens when businesses shrink. The latest earnings season for retail brought some more bad news. But let’s be clear, retail isn’t dead. It just has too much friction.  There is the perception that the lowest prices can be found on-line. I as an average consumer believe that there are some things that I simply can’t buy online. I haven’t got my mind around buying shoes online. I find that only a small percentage of shoes fit my feet. I need to try them on. Shipping shoes that don’t fit back to the online shoe retailer is more work than going to the shoe store. But if there is a specific pair of shoes that I already own, and I’m looking to buy the exact replacement, then I definitely would consider buying that shoe online. Or if there is an article of clothing like a white dress shirt, here too I would buy that online. If I can save an hour of my time by ordering online, the savings are significant because my time is worth a lot, to me anyway. So what does this have to do with real estate? If bricks and mortar stores are facing declining sales, all retail commercial real estate will suffer, not just the ones that are landlords to Sears or JC Penney. This past week, the shares of Gap, Abercrombie and Fitch, and J. Jill were absolutely hammered. The shares at Gap fell 9% on Friday. Shares at PVH which owns Calvin Klein and Tommy Hilfiger fell 10%. Abercrombie and Fitch was off 26% last Wednesday alone, and J.Jill fell 53% in a single day last week. What do all these retailers have in common? They rely primarily on shopping malls for the majority of their sales.   Last year it looked like retailers were poised to rebound. It turns out that in 2018, many retailers numbers improved due to better inventory management. That change was short lived. So far sales in North America have been slow as cooler than seasonal weather has kept shoppers at home.  Here’s the problem. Businesses either grow or they shrink. If they can’t move their inventory, they resort to selling at a discount to move the inventory. You can’t wait another 15 years until that color comes back in style. The product has a shelf life and it’s about 16 weeks in the case of fashion clothing.   Once a store closes in a mall, I’m not seeing legions of new businesses looking to open up in the mall at $65 per square foot just waiting for a vacancy to open up. Sometimes, you will see a store reduce their footprint in the mall as a larger proportion of their sales shift to online.  When there is excess inventory in the retail market, prices drop. When there is excess inventory in real estate, prices also drop. You don’t need that much vacancy to cause a precipitous drop in rents. Rents will drop to the point where any rent is better than no rent. We’ve seen mall after mall close down. So what will cause people to get up from their sofa, get in their car and drive to a business? 

On today’s show we are talking about what is up or down with interest rates.  Interest rates are traditionally influenced by two main factors, inflation and risk. If inflation goes up, then naturally investors will want their bonds to at least keep pace with inflation.  If the investment is perceived to have higher risk, then investors will want a premium to compensate them for the higher risk. These are the two principles at work in pricing interest rates.  But of course there isn’t a single interest rate. There are short term rates and long term rates. The short term rates will often experience larger swings than the long term rates. Shorter loans tend to be linked to short term interest rates like libor. Longer permanent financings tend to be linked to the yield on the 10 year government treasury bill.   In recent weeks, the yield on the 10 year treasury has fallen to the lowest level in two years.  The US dollar has remained persistently strong as the uncertainty over global trade has sent investors globally looking for safety. The vehicle of choice seems to be US treasury bills. That explains why the yield for 10 year T-bills is falling.  But since long term mortgage rates are tied to the 10 year treasury, mortgage rates have fallen to below 4% on the longer 30-35 year loans.  So what does this all mean for real estate investors?  I believe that the period of low interest rates is here for a while longer. That means that prices for commercial properties will broadly remain stable. Even an modest economic downturn will not have a dramatic negative impact on prices for commercial multi-family properties.  If you’re considering a bit of profit taking, or rebalancing your debt to equity ratios, now might be the perfect time to do that.  You may have one more year remaining on a conventional loan. Locking in for another 5-10 years at today’s rates would make a lot of sense even if you had to pay a 1% pre-payment penalty. Often times, if there is only one year remaining on a loan, the bank may waive the pre-payment penalty if you refinance with the same bank. They would rather keep the business and waiving the pre-payment penalty might be the necessary inducement to stay with your present bank. But even if you elect to pay the penalty, remember that you’re going to amortize that penalty over 5 or seven years, so a 1% penalty has roughly the same cost as a 0.2% increase in the interest rate over 5 years. If you can save more than 0.2% in the interest rate by refinancing, it would be worth paying the pre-payment penalty. Many people refinance in order to increase a loan amount, or reduce it. As long as you can maintain a responsible debt coverage ratio, you might consider increasing your loan amounts and pulling some equity to build up a war chest of cash to prepare for new acquisitions in the coming years. There is still a lot of money sitting on the sidelines and while there aren’t too many bargains in the market today, there will be a time when bargains will re-appear. 

Andrew Keel is an expert in repositioning manufactured home parks. He currently operates 14 parks in 6 states. To find out more, contact Andrew at keelteam.com. 

Today is June the first and on the first day of each month we feature a new book on our book of the month episode. In order to be considered for a book of the month the book has to meet a very simple criteria. It has to be impactful enough that it will change your life or your perspective on the world. Whether it does or not is entirely up to you. You might read the book and comment on what a great book it was. But if you don’t internalize the book and make a part of you, you’re missing the point. The book of the month this month is “The War of Art” by Steven Pressfield. This book describes in mythical terms the different forms of resistance that prevent you and I and most people from achieving their creative potential. In the book he describes the different forms of resistance that systematically seek to undermine creative work. They include: Rationalizing Fear and anxiety Distractions The inner critic These ego driven saboteurs prevent you from getting down to the business of fulfilling your calling.  In the war of art Steven Pressfield shows how to get into a flow by being into the present moment and losing yourself into the doing. You can be doing and thinking about the doing at the same time. If you’re thinking about doing, you’re not doing.  The secret isn’t to ignore the fear. You need to dance with the fear. Steven Pressfield writes.  If you're overwhelmed with dread, that's a good sign. The real artist is always terrified. The fake artist is wildly self-confident. Remember, Resistance always comes second. The dream comes first. The more Resistance you're feeling, the bigger the dream in your heart. The resistance shows up any time you seek to elevate yourself from a lower state to a higher state. The resistance is described like a force of nature whose aim is to maintain the status quo.  The most common areas where resistance shows up include: The launching of any entrepreneurial venture  Any diet or exercise regimen Any program of spiritual advancement Any activity whose aim is tighter abdominals Any course of program designed to overcome an unwholesome habit or addiction.  Education of any kind The undertaking of an enterprise whose aim is to help others Any act that entails commitment of the heart such as a decision to get married or have a child. Steven wrote The War of Art in many ways as his own life story describing the struggles as a writer. In the process, he discovered that the struggle was universal and that’s why the book was the first book that really put him on the map. In the book he writes:  Resistance is a negative force that attempts to prevent us from taking the first step to achieving our dreams. Resistance doesn’t just show up at the beginning. It can show up daily. The battle with resistance is an ongoing one. Even the most successful, talented, acclaimed authors, business leaders, all face resistance. There are some days when I’m producing the podcast where it takes me far longer than part of my mind says it should to come up with the concept for a show.  Overcoming resistance is more important than talent.  A single sheet of paper is enough to outline even the most complex project. The single sheet of paper enables you to cut through the Resistance and concentrate the mind.  It’s one of the most quoted books in recent years. Steven has been interviewed by Oprah, Marie Forleo, Joe Rogan and countless others.  If you have been struggling to get something started, or to get something completed, then the War of Art is for you. 

David from Placencia in Belize asks: "I was wondering your thoughts on opportunity zones. Specifically do you feel this can trigger a mass exit in the market that will drop stock prices for ones wanting to get into Opportunity Zones and trigger a crash or at least a a major correction?" David, that’s a great question. First let’s define the opportunity zone and what it’s used for, and then we’ll talk about the source of funds for opportunity zone investment.  Opportunity Zones are low income census tracts nominated by governors and certified by the U.S. Department of the Treasury into which investors can now put capital to work financing new projects and enterprises in exchange for certain federal capital gains tax advantages. The country now has over 8,700 Opportunity Zones in every state and territory. They make up about 25% of the low income areas in the country.  Opportunity Funds are new private sector investment vehicles where the fund must invest at least 90 percent of their capital in qualifying assets in Opportunity Zones. Opportunity Zone investments offer a number of benefits for the investor.  A temporary tax deferral for capital gains reinvested in an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is sold or December 31, 2026. A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis of the original investment is increased by 10% if the investment in the qualified opportunity zone fund is held by the taxpayer for at least 5 years, and by an additional 5% if held for at least 7 years, excluding up to 15% of the original gain from taxation. A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in a qualified opportunity zone fund, if the investment is held for at least 10 years. (Note: this exclusion applies to the gains accrued from an investment in an Opportunity Fund, not the original gains). So virtually any capital gain would qualify to be reinvested in an OZ fund. You might have made a ton of money in, say, Bitcoin, or a piece of rare art work.  There is a ton of money in the stock market. But remember, less than 10% of the transactions on the stock market are made up of actual bona-fide value investing. About 90% of the volume on the stock market are program trades by the brokerage houses for their own account or for institutional investors. Those vast sums of money are largely seeking arbitrage profits. These short term trades fall under the category of trading, and not investing. The hold period is often too short to be considered eligible for treatment as a capital gain.  There are likely a spectrum of opinions on the topic and there are likely people who disagree with me. I really don’t see the advent of opportunity zone tax sheltering as driving a selloff in the equity markets. There is a mismatch between liquidities in those two types of investments. I really don’t see stock market investors who have the ability to execute a trade on a moments notice then agreeing to tie up their money for the next 10 years. I think those investors are fundamentally different investors. Most of the long term money in the stock market is in the form of mutual funds, and a lot of that money is tied up in retirement accounts.  I expect that the majority of money going into opportunity zone investments is going to come from the sale of businesses where there is a substantial capital gain from a single event, the sale of other real estate assets where the purchase of a suitable replacement asset is proving to be difficult under a section 1031 exchange.

The recent tornadoes to hit the midwest have cut a swath of damage and devastation. The storms hit populated areas including Dayton Ohio, and Kansas City. Over 100 tornados have hit the midwest in 12 straight days. Federal government weather forecasters logged preliminary reports of more than 500 tornadoes in a 30-day period. These storms touch down quickly and offer little time to escape, especially in heavily populated areas where you don’t have a clear line of sight of the sky. Some people become complacent and ignore the severe weather alerts that are broadcast onto cell phones using the emergency preparedness system.  Even areas that are not known for tornado activity like New Jersey and Staten Island in the heart of New York City had tornado warnings this week. They can truly strike anywhere. Last summer, four tornadoes narrowly missed our home in Ottawa Canada.  A particularly destructive storm splintered homes, ripped up trees and downed power lines southwest of Kansas City.  One of our regular listeners to the show had a tornado damage their car, uproot trees, and destroy multiples homes in the neighborhood. Their own home fortunately was spared a direct hit and the impact was a lengthy loss of electricity.  Every year, homeowners dutifully pay their insurance premium, expecting that they will be covered against major risks like tornadoes.  Insurance companies are not in the habit of losing money. So it’s important to read your policy carefully. Policies come in two major forms. There are named peril policies and broad form policies. In a named peril policy, you are insured against the specific risks that are named in the policy. These usually include policy limits both in terms of the scope of coverage provided and dollar limits for each named peril.  If your risk isn’t specifically insured you’re probably not covered.  The second type of policy is broad form. This basically covers everything and the exclusions are named specifically. Broad form policies generally cover more. But either way you still want to read the policy and ensure that you are properly covered.  Tornadoes represent several major risks. These include wind, hail, flooding, fire. You might discover that the insurance company will attempt to assess which damage was caused by wind and which was caused by water. Water damage is the number one category for insurance claims and is therefore subject to the greatest limitations.  You may be able to purchase a separate flood insurance policy through the National Flood Insurance Program. Only 12% of homes in the US actually have flood insurance coverage. The remaining 88% are making the bet that they will not experience that risk, or they mistakenly think that they are covered.  However, if rain water gets into your home because your roof was damaged by wind, you may find that your insurance offers some protection — but only if your policy includes coverage for wind. Some policies that offer coverage for wind, list named storms as being excluded. For example if a storm is given a name like, say, Hurricane Andrew, that would be excluded from the policy coverage. Tornadoes are so short lived that they are not named storms. By the time they could be given a name, the storm is over.   It’s really important to read the policy, not just the one page term sheet that your insurance broker give you. 

On today’s show we are talking about leverage. But folks I’m here to tell you that most people think of the word leverage in a very narrow way.  Most of the time when we say the word leverage it’s assumed that we are talking about borrowing money, financial leverage.  Let’s go back to the root of the word. A lever is used to describe what happens when you take a large stick or a pole and use it to multiply the forces. For example, I have a shovel with a really long handle. If I’m trying to remove a rock in my garden, I will use that long shovel as a lever. The force applied at the end of the handle is not very large and I’m able to multiply the force considerably at the end of the spade and pull that rock out of the ground easily. A lever can multiply forces, or it can multiply distance traveled.  There are many places in real estate investing that we can seek to get a multiplier. Financial leverage is what most people think of first.  But we can get a multiplier many different ways. For example it doesn’t take very much energy to release a huge amount of energy when you apply a needle to a balloon. Popping a balloon is a form of leverage where you get a huge multiplier.  The second form of leverage is when you can multiply your time. The easiest way to do that is to hire someone to do the work for you. That multiplier comes simply from saving you time. But if you hire the right people, they will also have skills that you lack in some areas. They will perform that same task many times faster than you could.  Another form of leverage is education. When you know of a better way, you can take a huge shortcut and reduce something complex into something that is extremely easy.  But there is one other form of leverage that is extremely powerful for real estate investors. That is scale.  You might work for days on a renovation of small single family home in an older neighborhood. When it’s complete, you might make $20,000 or $30,000 profit on that deal.  But even if you apply the other forms of leverage, you can leverage money by using other people’s money. You can hire people to leverage your time. You can use systems, processes and automation to make the use of time even more efficient. But at the end of the day, your profit potential is still that $20,000 or $30,000 profit.  But if you are working on a project with 100 apartments or 1,000 apartments you are leveraging scale. Instead of improving one single family home, you’re improving 100 or 1,000.  There are so many places in the system when you can get a multiplier in your business. Each one of these is an opportunity to exercise leverage. For example, an insurance policy is a form of leverage. You pay a relatively small insurance premium and in exchange, the insurance company promises to cover the risks named in the policy.  So many of you are stuck because you’re thinking linearly. You are thinking using simple the math of addition and subtraction. If you want an extra dollar, then you need to add a dollar to your bank account. There’s no question that addition and subtraction are essential to what we do. But given the choice between using addition or multiplication to bring cash into your bank account, a multiplier seems very attractive. 

 U-Haul is known for the do-it yourself mover. Frankly they have a great product.  I especially have a soft spot in my heart for their smaller moving trucks. Are used to rent them on a regular basis when I was in my teens and early 20s.  One of the great things about Uhaul is that you can do a one-way rental without having a drop charge. But this also represents a problem for Uhaul. Eventually over time as people migrate around the country trucks and a bunch up in cities the people are moving to, leaving a shortage in cities where people are moving from. Today as a real estate investor, Uhaul is a powerful source of data. They know where those excess trucks and trailers are bunching up. And I can mean only one thing. People are moving there. The government also provides very useful information about net migration when they conduct their census every few years. But this information only gets updated every few years. Uhaul has the ability to measure statistically when and where people are moving on a real-time basis.  One of my criteria for investing in a particular location is influx of population. I will not invest in a shrinking city. I don’t care how good the deals are. The state of Texas ranked number one in Uhaul‘s growth state for the third consecutive year in Florida ranked second and the Carolina’s ranked third. The three states at the bottom of the list having the largest number of people leaving work Illinois California and Michigan. Uhaul has a pretty good statistical data set. They compile their data from more than 2 million one-way truck and trailer rentals each year. And while migration trends do not correlate directly to population wreaking on the growth, the Uhaul data is an effective gauge of how well states and cities are attracting and maintaining residents.  In 2018, the North Dallas suburbs of Frisco and McKinney are some of the fastest growing areas. In fact the entire Dallas-Fort Worth metroplex is it tracking more population than any metro area in the country. In Florida, Orlando topped the list as the number one growth market. Orlando offers a number of great opportunities. The city became known for its theme parks and resorts. But it's one of the top transportation hubs in the country. Within a few hours drive, you have access to 20 million population. The warm weather, low taxes, affordable cost of living, makes Orlando a top destination for retirement, and a vibrant place to work. It's one of the best connected cities in the country in terms of air travel with a large number of low cost direct flights to most cities.  It’s only one hour drive to the coast. So a day at the beach is easily accomplished. 

Today is another AMA episode, Ask Me Anything.  Ryan from Fresno, California asks.  "I really enjoy your Real Estate Espresso podcast. Thanks for the great work. The silly question has in my mind for a while. Why do banks, including lenders backed by Fannie Mae, make 30 year fixed loan to home buyers?  When I bought first home in China, all home loans are adjustable rate.  Let's say the interest rate goes back to normal level  like 6-8%  2 years later, the bank (or whoever bought the security from bank) can still only get 4% for the remaining 28 years, do they lose money? On other hand, if interest rates go even lower, the home owner can always refinance. The bank does not have such freedom, will it put them at a disadvantage? Regarding refinance,  what is good criteria to  apply for refinance? Interest rate dropped 10%? 20%? " Ryan, that is a great question. In fact two great questions. Let’s talk for a moment about how the banking system works. And let’s talk about how the banks make money. In the US, Canada, Europe, and much of the world banking system is based on a fractional reserve system. That means that when depositors put say, $1 million in deposit at the bank, the bank makes money in several different ways. The bank is taking 1 million in deposits, but has the authority to write $10 million worth of loans against that 1M in deposits. The bank makes money on the difference between the interest rate it pays to depositors and the interest it collects from borrowers. Let’s do some simple math. Let’s say that the bank pays 1% interest to its depositor on the $1m deposit. Let’s say that it’s lending the money at 4%. The difference between the deposit and the loan is 3%. So the bank is making 3% on the money it loaned out for the first loan that it makes. But the bank gets to loan the money out another 9 times. In that case it’s making a full 4% interest times 9, which is 36%, plus the 3% from the original loan. So the bank is making 39% interest on the original deposit. That’s a pretty good rate of return. Now let’s say that interest rates go up during the term of the loan. Let’s say that the bank now needs to pay 4% to the depositors instead of 1%. In that situation the banks rate of return drops from 39% to 36%. They’re still very far from losing money.  Understand, when the bank makes a loan that is insured by a federally backed insurer, whether it is Fannie Mae, Freddie Mac, or the US government directly through the department of housing and urban development (HUD ), that is about the lowest risk loan you can write.  The business of banking is made lucrative by the bank leverage, that 10:1 leverage we just talked about. The other side of that is what happens when a loan goes bad.  If the loan is a conventional loan, then the bank has to write down the loss from the loan and it needs to find another $1m in cash quickly, otherwise it can’t pay the depositors their money when they go to the bank to make a withdrawal.  The other way that the bank makes money is through fees. They typically charge an origination fee at the start of a new loan. That fee is usually 1% of the loan amount. In the first year of the loan, the bank makes another 1% on each loan, which brings their total rate of return to 49% instead of the measly 39% they will make in subsequent years. The second part of your question was about refinancing. Your question was about interest rates. It is true that getting a lower interest rate is part of the motivation for a refinance. But usually the main reason to refinance is to change how your equity is being used. Let’s say you own a building that has 50% equity. You might refinance to increase the loan amount and free up a bunch of equity. You can then take that money and go buy another building.

On today's show I'm talking with George Ross on the current state of the negotiations between the administration and China surrounding Huawei, who happens to have a leading next generation cellular infrastructure offering with their 5G base stations. 

Sonia Lee is a syndicator based in San Francisco. She invests in multiple asset classes. On today's show we take a look at a 252 unit apartment complex in Evansville Indiana. Sonia's company can be found at leewardrei.com

Earlier we talked about the economics of solar power compared with purchasing electricity from the power grid. On today’s show we’re talking about another form of power co-generation.  Many larger commercial facilities are turning to co-generation as a way of reducing high electricity costs. This only makes sense in areas where the cost of natural gas is considerably cheaper than the comparable cost of electricity.  Where these systems really shine is in the harnessing of the waste heat to heat water. The use of energy for producing hot water means that the savings can be substantial. If you’re familiar with the internal combustion engine, or the diesel engine, you are already aware that most of the energy is wasted in the form of excess heat. The diesel cycle generates much more mechanical work and relatively much less wasted heat than other systems. It’s about 44% efficient, which means 56% of the energy is wasted as heat. But if you can harness that heat and put it to good use, the savings can be substantial. The are particularly true in areas where the cost of electricity is high.  The latest example is a new hotel that just opened at JFK airport in NYC on the site of the old TWA flight center. The original structure was built in 1962 and was updated to create a 512 room hotel. The hotel incorporates some of the most innovative power generation technology. It stands apart because their system is so good that the hotel has fully disconnected from the utility’s power grid.  The system has four main features. The roof mounted generators are powered by low cost natural gas. Second, the hotel has a sizeable battery bank which allows the power plant to store excess energy during periods of lower demand. This means that a smaller power plant is needed to handle peak demand and the plant can operate with less fuel on average.  Third, they use the cooling system for the power plant to produce the hotel’s hot water rather than allow the excess heat to go to waste. Finally, the hotel also uses absorption chillers to create cold water from the hot water.  The hotel calculated their power consumption based on other hotel metrics and determined that their annual electricity bill with the utility would be about $5M. The payback on their entire installation is estimated at 3 years. Now that number definitely makes sense. But it makes sense partly because NY power rates are $0.21 per Kwh, the highest in the country. If the same hotel were located in Texas where electricity costs $0.11 per kWh, the payback period would double to 6 years, which frankly is still pretty good.  To date, about 600 buildings in NY state have installed systems like this. But most of them still connect to the power grid. The TWA hotel is one of the rare buildings that has gone fully off-grid.  There are an increasing number of systems like the one at the TWA hotel where the connection to the power grid is used to sell excess power back to the utility. Many health care facilities are required to have backup power generation systems under the building code. Rather than have these systems which have a high capital cost sit idle, many facilities choose to operate the systems to produce their critical power needs on a regular basis. They may draw peak power demand from the utility and sell the excess power back to the utility.  The final piece of the puzzle is the financing of these systems. An entirely new group of company s have surface which are willing to install the systems for a low monthly lease cost where the lease cost is offset by the power sales to the utility. The operation of power plant is maintained by the supplier, and the lower electricity bill can often result in operational savings in addition to the up front capital savings. 

Have you ever had a situation where you had purchased something and then couldn’t find it? So you went out and bought another one? It happened to me. I couldn’t find my tape measure. It was in my toolbox. Eventually, I really needed it so I went out and bought another one. A few weeks later I found my tape measure. Now I have two.  The latest bit of insanity to come out of Albany New York is a proposed new bureaucracy.  Earlier this week, NY State Senate Deputy Leader Michael Gianaris joined members of the Neighbors Beyond Amazon coalition today to launch a new platform of policy proposals aimed at improving New York’s economic development climate. Senator Gianaris is leading the way with legislation that would require a social impact study for any major economic development project.  "For too long we have funded economic development without considering the impact it has on our neighborhoods,” said Senate Deputy Leader Michael Gianaris. “It’s time to change that and insist on development that helps our communities rather than hurts them. We must prioritize the benefit of everyday people and not just wealthy interests."    Senator Gianaris’ new legislation would require a Social Impact Study, similar to the currently required Environmental Impact Study, to be completed before major economic development projects are undertaken. This would give communities a chance to understand the need for addressing housing and transportation before funding is permitted.  It’s inconceivable that any major project gets undertaken in the state of NY without involving a zoning application. The zoning process is a 5 step process. This is required for anything that does not fit the criteria of being built “by right”.  The final review process once all the applications have been submitted is also a 6 step process called the Uniform Land Use Review Procedure.  Certification Community Board Review Borough President Review City Planning Commission Review City Council Review Mayoral Review Within sixty (60) days of receiving the certified application, the Community Board is required to hold a public hearing and adopt and submit a written recommendation to CPC, the applicant, the Borough President and when appropriate, the Borough Board. The entire process takes 265 days according to the City of NY disclosures. The ULURP rules include provisions relating to the notice and conduct of a Community Board public hearing. The senator is concerned with the financial impact on infrastructure for any planned project. It seems to me that the City Planning Commission, City Council, and the Mayor are already tasked and mandated with managing those aspects of the impact of a project. That’s why those organizations exist.  If an environmental impact study is required, then you can add a minimum of 110 days to the process, and that’s a minimum. That’s the fastest the process could ever be.  If you read the environmental impact study rules, chapter 5 already deals with social and economic impact. It lays out the rules for conducting a social impact study in addition to the environmental impact study. A socioeconomic assessment should be conducted if a project may be reasonably expected to create socioeconomic changes within the area affected by the project that would not be expected to occur without the project. There are chapters that deal specifically with Water and Sewer Infrastructure, Transportation, Energy, Air Quality, Noise, Neighborhood Character, Sanitation, and Public Health.  The whole thing reminds me of the time when I lost my tape measure. Our legal system is so stuffed with regulations that our own lawmakers have no idea what’s in there. 

Billy from Barcelona Spain asks: I’ve been listening to you RE Espresso podcast recently and I really enjoy your perspective and the content… I’ve been thinking of starting a podcast and have gotten stuck on the design of the show, and some of the technical aspects of creating a podcast. What has been your experience in producing a daily show? Billy, that's a great question.  I had three main ideas in designing the show.  1) I felt that if I was going to get good at podcasting, it would need to be a regular show. Putting out a show once a week, or less didn’t seem to make sense to me.   2) The current population of podcast listeners is about 75 million people in the US. It’s growing about 15% -20% per year. Those listeners on average subscribe to 6 and listen to 5 because that’s all they have time for.  Increasingly, podcasting is attracting the same kind of attention and production values that radio and TV have been known for. The major networks are starting to enter the fray with well produced shows. If I’m going to be one of 5-6 shows, I need to be that good.  3) I’m a huge fan of Seth Godin. He’s written 18 books in his career so far.  He has a daily blog that aims to communicate one idea each day. Not two, not three, just one. That idea seemed very appealing to me.  So I designed a show that incorporated those three ideas at the core of the show. 

I’m a huge fan of solar energy. My boat has solar panels and I can go weeks without plugging into shore power. I love everything about it. So today I’m going to share an analysis of solar power economics that I recently undertook. I do this every few years, because someday soon, I hope, it will make sense for me to install solar power on every project I undertake. It hasn’t happened yet.  In the early days, solar power has largely relied upon government subsidies to make financial sense. The panels were expensive and inefficient. The payback on many installations was over 40 years. I don’t know too many investors who would wait that long for an ROI. So governments created incentives by purchasing the electricity generated at a higher price than the cost to the consumer for electricity. That shortened the payback to somewhere between 10 and 20 years in many cases. But as solar technology has improved, the panels have become more efficient, and the cost of manufacturing the panels has improved. Solar is on the cusp of making sense financially on its own. In response the government subsidies have been scaled back significantly.  Back in 2014, SolarCity was the largest residential solar installer in the world. Tesla, Elon Musk's car company acquired/rescued his cousins' troubled firm in late 2016 for $2.6 billion in stock and the assumption of approximately $3 billion in debt. The sales at SolarCity, now a unit of Tesla have been sliding ever since the acquisition. They installed only 1/3 the number of panels last year compared to when they were independent. Today, Sunrun has taken over as the largest supplier of installations in the US and has the most economic  As the company has been trying to achieve profitability, it has changed the sales model for solar installations several times. They eliminated the door to door sales team as part of a company restructuring. In some ways, that’s a shame because the door to door sales model seems to be the most effective in the industry. Tesla’s competitors are still using it because it works.   Tesla will be allowing customers to purchase "directly from their website, in standardized 4kW increments of capacity. The aim is to put customers in a position of cash generation after deployment with only a $99 deposit upfront.   The Tesla website allows prospective solar customers to take out a loan for a 4-kilowatt system that will generate an estimated "$600 to $800 per year" at a cost of $85 per month for 240 months at a 5.99 percent APR.  If you want the Teslas Powerwall, you are looking at another $58 per month. The entire system will give you about 4,000 watts of power generation capacity and about 14 kWh of storage. But remember, you’re only getting about 4-6 hours of useful sunlight each day to produce that kind of power. If you average consumption over the entire day, you’re only getting about 700 watts of useful power on a sustained basis. That’s enough to power your refrigeration, basic lighting, the fan for your furnace, home appliances. The oven will need to be powered from the utility. So will the clothes dryer and the air conditioner.  The payback on the system is in about 18.5 years depending on the cost of electricity. In California where the electricity is much more expensive, the payback is closer to 10 years. 

Thank you to all the loyal listeners. I’m truly astounded that The Real Estate Espresso Podcast now has listeners in 114 countries. Whether you are located on an island in the Pacific, central Africa, South America, Europe or the good ol USA. Thank you for listening.  On today’s show we’re talking about the opportunity trap. We’ve all seen it happen. Maybe some of you have done it. I’ve fallen prey to my own desire to grow faster than I was capable. The picture looks something like this.  You’re in business, you’ve got a great product. Let’s call it super duper. Customer orders are coming in. The growth has been good. Most of the sales have been online and the order fulfillment process is working pretty well. The marketing efforts have grown the company consistently month by month. Then one day Walmart calls and asks if you would like to supply Super Duper to Walmart. Simple math suggests that this one customer could increase sales by a factor of 10. The opportunity is so huge compared with your present business that the only correct answer is yes. It’s a huge stretch. It could possibly break the company, but the opportunity is so great that you can’t say no. You can’t say no for several reasons. You recognize that your product is filling a gap in the market. But there are some competitors who are a little behind you. So far you’re doing well. Walmart has recognized the gap in the market and is asking for Super Duper. If you say no, then Walmart will probably approach your closest competitor, and the explosive growth will go to the competition. Most importantly, the market share will go to the competition. Saying no is not an option. Sure there will be problems. Walmart will negotiate pricing that will hurt margins, but the company will make it up on volume. The team will figure it out. They always do.  Walmart pays their bills, but they manage their payment terms so that most of the time the product spends on the floor in the department store, the inventory is actually being funded by the supplier. That means requiring a huge increase in capital to fund that inventory.  The scenario I’ve described sounds pretty compelling. Almost every business has encountered some version of the narrative that I’ve described.  Now imagine you’re an existing customer of the company. You’re going to suffer terribly when the company starts to supply to Walmart. Walmart will get all the attention. Customer service will suffer. Order lead times will suffer. You were one of their best customers and now you’re a second class citizen. Super Duper is strategic to your business. You can’t meet your business commitments without it. Buying the product off the shelf at Walmart won’t deliver the quantities you need. The company has signed a supply agreement with you and they’re not living up to the terms of that agreement. They can’t be counted on to meet their commitments. They’re not an honourable company. They can’t be trusted. You are angry at the company because they’re harming your business.  Does this scenario sound familiar?

Devin Redmond is with Stessa, a new property management software startup based in the San Francisco Bay area. On today's show we are talking about some of the limitations of many of the established applications in the market and how a bigger picture can help investors manage their business overall.

Tom Krol is a specialist in Wholesaling. He has raised the art of wholesaling above real estate and totally separated it from the science of real estate investing. This is a perspective on wholesale transactions that you likely have never heard before. Check it out.

The Yale endowment is  considered as one the best institutional investors. In 2018 it earned a 12.3% return, beating the average endowment return in 2018 at 8.2%.  For 2019 they are allocating 49% to illiquid / alternative assets (VC, leveraged buyouts, real estate, natural resources). I'm somewhat surprised to see that real estate only takes up 19% of their alternative assets and not more. Their real estate return in the last 10 years was also an anemic 2.7%. In contrast, they've had a lot of success with venture capital (165% in last 20 years.  Given Yale's endowment at a whopping $29.4B, how and what can the everyday investors learn from them and the super rich?  It’s true that they’ve grown the endowment from about $6.6B to 29.4B in the past 20 years. That’s impressive considering that the endowment is the single greatest source of cash for the university programs. Tuition is second.   First of all, there are numerous ways to make money.  I have some first hand visibility into the Yale endowment and where they invest. The Yale Endowment is a major investor in a private equity firm called Golden Gate Capital. They were the firm that was funding my buy-out of IBM’s microprocessor division in 2004.  From my exposure to family offices, and other “old money” over the past while, I can share what I’ve learned. I believe that their goals are different from the average investor.  First of all, they are more concerned with preservation of capital than rate of return. They also employ sophisticated consultants to evaluate their investment decisions.  The line between late stage venture capital and private equity is quite blurry. I don’t believe Yale is investing in early stage startups. These are late stage startups where the capital requirements are larger. These businesses are proven and need funds to scale up. This is not that different in the world of private equity. Generally speaking, private equity firms make low risk bets on re-engineering businesses and executing business turn-arounds.  David Swensen is the chief investment officer at the Yale Endowment. He outlines his investment philosophy in his book entitled Pioneering Portfolio Management. In that book he divides the portfolio into five or six roughly equal parts and investing each in a different asset class. Central in the Yale Model is broad diversification and an equity orientation, avoiding asset classes with low expected returns such as fixed income and commodities.  He also maintains a low cash position. He maintains a low exposure to traditional wall street equity investments, and a high exposure to alternative investments that are not readily marketed. That’s why he’s investing directly in funds like those of the Golden Gate Capital Group. These firms have some of the most sophisticated money managers involved. For example, they routinely use the services of Bain Consulting. This is the consulting division of Mitt Romney’s Bain Capital Group. I can say from first hand experience that these folks  It’s no surprise that Bain consulting recruits heavily each year at Yale University. They have developed a way of looking at the investment world that is different from most. They realize that these are businesses that need to be run, and they know how to run successful businesses.  In your question you mentioned that the real estate performance of the Yale Endowment was surprisingly low. But remember that the measurement notes in the article you referenced is over a 10 year period. Note that the fund would have experienced significant losses from 2008-2012, and these deficits would have started to be recovered only starting in 2012. 

On today’s show we’re talking about how properties disappear from the market. No, they weren’t demolished. I’ll tell you where they went.  Harry Dent is an economist who bases his entire thesis about the economy on demographics. Demographics can predict so much about human behaviour. We know that there is a range of ages when people spend the most money on education. That’s usually between 18 and 24 years of age. We can use the number of live births to predict the number of diapers that will sell in a given year. We can use demographic data to predict housing trends.  As real estate investors we know that real estate is hyper-local. So how do you map the knowledge of the macro economy and demographics to the specifics of your local market? It’s by understanding who your ideal customer is, and then overlaying demographics on top of the needs of your ideal customer. Today we’re going to talk about that huge demographic group called the baby boomers. The oldest baby boomer is 73 years old today, and the youngest is 55. For the next decade we’re going to see that demographic group retire in growing numbers. That’s worth paying close attention to.  This past weekend I was speaking at an investor conference about a vacation destination. I actually met several people who had purchased in the same destination, but not as investments. They chose to live there.  When people retire, they often have certain life goals. They want to downsize. They don’t need such a large house. They don’t want the effort and expense of cleaning and heating a large space that they’re only using a small fraction of.  They also want to travel, so for many that means having a place where they can confidently leave and know that the property will be safe. If the property has a large yard with grass that needs to be cut, or a laneway that needs snow clearing, that’s not as good a fit as a condo in a complex where there is maintenance staff onsite and the majority of maintenance items are the responsibility of the condo corporation.  Some people want to retire to the beach. Some will want to retire to the chalet in the mountains. They want to spend time in an environment that is emotionally uplifting and inspires them on a daily basis.  Some will choose to rent and experiment with a number of locations over a period of 4-5 years before finally settling on a single location. Others will choose their dream pad very quickly. For others, they will maintain multiple residences and move with the seasons.  This particular demographic group is looking for walkable communities with lots of community amenities. They’re looking for desirable destinations. They’re looking for buildings with on-site amenities and strong on-site management. They’re looking for a resort lifestyle where they can walk to the beach, or breath in the mountain air.  These properties were often built as condo’s in resort complexes. They were intended to be part of a rental pool under the hotel management. But the condo hotel model means that an individual owner can purchase a unit and owner occupy the unit whenever they want. Of course, when it’s owner occupied, the hotel can’t rent it out and the owner gets zero revenue for those nights.  The investor will value the property based on multiples of income, where the income is determined by the seasonal factors and the nightly rate. For the owner occupant, their price criteria is based on the value to them as a home.  As you pay attention to the laws of supply and demand, consider that supply may actually shrink in some rare cases where properties are highly desirable. We always look for those special situation where there is more demand than supply. 

On today's show we’re talking about President Trump’s visit to a project located just down the road from several of our own new development projects. The president was in lake Charles Louisiana to promote the expansion and job creation opportunities associated with liquified natural gas. The oil and gas industry in America has evolved over the years from conventional oil that some of the very first oil wells in Texas and California produced. These were relatively shallow wells in fairly porous rock. They produced oil, and virtually no natural gas.  The more recent shale wells produce oil or gas and in some cases both. These rock structures have the oil and gas trapped in the rock which is not very porous, and not very permeable. If you think of the rock like Swiss cheese, the porosity of the rock is the size of the holes in the cheese and the permeability is the ability for oil or gas to flow between the holes in the cheese or in this case the rock. In order to get the oil out of the ground, the drillers push water down into the well at about 2000 psi. That high pressure smashes the rock and allows the oil and gas to flow. The oil gets pumped to the surface and is stored in tanks that get emptied on a regular basis and is then transported by truck to the refinery. The gas is lighter than air and just wants to float away. The only way to capture the gas is to pressurize it and transport it by pipeline to an local mini refinery which gets rid of the impurities to ensure the gas is of pipeline grade before being sent down one of the major pipelines.  Natural gas is a great source of energy. But it’s so inconvenient to handle that the average consumer has trouble dealing with it. Most of the worldwide consumption of natural gas is for the production of electricity or home heating. Natural gas is is one of the cleanest ways of producing electricity behind wind solar and hydro. Much of the electricity in Europe, Asia is turning to natural gas as a cleaner alternative to coal or oil. For example, in 2016, Spain didn’t import any natural gas from the US. In 2018, Spain imported 29 billion cubic feet of natural gas and growing. France is buying from the US, so is Portugal, Italy, and Greece. Last year the US exported 22M tons of LNG. This export capability was only made possible in 2015 when president Obama authorized the export of hydrocarbons from the US. Today, Lake Charles Louisiana is the largest LNG export hub in the US. The export capacity for LNG is expected to grow by huge multiples over the next decade. Lake Charles is undergoing tremendous growth as a result of these energy projects. It’s driving population growth and employment growth. Most importantly, these jobs are not linked to the price of oil or gas. It’s all about global distribution of natural gas. The widening of the Panama Canal in 2016 opened up markets in Asia.  So what does this have to do with real estate?  We look for market opportunities where the demand is growing and there is a shortage of supply. The president’s motorcade passed directly behind our Maplewood Place RV Park. We built that facility over the past year to house the legions of construction workers who will be temporarily in Lake Charles over the next decade to build the mega plants.  This town needs everything from housing to retail, to office and medical. The President’s trip to the area is shining a spotlight on the opportunity. We believe that the additional visibility will make the market more broadly recognized in the financial markets.  The President’s visit will bring attention to this market and may facilitate future investment. Have a lookout for other places, anywhere in the world where major business activity is taking place. As always, look at those opportunities through the lens of supply and demand. 

Today’s show is about protecting rookie investors from making bad investment decisions.  This weekend I was speaking at an investment conference. I had several people approach me and ask advice about buying properties in markets where purchase prices were low and tenants don’t have the funds to pay the rent.  Yes folks, don’t get ahead of me now. I know many of you have seen this movie before. You know the ending.  One investor in particular bought a multi-family property in Chicago. It was clear to me that he did not do his due diligence. He didn’t know which streets were the dividing lines for rival gangs in the area. He relied upon the publicly available heat maps that were available on the crime statistics websites. He didn’t know that the city had cut back on policing in many neighbourhoods and that violent crime had jumped by 60% in a period of months. He relied upon the broker’s information about the property. The financial model he constructed followed what he had been taught in a real estate training workshop. He had allocated 8% of his gross monthly income to maintenance. He chose that percentage in his financial model because that’s what he was taught. He liked the fact that the government subsidies for rent were above the market rent and the property was going to produce strong cash flow.  But here’s the problem with that approach. All of these spreadsheet based approaches neglect the reality on the ground. The spreadsheet approaches neglects the true cost of maintaining the property when maintenance events occur. Some maintenance events are somewhat difficult to predict. You don’t know when a refrigerator will die and need to be replaced. You don’t know exactly when a water heater will die and need to be replaced. But you do know that a water heater costs exactly the same in an apartment that rents for $2,000 per month as an apartment that rents for $650 per month.  The water heater doesn’t care how much rent you are collecting.  You are looking at hiring a plumber to replace it. If it is powered by natural gas, you may also need to hire a gas contractor to disconnect the old one and reconnect the new one.  If the water heater died the way most of them do, you are probably facing a significant cleanup and repair from the water damage. You are replacing flooring, repainting, possibly having mold remediation. All these things happen the same to an apartment that brings $650 per month or $2,000 per month.   If the 8% budgetary number is appropriate for the $2,000 apartment, then it’s way too low for the $650 apartment. You would need to reserve 24% in the case of the $650 apartment to equal the same dollar amount.  When a tenant moves out and the apartment needs to be cleaned, the cost of the cleaning is going to be roughly the same, regardless how much rent was being charged. Your financial model needs to consist of listing all the expected maintenance costs that could come up for an apartment. It’s then your job to estimate how frequently these events will occur. A water heater will need to be replaced every 10-15 years. Carpeting will need to be replaced every 5-8 years. Ceramic tile will need to be replaced every 15-20 years. Air conditioners will probably last 15-20 years. Apartments will need to be painted every 3 years.  When you add all that up, then you can estimate the real dollar value that you need to reserve.  But here’s the other problem that often arises in the financial model. You construct a model where the rents increase with the rate of inflation, perhaps 2% per year. You might model the same 2% for your expenses. I can show you examples where energy costs have increased 10-15% in a single year. If you construct your model using arbitrary percentages, you run the risk of overlooking the real situation on the ground.  

 What can we learn from the Uber and Lyft Initial Public Offerings? Both companies have grown to the point where they have a strong share of the market globally in just a few short years. Both companies have seen Luke-warm demand for their stock post-IPO. Uber and Lyft have never been profitable. One of the stated reasons that both Uber and Lyft have not achieved profitability is that the two companies have been locked in a battle over market share. If one company could achieve commanding market dominance, it could seal their fate for years to come.  Lyft went public on March 29 and their shares are currently trading 42% below the peak achieved shortly after their IPO. The company just announced their first results as a public company. Riders increased by7% in the quarter. But the company lost $1.1B for the quarter.  The picture isn’t that much different at Uber. The company went public this past week and they too are losing a breathtaking amount of money.  So here is why we are looking at these two companies. I speak with investors on a regular basis. I’m trying to imagine myself having a conversation with an investor where I tell them that we are going to have an operating loss of $8B dollars over before we transition to profitability. In the meantime, we’re going to focus on market share and when we have millions of customers we’re going to take the company public. We will all get rich from the IPO as new investors step in and buy new shares. The company will be worth billions.  I’m trying to imagine having that conversation with the most sophisticated angel investors in Silicon Valley and the top tier venture capitalists.  Now I’m perhaps being a little unfair because I doubt that the early conversations truly foresaw a future of $8B in losses followed by an IPO.  But here is what the broader market is saying to the likes of Uber and Lyft. We want to see profitability. The market has been extremely tolerant of companies like Netflix and Tesla, and Uber. Somehow these companies have been able to raise billions of dollars on a promise that hasn’t been proven. Part of that promise is profitability. Delivering the product and gaining market share is incredibly difficult and I applaud all of those companies that have managed to do so. But investors aren’t investing for the product or the service. They’re investing for profit, and profit is at the core. The only way Uber and Lyft can achieve profitability is by raising fares. To maintain market share they need a price advantage compared with the traditional licensed taxis. If the price gap gets too narrow, then the number of riders will fall and we will see revenue fall. The issue always comes down to economic fundamentals. In the case of Uber, the critical concept is price elasticity of demand. If I’m looking for a drive to the airport, I evaluate the cost of the ride to the airport and back and compare that against the cost of parking my own car at the airport. If the ride is too expensive, I’ll take my own car.  Not only do those companies need to achieve operating profitability. They need to generate positive cash flow. I honestly can’t imagine proposing a real estate project to investors with the kind of blue sky dream that Uber and Lyft have been pushing for years.  Raising more money is prudent to extend the runway to profitability. But there are limits to the runway that most investors will consider reasonable. Uber has been operating for 10 years. In that decade they’ve generated 8 billion in losses. How do you spin that into a story for investors? Are you lining up for that investment? It wouldn’t be me.  Now that they’re public, they will come under immense pressure to generate profits and cash flow. When you evaluate your business, focus on profitability and cash flow. 

Kyle Humphreys oversees the building of new construction projects in the high arctic. The considerations there are completely different from the dense urban projects most of us are involved with. Join me for this fascinating conversation.

Rod is one of the most well known apartment real estate investors with a large following. On today's show we had a wide ranging conversation about goal setting and setting life priorities. His upcoming bootcamp in Denver is always widely attended. If you go to rodsbootcamp.com and enter the discount code "espresso" you can get $100 off the admission to the bootcamp.  

On today’s show we are talking about some low-cost improvements that can build tenant loyalty, and create a lot of goodwill between landlords and tenants. When tenants are late with their rent, it’s often because there is something about their accommodation that isn’t right. Maybe they haven’t told you about it. But somehow they have the feeling that they’re not getting their money’s worth. Of course, if there’s something really wrong, you should fix it. Whenever a tenant feels ripped off, they will find a way to get even. Maintaining tenant loyalty means eliminating the irritants and the problems. It also means creating pleasant surprises. These are the small WOW experiences that people remember.  As the seasons change, properties also need to adapt. Leasing activity picks up significantly in the Spring in most markets. If you’ve had a vacancy through the winter months, now is the time to improve your curb appeal and get rid of the winter residue on the property. The dead grass and leaves should be cleaned up, and any debris that accumulated over the winter.   This is also the perfect time to perform scheduled maintenance on the inside of your property. After the winter heating season, air filters need to be changed.  Screens on windows should be inspected and repaired. Take the time to repair any broken blinds at the same time. If your windows are standard sizes, you can often get some pretty significant savings by having blinds cut to size in larger quantities. If you have a few extra in inventory, you will need them eventually.  The largest energy cost in the summer months is air conditioning. Functioning blinds can reduce cooling costs. Ceiling fans can be another huge energy saver. They can also go along way to making an apartment more comfortable during the hottest months. A little bit of air movement makes the room feel cooler. It also improves the heat transfer to the outside when the windows are open.  If you don’t have ceiling fans, you may want to consider installing them. They are a low-cost upgrade. If you surprise your tenant with that improvement they will be highly appreciative. Part of maintaining low vacancy is creating a feeling with your tenants that you care about their experience living in your property.  Regular maintenance of your property shows your tenants that you are serious about maintaining your property. It also gives the management team the opportunity to inspect the condition inside each apartment. There’s a balance between allowing your tenants the quiet uninterrupted enjoyment of their property, and regular inspections to protect your investment. If a tenant refuses the upgrade and attempts to refuse entry, that could be a red flag. You should insist on requiring entry to the unit to replace the air filters and maintain the HVAC system since this is a health issue and is therefore not negotiable.  As always, make sure that any request to enter property complies with your local landlord tenant regulations. If your property has amenities like a swimming pool or hot tub, start the process of preparing the pool for summer. They haven’t used the pool in months and will be looking forward in anticipation of dipping into the water when the weather heats up.  If you want to build a sense of community, how about hosting a social event for residents during the upcoming long weekend in May. You don’t have to spend a lot on refreshments. You could heat up some BBQ’s and make it a pot-luck event. The sense of community after a long winter creates a stronger emotional connection between your tenants and the place they’re living.  People won’t remember that they got a $20 break on their rent for one month. But they will remember how you made them feel. That’s where it’s your job as a landlord or property manager to create a spontaneous WOW experience.

Frank from Portugal asks: “I’ve had my eye on a 6 plex that has been on the market for 5 years. The original owner who built them went into bankruptcy 8 years ago and only completed 60% of the project. I’ve spoken with the local bank manager that owns the property and I explained my reasoning for a low offer and we agreed on a reasonable figure for the property. The property is listed at 855,000. And 4 different builders have quoted around 600,000 to complete the project giving a total of 1.45m. I've had 3 different local agents value the completed properties and the valuations on the low side are 225,000 per unit. Which is a total sale value of 1.35m. We made several offers our highest being 400,000 but the bank won’t budge.  The opportunity is in short term rentals where you can possibly get 1000€ a week for about 12 weeks as the area is a hot tourism local. Perhaps the property could also be reconfigured into a larger number of smaller units in the same footprint.  It’s important to know that the decision on the sale of the property is being made at the Banks head office 70 miles away. We are not sure what is driving the valuation but it’s out of context with the local property market. How would you proceed in this case or would you just move on?”  Frank that is a great question.  I don’t have an exact answer to your question because there are a number of additional questions that need to be answered before you make a decision.  Whenever you consider a business opportunity you need to examine 3 aspects: The market opportunity  The team who will operate it The specific deal  1) Let’s start with the market opportunity. You identified seasonal short term rentals as the market opportunity. There is no question that the region of Portugal you are located in attracts a lot of visitors from all over the world.   It’s considered one of the top retirement destinations for people in the UK. I believe the demand is strong. But it is seasonal. You need to do a detailed study of the local market where you understand the seasonal aspect and the revenue potential by month. 2) Let’s look at the team. Short term rentals are a service business, not that different from a hotel. The way we operate short term rentals results in 5 star reviews across the board. That doesn’t just happen by accident. We took the time to define the systems and processes that would deliver that result and we hired the team that we could rely upon to consistently deliver that result. If you want to travel, if you want to have a life, you need to hire the team that can deliver. That means that the project needs to be large enough to generate sufficient cash to afford the staff and pay suitable profits to you as the property owner. If not, then you just spent a lot of money to buy yourself a job as a cleaner.  3)  The deal. It sounds like you have worked backwards from the rental income to determine the maximum you can afford to pay for the property.  If the bank has been holding onto the property for that long, And they have a skewed view of its value, then there must be something funny going on behind the scenes. Banks are not usually in the business of owning property. If they are carrying the property on the box at an inflated value maybe they are keeping it intentionally to make their balance sheet appear stronger than it is in reality. I don’t really know. I’m just speculating on the reason why they might be behaving in this way. This isn't a direct answer to your question, but rather it's what I would examine to make a decision on whether to get into that business in that location, with that specific property. 

On today’s show we’re going to talk about how many people in business are confusing their customers with their business cards. In particular, I’m talking about real estate investors.  I was sitting with a client today having an intellectual conversation about what should be on a business card. So I reached into my briefcase and pulled out a stack of business cards that I’ve received over the past couple of weeks at various events.  I laid out the cards in an array on the table and asked my clients to rate the cards in terms of communicating a clear message to the person holding the card. There must have been about 20 cards in total. I asked my clients to rate the cards simply on the basis of whether they would want to initiate a follow-up phone call purely on the strength of the business card. These cards were chosen totally at random. Out of all the cards, only one of them was for a globally recognized brand. The Vice President from Goldman Sachs got a high rating on the clarity of his card, mostly on the strength of the Goldman Sachs brand.  Half of the cards had no clear marking of the geographic location of the person or their business. While the geographic location of a business isn’t as important as it once was, we didn’t even know what country the business was located in. One business card said that the person was the new york regional manager, but listed new orleans, Louisiana as a physical address. That was confusing. From there, we saw numerous inconsistencies other on the cards. In some cases, the company name didn’t match the domain name for the website, and the email address didn’t match the domain name for the company. If your card is using a free email service like hotmail, you’re sending a message to your potential customers that you’re not serious about being in business. You’re saying that you can’t afford the $6 per month to have a properly hosted email service.  Many of the business cards had corporate tag lines that were next to the company name.  I’m going to share some of the tag lines with you, but not the company names. I’m not here to embarrass anyone, but to highlight how confusing some of the tag lines are. It’s been said that a confused mind doesn’t buy. So if you are confusing your customers at the point of introduction with your business card, you’re doing yourself a huge disservice.  Out of all the cards, only one stood out as being really worth calling the next day. The prize goes to a syndication attorney who told the potential customer clearly what they did.  It spoke directly to the target customer. The business card said clearly who the target customer was. It triggered a positive response from the recipient of the card. In some cases the name of the business states clearly what the business does. One of the common naming conventions for a company is to combine a distinctive term with a descriptive term. For example “Al’s Barber Shop” has the distinctive term “Al” and the descriptive term barber shop. You can tell from the name that Al is probably the owner and that’s where you will probably go for a haircut.  One company simply had a 4 letter company name. They were all consonants and no vowels. I’m guessing that the 4 letters had some meaning, but it was really unclear on what it could be.  After that, it got difficult to figure out what the companies did.  The goal is for the holder of the card to say “I need that”. Get me more of what’s on that card. One card was divided in half. On the top half, the person listed their software development business. The bottom half was in a different colour and listed their family owned restaurant. When you confuse people about what you do, they choose neither.