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    Business

    The Real Estate Espresso Podcast

    Welcome to The Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. Join investor, syndicator, developer, and author Victor J. Menasce as he shares his daily real estate investment outlook. Our weekday episodes deliver 5 minutes of high-energy, high-impact content to fuel your success. Plus, don’t miss our weekend editions featuring exclusive interviews with renowned guests such as Robert Kiyosaki, Robert Helms, Peter Schiff, and more.

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    Copyright: © 424617

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    Latest Episodes:
    Equity Harvesting with Billy Brown Jun 06, 2021
    Show notes

    Billy Brown is based in Nashville. On today's show we're talking about taking chips off the table to ensure you have a strong cash position going into the next economic cycle. To connect with Billy, visit https://theinvestorscapitalgroup.com.


    Kevin Brenner Jun 05, 2021
    Show notes

    Kevin Brenner is based in Washington DC where he is still on active Air Force duty. He's launching his first real estate investment fund and on today's show we talk about the merits of the fund model versus the individual investment. To learn more, reach out to Kevin at risewithnimbus.com.


    AMA - Hedging Strategies Jun 04, 2021
    Show notes

    Tom asks,

    First of all, thank you for your dedication to provide as much value as you do on such a remarkably consistent basis. I own a portfolio of multi family properties with about 2/3 debt and 1/3 equity. Almost all of my net worth is in my real estate holdings. The way I see it, I am long economic growth and inflation. I’d like to buy a hedge so that if we get hit with a contraction or deflation or spike in cap rates that decrease values, the hedge pays off. How would you - or do you - hedge? Which financial products would you consider?

    Tom,

    This is a great question. I’m hearing a couple of assumptions and questions wrapped up in your question. The first is that we could see a market down-cycle at some point in the future.

    The challenge with pure hedge investments is that they tend to be short term. I’m thinking of options to sell shares in the stock market. That’s a traditional hedge. But you need to time the market pull-back correctly for that to work. Unless you have a strong analysis team and have developed an expertise in hedging, it’s very difficult as a short term strategy. Longer term hedges are more moderated in approach.

    I think the basic premise of using inflation to give you leverage is sound. We have gone through nearly a century with no sustained reversal of inflation. If you’ve been listening to this show for a while you know that inflation can be your enemy or your friend, depending on which side of the trade you are participating in. Inflation devalues the purchasing power for those on fixed income, it devalues cash savings and it devalues debt. Inflation results in higher asset prices for real assets which provides an effective hedge against inflation.

    Your strategy is the right one in my opinion. In this instance, leverage is your friend. It means that even in an environment of slower economic growth, or perhaps economic stagnation, if inflation continues, the benefit goes to the equity side of the equation. You don’t want to be so highly leveraged that you build a house of cards.

    The most important thing is to protect your assets. The first step in doing that is to convert your debt from recourse debt to non-recourse debt with the longest possible term. This may sound like a small point, but it’s not.

    Recourse debt has a personal guarantee associated with it. While you’re probably investing through a corporate entity, you probably have personally guaranteed the debt. But if the debt is non-recourse debt then you get to keep the asset on your personal balance sheet, and you don’t need to report the debt on your personal balance sheet.

    You also want to maximize your cash position by maximizing your leverage. Once you’ve done that, you can purchase additional inflation hedges. I’m thinking specifically of gold. When I say gold, I’m talking about the physical metal.

    Gold is a very liquid asset and it’s also a pretty good store of value. It’s an effective hedge. The critics of gold would say that gold doesn’t cash flow and therefore they don’t consider it to be a very good investment. They would say that gold goes up and down and that investors pile into gold during times of economic worry. Investors largely ignore gold in the good times.

    You would like to use cash but your cash is tied up in gold and in properties. So you go to your cash rich uncle, or cash rich lawyer and negotiate a low interest loan where the lender holds the physical gold as collateral. The lender is completely secure in their loan. They’re holding highly liquid collateral. There is no need to qualify the borrower since this is an asset based loan.

    The market has created a lot of value for equity investors lately. Some are using it as an opportunity to take some chips off the table and hold them in reserve for future opportunities when they arise. I personally think that gold is a good hedging strategy when kept as a liquid borrowing tool.


    Versionitis Jun 03, 2021
    Show notes

    On today’s show we’re talking about a disease that is rampant throughout the world of real estate investing. This disease is everywhere and it is the source of millions of dollars in lost revenue and increased expenses. There is no vaccine against it. There is no outright cure. But with good process it is possible to be immune from this disease.

    The disease I’m referring to is called versionitis. Versionitis happens when you reference the wrong version of a document, an outdated version of regulation, or the wrong version of a drawing.

    It’s the source of misunderstandings, it causes wasted materials, cost over-runs, and contractual disputes between contractors, architects, subcontractors and owners.

    It happened to me very recently. The planner for the city sent me a document. She told me it was the latest and greatest. It was not yet published by the city on their website, but we should use the one she sent us as a guide for our development plans.

    So I did as she suggested and saved the file, referred to it frequently, and built our plan based on her guidance. Imagine our surprise when the newly updated published document on the website didn’t match the version the planner sent us. All of this happened in the span of two weeks.

    You might be a subject matter expert in a particular area. You know the regulations. But the regulations change without warning. I had a real estate agent give me an environmental report for a site that had contamination. She told me that the concentration levels of gasoline in the ground were below the required level of 150 ppm. But then the regulation changed to 50ppm and she had no idea. She was operating on stale data.

    We had a subcontractor bid a job based on an old drawing. The GC made a mistake and didn’t include the latest drawings in the contract, even though the old drawings referenced in the contract were nearly 6 months old. The result was several mis-steps where the wrong components were ordered. The building inspector for the city pointed out the deficiencies and the new parts needed to be ordered for the HVAC system. The cost of this single error was more than $60,000.

    Every time a copy of a file is made, there is a chance of versionitis.

    So how do you prevent versionitis?

    It requires a discipline. It means that every time you reference a government regulation, you go to the website and download a fresh copy of the document. Every time you share a file, you send a link to the file and not the file itself.

    You see, the second you make a duplicate copy a file, one of those versions is potentially out of date. Even within our own team, we have to exercise great care and put version numbers and date codes in the name of a file.

    The cost of implemented a bullet proof document management system is not that much. It’s a few thousand dollars a year. But saving a single costly mistake makes the investment look like a bargain.

    We’re in the process of evaluating several software systems. In the coming months, once we have selected and implemented a system we’ll share more about what we chose to use and why.


    Unemployment Leads Real Estate Jun 02, 2021
    Show notes

    On today’s show we’re taking a look at how job creation is going to drive migration and ultimately affect local real estate markets.

    The US recorded the lowest number of jobless claims in the pandemic in the second last week of May. This is a further sign that economic recovery is taking hold. The number of people vaccinated rose quickly in the first quarter and is slowing. Still, the number of infections and hospitalizations in the US are falling steadily and many local economies are re-opening as a result.

    We have some states that have been slow to open up from the pandemic and others that have been faster on the path to economic recovery. In a recent report published in the Wall Street Journal which relies on data from Zip Recruiter, there are some states where the number of job seekers exceeds the number of job openings. Those who have lost their jobs are having a hard time looking for work. I’m thinking of states like California and Arizona. This is not a red versus blue argument. These states were very hard hit by the pandemic and they have been slow to re-open their economies. California’s unemployment rate is at 8.3% and has held pretty steady since earlier this year.

    But in other states like Utah, Idaho, and Kansas the number of job openings far exceed the number of unemployed by more than 3:1. Finding qualified labor in today’s market has proven difficult in those states. The current unemployment rate in Utah is on 2.8%. A number that low would be the envy of any economy. Idaho had an unemployment rate of 3.1% at the end of April.

    Fully half the states in the US have decided to end the special pandemic unemployment benefits ahead of the previously published September deadline. Many states are ending the benefits in the next 2-3 weeks.

    It remains to be seen whether the labor shortage is the result of people preferring to stay home and collect unemployment benefits, as many have asserted, or whether there is truly a labor shortage in many markets.

    By the end of June we will start to know the answer. As these benefits end, we will want to keep a close eye on the job metrics and how these new jobs get filled. Will the labor come from the local population, or will it be the result of migration from other parts of the country.

    It’s very difficult to generalize. But some states like Utah which have strong midwestern values, I have a hard time believing that people are sitting at home collecting a government check and watching Netflix all day long.

    So the real question is whether the new job creation will also create new demand for housing that is not apparent in the current real estate market metrics.

    We are seeing strong migration into those midwestern mountain states. Some people are clearly moving to those states. I’ve spoken with several people over the past year who are relocating. Some are moving for work, but in fact some are moving for the lifestyle and more relaxed pace of life associated with these states.

    When I look at unemployment numbers, they can be a leading indicator of housing demand.


    Book of the Month - "Atomic Habits" by James Clear Jun 01, 2021
    Show notes

    Our book this month is called “Atomic Habits: An easy and proven way to build good habits and break bad ones” by James Clear.

    I was introduced to this book by Kelli Calabrese, one of the members of a mastermind that I’m part of. I have to say that the book has been impactful for me as I’ve been examining my own daily habits in the areas I’m seeking to redefine.

    Habits are the compound interest of self-improvement. The same way that money multiplies through compound interest, the effects of your habits multiply as you repeat them. They seem to make little difference on any given day and yet the impact they deliver over the months and years can be enormous. It is only when looking back two, five, or perhaps ten years later that the value of good habits and the cost of bad ones becomes strikingly apparent.

    One of the core concepts in the book is that small changes can compound. A 1% change can seem small. But if you start doing push-ups. On the first day you do one push-up. On the second day you do two. On the third day you do three. After 100 days you’re doing 100 push-ups.

    We often dismiss small changes because they don’t seem to matter very much in the moment. If you save a little money now, you’re still not a millionaire. If you go to the gym three days in a row, you’re still out of shape. If you study Mandarin for an hour tonight, you still haven’t learned the language.

    We make a few changes, but the results never seem to come quickly and so we slide back into our previous routines. Unfortunately, the slow pace of transformation also makes it easy to let a bad habit slide.

    Your identity emerges out of your habits. You are not born with preset beliefs. Every belief, including those about yourself, is learned and conditioned through experience.* More precisely, your habits are how you embody your identity. When you make your bed each day, you embody the identity of an organized person. When you write each day, you embody the identity of a creative person. When you train each day, you embody the identity of an athletic person.

    The labels “good habit” and “bad habit” are slightly inaccurate. There are no good habits or bad habits. There are only effective habits.

    It turns out that habits are anchored in several loops of human behaviour. The first is the notion of conserving mental energy. Items that require conscious mental effort to bring to reality are not habits. Getting dressed in the morning, making a cup of coffee, emptying the dishwasher, all can be habits that don’t tax the conscious mind.

    People who try to form habits operating exclusively from the conscious mind are destined to fail at habit formation. Habits, both good and bad don’t require a lot of mental energy. How much energy does it take to check your news feed in social media?

    Forming new habits can often be accomplished with habit stacking. For example, if you do 20 pushups as part of making your morning coffee, then you will have a much easier time forming a new habit because it is associated with a pre-existing habit.

    Brushing your teeth with your morning shower adds one more step to an existing habit, but doesn’t require a new separate habit to be formed.

    It turns out that your environment contains powerful cues that are mentally associated with repeated behaviour patterns. If you can make a radical change to your environment, so too can change the patterns. Often a return to a previous environment will cause old patterns to re-establish because the cues are encoded in your memory as being associated with those patterns.

    As I read the book, my awareness of my own autopilot behaviours became crystal clear.


    AMA - Agricultural Acreage May 31, 2021
    Show notes

    I have listened to every one of your podcasts since Dec 2018 and because of your influence in my growth as a real estate professional I'm now working with an experienced developer and we currently have 83 acres under contract. I’ve attached the details to this email. I personally would like to develop a community designed for resilience. What are your thoughts?

    John,

    This is a great question and one that often perplexes new developers. The specifics of your proposed development project don’t work in the current market conditions. The land can be seen as a bargain. 83 acres for $900,000 comes to $10,800 per acre or about $0.25 per square foot. That’s not quite free, but it’s a very attractive price for raw land.

    The problem with the specific proposal you sent is that comparable sales in the area range from about $135 per SF to about $180 per SF. Since new home construction in today’s market is costing about $150 per SF, and you also need to build the entire subdivision including roads, utilities, storm water management, landscaping and so on, the values in the area are not supporting new construction at this time. The infrastructure is going to cost you anywhere between $30,000 to $75,000 per buildable lot. Some items can really add to the cost. Don’t forget you need to bring fiber internet service at a cost of $7.00 per linear foot to each property. All of these costs are significant and it would cost you more to build these properties than the current local market is attracting in sales prices.

    But by far the biggest cost is the site work and offsite improvements required to bring the infrastructure to the site. Many of the lots are larger lots. Even though the land is inexpensive to purchase, the cost of creating a shovel-ready lot can still be considerable.

    The value of the particular property about 30 minutes outside Dallas will vary as a function of time. There has been some growth in the local area in recent years. Most major cities tend to grow outwards. Eventually those outlying areas become close enough to the city that people are willing to move there.

    People move to the outlying areas for two major reasons.

    1. They’re in search of lower cost real estate because the city has become too expensive.
    2. They prefer to have more space and be outside the city. But they want to be close enough that they can drive into the city whenever they want to.

    I find it useful to examine what major developers have done historically. They know that the land doesn’t support development today. So they will purchase land a few years ahead of their planned development and simply land bank it. Land banking is extremely effective, but it ties up cash. Land doesn’t generate cash flow. So the entire investment will likely be made with equity and zero debt.

    The major developers plan a few decades ahead in their land acquisition. They will buy land inexpensively and sit on it until it becomes worth developing. At that moment, they look like geniuses. Land will sell for 100 times what they paid for it. But remember, they took the risk, tied up a bunch of cash and sat on it for a long time waiting for the growth of the city to create the value in the outlying area.

    In retrospect when you run the math on the initial investment, the annualized rate of return looks incredibly healthy. But it’s a bit like melting ice. You might start out with a block of ice at -40 degrees. You start by adding heat. The temperature rises slowly, bit by bit. After a bunch of years, the ice is still 10 degrees below freezing. Then one day, you reach a tipping point and the ice melts. But you have to keep applying heat and have faith that the ice will melt a long distance into the future. So it goes with land banking.


    Glen Sutherland May 30, 2021
    Show notes

    Glen Sutherland is a Canadian investor who has gone into lower priced US submarkets in search of greater value. On today's show we're talking about how he has decided where to invest. Glen is also the host of "A Canadian Investing in the US" podcast.


    Megan Lamke May 29, 2021
    Show notes

    Megan Lamke made the leap from home owner to investor to multi-family investor to syndicator. Today she runs a portfolio of properties across multiple markets. There are some innovative ideas in today's discussion that every multi-family investor should pay attention to. To reach out to Megan and to learn more, visit meganlamke.com. You can download a copy of her free book at https://meganlamke.com/grit


    J Walking May 28, 2021
    Show notes

    On today’s show we’re talking about J-walking. J-walking is when you take a small risk and cross the street where you don’t have a traffic light for pedestrians.

    We’ve all done it. It’s breaking some rules, but as individuals we take some calculated risks.

    The idea of J walking brings me to discussing building extra apartments into a property.

    In the city of Chicago there are many 50 foot wide 3-story buildings with six apartments. These lovely old buildings were built in the 1920’s. There are thousands of them. Remember the roaring 20’s? That was the period after WW1 and after the Spanish Flu pandemic when the economy took off and expansion was happening everywhere. It was the precursor to the Great Depression that started later that decade.

    These 1920’s buildings were made out of stone and brick with wood framing on the interior structure. The foundations were made out of stone and cement. Most foundations were 5 feet deep. But the basement typically had windows at the front and back which mirrored the look of the stately windows of the units above, even though the basements were largely unfinished. In some cases, owners would finish the basements in order to create storage space for residents in the basement. That space also created the opportunity for two more apartments. Many enterprising building owners did in fact create two more apartments in the basement. Some were done properly. But many were not.

    For some reason, these basement apartments are called garden units. I don’t know why they call them that, because there’s nothing garden about them. They’re a basement apartment. If you visit Chicago and hear people talking about garden units, you need to translate that into meaning basement apartments.

    If you look through the real estate listings for these types of buildings, you will also see mention of “legal garden units”. That means that a building permit was issued for those basement units.

    The problem with these illegal units is that, unbeknown to the building owner, they are at risk of not having any insurance coverage. You see most insurance companies will not insure properties that were not legally built. I can see their point of view. They don’t have the opportunity to inspect properties before providing insurance coverage. If there were no bounds on the insurance, then property owners would be free to continue expanding their property illegally and the insurance companies would be on the hook with virtually unbounded liability. Let’s be clear, the insurance company will happily collect the insurance premium from you. They will take your money. But when there is a claim, the property owner and the insurance company become legal adversaries. There will be a review of the policy by the insurance company’s legal team and a determination on the limits of coverage will be made after an examination of the facts surrounding the claim. That includes an investigation. The insurance company may look to see if there are any building permits that were opened on the property and never closed out. They might do the same for any electrical permits. They may examine whether any additions were made to the property without a permit. Insurance companies will likely do anything they can to get out of paying out on a claim.

    Now I’m not an insurance professional, and I’m not here to provide insurance advice. If you want to get a proper opinion, then I recommend that you connect with a lawyer who specializes in litigating insurance claims. They can usually set you straight on where your points of vulnerability might be.

    When you J walk, you are taking a risk. Yes, everybody does it from time to time. But J walking is done selectively. Owning an illegal unit is a bit like J walking every minute of every day, 7 days a week, 365 days of the year.


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