The Real Estate Espresso Podcast

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More Slices of Pizza Please Apr 27, 2021

Show notes

You’ve no doubt heard the old joke about the guy who calls a pizza place to order a pizza over the phone. He orders a medium sized pizza with mushrooms and sliced tomatoes. The person taking the order asks whether they would like the pizza cut into 8 slices or 10, to which our trusty guy ordering the pizza says. Oh yes, cut it in 10, I’m hungry today. Yes, it’s an old joke, and not all that funny really. But, I’m guessing the guy who ordered the pizza must work for the Federal reserve.

In a world of finite resources, of finite primary wealth, and of finite pizza, issuing more currency, or making smaller slices doesn’t create more pizza. It simply dilutes the value of each slice of pizza.

OK. So we know governments are printing money like never before. According to modern monetary theory, we’re being told printing money will not be inflationary as long as it’s being done the right way.

What will cause the next downturn in real estate?

The world is filled with counter party risk. Quite simply, counter party risk is the result of an asset on one balance sheet appearing as a liability on someone else’s balance sheet. When the chain of financial dependence becomes too deep and too unstable, then you have a chain of dominos. Once one domino falls, then all of the dominos in the chain fall over.

So the question is, where is the instability in the system? Where is the house of cards?

Some have argued that the government is simply printing too much money and that’s the cause of the instability.

If you’ve been listening to this podcast for a while, you’ll remember me saying that printing money works, until it doesn’t. When it doesn’t work, there’s no turning back. It’s a slippery slope, a runaway train.

The only way back from that kind of slippery slope is a complete reset of the financial system. Some countries have tried cosmetic resets to the financial system. Venezuela’s recent attempt was to lop off five zero’s from their bank notes. In the end, that didn’t work, because they didn’t fix the underlying issue. It takes a commitment to stop printing money.

We also see inflation when we look at asset prices.

Stocks are trading at peak valuations; the average Price/Earnings ratio in the S&P 500, for example, is now 42, roughly 3x the historic average. It has only been higher two other times– just before the 2000 crash, and just before the 2008 crash.

Bonds are so expensive that more than $13 trillion worth trade at negative yields.

So let’s imagine that one day, stock traders wake up and realize that the prices being offered in the stock market for these companies don’t make sense. This has happened from time to time throughout history. We saw it on October 19, 1987. We saw it in 2001 after the dot com bubble burst. We saw it again in 2008 when it became clear that the US banking system was over-leveraged.

A precipitous drop in stock market prices could cause a cascade effect on assets across the board.

One of the warning signs is the amount of debt in the stock market. You might be wondering what I’m talking about. The stock market is an equity market. I’m talking about the margin accounts at all the major brokerage houses. When traders have high margin accounts and market prices fall, then traders need to sell assets in a hurry to cover their margin shortfall. That puts more downward pressure on the market.

Let’s imagine that you are sitting on a lot of cash. Let’s imagine that you’re worried about inflation. That means your cash is going to be worth less a year from now, or two years from now, of five years from now than it’s worth today.

Would you be willing to lend money for a long time at a low fixed interest rate? Or would you prefer to put your money into an asset that provides a more effective hedge against inflation?

What is Wealth? Apr 26, 2021

Show notes

There are those who have a scarcity mindset, and those who have an abundance mindset. The scarcity mindset says that the pie is only so big and if you’re going to get more, that means that somehow I’m going to get less. The abundance mindset says that it’s possible to make the pie bigger for everyone. As you will see, both these philosophies can be simultaneously true. But it depends on the context.

If you compose a new hit song, and it sells a million copies, you didn’t take a song resource away from anyone else. Someone else can also come along and compose a hit song. There’s no hard limit on the number of songs that can be hits, or that can be written. You can create wealth by creating value in multiple different forms.

On today’s show we’re talking about the different forms of wealth. We’re being asked to believe that there is a new way of accounting. Modern monetary theory says that you can print money and it won’t be inflationary.

But before we can take a deep look at this question, we need to return to basic principles. Tactics sit on top of principles. Just like actions sit on top of the laws of physics. When someone tells me that they can defy the laws of physics with a new technology, I quickly return to the laws of physics. So far, we have not managed to act our way out of physics.

There are three types of wealth. Primary, secondary and tertiary forms of wealth.

Primary wealth is sourced from the land. It is rich soils, thick stands of timber and abundant reserves of ores and fossil fuels in the ground. Primary wealth relies upon rich supplies of fresh water. When we grow wheat in the prairies in Canada and export the wheat to China, we’re really exporting water to China. Fresh water is primary wealth. Arable land is primary wealth. Reserves of oil and copper and lithium and iron and gold are forms of primary wealth.

Secondary wealth is the means of production that has been extracted and/or converted from primary wealth and brought to market. It's lumber, steel, food in the grocery store, and factories. China has extraordinary secondary wealth, which has relied upon other countries to supply the primary wealth.

Tertiary wealth, better known as 'paper wealth' (stocks, bonds, etc), is merely a claim on either primary and secondary wealth. Without either of those two forms of wealth, tertiary wealth has no value.

It was only recently that people somehow forgot this simple logical progression. Two hundred years ago, the answer to the question “Who are the wealthiest people around here?” was as simple as pointing to those who owned the most land (primary) or factories and stores (secondary).

So when people are trading in paper assets, or electronic assets like a crypto-currency, those assets are worthless unless they sit on top of a foundation of either primary and secondary assets.

Let’s look at one of the savviest guys in the world. I’m speaking of Bill Gates. His Family Office is estimated to own 269,984 acres of farm land in the United States. He is estimated to be the single largest farm land owner in the world.

Agricultural land with water on it is primary wealth. With population increasing globally, we will need to produce 70% more food over the next 30 years. The world population has grown 28% since the year 2000. We could be at 9 billion by the year 2037 and 10 billion by 2057. More importantly, global fresh water demand is expected to grow by 20-30% by 2050. We already have vast areas of arable land that have become depleted through a combination of erosion and depletion of the water table. These losses will eventually have an impact on the ability of the world to sustain human life.

That farm land is going to become more and more valuable as demand for food increases.

Storm Cunningham Apr 25, 2021

Show notes

Storm Cunningham became obsessed with revitalization after seeing our choral reefs dyings. A diver and former Green Beret, he now lectures all over the world on the topic. He's the author of several books on the topic and is the editor of "Revitalization Magazine". His latest book, "Reconomics" can be purchased on Amazon.

To learn more and to connect, visit https://stormcunningham.com

Alicia Jarrett Apr 24, 2021

Show notes

Alicia Jarrett is 16 hours time zone away in Melbourne Australia. She invests in Florida real estate. Today's episode focuses on how she has built her business to effectively implement systems and processes to invest from afar.

To connect with Alicia, visit superchargedoffers.com.

Why Is Lumber So Expensive? Apr 23, 2021

Show notes

On today’s show we’re taking a closer look at supply chains in today’s environment. I’m now hearing daily reports of empty shelves at building supply stores.

I’m seeing posts on social media of contractors who have placed orders for construction lumber with some of the big box lumber stores two weeks ago and still do not have their orders fulfilled. I experienced the same thing last year when purchasing cedar for a small project. The supplier took my order for material that was in stock. By the time the staff went to pick the inventory and fulfill the order, someone else had purchased the material. I found another source and I asked for a refund. A month later, I received a phone call that my order was ready and I could come and pick it up. Needless to say they were surprised to hear that I had cancelled the order and already received a refund.

The higher cost of lumber is adding between $25,000-$30,000 to the cost of a new home, if you can find the material.

Earlier this year, one of my general contractors submitted a change order asking if he could replace some roof decking with a superior plywood product, since the builder grade chipboard was out of stock. The price difference was nearly zero because the more commonly used product was in such short supply that it was actually more expensive than plywood. Naturally I said yes.

The recent quotes I received for materials made me redevelop all of my budgeting spreadsheets. Some construction projects have been cancelled due to the high cost of construction. In my home market, a new $100M police station tender was withdrawn. The police station is needed and the budget is in place. But the high cost of construction seems to be extending beyond the cost of lumber.

So the question is why have lumber prices gone up so much, especially at the retail level?

Madison’s Lumber reporter has been publishing weekly since 1952. They’re one of the foremost authorities on the lumber industry. Canadian lumber is a significant contributor to the US construction industry. The pandemic lockdowns of 2020 closed saw mill plants for 6 weeks in Canada, and then when they re-opened they were cautious on ramping up production. Meanwhile, demand did not fall throughout the year. The retailers experienced a spike in price coming from the sawmills. The retailers had no time to react. They had no time to hedge with futures contracts. They were selling framing studs at $3.50 and then turning around and buying the replacement inventory from the sawmills at a higher price. They had never experienced that before. A sheet of plywood that used to sell for $35 is now $100.

For the sawmills, the year 2020 was ideal. They want to close the year with the log yard full of new timber to cut and the yard with finished inventory empty. That’s exactly what happened. But the demand is so far in excess of supply, that sawmills are resorting to transporting finished product by truck instead of by rail. The transportation cost by truck is triple compared with rail. So the rail transport is going unused, and there are a shortage of truckers, which further pushes up the price for transportation of finished goods.

The major builders are definitely taking steps to ensure security of supply. There is no question in my mind that builders are hoarding materials in order to secure supply. I’ve spoken with several major builders who have purchased the lumber for about 2,000 residential units at a time. That inventory will be consumed this year, but not next week. This shadow inventory follows classical economic cycles. At some point, production will expand to meet demand and the stockpiling behaviour will end. At that time, companies will stop placing excessive orders to protect their security of supply. They will consume their in-house inventory and demand for materials will drop despite continued construction activity.

Build To Rent Communities Apr 22, 2021

Show notes

On today’s show we’re talking about one of the hottest new trends in rental product. The single family home is part of the American dream. People want a place they can call home. But home ownership isn’t necessarily a perfect fit for everyone.

Home prices for single family homes have risen to the point where owning is 40% more expensive on a monthly basis compared with renting. In the late 1990’s, the premium for ownership was only 20% compared with renting.

Regardless of affordability, single family homes in a neighborhood are more desirable for young families compared with a multi-family apartment complex. An apartment complex can be a better fit for some people who prefer the lifestyle and amenities that only a rental complex can provide. If your apartment complex has a half million dollar swimming pool, recreation center and fitness room, you’re going to have a hard time replicating that experience in a single family home.

Multi-family apartments are ideal from an investment standpoint. Property management is easily accomplished. Single family homes are designed to be unique, to express the individuality of the owner. Since no two homes are alike in an ideal world, the cost of maintaining single family homes will inherently be higher than apartments that can be standardized. None of the interior finishes are likely to be the same. The flooring will be different, paint colors, room sizes, appliances. So much will be different.

But if you designed a community of single family homes or townhouses for rent, you might be able to marry the best of both worlds. You might deliver the end user experience of a single family home, combined with the management efficiency of the apartment complex.

Not surprisingly, as investors have discovered the benefits of this product. Rental homes are more expensive to rent than apartments. As a result, you tend to attract a higher quality of tenant that can afford a more expensive product. A single family home will rent for several hundred dollars more per month than an apartment. When it comes to quality of rental product, you are also selecting the quality of your tenant. The poorest quality of tenant tends not to rent a more expensive product.

The purpose built rental community has become a much more desirable investment for both investors and lenders.

There are a number of new loan products that are aimed specifically at the single family home rental community. The tenants for these homes are typically young families with stable employment.

Institutional investors are snapping up stabilized portfolios of single family home communities at relatively high prices.

It’s no surprise then that we have started to design more of these communities as part of our own portfolio of assets.

Podcast Technology Accelerates Zoning Process Apr 21, 2021

Show notes

On today’s show we’re going to do a deep dive on a technology tactic that has been very effective for us.

If you are new to a market, you have a hard time developing the relationships and getting a deep local knowledge of what is happening in a market. You have a hard time getting to know the city councillors, the key people in the planning department, and the mayor.

You might be developing your zoning application, but with next to zero knowledge of where various members of city council stand on specific issues.

These meetings are usually recorded video conferences. They’re slow moving formal meetings with lots of procedures. There will be a roll call at the start of each meeting. The first several minutes of each meeting will be a review of the agenda, an introduction of the attendees, and a series of guidelines for how the meeting is to be conducted. These meetings can last anywhere from one hour to eight hours. There is a wealth of information contained in these meetings. Imagine if you had been in attendance at all of the city council meetings over the past year, or if you had been in attendance at all of the planning and zoning meetings over the past year. You would be much better equipped to submit your zoning application if you were armed with the experience of attending all of those meetings. You would know which city councillors are likely to object. You would learn what the effective arguments and counter arguments would be. You would also learn which arguments are likely to fail or be outright ignored.

But unless you take the time and listen to those days of meetings, you would be at a distinct disadvantage to know the issues and opinions of the various committee members.

Let’s say that you’re looking for relief on the height of your building. The zoning might limit your project to 40 feet and you need 45 feet to build your project. How do you know when and where the city has dealt with issues relating to height over the past two years? Do you really want to take the time to listen to two years of city council meetings in order to become an expert on heights?

You could hire a consultant who speaks regularly with people in the planning office and who is a paid lobbyist to influence city council members on behalf of developers on various projects.

These high priced consultants have assembled knowledge based on extensive involvement in the planning process over a multitude of projects.

What if you, or someone in your own team could accelerate their level of knowledge in a fraction of the time? What if you could zero in on any time the topic of height restriction was uttered in a city council meeting. Even the most highly paid consultant could not effectively amass this level of knowledge.

In our business we have married one of the technologies out of the world of podcasting to accelerate our access to the details of all of the city council meetings. We developed an internal system to effectively accelerate the capture of salient information from these hours and hours of meetings.

If you apply transcription technology to a city council meeting instead of a podcast, you can produce a transcript that is fully searchable.

So now you have a word document complete with time stamps. Let’s say that you’re interested in the height restrictions. You can search an entire 3 hour city council meeting for the word height. Changes are good, that if the word height is being used in a city council meeting, it is with reference to the height of a building. You can go back and see any time the word height was uttered in a city council meeting or a planning meeting in the past several years. In a matter of minutes you’re able to zero in and extract the relevant information by searching every single word that was uttered during that time.

If you're interest in learning more about this technology, send me an email at info@victorjm.com

The Technology of Migration Apr 20, 2021

Show notes

In the mid 1800’s the Steam locomotive opened up the Western part of the United States and Canada for that matter. This new technology made migration possible on a large scale. It became possible to move people and materials. Not surprisingly, communities opened up within a very short distance of these railway lines. It was a technology breakthrough that enabled migration.

The year was 1902, American inventor Willis Carrier built what is considered the first modern electrical air conditioning unit. He installed it in a printing plant in Brooklyn to help maintain the printing equipment in better alignment with more consistent temperature and humidity.

The migration of people from the cooler Northern latitudes to the Sunbelt of the US was largely made possible by the invention of the air conditioner. Think about it. Phoenix Arizona would not exist without two technical innovations.

The air conditioner
The redirection of the Colorado River into central Phoenix with the Central Arizona Project.

Las Vegas Nevada would not exist without the air conditioner.

Back in 1900, Miami Made County had a population of under 5,000 people. In fact Miami didn’t become a major city until after the second world war. By the 1960’s, Miami was adding 120 people a day. Without the air conditioner, Miami would not exist in the way that it does today.

When you look at the urbanization trend over the past 30 years, we have seen more and more people move into the highest density cities. These moves have been largely driven by employment.

New York City is one of the best examples.

The question is, what is the next technology innovation that will change the way migration patterns happen? Will it be global internet coverage? Will it be the combination of internet and video conferencing technology like zoom?

For the past several decades, proximity to the office has been the driving factor in choosing where to live. Location of employment has driven housing demand more than any other single factor.

But what if the narrative has changed? What if you can live where you want to live and work where you want to work?

You truly can have it all. Your manager can be sitting in an office in Manhattan and you can live on some acreage overlooking the mountains. That’s possible today, but somewhat unthinkable a few decades ago.

The bigger question is what will happen to migration patterns. How will companies train staff for positions that can be virtual? Will it be important for new hires to start in the physical office environment in order to become indoctrinated in the company’s culture, before being allowed to work remote?

Will the human contact of the traditional office become a competitive advantage? Or will the more agile virtual organizations be more competitive?

Will the higher perceived quality of life that comes from working at home be perceived as an employment benefit? Will the time recovered from commuting to the office be seen as a life improvement? Will people work longer hours when they work from home because there are fewer boundaries between work life and home life?

All of these remain open questions. But these are questions worth examining as you make investment decisions where the outcome is heavily influenced by the answer to these questions.

When The Seller Has No Idea Apr 19, 2021

Show notes

On today’s show we’re talking about how to negotiate with a seller who has no idea what is permitted on their property.

There are numerous examples of properties that exist for historical reasons, but don’t comply with new zoning regulations.

For example, new zoning regulations may have a minimum lot size, or perhaps new setback requirements. As long as you keep the existing structure within the existing envelope, you’re entitled to maintain the existing improvements.

But as soon as you demolish the existing structure and attempt to build something new, then the new rules apply. In that case, you could be destroying significant value and ultimately render a parcel of land useless.

I was speaking with the owner of a property this week and he didn’t know the zoning of his property. His property was below the minimum lot size and the existing house did not meet the minimum setbacks to the back property line, or the side property line. The property has no municipal services and would be too small to have both a water well and a septic system. A septic system requires about a 49 foot spacing between a water well and a septic system. It also requires the septic system be located 10 feet from the property line. Put all of this together and you have constraints that can no longer be met on the existing property.

If his septic system needs to be replaced, the new permit will require compliance with the existing code. But if you don’t have enough land to comply, you have a problem. There is a paradox that cannot be satisfied on the existing property. You will need to somehow expand the property, or find a way to connect to municipal services. The property just became unusable and its value dropped like a stone.

All too often, the existing home owner doesn’t understand these risks. They often don’t even know the zoning attached to their property. After all, why would they? The property has been in their family for generations. Their grandparents lived there. Their parents lived there. They spent summers there as a child.

Nobody ever discussed zoning rules. There would be no reason to. Over the years, the zoning code was updated and the owners would have not even have been notified. Unless there was an act of condemnation, the seller of the property would have no idea what the current zoning restrictions would mean for their own property.

In the old days, homes were built very close to the road. This was for practical reasons. Cars didn’t exist. Snow would have been a problem in the winter months, so a large setback from the road would have been reserved for only the wealthiest of property owners with an estate.

As roads were built to accommodate cars, they were widened to deal with increased traffic levels and the setback to the front door of the house would have shrunk as more and more cars dominated daily life.

These older homes built on stone foundations would never have contemplated what the future would bring.

I’m currently in discussion with the seller of another property. They believe that a significant subdivision can be built on that land. If the zoning can be changed, then that’s true. But the final number of units will be limited by the the access to the major arterial road immediately in from t of the property. The seller can’t be an expert on what will be permitted. It’s not their field of expertise, and they have not attempted to get the kind of zoning density that a developer would want in a parcel of that size.

Nevertheless, the seller and their agent speak with tremendous confidence about what can be built on the property.

The agent aims to convince the buyer that they have the knowledge and that’s all the buyer should need. No need to worry. Zoning changes are done all the time and they’re completely routine, right?

Spencer Gray Apr 18, 2021

Show notes

Spencer Gray hails from Indianapolis, Indiana where he heads up Gray Capital. Through partnerships over the past six years, he now owns a share in over 9,000 apartments. On today's show we are talking about how to scale the organization. To learn more or to connect with Spencer, visit graycapitalllc.com

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