The Real Estate Espresso Podcast

Latest Episodes:

How To Be A Great Podcast Guest Mar 28, 2021

Show notes

Today's show is an excerpt of a talk I gave at a podcasting workshop earlier this week. We're talking about how to provide an effective pitch to a show host or show producer and what makes a good guest.

Special Guest, George Ross Mar 27, 2021

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On today's show George Ross and I are discussing how to handle inflation of construction material prices.

Senior Housing - The Year In Retrospect Mar 26, 2021

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On today’s show we’re taking a retrospective look at what’s happened in the world of senior housing in the past year.

Unlike other multifamily asset classes, senior housing follows completely different demographic and adoption patterns. That is certainly born out in the data over the past year. Rental properties have seen very little change in vacancy during the pandemic. Sales and refinance activity of rental properties have been brisk.

According to data from NIC, seniors housing occupancy fell to another record low in fourth quarter 2020, though the rate of decline eased from earlier in the year: Occupancy declined 7.0% in 2020 to 80.7%. Underlying segment trends were similar: Majority Assisted Living (AL) declined 7.7% to 77.7% and Majority Independent Living (IL) declined 6.3% to 83.5%.

Nursing care occupancy averaged 75.3 percent in the fourth quarter. Inventory growth also slowed to just 1,626 units added in NIC’s top 31 metropolitan markets, the slowest pace since the third quarter of 2013. Personally, I’m glad to see that new supply is slowing down. In my opinion, the majority of primary markets are oversupplied. The opportunity exists in secondary and tertiary markets. That means paying close attention to the hyperlocal market conditions. We’re talking about the demand side of the equation, and the income demographics to support the senior housing economic model.

Of course averages don’t tell the full story. Results varied widely among metropolitan regions, according to NIC MAP, which found that the West Coast cities of San Jose, Calif., San Francisco and Seattle reported the highest occupancy rates at 88.5 percent, 86.8 percent and 84.8 percent, respectively. Houston, Cleveland and Miami saw the lowest occupancies at 73.5 percent, 76.6 percent and 76.7 percent.

We have an 80 bed assisted living facility scheduled to open in the next couple of months and we should be in a position to start taking reservations for residents in the coming weeks. My partner in that project also operates a number of facilities in the Dallas market. In that portfolio, there is a 1.6% vacancy rate as compared with a nation wide market average of nearly 22% vacancy.

The obvious question is what is being done differently in these facilities that is resulting in such a dramatically different vacancy rate. I believe it comes down to a few key differences.

These homes are built on the residential care model. These homes are smaller facilities with 12 to 16 residents per home. That contrasts with the big box model of hundreds of beds in a single building
We have not had any Covid-19 outbreaks in any of the facilities. We had a single staff member test positive for Covid-19 and they were immediately isolated from the rest of the staff and residents and fortunately we had no propagation of the disease into the homes.

This emphasizes the importance of having a highly differentiated product in the market. When we perform the intake interview for most new residents, they’re not coming from their own home. They are typically coming from an existing big box care facility and they hated it.

It is clear that there will be opportunities to acquire distressed assets in the coming months. Some have already appeared on the market. But success in the market starts with understanding the operating model for success, not just the averages.

Will Elon Change Real Estate Values? Mar 25, 2021

Show notes

On today’s show we’re talking about how Elon Musk could change the dynamics of real estate for ever.

Now you’re probably thinking that is a bold statement. You might be thinking that I’m talking about electric cars. But I’m not.

You see the value of real estate is determined by location, location, location. Location matters for several reasons.

People want to be close to certain amenities. They don’t want to have to travel too far to get their groceries, eat a nice dinner in a restaurant, or commute to work.

Many people view their house is a sanctuary, a place to get away from the density and hustle of the big city.

But rural properties suffer from a number of problems. Unless the city has brought the infrastructure to your property, the cost of building and maintaining your own infrastructure is less appealing than using city services.

We’re accustomed to having seven utilities at our property. We expect electricity, water, sewer, natural gas, TV, phone and internet. If even one of those are missing, the property is less desirable. The cost to bring those services to your property can be prohibitive.

Well a little over a year ago, SpaceX launched its first satellites for its Starlink service of low earth orbit satellites.

This mesh of satellites will enable global rural communications. Eventually, SpaceX hopes to launch 42,000 satellites to service rural internet in virtually every corner of the globe including the high arctic.

Today’s satellite internet service uses geostationary satellites. But in order to match the earth’s rotation, the satellites must be 22,236 miles from the earth’s surface. Even at the speed of light, it takes about 1/9 of a second to reach the satellite from earth. Sending a round trip message to a satellite, another destination on earth and back takes about half a second. That’s a long delay in the world of computing. That’s just the travel time. Computers need time on each end of the link to process information. So satellite internet traditionally has been very slow.

The Starlink service has already over 1,000 satellites in service. Each launch of the falcon 9 rocket carries another 60 satellites. Friends of mine are already participating in the limited beta trial of the Starlink service. The downlink speeds of 70-80 Mbps are pretty respectable. Uplink speeds of 20 mbps are also quite acceptable. The service today is prone to short term dropouts. Uptime statistics are reportedly between 98.5% and 99%. These brief outages are the result of gaps in coverage. As more satellites are launched, these brief periods of downtime should disappear.

If the launch schedule is maintained, there should be 12,000 satellites circling the earth at a distance of 340 miles by 2024.

The price for a receiver is $450 USD and the service costs $99 a month. I just purchased a rural property for my wife and I and the Starlink website indicates that I should be eligible to get a Starlink receiver later this year.

If I can get respectable internet service for under $500 in up front investment and $99 a month, pretty much anywhere, then the choice of property location opens up dramatically.

London Calling Mar 24, 2021

Show notes

London has been paying the price for Brexit for nearly five years as the uncertainty of the outcome had businesses leaving the UK for a headquarters on the continent. Many companies chose the UK because it is English speaking and has a stable legal and monetary system, while giving those companies full access to the European market under the single pan European economic zone.

But then those same businesses faced the prospect of losing access to the vibrant European market by virtue of having located in the UK, many businesses relocated to Amsterdam, Copenhagen, Belgium, and Germany. Real Estate prices in London predictably fell hard over the past five years.

Here we are in 2021. Real Estate prices are showing a surprising rebound. Is this the same artifact that we have seen during the pandemic where supply of homes for sale diminished significantly?

Throughout 2018, 2019 and 2020 we’ve seen one business after another relocate from the UK to other parts of Europe. Some of them relocated to Ireland which remained as part of the European Union. The UK is now divided with one foot inside the European Union and one foot outside.

Needless to say, there has been a flight of capital from England to other parts of the UK and to continental Europe.

For future for real estate in London looked bleak. Vacancies are up, and commercial vacancies have hit troublesome levels.

But then came China to the rescue.

You’re thinking wait, what? What does China have to do with England? How can China help UK real estate?

Since the new security law was enacted in Hong Kong in 2020, the central Chinese government has taken steps to eliminate dissent. Freedoms in Hong Kong that were taken for granted under British rule are disappearing. The new security law, under which at least 100 people have already been arrested, makes it easier to punish demonstrators and reduces Hong Kong’s autonomy. This month, 47 activists were charged with subversion under the legislation, after a mass arrest in early January.

Earlier this year, the Hong Kong government told UK citizens that they will need to choose between the having British status or Chinese status.

On March 11, the Chinese central government put another nail in the coffin of freedoms in Hong Kong.

But one thing is clear, people from Hong Kong have started arriving in London. They speak the Queen’s English and they are bringing investment dollars with them.

There has been a surge in interest in London real estate from Hong Kong over the past year.

According to Astons, Hong Kong residents represented the second-largest foreign buyer group in prime central London in the first three quarters of 2020. They accounted for 9.2% of foreign property purchases and spent an estimated £305.5 million across 243 transactions—or roughly £1.19 million (US$1.67 million) per property.

So far in the second half of 2020, property prices in London edged up about 17,000 pounds. That’s not a huge increase, but its a reversal of the previous trend over the past four years.

Pay close attention to geopolitical migration.

Our Shrinking Dollar Mar 23, 2021

Show notes

On today’s show we’re trying to make sense out of our financial markets.

You would think that the Federal Reserve, the central bank for the world’s reserve currency is influential in the world’s monetary system. So therefore the chair of the Federal Reserve would hold the single most influential banking position in the world. You would also expect the person occupying that chair to demonstrate a modest amount of fiscal responsibility.

It used to be the case that printing of money was something that was spoken of in hushed tones. It was a bit like cheating at the black jack table. Professional card players didn’t speak about it, but everyone knew it was happening to some degree.

But now in 2021, there is no attempt to hide it. The US Federal Government brings in 1.7T in personal income taxes per year. That’s about half of the total revenues it brings in each year.

But in 2020, the Federal Reserve printed about the same amount of money that the US government collected in taxes. Nearly 1/5 of the dollars in existence since the beginning of the US as a nation were printed in 2020.

Now the latest comments from the Federal Reserve Chairman seem to focus less on any measure of inflation, but on the “anchoring of inflation expectations”.

Anchoring is a concept that applies to psychology. If you believe it’s warm out, then it’s warm out. If the weatherman says the temperature is 10 degrees today, then it’s 10 degrees. The temperature has been measured and reported, irrespective of the weatherman’s opinion on the temperature. But if the weatherman says, it’s a beautiful warm day today, and the temperatures will be a nice balmy 10 degrees by mid afternoon, he is said to be anchoring an expectation.

The Fed chairman in his remarks Monday, prepared for a presentation to the House Finance Committee today, said that a short term jump in prices would not be enough to trigger a panic about inflation.

He said that as the economy emerges from the pandemic, there will be all kinds of increases in demand, and supply chain constraints, that will trigger price fluctuations. These price increases don’t concern him. He’s focused on the long term anchoring of inflation expectations at the 2% average. They intend to keep interest rates low until the economy reaches full employment and interest rates exceed the average 2% anchored expectation.

The countries with excess US dollars are starting to get worried that the US is printing too much money and therefore the value of the dollars they’re holding is declining. The international market is clearly attaching a risk premium to the US dollar. But the US continues to behave as though it can do what it wants, when it wants as if it sets the rules alone. If the Fed says interest rates are low, then rates are low, irrespective of what international investors are saying.

Other countries have tried this approach and failed. I’m thinking of modern day Argentina where interest rates are 38%. Back in 2012, their interest rate was a fairly respectable 9%. They boldly started printing their way out of their economic malaise. The memory of hyperinflation in the early 1990’s was a distant memory.

But then why would other countries be selling their US Treasury bills and using the proceeds to buy gold? Russia sold almost all its US Treasuries and bought gold instead. China has been on a gold buying binge over the past 20 years.

When I hear the word “anchoring” in the same sentence as inflation, I hear that the measurement is being replaced with a narrative, in order to direct attention away from the facts.

How To Protect Against Construction Inflation Mar 22, 2021

Show notes

On today’s show we’re talking about construction budgets and how to make sure you’re insulated from construction price increases during the early phases of a project.

When you’re investing in new construction, you need to lock in expectations. You are setting expectations with your lender who is going to take a few months to underwrite the project and approve the loan. You’re dealing with investors and you’re setting expectations on the total equity investment and the rates of return.

Then along comes a year like 2020, or 2021 and construction prices are volatile. How do you set realistic expectations with your lender on the total investment? How do you set expectations with your investors when the ground is shifting beneath your feet?

This raises the question about whether we’re in an inflationary environment or not. Are the price fluctuations an artifact of short term supply constraints? It’s been clear that lumber prices have swung wildly over the past 12 months. In March of 2020, lumber was priced at $264 per 1,000 board feet. By September, the price was $985 per 1,000 board feet and by November had fallen to about half that price. Today we’re back up around $1,000 per 1,000 board feet.

Are these prices here to stay? Over the past 20 years, prices have fluctuated up and down. Energy prices are up compared with this time last year. Oil is now up to about $67 per barrel. That’s more than double the price at this time last year. We even had a short term supply glut when prices ran negative as some futures contracts expired with a shortage of midstream storage capacity.

Inflation as measured by the consumer price index is an average over a basket of goods.

If prices for materials go up, will rents go up correspondingly? Will salaries go up correspondingly or not? Which of the metrics be negatively impacted?

Modeling the future of a project that is a year away from construction becomes an exercise in Crystal ball gazing. How do you buffer your project for construction price increases? Do you assume that rents will go up or not?

So the question becomes, how do you plan your projects to be resilient in the face of inflation, and the beneficiary in the event of longer term inflation?

We’ve spent a lot of hours modelling these scenarios in our business as we put together various pro-forma estimates for our projects.

There are two questions that you need to answer.

What would be the impact on the IRR on a 5% increase in cost of the project? Is it still a viable project? Are your profit margins still in an acceptable range? Will your debt coverage still meet the metrics with a 5% increase in cost?
What happens to the cash position within the project if you’re faced with a 10% increase in hard construction, or a 5% increase in overall project cost? Do you get backed into a corner and risk running out of cash during construction?

It’s the second scenario, running out of cash that is the most dangerous to a project. You have to make sure you don’t run out of cash. That means using your leverage responsibly. It means increasing your loan reserves to protect the project. It means bringing 5% more equity to the table. If you bring 5% more equity to the table, you could theoretically borrow 5% more money if you needed to. That doesn’t mean you have to increase the cost of the project by 5% in your pro-forma. You still have your original plan based on a prudent forecast of construction costs. But if you had to ask the bank for additional funds, you have the necessary equity already raised as part of your capital raise to handle the larger loan request.

In an inflationary environment, the road can be bumpy. It will likely work out in the end and leverage will multiply your returns. But you need to design in a buffer to protect yourself from the downside risk.

Dr. Trevor Blattner Mar 21, 2021

Show notes

Dr. Trevor Blattner is an endodontist (specialist in root canals) and real estate investor. On today's show we're talking about his new book "Redefining the Top 1%".

Everyone's journey into real estate investing and development is unique. To learn more reach out to Trevor at

DrTrevorBlattner.com

You can pre-order his book and take advantage of a bunch of pre-release goodies including the workbook and the audio book.

John Lee Dumas Mar 20, 2021

Show notes

John Lee Dumas is the host of the wildly popular Entrepreneurs on Fire podcast. After more than 3,000 interviews with the world's leading entrepreneurs, he has distilled down a decade of learning into a new book that represents the 17 key steps to have a successful business and a successful life.

The book is called "The Common Path To Uncommon Success" by John Lee Dumas. The book launches on March 23, 2021. Go to uncommonsuccessbook.com to pre-order your copy. John includes a number of free additional resources for those who pre-order the book.

I'm an avid listener as well to his daily show Entrepreneurs on Fire which can be found on all the major podcast platforms. It was Entrepreneurs on Fire which was my inspiration and proof point that a daily show was both possible and realistic. Now nearly three years later, The Real Estate Espresso Podcast is still going strong as a daily show.

Reflection On A Tough Day Mar 19, 2021

Show notes

On today's show, this is a personal reflection on a day that seemed filled with setbacks.

It’s easy to get discouraged when setbacks occur. But as I took inventory of my own emotional state at the end of the day. Surprisingly, I was not upset. I came to the conclusion that what happened had nothing to do with me. Those setbacks in a project don’t reflect on me personally. I clearly wasn’t happy about the situations. But I wasn’t upset.

I found that my energy and focus remained consistent throughout the day. Each setback was met with immediate acceptance of the reality. The decisions that resulted from each of those setbacks were obvious. There was not angst, no worry about the future. Just simple logical decision making.

I have to tell you, this was not always the case. There was a time when I was younger that I would have grieved during a setback. I would have experienced a sense of loss. But today, I don’t

As I spoke with members of my team, there was a real recognition that the journey we are on is truly the best part of the experience. Setbacks are part of the process. We’re truly having an amazing time, even when the ball takes a bounce that is not the way we wanted.

We also have dozens of things that have happened the way we would want them to. It’s easy to focus on the negative. Those items are glaring. I’m closing out the day with an immense sense of gratitude for the commitment of our team, and for the support that we have received along the way.

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