The Real Estate Espresso Podcast

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Joseph Fung Feb 06, 2021

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Today's show is not a real estate show. Our guest is Joseph Fung, founder of a technology startup company. We're talking about an innovative technology company that is training people how to become expert sales people involved in the sale of complex products. All companies require sales. As legendary investor and RichDad advisor Ken McElroy says, "Sales solves all problems".

To learn more, reach out to Joseph at uvaro.com.

AMA - Crypto Currency Feb 05, 2021

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Today’s question comes from Chris in Long Island. He asks,

You’ve talked about many different asset classes on the show, but I haven’t heard you talk about crypto currency? Why haven’t you talked about it, and what are your thoughts on crypto-currency.

Chris this is a great question.

In order to answer the question, we need to go back to the very definition of what is money. I don’t know if this is strictly a dictionary definition, but in my mind in order for something to be money it has to have three characteristics.

It has to be a means of exchange
It has to be a store of value
It has to be easily divisible into different sizes so that you can use it to exchange for a wide spectrum of goods, services and commerce.

Let’s look at a crypto currency like Bitcoin, or Etherium, or any of a host of others and measure them against those three criteria.

As a means of exchange, it’s not great. There are more methods coming into play. But you can’t just go out and buy groceries with a crypto-currency
As a store of value, it definitely fails. The value of crypto currencies have been extremely volatile, both up and down. The value seems to be linked to the number of coins in existence and demand for coins. The notion of value is based on the promise that supply of coins won’t be inflated and debased the way the dollars are being printed.
Most of the coin exchanges like coinbase allow for fractional purchase of coins. So maybe the third is satisfied.

But against the measures of the definition of what money needs to look like, I can’t see how anyone thinks that crypto-currency is money.

A bank has a centralized database where they keep track of how much is owed to you. That centralized database is not 100% perfect, but is pretty trustworthy. I assert that it’s trustworthy because I can virtually guarantee that all the listeners of this show have a certain amount of their liquid cash on deposit at the bank where it is being tracked in a central database.

The argument for crypto currency is that there is no bank that is keeping track of your funds. The database technology that sits underneath the crypto-currency is based on a technology called block-chain. The blockchain is a database that is distributed across thousands if not millions of computers and so there are literally thousands or millions of copies of your transaction being recorded across all those computers. The argument is that if someone attempted to tamper with the records in the database, it would be virtually impossible for them to tamper with all of those copies of your records. The inconsistency would show up instantly and the fraud would be exposed.

A single computer updating a single entry in a database can complete that operation in a few microseconds. But if you have to make the same change and recalculate the signature 1,000 times across 1,000 computers, or 10,000 computers, it’s clearly going to take a lot longer.

So blockchain technology is essentially a slow distributed database.

So crypto has some security features that are interesting and compelling. On the flip side, the inherent security doesn’t come for free. There is a technical problem associated with a distributed database and that is scalability.

Have people experienced huge capital gains in crypto-currency? Clearly the answer is yes. Have people lost money? Absolutely. In my world investing has the notion of value at the foundation. Speculation on the future price is not investing in my world. That’s gambling. I believe there is risk in everything we do. But when it comes to investing I want to take calculated risks, not play in a game of chance.

Mastermind Introduction Feb 04, 2021

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In a mastermind, you will often meet new people who each take a few minutes to introduce themselves. On today's show you're hearing a recording of my introduction to a mastermind group. If you're not part of a mastermind, I strongly urge you to make that investment in time and relationship building.

Adapting To Current Conditions Feb 03, 2021

Show notes

On today’s show we’re talking about the shift in housing supply during the pandemic and what it means for new builders. Housing starts were up 12% for the year according to data just published by the research team at Fannie Mae. Multi-family starts are down 13.6% compared with a year ago. Total housing starts of all types were up 5.8%. Now through the year we had supply chain disruptions which meant that some items were difficult to source. Those hard to find items naturally went up in price.

Lumber is priced as a commodity and lumber futures trade on the commodities markets like many other commodities including copper, pork bellies, wheat, and energy. Softwood lumber is priced per 1,000 board feet. The math is pretty easy to work out. If lumber prices are at $1,000 per 1,000 board feet, you’re basically paying $1 per foot. The simple test is how much would an 8 foot long stud cost you to purchase? You might expect it to cost about $8-10, and that’s exactly what we see.

We’ve seen lumber prices fluctuate wildly throughout the year. Prices dropped to $264 at the end of March, and were up to $367 by the end of May. Once summer hit and we had a succession of hurricanes make landfall all over the country. Lumber prices hit $970 in mid September before dropping into the $500’s for most of the fall. Through Q4, prices rose into the $800’s and have remained around $850-$880 for most of January.

The impact of these high lumber prices, along with all the other supply chain shortages is that overall construction cost has increased about 10-12% in less than a year.

The price increase by itself would have made it difficult to start any new construction. The saving grace has been that the falling inventory has pushed prices up to the point where higher sale prices have made new housing starts viable. If prices hadn’t jumped an average of 11% across the nation for existing home sales, the market conditions would not support new construction. Fortunately for builders, prices do support the higher cost of construction.

But there is also an opportunity. It turns out that steel framing is less expensive than wood. Steel framing has commonly been used in commercial construction. It has the advantage that it doesn’t warp or shrink, or swell with humidity. It’s also very strong in compression when properly installed with drywall.

Some might be tempted to switch materials from wood framing to steel in certain applications. Sadly it’s not that simple. The carpenters who frame out of wood are not necessarily experts on how to frame out of steel. In addition, your architect would need to design the building to have the proper lineup of materials and cross sections.

What you might save in materials, you could easily lose in labor, complexity and rework if things are not done properly.

But if you’re looking to build cost effective housing, this could be an area to explore with your architectural team.

Unless you’ve been able to secure your materials or your subcontractors are willing to reconfirm and guarantee pricing, you might face a situation where a subcontractor walks off the job and refuses to honour their contract. You could sue them, but at the end of the day, you have a project to complete and a law suit won’t get the building finished on time and on budget.

2021 is turning out to be a year of value engineering, where the owner, the architect, and the general contractor will need to get creative about adapting to material shortages, price jumps, and optimizing your negotiations with subcontractors.

Not A Headline Feb 02, 2021

Show notes

On today’s show we’re going to pick up on a story that we covered several months ago. The headlines these days are about Covid-19, it’s impact, and the slow vaccine rollout. The papers are headlining updated economic stimulus plans, the surging price of silver, surging AMC stock prices and the military coup in Myanmar.

Frankly, these are all important, but there’s something far more important to pay attention to, and it’s not making headlines.

I’m talking about the handling of the situation in Hong Kong. Depending on how the world responds to the Hong Kong situation, will likely determine how China acts when it comes to Taiwan. Hong Kong is the dress rehearsal for Taiwan in my opinion.

You might be wondering what all of this has to do with real estate investing. Stay with me and I’ll make the link in just a minute.

One of the things that can dramatically affect local real estate is migration. When people pick up and leave due to political situations, we can see large scale migration.

Two weeks ago the Hong Kong government told UK citizens that they will need to choose between the having British status or Chinese status.

The new policy was in reaction to the British Government’s decision to allow people with BNO status, which is British Nationality Overseas status to apply for a visa and have a path to citizenship where they would eventually get a British passport.

China stated that as of Jan 2021, the BNO status will no longer be recognized.

The British government estimates 5.4 million Hong Kong residents are eligible for the scheme, that's about 72% of its 7.5 million population in Hong Kong.

These include:

2.9 million BNOs
2.3 million dependents of BNOs
187,000 18-23-year-olds with at least one BNO parent

It is difficult to say how many eligible people will actually come to the UK. The latest estimate from the UK government puts the number expected to take up the offer at 300,000.

There are about 80,000 people in Hong Kong who hold US passports, and 300,000 in Hong Kong who hold Canadian passports. The unofficial number suggests that as many as 500,000 Canadians may reside in Hong Kong.

So the question is, how many people may choose to leave Hong Kong in favour of their second passport. It’s hard to believe that things will get better for foreigners living in Hong Kong. It’s not like the climate will get more business friendly, or that individual citizens’ rights and freedoms will improve in the coming years. So the question is, how many will leave and how soon?

So what does this mean for real estate investors?

We could see a significant influx of residents from Hong Kong in the coming months.

It’s most likely that they will move to a coastal city that already has a large Cantonese community. Remember, people in Hong Kong don’t speak Mandarin. They speak Cantonese. This is a different language. The culture is different. We can expect people to favor cities like Vancouver, Toronto, San Francisco, Seattle, and a few others.

If 300,000 Canadians were to land in Toronto, or Vancouver, where would they go? Yes, there is some vacancy, but not enough to absorb 300,000 people.

If 80,000 Americans were to land in San Francisco, Los Angeles or Seattle, where would they go?

I believe there is a window of opportunity for investors that are paying attention, who can clearly identify the needs of Hong Kong residents looking to relocate in North America, to deliver a product ideally suited to the needs of someone coming to the US or Canada in a hurry. Maybe they’ll send the kids across first and then follow later in 6 months when personal and financial affairs are in order.

Book Of The Month - "The Go Giver" by Bob Burg Feb 01, 2021

Show notes

On today’s show we’re talking about a book that has changed numerous lives of friends of mine, and quite frankly I’m embarrassed to say that I waited a long time to read it. I waited even longer to recommend it. But we’re here to correct that this month.

This weekend I had the privilege to spend an hour with the author of this month’s book on a zoom call. The author’s name is Bob Burg and he was coming to us from his home in Jupiter Floria. Bob is the author of 8 books and has sold over 2M copies. Some of his books have been translated into 29 languages. Bob has been named one of the 200 most influential authors in the World by Richtopia.

The book is “The Go Giver; A Little Story About a Powerful Business Idea”

I’ve long been a believer in abundance mentality. If you’re a listener to this show, chances are good that you’ve been certainly exposed to it, if you’re not a full convert to the mindset of abundance.

The opposite of abundance mentality is scarcity mentality. That’s the mindset that says “The pie is only so big. If I’m going to get my fair share, I have to take it from someone else.”

The abundance mindset says that, rather than taking from someone else, focus instead on making the pie bigger.

But the book the Go Giver is much deeper. You are probably thinking that you understand the abundance mindset. But there are many other factors that go into the true giver mentality, rather than focusing on abundance. Bob Burg breaks it down into 5 principles, as if they’re almost laws of nature.

The book is written as a narrative, as a fable with Joe, the super aggressive salesman trying to meet his sales quota for the quarter.

He keeps losing deal after deal. He’s focused on the prize. He’s focused on meeting his sales quota. There’s a week remaining in the quarter and he’s getting desperate.

In the course of the week, our salesman Joe meets a mentor who takes him through a series of five lessons, each with daily homework.

The power of this book is in its simplicity. Bob Burg doesn’t just give you the information. He wraps it in a story. We learn through stories.

We are taken through a narrative that transforms the main character in the story, bit by bit. Each lesson results in a shift. But still pieces of the puzzle are missing and the picture isn’t clear.

You see some businesses are focused on just giving enough value to make the trade a fair trade. If you get a decent cup of coffee for $2, that’s a fair trade. But you’re not going to become a global leader with that. You have to deliver a coffee experience so great, that the customer feels like they’re getting a massive bargain at $2.

But even if you deliver incredible value, it will still be a small business unless you truly aim to serve a lot of people, and serve them really well. That’s why a rock star gets paid so much more than a great musician who plays on Friday night’s in a bar band. The rock star has focused on impacting many more people.

I’m not going to give the entire book away. What I discovered is that those people who are takers show up as plain as can be.

Spending time with the author Bob Burg was very special. It was clear that even though the book has a few simple ideas, it doesn’t mean they’re all easy to implement. Social conditioning can run deep for many. The ideas in this book can challenge core beliefs for some.

The discussion took us much deeper than the book itself. Bob started quoting Benjamin Franklin and other great thinkers that came before. The ideas in the book are really designed to be timeless. Even though this book was first published in 2007, and then later updated in 2015, this book is destined to become a timeless classic.

Martin Saenz Jan 31, 2021

Show notes

Martin Saenz is a specialist in buying distressed notes in the secondary market. These loans can be the source of huge profits when they are modified and restored to performing status. This is another incredible conversation about investing strategy. To learn more, you can connect with Martin at bqfunds.com

Sam Bates Jan 30, 2021

Show notes

Sam Bates is undertaking a value-add multi-family apartment investment project. The usual tactics of adding value through improvements form part of the forced appreciation. But the addition of a captive high speed internet service is bringing an additional high margin revenue stream which adds nearly $1M to the value of the property while being minimally invasive to the operation of the property. This story contains a powerful lesson on how to improve the property with minimal impact.

A Short Lesson on Short Sales Jan 29, 2021

Show notes

Some people think that putting money in the stock market is investing.

But in the past week we’ve seen the power of social networks to mobilize large numbers of people to undertake an otherwise un-natural transaction en mass, all at once.

The nearly dead company GameStop has been making headlines in recent days. A number of people are probably wondering why Gamestop’s stock has been surging. It doesn’t quite make sense. So before I explain what happened to Gamestop, you need to understand short sales in the stock market.

So imagine you think that a company’s stock is going to fall. Pick a company, any company. You might choose Boeing. Boeing is trading around $197 per share. Let’s say that you want to short Boeing, you borrow a share from a broker and sell it immediately at its current price. You then hope that the stock’s price is going to fall so that you can buy it back at a lower price and return the shares you borrowed to your broker. You make money on the difference.

So if Boeing shares fall to $190, then you could buy the stock for less than you sold it and and profit on the difference. You decide to cover your short position by purchasing the stock and $190 and now you’re in a safe position with a profit of $7.

But if instead of the $197, the stock shoots up to $205, you still need to return your borrowed share to the broker, except now it’s going to cost you $8 to buy back the stock at the new higher price. You would be facing a loss of $8. Since the stock could continue to rise indefinitely, the losses for a short seller can continue to increase indefinitely. You have to replace the borrowed share and the more the price rises, the bigger the loss.

For Gamestop, a few weeks ago someone on reddit on the wallstreetbets page noticed that a hedge fund had taken a massive amount of short trades against Gamestop. The one reader convinced everyone on the thread to join forces to buy as much of the Gamestop stock as possible. This pushed the price up in the short term. The short seller was immediately exposed to billions in potential losses. Eventually the losses grew beyond the $13.1 billion that the hedge fund was worth. Eventually the hedge fund was forced to declare bankruptcy. Now we have the reddit thread combing through other hedge fund positions with massive short exposures so they can short squeeze them into bankruptcy as well.

We’re now seeing similar assaults on share of AMC Entertainment which nearly tripled in value on Wednesday.

Now folks, this isn’t investing. This is called gaming the market. But it’s pitting massive distributed liquidity against concentrated liquidity in the brokerage houses.

Today, 90% of the trading volume in the market is based on large computer based trades that are aiming to squeeze out small profits. The initiative for these trades are software programs written by quantitative analysts. These guys and gals are mathematicians who analyze the performance of the markets and they try to develop algorithms that give a brokerage house, a hedge fund, or an investment bank a quantitative edge in the market. So as a simple example, a computer program that looks at the price of Boeing on the London stock exchange might notice that the stock is trading a few pennies higher in London than on New York. The software would then exploit the price difference by purchasing the stock in New York and immediately selling in London and making a few cents profit on the trade with very little risk. You don’t make a lot of money on each trade unless you through huge volumes at it. Throw too much money at the trade and now you risk eating your own lunch and negating the very price difference you were aiming to exploit. There are dozens and dozens of algorithms that have been created to try and outsmart the market. The folks who do this are affectionately called quants.

To the untrained eye, this is strange. Now you know why.

Look Ma, No Bricks Jan 28, 2021

Show notes

On today’s show we’re talking about the work from home trend that the pandemic seems to have amplified. Long before the pandemic, the warning signs were there in many industries. On today’s show we’re going to take a closer look at one company that was formed purely with the assumption of zero bricks and mortar locations for the entire company.

This company was newly formed EXP Realty, now a public company that has nearly 40,000 agents in the company. The company was formed in 2009 and has been slowly quietly building to create a breakout transformation of the industry.

If you consider that each employee in a traditional company would allocate anywhere between 200-300 square feet per employee, the annual cost of office space at $30 per square foot gross is about $6,000 per employee. For the company with 40,000 employees that amounts to a cost saving of 240 million dollars a year.

That’s a real saving of hard cash that can better be put toward creating a more competitive company.

The fact is, almost every real estate broker or agent has a home office, or at times a mobile office. What they need are strong systems. They need to be in the field with their clients.

The incredible part of their story is that they have been able to scale much more quickly than most other companies. The effort to onboard a single employee is much greater when they need to have a physical space, a physical desk.

The company is growing fast. Last year, the company grew from 500M in 2018, to 980M in 2019, and 1.46B in 2020.

Imagine if the company had a bricks and mortar footprint, would they have achieved the growth in 2020 in the middle of a pandemic?

The point of this episode is to highlight a business that is all about real estate, that has zero real estate. Think about it. That’s a pretty strong contradiction in terms for some. It might be ironic for others. But they own no real estate. This is not something that just happens. In order for a company to grow to 40,000 strong requires strong systems. It’s a little like the McDonalds philosophy. When Ray Kroc bought the original McDonalds locations from the McDonalds brothers, he didn’t focus on making a better hamburger. He focused on the systems and processes that would allow the business to scale. The systems would have to be strong enough to allow a Big Mac to taste the same in Tokyo or Tasmania, in Santiago or San Francisco.

That means an emphasis on training and onboarding of new staff, on having systems for routine transactions, and more importantly for having systems for managing exceptions.

After all, why do we need physical offices?

Some would say that physical proximity is needed for training. Well, that’s not strictly true. Some would say that you need to be able to walk down the hall and ask the boss a question when you have a problem. That’s not true either. You need a place to store all your physical files for security. Well, yes you do, but nothing says the file storage has to be centralized. If you have a system of electronic records storage, that data center is going to be internet connected anyway.

Real Estate as a business is hyper local. Being an agent or a broker in a particular area is hyper local. But operating a brokerage is geography independent. You need to localize certain forms to comply with local regulations, but the steps involved in a transaction are the same.

So the question remains, how many other industries can be virtualized? Does a law office need to have a physical office?

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