The Real Estate Espresso Podcast

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Share Price Manipulation Dec 08, 2020

Show notes

On today’s show we’re talking about the dangers of stock market manipulation and why every investor who has exposure to the stock market needs to pay attention .

The performance of the stock market is a phrase that makes no sense. What we’re describing is the aggregate performance of the underlying companies that make up the stock index.

There are a few things that determine company value. First there are the fundamentals. Is the company generating a profit? Is it growing both revenue and profit? Is it gaining market share?

Then there are technical factors that are influenced by market sentiment? These are the headwinds and tailwinds that have more to do with the buyers and sellers of shares than the underlying companies. We’ll come back to that in a minute.

Finally, there is the financial engineering that manipulates the price per share of a company without changing the fundamental value of the business. In fact, sometimes the management can goose the price of a stock artificially for short term gain while harming the long term health of the business. This is the part that is the most troublesome and we’ve seen happen on a large scale in recent years.

A buyback occurs when a company uses some of its cash to repurchase its own shares. Other choices include investing for growth, acquisitions, paying down debt or paying dividends.

Legalized in 1982 by the Reagan administration, buybacks took off after a 1992 tax bill created incentive for more stock compensation. Now stocks and options making up about two-thirds of executive pay.

In the current low-interest-rate environment, many companies have taken on more debt, whose interest cost can be tax-deductible, to buy back shares whose dividends may be more costly.

Imagine if you have a preferred share that has an interest coupon at 7%, and you can borrow funds at say 5%. You can buy back equity which reduces the number of outstanding shares, and reduce your interest expense. That would be an obvious move for any company to undertake.

Where it gets dangerous is when a company retires common shares that do not pay a dividend and increase the company’s interest expense in order to reduce the number of shares outstanding.

Reducing a company’s float of outstanding shares through a buy-back program increases the earnings per share, creating the illusion that the company is performing better than it really is. The increase in earnings per share can drive bonuses for company executives. Imagine for a moment that executive compensation is tied to earnings per share. In some cases the compensation might be a cash payment, or as increasingly the case, stock options. On the surface that seems like a fair and reasonable method.

Let’s create a fictional example. We’re going to use the company from the Road Runner and Wiley Coyote cartoon. Our company is Acme. The company has an enterprise value of $1B with virtually no debt and the stock is trading at $10. The company is earning $1 per share in earnings. The company executives are given a stock option grant at $10. The company had a hiccup in the past year and isn’t growing. It’s revenue is flat, and earnings are flat.

So the executives decide to go borrow $100 million dollars to buy back 10% of the shares of the company. The interest cost has gone up a bit, so they decide to lay off a few employees to reduce expenses. The impact of the layoffs is on projects that would deliver revenue in 3-4 years, so the immediate impact to revenue is zero. It’s merely a cost saving.

With fewer shares in circulation, the earnings per share has increased by 10%. All other things being equal, the shares are now worth $11. The company executives are now sitting on $1 worth of profit on their stock options.

AMA - How Much Do I Charge For A Short Term Rental? Dec 07, 2020

Show notes

Natalia says, “I have a property that is my personal residence that I’m looking to rent out as an entire property on a short-term basis. I also have several condos that I own that would do better as a short-term rental than as a long-term rental. How do I decide on pricing a nightly rate?”

Natalia this is a great question. It’s also a huge question and I’m going to try and condense about an entire day worth of content into about 5 minutes.

Your question is more about marketing and digital marketing in particular.

The whole process starts with understanding who your target client is. Let’s imagine you’re buying chocolate. You could go to the grocery and purchase a giant bag of Hershey’s kisses. You can buy the 4-pound bag for about $23. You could also go out and buy a specialty hand-made box of three unique truffles for about $20. These are vastly different products. They’re targeted at different customers. The difference in price on a per pound basis is more than 20:1.

The same is true for a short-term rental. If your property is a commodity, then you’re going to be positioned in the market as a commodity. You’re going to be one of those Hershey’s kisses in the bottom of the bag, indistinguishable from the next hoping that you’re the one who is going to get picked today.

But if your property has distinguishing features, then you’re set apart from the rest. If your property is a ski-in ski-out property, 300 feet from the base of the gondola that takes you to the top of the mountain, that’s a unique product. There might be 500 short term rentals available at the ski resort. In that case you’re chance of being picked is 1 in 500. But if your product is that unique ski-in ski-out chalet, then your chances of being picked improve to 1 in 3 or 1 in 5. I like those odds a lot better.

If you’re serious about being in the short term rental business, then you want to think about dynamic pricing. This is similar to what the airlines do. It’s no secret that it’s less expensive to fly on Wednesday than on Monday or Friday. Likewise, you may price weekends higher than weekdays.

There are tools that help that process of determining the best pricing. One that I recommend is a company called Airdna. The have over 25 performance metrics for over 80,000 cities worldwide. They examine thinks like market occupancy, number of active listings, average daily rate, revenue per available room, booking lead times and so on. You can also get customized competitive data sets which allows you to get a much more accurate perspective on your specific segment of the market.

Some properties are seasonal with a peak season, a low season and two shoulder seasons. Your pricing strategy is going to vary depending on which season you’re in.

I own a portfolio of short term rentals in a seasonal market. We know that the highest nightly rate is in the 16-20 weeks during the summer. Demand is good during ski season, but a fraction of what it is during the summer, hence the lower nightly rate.

This is where the importance of product positioning comes back into play. I want my properties to have the best positioning in the market. I want the vacancy to go to the junk in the market. I want more than my fair share of the market during those periods of softer demand. Key to that is the reviews. So we will spend extra on a few items of furnishing. We will buy the most comfortable king sized mattress that money can buy. I don’t mind spending extra on that. I want you to get those guest reviews that say “Wow, this was the most comfortable bed ever.” If you have those reviews for your property, then you will get more than your share of the market.

Finally, I want you to make sure that you show up as a superhost in AirBnB. All these little things separate you from the rest of the properties that are just commodities in the market.

Sharon Restrepo Dec 06, 2020

Show notes

Sharon Restrepo is based in West Palm Beach, Florida. On today's show we're talking about market cycles and how to recognize the four phases of the market cycle. You can Sharon at takingthelandinvestors.com.

Chris Miles Dec 05, 2020

Show notes

Chris Miles is based in Salt Lake City Utah. He made the transition from the monolith world of insurance and financial planning to main street investing in hard assets. He's committed to stopping the speculation and leveraging boring proven strategies that work repeatedly and predictably. You can reach Chris at moneyripples.com or listen to the Chis Miles Money Show on your favorite podcast platform.

AMA - How Much Should I Pay, part 2 Dec 04, 2020

Show notes

Danielle asks: "I am considering purchasing a 4 unit apartment building that is approved for higher density to six apartments. How do I know what is a fair price to pay for the property?"

Danielle, this is a great question.

When we buy real estate for a long term hold, or a quick sale we use a very similar approach that is pretty standard in the industry. The method is called “Residual Land Value Analysis “. Click HERE for a copy of the spreadsheet

It’s a fancy term that basically means you need to work backwards from the answer to the question, or work backwards from the value of the finished product to the raw material that you are starting with.

On yesterday’s show we looked at the case of a simple new construction project or a flip. We did a bunch of math to explain how the residual land value analysis works. For those of you that want to follow along with a spreadsheet, there is an example you can link to in the show notes for this episode. Just go to the show notes, click on the link and you’ll get a copy of the example. The same spreadsheet that we used for yesterday’s show has a second sheet embedded in it with the buy and hold analysis.

On today’s show we are going to look at the case of a 4 unit apartment building in a hot area. The first thing you need to assess is the as is value. That’s based on the current rent. For your specific property, the rents are quite low at about $1,050 a month. The taxes are high and the expenses will probably run near 50% based on a building of that age. If we valued the property aggressively at a 5% cap rate which would be high for that quality of asset, you would find that the property is worth no more than $500,000. That is a long way from their asking price.

So now we are going to look at the residual land value analysis assuming you redevelop the property into a six unit apartment.

The property you found is in a great area that is in high demand. Rents for new product in the area are running at about $2.30 per square foot. We are going to build 4 apartments at 900 SF each with an additional overhead of 20% for the common area. We only charge rent on the rentable area of 3,600 square feet. Gross rent will be $100,000.

I’m going to cut a few corners here in the rental analysis like accounting for vacancy. The point is not how to model a rental, but the residual land value analysis.

The expense ratio is going to be much lower than the previous case because the rents are higher and you have a new building. We will assume a 35% expense ratio. We will use the same 5% cap rate as before. Once built, the building should be worth 1.4M

Your business is going run as a healthy business and I recommend that you set the profit margin for your business somewhere between 25-30%. I would start at 30% and as you get more experienced with strong and predictable systems you can lower your margin requirement.

Except in this case the notion of margin is different. We’re not selling the property. Instead we are going to refinance. We want to target a refinance at 70% loan to value so that you can recover 100% of the initial investment in the refinance.

If we take 70% of the value, then our maximum investment is $980k. Our loan closing cost is going to be about 3% of the loan amount or $35,000. We are now down to 935,000.

We are facing a year of holding cost, so we can budget $60,000 for that. We are now at 835k. Just like the case yesterday, we need design engineering and permit for $30k.

We can build a good quality B+ product these days for about $126 per square foot in many markets. We subtract the hard construction, foundation, and site servicing costs and that leaves a residual land value of $331,400.

This exact same calculation that applies to a flip or a new construction project for sale .

Go to the show notes with this episode to download the spreadsheet example.

AMA - What Should I Pay For The Property? Dec 03, 2020

Show notes

Today is another AMA episode - Ask Me Anything

Danielle asks: "I am considering purchasing a 4 unit apartment building that is approved for higher density to six apartments. How do I know what is a fair price to pay for the property?"

So let’s construct a simple example of how to conduct residual land value analysis. For those of you that want to follow along with a spreadsheet, there is an example you can link to in the show notes for this episode. Just go to the show notes, click on the link and you’ll get a copy of the example.

We are going to run through the example twice. On today’s show we are going to examine the simpler case of a sale of the finished product, and on tomorrow’s show we look at the second case which has a couple of additional calculations when you are doing a long term hold project.

Imagine you found a property that is in a great area that is in high demand. You know that houses in the area are selling for $1,000,000 for a 2,000 SF home. How do you know what you can offer for the property in order to have a profitable project?

Let’s say that you have completed the comp analysis and you have a high degree of confidence in your ability to sell a quality product at that $1,000,000 price tag.

So now you know the sale price is 1,000,000. If your margin is 30%, then your total investment should be no more than $700,000. That’s going to get you a profit of $300,000.

You need to subtract your transaction costs associated with selling the property like the realtor commission, the land transfer tax, the legal fees and so on. Let’s put all of that together and estimate it at 8% of your sale cost or $80,000. We are now down to $620,000. You expect to hold the property for a year and you are going to be paying interest on that money, as well as paying for property taxes and insurance. Let’s estimate that at $60,000. Now we’re down $560,000. You will need to pay an architect and engineers for the plans and permits. Let’s estimate that at $30,000. We’re down to $530,000.

We said the house is going to be 2,000 square feet plus a foundation and a garage. Our hard construction cost might be $150 per square foot for a product with somewhat better finishes and the foundation may cost an additional $50,000 to dig and pour. When we add all that up we are looking at $350,000 for the construction. There is additional site work to bring utilities from the edge of the property line to the foundation. We estimate that at $20,000. So now our total construction cost is at $370,000. We subtract $370 from our earlier subtotal of $530,000 and we get $160,000.

So the maximum price we would be willing to pay for the land in that instance is $160,000.

This exact same calculation applies to a flip. Your starting point might be a older home that needs a major renovation instead of a brand new construction. But the analysis is exactly the same.

On tomorrow’s show we are going to be going through a similar analysis for the case of a property that is a long term hold instead of a quick sale.

Diplomatic Immunity Dec 02, 2020

Show notes

On today’s show we’re talking about whether diplomats from a foreign country are immune from complying with landlord tenant rules.

When a foreign diplomat approaches your property manager seeking to rent a house or apartment from you, several thoughts might cross your mind: What do I do if this person defaults on the lease? Will I ever be able to get them out of the property? Do I have to rent to them? What should I do?

If you refuse to rent to them because they’re a diplomat, then are you contravening laws against discrimination due to profession? After all, being a diplomat is a valid profession.

When faced with this situation, you have three options available:

Enter into a lease with the individual
Enter into a lease with the embassy or diplomatic mission directly
Don't rent to them at all.

Each option has different benefits and drawbacks, and you should carefully weigh all factors before making a decision.

You might be thinking I don’t live in a capital city therefore I don’t have to worry about this. But remember, the laws around diplomatic immunity don’t just apply to a employees of an embassy. There are diplomatic missions all over the country. Major cities contain consulates in order to provide consular services for foreign nationals all over the world. Embassies and consulates can be great tenants. They are generally willing for high quality properties in great locations and are willing to pay top rental rates.

In a case back in 2018, an Ottawa based landlord upgraded the security for a tenant who was an employee of the US embassy in Ottawa to include bomb-proof windows and double bolt locks on the doors.

The tenant was repeatedly causing a disturbance for other occupants in the building. The tenant stayed past the agreed date to vacate the unit, and then skipped out without returning keys and still owed two months rent. Attempts to collect through the standard means were met with a letter from the tenants lawyer claiming diplomatic immunity.

About a month after receiving this response and the threat of a counter-suit, the matter was taken up in Ontario Superior Court. The Judge in the case sided with the landlord and said that diplomatic immunity didn’t apply when it came to rent. The court ultimately issued an order to garnish wages from the employee of the embassy.

Today’s there’s a new story is about a home located in Ottawa Canada. This time the roles are reversed. The property is owned by Saudi Arabia’s top diplomat in Canada. The tenant in question is An Ottawa military. They allege that their former landlord — Saudi Arabia’s top diplomat — acted in bad faith when he gave them a notice of eviction, claiming he intended to move into the home with his own family. Under Ontario’s landlord tenant laws, owner occupancy is one of the few legitimate reasons for eviction under the law.

The tenant was surprised to see the property listed for rent a few weeks later for $500 more per month. When confronted, the landlord offered for the tenant to remain in the property for an extra $500 per month, clearly in violation of the law around both evictions and rental increases.

The tenant filed a suit in the landlord tenant tribunal seeking damages of one year worth of rent. So the question is whether the landlord will claim diplomatic immunity. The question is whether diplomatic immunity applies to cases involving real estate law and in particular landlord tenant laws.

If you’re going to be doing business with a foreign diplomat, you want to get legal advice from someone who is knowledgeable in the field. The considerations are a little different from your average tenant. The possibility of claiming diplomatic immunity significantly weakens your recourse with any contract that is signed.

Book Of The Month - To Do List Formula by Damon Zahariades Dec 01, 2020

Show notes

Our Book of the month is “To Do List Formula: A Stress Free Guide To Creating To-Do Lists That Work “ by Damon Zahariades. This is one of 11 books by the author. All of his books are centred around the topic of personal productivity, a topic that he clearly has studied deeply.

We’ve all experienced the frustration that comes from having that 15 minute task that ultimately took 2 weeks to complete.

If you are like many people, you have probably tried many different management systems for organizing your daily life. There are so many and quite frankly almost all of them have pitfalls and break down in some way.

Our book this month takes a deep look at 10 of these systems and provides insight as to why a particular approach doesn’t work in a sustainable way.

It starts with the simplest to-do lists and examines the more capable approaches to the more sophisticated systems like “Getting Things Done” by David Allen.

Todo lists suffer from a basic problem. They are often mixing tasks of differing sizes, differing importance, and rarely are they scheduled on the calendar in the way a meeting or a dental appointment would appear on the calendar.

If you’ve been listening to this show for a while you will remember that the book “Getting Things Done” by David Allen was the book of the month back in...

Todo lists either capture too little, or they create overwhelm. There doesn’t seem to be a happy middle ground.

The problem with many of the to-do systems out there is that they don’t help you establish a meaningful context. Years ago, Stephen Covey built a todo system around the concept of first things first. That’s based on the idea that items can be categorized in terms of both urgency and importance. That defines a 2x2 matrix of items that are urgent and important, important but not urgent, urgent but not important, and neither urgent nor important. While maybe academically useful, there is no connection to projects,

Effective Task management requires gaining clarity between what is a project, a wish, a trivial task, an outcome and a task.

Sometimes I see resolutions on a todo list. Resolutions are different than todo items since they usually involve a change in habit versus a normal todo item.

Outcomes that have multiple steps are not tasks, but projects and only tasks should make it on your daily todo list. Projects should have a project plan and a todo list is a poor substitute for a project plan.

I’ve personally experienced the many pitfalls that various todo list management systems have intrinsic to their design. They have left me feeling like I can’t keep up.

The book doesn’t prescribe a single specific one size fits all solution. Rather, it takes you through the thinking process that enables you to gain clarity on how to define a task for your todo list. If you have multiple projects that are competing for your attention on a daily basis, you will inherently experience conflicting priorities.

Many todo lists capture trivial tasks lasting 2 minutes in duration. The satisfaction of crossing something off the list creates a false sense of accomplishment when that big important task gets procrastinated.

Standard todo lists don’t distinguish between items that require input from others compared with items that can be completed in isolation. David Allen proposes a separate waiting-for list. But this additional list adds another layer of task management. Systems that are overly complex ultimately don’t get used because they are too cumbersome.

If you have a well-oiled system in place, your lists will help you to get important work done faster and with more efficiency. If your system is faulty, your lists can actually hurt your workflow, sabotage your time management, and demolish your productivity.

A Little Forethought Nov 30, 2020

Show notes

On today’s show we’re talking about Radon, but there are a number of examples of things that that cost far less to build into the design of a new project when compared with adding them after the fact.

Radon is a colorless odorless radioactive gas that exists in the ground, almost everywhere. It poses a health risk to humans because in today’s highly insulated homes, you can get a buildup or radon gas inside the home over time.

Long-term exposure to radon is the 2nd leading cause of lung cancer after smoking and the leading cause of lung cancer for people who have never smoked. If you’ve heard of someone getting lung cancer, who never smoked in their life. You might be wondering how it happened. It could be that Radon is the culprit.

As radon breaks down it forms radioactive particles that can get lodged into your lung tissue as you breathe. The radon particles then release energy that can damage your lung cells. When lung cells are damaged, they have the potential to result in cancer. Not everyone exposed to radon will develop lung cancer, and the time between exposure and the onset of the disease can take many years.

Radon occurs naturally. It forms when uranium, thorium, or radium, (radioactive metals) that are present in the earth breaks down in rocks, soil and groundwater. People can be exposed to radon primarily from breathing radon in air that comes through cracks and gaps in buildings and homes. Because radon comes naturally from the earth, people are always exposed to it.

The CDC published a paper in January of this year in which they note that Radon is so pervasive, the CDC recommends that all houses get tested for it. That’s right, they recommend that every single house in the nation gets tested.

Radon gets into the indoor air primarily through pores and cracks in the foundation under homes and other buildings. Usually, the air pressure in homes and buildings is lower than the pressure outside in the soil around or underneath the foundation. The pressure difference will create suction. Radon will come into the house through cracks in the foundation due to that suction. There are numerous paths.

The most common and effective method for reducing the risk of Radon poisoning is the installation of an active soil depressurization system.

This method involves installing a pipe through the foundation floor slab and attaching a fan that runs continuously to draw the radon gas from below the home and release it into the outdoors where it is quickly diluted. This system also reverses the air pressure difference between the house and soil, reducing the amount of radon that is drawn into the home through the foundation. One, or sometimes multiple, suction points are inserted through the floor slab into the crushed rock or soil underneath to effectively reduce the radon level in the home.

I recently saw a quote for the retrofit of such a system in a single family home for $4,600.

We’re talking about the installation of a PVC pipe through the concrete slab of the foundation with an active blower type fan that runs continuously. The fan costs about $250 to buy and has a 5 year warranty. We’re talking about 16 feet of PVC pipe which costs about $1 per foot. The installation of the entire system during the time of construction is almost zero. A vapor barrier across the crushed stone is also inexpensive and costs no more than a hundred dollars for an entire foundation slab.

If a property fails a Radon test, the rules in most real estate boards say that the realtor must disclose the result to a prospective buyer. The impact of a radon problem on resale value and marketability of the property should be clear.

The simple addition of these inexpensive remediations before you even know you have a problem can be a cheap insurance policy for maintaining the future value of the property.

Lisa Haisha Nov 29, 2020

Show notes

Lisa Haisha is an author, actor, model, real estate investor, producer, director, angel investor, philanthropist, therapist, coach. It's rare to find someone who can effectively operate in so many different domains. Today's show is not real estate focused, but rather spending time to understand Lisa's journey and how opportunities opened up for her. Her approach is so unconventional that there are some powerful lessons on how to live. You can reach Lisa on Twitter at @LisaHaisha.

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