The Real Estate Espresso Podcast

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Christian Szpilfogel Nov 28, 2020

Show notes

On today's show our guest Christian Szpilfogel is talking about how some of the newest innovations in automation can make the life of a property owner so much easier. We're talking about smart connected devices like thermostats, cameras, water meters, and a large variety of alarms. You can connect with Christian at christian@aliferous.ca.

Layers Upon Layers Nov 27, 2020

Show notes

On today’s show we’re talking about what happens when there are multiple levels of government involved in the purchase of a property. It’s common these days to find properties that are outside the boundary of a municipality. In that case, the rules are set by the county in which the property resides.

But there are so many cases where multiple levels of governing bodies are involved and it’s incredibly easy to make assumptions about whose rules you need to meet. Let me give you a few examples because I want you to be sensitized to the web of complexity the exists in reality.

Imagine you had a property that was legally in the county, but a city street needed to access the property was located in the city. The zoning and construction in that case would be approved by county as you would expect. But there could be an extra layer of city approval required since the property would rely upon a city service in order to access the property. The city may require you to conduct a traffic study in order to approve the extra traffic that would be in the future be loading the city owned street. But the city may overload its traffic approval by imposing additional requirements that have nothing to do with traffic whatsoever.

This may seem unfair at first. After all, the city has no jurisdiction over the property. But cities have a tendency to grow. When that happens, they want lands that are annexed into the city to follow city guidelines. So often these rules are imposed by contemplating the future possibility of annexation by the city.

I’ve seen cases where the property in the county may require you to drill a well and septic. City services for water and sewer may be close by. In order to use those services, you might be required to meet the city’s zoning rules for a property that is not in the city. These examples of government over-reach exist all over the place.

Earlier this week I had a conversation with the Mayor of a town. He acknowledged that the property was in the county. But the services were provided by the city, and the road is owned by the state. In order to gain access to the services, the property would need to be annexed into the city, and the state would need to approve access to the road. So if you wanted to put in an extra driveway, approval from a third level of government would be required.

We had another conversation with the planning department of a city in Texas. They acknowledged that the property was in the county. Subdividing the property would fall within the approvals of the county. Zoning would be approved by the county.

But the property falls within the extraterritorial jurisdiction of the city. That’s an important term that you need to become familiar with. Extraterritorial jurisdictions are the legal ability of a government to exercise authority beyond its normal boundaries. Any authority can claim ETJ over any external territory they wish.

For this particular 9 acre property in question, the county would happily approve the subdivision of the land into two parcels. The back parcel would gain access to the road with the granting of an access easement, a 40 foot wide strip of land for a nice wide driveway. So far so good. Everything seemed to check all the boxes.

But then the city planner notified us that the property fell under site plan control of the extra-territorial jurisdiction. In order to build on the property, it would require a minimum of 130 feet of frontage on the road. Anything less and the building permit would not be approved.

As you think about that, pay very close attention to all the different government and regulatory bodies that could control what you build on your property.

Gratitude and Growth Nov 26, 2020

Show notes

Happy Thanksgiving to our US listeners. Canada has its Thanksgiving about 6 weeks earlier. That’s because our growing season is shorter than the US with our more northern climate.

The concept of Thanksgiving exists in most cultures around the world.

The Harvest Festival of Thanksgiving does not have an official date in the United Kingdom; however, it is traditionally held on or near the Sunday of the harvest moon that occurs closest to the autumnal equinox.

Japanese Thanksgiving is called Kinrou Kansha no Hi and this year it fell on November 23 earlier this week.

Traditionally, the concept of thanksgiving is rooted in thanking for the bountiful harvest.

Some people are grumbling that they can’t get together with family during this time due to the pandemic. Some are grumbling that they can’t travel. If that’s your experience, it’s because you have an expectation that differs from the current reality.

I am present to that which I’m enormously thankful for. I take the time each day to pause and reflect on what I’m grateful for.

I’m grateful for my health, for my family. I’m grateful for waking up next to my loving wife every morning. She is a source of love, support, inspiration, sage advice, and the occasional poke when I’ve got it wrong.

I’m grateful for the opportunity to contribute to this world in a meaningful and positive way. I’m grateful for the journey that this life has given me so far. Has it been perfect? No.

I’m grateful for the support of my team members who are genuinely working to pick up the slack for the benefit of moving the projects forward. I’m grateful for their skill when we’re working with outside clients as well. I’m grateful for our investors who have put their trust in us. We’re working tirelessly to protect their investments.

I’m grateful to you the listener for dedicating a few minutes so we can spend time together every day.

I’m grateful to those of you who have reached out to me for help with your projects. I’m grateful for the opportunity to contribute. In several cases we’ve saved families from financial ruin. Those opportunities are particularly gratifying.

We actually get approached on a regular basis is to provide consulting for investors and sponsors who are having trouble with their projects. These requests have been so regular that we’ve decided to expand our business so that we’re properly equipped to provide excellent service, rather than just casually helping out on an exception basis. We have formalized our Consulting Division. It turns out that the needs of our consulting clients are often the same as for our own business.

Frankly when we find and fix a problem that the client didn’t even know they had, that makes for a very good day. I’m grateful for the opportunity to help aspiring developers get to the next level.

We’re not making any formal announcements at this point about the launch of the consulting division. That will come before the end of the year. Have a wonderful thanksgiving

AMA - Where Do You Get Your Research? Nov 25, 2020

Show notes

Today is another AMA episode (Ask Me Anything). Ryan in Los Angeles asks:

“I'm astounded by your prolific podcasting and breadth of knowledge. You seem to be inside my head in that whenever I think of a question to ask, I usually find the answer by listening to earlier episodes of your podcast. Please keep up the amazing work.

Where do you go to or what do you use to curate your summary of daily or weekly news sources you read to stay abreast of your real estate and related economic news? I find myself being overwhelmed by having to pick certain sites (e.g., REIS, NMHC, John Burns Consulting, Marcus & Millichap, etc.) to read each week.”

This is a great question. Developing content for the show is an intentional process that consists of a balance of topics of different types. As much as possible, I would like the content to be evergreen, that is to say, timeless. Some episodes are precisely that, a timeless piece of content on a particular topic. For example, if you search back through the archives. There is an episode on water rights. That’s an example of evergreen content.

Some topics are tie into something that is trending in the news. For example, there will usually be an updated economic outlook once a quarter, or an interest rate adjustment. But this year, things have been changing so rapidly, that once a quarter isn’t enough. The impacts are being felt fast and furious.

I try to cycle through the major segments in the industry including residential, multi-family apartments, retail, hospitality, office and industrial.

To answer your question specifically, I have a number of sources that I refer to regularly to when I’m researching topics.

The major brokerage houses have research departments. I read those reports and often use them as a launch pad for deeper research. I also look at the reports from the research wings of Fannie Mae and Freddie Mac. The folks at Fannie Mae under chief economist Dr. Doug Duncan do some of the best research in the business.

I pay attention to what some of the most tenant friendly politicians are saying. For example I regularly receive press releases from certain elected officials at the Federal and State level. They often put out a press release when they table draft legislation.

I follow the work of Dr. Chris Martenson, Dr. John Campbell, Simon Black, David Stockman, Jim Grant the author of Grant’s Interest Rate Observer. I follow John Mauldin. He’s an economist who is one of the best connected guys in the business. He has central bankers on speed dial on his phone.

I speak with other investors. I speak with Robert Kiyosaki, Russell Gray, Robert Helms, Brien Lundin, folks who are specialists in their specific area.

I also mine Business Insider, the Wall Street Journal, Apartments.com, the Financial Times, the Globe and Mail, the National Association of Realtors. What I’ve shared is a subset of a long list of regular sources.

But when I find a story that I think will be interesting, I’m not merely retelling the story from a newspaper. I will go to the original sources and construct a completely new perspective on the story based on my own observation. For example, the story on yesterday’s show was about a landlord defending a discrimination complaint in New Jersey. It was reported in a local Northern New Jersey publication. I went to the 10 page transcript of the settlement ruling from the New Jersey Attorney General’s office in order to make sense of the story.

If the source of the story is in a fringe publication, I will look and see if the story has made it into some of the more mainstream publications. I don’t want to be seen as part of the lunatic fringe. There are some days when I’ve completed the research and the summary for an episode and I decide against publication. Those are difficult decisions.

Thank you Ryan for a great question.

What Did You Not Say? Nov 24, 2020

Show notes

From time to time we come across the weird and wonky news story. Today’s show is precisely one of those. It’s one of those stories that seems to defy logic. But then again, in the litigious good ol USA, even the most seemingly benign things can be cause for a lawsuit.

The owner of Ivy Lane Apartments in Bergenfield New Jersey settled a discrimination complaint and agreed to pay $30,000 to a man who applied to live in the apartments. The fact is, he didn’t actually apply. He called the leasing office and asked about living in the apartment complex.

According to the story, Ricardo Moran visited Ivy Lane Apartments to ask about renting a one-bedroom unit and alleged that the management company, Tower Management said he needed to meet a $33,000 minimum yearly income requirement. which didn't take into account public assistance. Mr. Moran, who has a disability, planned to pay at most $386 out of pocket to cover the monthly rent of $995, paying the rest with Section 8 vouchers. He left Ivy Lane without filling out a rental application, according to the details in the 10 page court filing. He also never mentioned that he would be using a section 8 voucher to make up for his income shortfall. He simply left and assumed that he would not qualify.

According to New Jersey law, it is unlawful for any person to refuse to rent property to a prospective tenant because of source of lawful income, including a Section 8 housing voucher, to be used for rent. But the tenant was never refused because they never actually applied. They made an assumption based on an incomplete conversation. Somehow, the property management company was alleged to have discriminated against the prospective tenant.

The motion was started in April of 2010 and was finally settled more than a decade later in October of 2020.

Some property management companies have a practice of looking up the records of the landlord tenant tribunal for cases having been brought against a prospective tenant. Unless the tenant was evicted, the fact that they appeared before the tribunal can’t be held against the tenant. Even if there are a dozen such cases against the same tenant, unless one of those cases resulted in a judgement against the tenant or an eviction, that information can’t be used in making a tenant qualification decision.

The New Jersey Attorney General’s office has held up the case a setting a precedent in the State for how discrimination cases should be handled.

I’ll be the first to say that anti-discrimination laws are vital and important to maintaining a just society. I can’t stand it when I see examples of injustice because someone has been discriminated against for their gender, their religious beliefs, their cultural background, sexual orientation or any lengthy list of possible discrimination. In this particular instance, the tenant was not turned down because they never actually applied. Holding the landlord responsible in this instance seems to cross a line in my view. But then again, I’m not a human rights lawyer and perhaps I’m missing something.

So why am I telling you this? As a landlord, as this case demonstrates, you might be held liable for something that you said, or more importantly didn’t say when it comes to human rights complaints.

If the tenant has simply asked whether a Section 8 voucher could be used in place of the income qualification, the whole decade long legal case could have been averted. The case puts the responsibility on the landlord to communicate the rental policy fully and completely in writing.

So Tower Management wrote Mr. Moran a check for $30,000 and updated their policy and provided training for their property managers on the policy.

Q4 Economic Prediction Nov 23, 2020

Show notes

On today's show, I’m making a prediction on the economic outlook for Q4 and the broad impact I project it to have on real estate markets.

The economy in Q4 is going to take a hit. We saw a resurgence of employment, a modest increase in consumption and a return to limited travel in Q2 and Q3. But new unemployment claims remain historically high. Prior to the pandemic, the US economy registered an average of about 250,000 new unemployment claims in a normal week. Since the pandemic, new jobless claims have been above 700,000 every week. The first 6 weeks of the pandemic registered 32 million job losses. We are still in a very troubled economy from a labor standpoint.

The other major driver of the economy is consumption. The law of averages tends to apply. If the population hasn’t increased, and people are still eating three meals a day, the amount of food consumed on average won’t fundamentally change when averaged over the course of a year.

Toilet paper sales surged in Q2 when it looked like there might be shortages. Those who were in the business of selling toilet paper might have felt like they won the lottery. But on average, if toilet paper sales surged in Q2, it makes sense that they might fall below average in Q3 or Q4. On average, toilet paper consumption at the final point of use, next to the toilet over the longer term isn’t going to increase just because there was a lockdown.

There is a business cycle in retail that has historically held true. Many retail businesses generate 50% of their annual profit in Q4 during the period between Thanksgiving and the end of the year. But this year could be different. We have many areas going into a new wave of Covid-19 outbreaks. This will mean a reduction in business activity, a reduction in social interaction, a slowdown of commerce. If family members are not traveling for the holidays in large numbers, what will that mean for retail sales?

If family gatherings are going to be scaled back this year, it makes sense that gift giving will also be scaled back. Some gifts will be sent by mail or delivery service. But it makes sense that fewer gifts will be bought this year. The big question is whether people will treat themselves to a gift on a larger scale to make up for it?

It’s clear to me that retail sales in North America in Q4 will be down from last year. It doesn’t take a huge crystal ball to predict that outcome.

So what does this mean for you as a real estate investor?

It means that some tenants will struggle to pay rent. I know of several landlords who are now getting eviction judgements against tenants who have stopped paying, depending on the jurisdiction.

Those property owners whose cash reserves are depleted may face a more dire situation. Lenders will face the difficult decision whether to extend forbearance terms or declare the loans to be in default. In my opinion, you need to be hunkering down for another economic winter, amassing cash reserves in order to weather another storm of unknown duration.

Dax Mitchell Nov 22, 2020

Show notes

Dax Mitchell is based in Fort Worth Texas where he specializes in industrial assets. On today's show we're talking about the various segments of the industrial market and the market outlook that has emerged in a hot segment. Dax can be reached at Mag Capital Partners. His website is magcp.com and he can be reached by email at dax@magcp.com.

George Ross on Election Nov 21, 2020

Show notes

I had a conversation with George Ross earlier this week where we talked about the outcome of the election. George offered his perspective on the election outcome and what it might mean for real estate investors.

Possible Tax Changes Under Biden Nov 20, 2020

Show notes

On today’s show we’re talking about the tax changes that could affect real estate investors following the US election. The 2017 changes to the tax code brought a number of new initiatives that were very beneficial to real estate investors. Top of the list were three changes.

1) Bonus Depreciation

2) Opportunity Zones

3) Step up in basis

Robert Kiyosaki’s Rich Dad advisor on accounting is Tom Wheelright. Tom has is the author of the best selling book called Tax Free Wealth. It’s newly updated and current to the tax code changes as of 2018. Tom has taken the time to read through the proposals from the Biden campaign to understand what they could mean for real estate investors. Tom’s analysis is that each of these moves would be bad for real estate investors. We should be moving to take advantage of them in 2020 while we still can.

Of course we don’t know for sure what the new administration will do. What was promised during the election campaign may or may not be implemented in practice.

The Biden campaign vowed to reverse the Trump tax changes and go a step further by eliminating the sheltering of capital gains under section 1031 of the tax code, the so-called 1031 tax deferred exchange. But even if bonus depreciation gets cancelled, 1031 gets cancelled, and step up in basis gets cancelled, there is a good chance that opportunity zones would survive. According to a new report in the industry magazine called “Accounting Today”, there is an article that sheds some light on the creation of the opportunity zone concept.

One of Biden’s top economic advisers co-wrote the white paper that led to their creation. Vice President elect, Kamala Harris, has pointed to Opportunity zones as a way to spur entrepreneurship. And their campaign website listed ways of reforming, rather than repealing, the policy.

Steve Glickman, is a former Obama administration official who pushed for the incentives. He now runs a consulting firm called Develop Advisors, specifically for investors looking to create opportunity zone funds. Steve used to be the leader of the Economic Innovation Group, a bipartisan Washington based research and policy organization. When he was at EIG, he was the architect and EIG conceptualized the program and drafted the underlying legislation. It was cosponsored by Tim Scott from South Carolina and Cory Booker, a Democratic Senator from New Jersey.

Last month, the Government accountability office issued a 28 page report on Opportunity zones. In that paper GAO is identifying two matters for congressional consideration, including that Congress consider providing Treasury with authority and responsibility to collect data and report on OZ’s performance, in collaboration with other agencies. As part of that deliberation, Congress should also consider identifying questions about OZ’s effects that it wants Treasury to address in order to help guide data collection and reporting of performance, including outcomes.

enator Scott has said his top priority is adding reporting requirements. A bill he introduced in December would direct the Treasury to post data annually on investment funds claiming the breaks, and to track job growth, poverty reduction and other economic indicators at five-year intervals. Oregon Senator Ron Wyden, the top Democrat on the Senate Finance Committee, proposed a reporting bill with lots of other restrictions attached.

It’s possible that we may see a re-assignment of opportunity zones.

Critics have taken issue with the selection of certain zones, such as a trendy arts district in Los Angeles and swaths of Brooklyn. And some have suggested replacing those that don’t meet traditional ideas of struggling neighborhoods with zones that do.

AMA - Should I Refinance? Nov 19, 2020

Show notes

Today is another AMA Episode. Ramon from Los Angeles asks,

I have several investment properties with reasonably low debt, <50% LTV, >1.6x DCR. With interest rates so low and the potential for inflation caused by central bank currency printing, I am considering refinancing a few properties to increase their debt, 70% LTV, 1.2x DCR. In addition to letting this potential inflation help wipe away the debt over time, I will get the added benefit of pulling cash out to take advantage of opportunities which may become available if distressed sellers start to sell and foreclosures begin to hit the market. On the other hand, by doing this I would be adding risk by increasing my debt service at a time when there is downward pressure on rents and increased rent collection risk. What is your perspective on responsibly loading up on as much low interest debt as possible?

Money comes to you in one of three ways.

1) Earned income

2) Residual Income

3) Capital Gains

The choice of how much debt to take on is a function of several factors. If you take on more debt, the residual income from the business will go down. A lower debt service and a higher debt coverage ratio means higher cash flow for you at the end of each month. If your goal is cash flow, then taking on more debt is going against your residual income or cash flow objective. But if you’re willing to defer a portion of the residual income in order to grow the portfolio and increase your total portfolio, that could be a winning strategy.

I’m going to make up some numbers following your example. Let’s say that you have a portfolio of $10M and you’re going to refinance the portfolio to increase the loan to value ratio from 50% to 70%. So you’re going to take on an additional two million in debt. The debt coverage ratio will fall from 1.6 to 1.2. You’re quite right in pointing out that the lower debt coverage ratio has more risk associated with it. The risk is that the portfolio might experience negative cash flow if you have something unexpected happen.

You’re going to borrow an extra $2M within that $10M portfolio in our example. This will give you the ability to put down up to $2M on a new property which could significantly expand your portfolio. But as you rightly pointed out, you would be taking on more risk.

What if instead of sinking all $2M of new money into a new project, instead you invested $1.8M. You could put the extra $200,000 in a reserve account to protect the portfolio from any short term cash crunch, if the need arises. It will require a lot of discipline not to spend that money.

To summarize, borrowing additional funds to buy another project, and increase your war chest cash reserve on your balance sheet could be the best of both worlds. You can improve the safety of the entire portfolio and at the same time, acquire another project.

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