The Real Estate Espresso Podcast

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Speculate At Your Peril Nov 18, 2020

Show notes

The world is filled with news articles that don’t make sense. I get bent out of shape when I read an article that is downright ignorant. When I say ignorant, I mean lacking in basic education. The worst part is that these articles are getting wide circulation and feeding mis-information on a large scale.

On today’s show we’re talking about one such article about the condo market published earlier this week in the Huffington Post. There have been numerous articles that are similar speaking about the fall in rents in New York, San Francisco, and other expensive coastal markets.

The article is entitled,

“Canada’s Condo Markets Face Perfect Storm As Rental Rates Tank, Costs Jump”

The story goes on to say,

“Add yet another to the many imbalances in Canada’s pandemic economy: Renters are catching big breaks as rental rates drop, while condo owners ― particularly investors ― are looking at potentially rough times ahead.

In fact, for condo owners, just about everything that could go wrong ― from bad construction and rising insurance costs, to rental rates that can’t cover mortgage payments ― is going wrong.”

Stories like this are just so ridiculous. They imply that the pandemic is to blame for the plight of these condo investors. The implication is that these were good investments to begin with, and the pandemic turned them into bad investments.

The fact is, these investments would have never met my criteria. Let’s look at some specific examples. In Toronto right now there are about 30,000 condo’s for rent in the core of the city. That’s a lot of inventory. No surprise that rental rates have fallen.

The city of Toronto attracts about 125,000 new residents a year and in a traditional year, there are about 35,000 units of new construction. The imbalance between demand and supply is one of the main reasons that prices have been continually rising. But immigration is down this year because of the pandemic. So fewer people are moving into the city and a lot of that new supply coming into the market is competing with existing inventory.

For those of you on this podcast, nobody is going to be shocked to hear that $1,600 a month in rent on a $500,000 investment is not going to pencil. You don’t need to pull your calculator out to know that those ratios don’t work. But here’s the crazy thing. Realtors all over are selling these types of properties to unsuspecting amateur investors. They won’t cash flow, but appreciation has meant that all you needed to do was sit on them and time would take care of everything. The memory of down years is a distant memory.

When you invest in shares of Tesla, you look at the last few years and the stock has consistently gone up. Maybe you decide to buy shares of General Electric. You tell yourself that General Electric is now a bargain after having fallen 75% from it’s highs a few years ago.

All of these plays are pure speculation of the same type that wall street investors use every day. These investments are not professional investments. They’re speculations, and are not based on fundamentals.

When I make an investment in a property or a new construction project, I’m very clear on where the profit is going to be generated. That doesn’t mean that you won’t encounter surprises or changes in market conditions. But at least I’m clear on the day to day cash flow. I’m not speculating that prices will go up, simply because they’ve always gone up.

When I underwrite projects, there is no speculation on the value going up. The investment has to make sense today, in today’s dollars with today’s market conditions.

Apple Widens Its Lead Again Nov 17, 2020

Show notes

On today’s show we’re going to take a brief detour from the world of real estate investing to unpack one of the largest technology announcements to come out this year. Unless you are involved deeply in the guts of the high tech industry, you may have a hard time understanding the significance of the latest Apple announcement.

Prior to moving into the world of real estate investing, I was a microprocessor designer and I used to manage microprocessor development teams. I have processors designed into all kinds of applications all over the world. This is a world that I know deeply, so I thought that taking 5 minutes to share a perspective on the latest announcement by Apple would be a good use of 5 minutes.

So here we go.

Last week Apple announced that they were moving away from the Intel architecture of chips to the ARM architecture. The question is, “What does this really mean for you as a user of these devices?”

A few years ago, they upgraded the operating system on the iPhone to include many of the elements from MacOS. There are three primary operating systems in use in computers today. Windows which has majority share of the desktop computer market, Android which has majority share of the mobile devices, and Unix with all of the various linux variants that make up the majority of the server world. The Mac Operating System was based on Unix technology. It's the most robust industrial strength operating system out there, and is the least prone to security breaches. So when Apple introduced many of these elements to the iPhone, the iPhone really became a robust computer.

Apple is trying to find a way to blur the lines between the desktop computing platform that you find on their desktop computers and notebooks, and the mobile computing platform that you experience on the iPhone and iPad family of devices. Mac applications don’t work on the iPhone and iPhone applications don’t work on the Mac, up until know.

The second major difference comes in the realm of battery life and overall performance.

The way to think of the difference between the Intel chips and the newly designed Apple chips is like comparing the difference between a Ferrari and a Volkswagen. The Ferrari is much more expensive. It’s a much faster car under perfect conditions like a race track. But in real world rush hour traffic conditions in Los Angeles or Dallas, a Ferrari and a Volkswagen will perform remarkably the same. The Ferrari might beat the Volkswagen through a few traffic lights, but the real difference will be small. Most importantly, the Ferrari will use a lot more fuel to get the same job done. So which car is truly better? The answer is it depends. The Intel chips are more like the Ferrari and the Apple M1 chip is more like the Volkswagen. The Volkswagen will use a lot less fuel.

The Apple M1 chip will consume less power than the Intel chip and therefore will have longer battery life. Apple is claiming up to 18 hours of video streaming on a Macbook. No other device on the market comes close to that kind of battery life.

A Four Letter Word Nov 16, 2020

Show notes

On today’s show we’re talking about a single word. The problem with this single word is that it’s ambiguous.

We often think that we know the language and what it means. But the truth is unless you’re really clear on exactly what you mean, very simple words can lead you down a dead end path.

Today’s show is focused on a simple word that has four letters.

When projects run into difficulty, the culprit is often a failure in the plan.

This year, in the year 2020 with all of the global dislocations that have befallen our economies most business leaders would bristle at the notion that the plan was to blame for the difficulties being experienced. We’ve had a global pandemic. We’ve had government mandated shutdowns. We’ve been ordered by our governments not to conduct business. How can you sit on you high horse and say that the plan was to blame? I heard a business leader tell me in the past week, he said “We had a plan, and the plan couldn’t be executed.”

The Project Management Institute is the globally recognized leader in project management certification. If you’re going to be a professional project manager, you’re going to take a bunch of courses and at the end take a lengthy exam. Finally you’re a professional project manager.

The PMI has a lengthy publication called the Project Management Body of Knowledge. This document breaks down project management into 5 distinct process groups, 10 knowledge areas, and 49 distinct processes. The project plan itself has an outline of 10 chapters.

According to PMI, a plan is a formal, approved document used to guide both project execution and project control.

A plan is a deliverable. It’s a document which you can point to. It’s a noun.

Therein lies the problem. When you have a plan, then the work to produce the plan is done.

When you think that the plan is a noun, you completely miss the fact that the word plan is also a verb.

A verb is an action word in most languages. You can conjugate the verb.

When you think of the plan as a noun, it often has a finite end-point. The plan is complete, it’s done. We now have a plan. We obviously don’t want to do an incomplete job of planning, no more than we want to do an incomplete job of anything. In order to achieve excellence, things need to be taken to completion.

But plans are different. Plans, despite our ideals are never done. They’re continually being pushed off track by forces. I may have a plan to sail the ship from New York to Gibraltar. I plot the course based on the direction I need to go. But there’s wind, there is current, there are local waves that can instantaneously turn the ship so that from one second to the next it’s not facing the intended direction. You have to always be adjusting course. In fact, you are almost always off course. There are a few miniscule instants in time when the ship is actually on course. The rest of the time it’s off course, trying to get back on course. Once you get out on the water, the weather you thought was going to be part of your journey changes. You may have to take a detour of 1,000 miles in order to avoid that hurricane that changed direction.

You see, in order to be useful in the real world, the word plan is a verb first and a noun second. The folks at PMI are great. But they’re academic. They’ve studied project management about as deeply as it is possible to do so.

We see a verb being more empowering than the noun.

Marc Von Musser and Nicky Billou Nov 15, 2020

Show notes

On today's show we're talking about goal setting for 2021. This is an exercise that needs to start now, not on December 31. Marc and Nicky are repeat guests on the show. They're having a one day virtual business goal setting workshop on November 28. You can connect with them at ecircleacademy.com/appointment

Ali Boone Nov 14, 2020

Show notes

Ali Boone is CEO at Hipster Investments where they specialize in turnkey investments. On today's show we're talking about Ali's new book, "NOT Your-How To Guide to Real Estate Investing".

Connect with Ali and get a copy of her new book at https://www.hipsterinvestments.com/espressobook

AMA - Should I Do The Deal? Nov 13, 2020

Show notes

Ramon from Los Angeles asks,

I am in contract to purchase a 6-unit value-add multifamily property in a rapidly gentrifying area of Los Angeles. It is a rare true off-market deal that is well priced (at least pre-covid). With 5 of the 6 units vacant I can immediately renovate most of the units. I own other property in the area and posted test ads so I feel like I have a good sense of the current rents. I am projecting a pro forma 6.3 cap rate, mid-to-high single digit cash on cash return and mid teens 5-year iIRR with further upside as the area improves and if I can bring the one currently occupied unit to market rent. Pre-covid this definitely met my investment criteria. However, given all the risks around covid, I am struggling with those criteria. Rents might continue to fall if vacancy increases. Assuming, I am able to lease up at my projected rents, collection risk is much higher than usual in this weakened economy. In addition, if foreclosures start to hit the market there may be there may better deals in the next 6 to 12 months. All that being said, this deal is trading below the price of comparable properties with low-paying tenants, the ability to execute my business plan immediately as a result of the vacancies is very rare, interest rates are low and I can hopefully benefit from the growth in this sub market for years to come. One way to think about all of this is as short-term noise - that it makes sense to buy a solid deal and not try to time the market? On the other hand, should I be getting "paid" more for all of this risk? Based on other deals that are selling the market doesn't seem to think so. I once heard a saying that if the answer isn't "hell yes" then it's a "no". Maybe that is good advice in this situation.

Ramon this is a great question. Real Estate as always is hyper-local. I don’t know the specifics of the neighborhood you’re working in. We’ve seen that during the pandemic there has been migration. That has meant migration from more expensive cities to less expensive cities. It has meant migration from the most expensive areas to more affordable areas within the same metro area.

There are a couple of factors that can play in your favor.

1) If you design a product that is going to be more desirable than competing product in the market, you have a distinct advantage that will take a long time for the rest of the market to copy. That isn’t to say that the rest of the market can’t copy it, just that it takes time for the rest of the market to catch up.

The quality of the property management can be a game changer when it comes to having a better product in the market. Most of the time when people leave a property, a disagreement with property management has been a factor in the decision. Good property management can give you above average results and poor property 1) management can completely destroy your investment. These are timeless fundamentals.

What I’m going to share with you now is another test that you can apply. Congratulations on test marketing rents in the area.

What if you went to the investor community in your area and offered to sell the project to other investors, complete with your design concept, financial model? You could wholesale the deal to them. Now you don’t have to actually sell the deal, but use the process of offering the deal as a source of feedback to see what others think of the deal.

But when you offer the deal, don’t set your assignment fee in the deal. Simply show them your analysis for the finished product and ask them what they would offer you for the deal. Some may offer less than you paid for it. Others may offer you $5,000 more than you paid. Others may offer you $50,000 more than you paid for the deal. The information in that feedback is like gold. You have a choice. You might choose to wholesale the deal, or keep it for yourself.

AMA - Should I Lend Money? Nov 12, 2020

Show notes

Today is another AMA episode (Ask Me Anything). Kara asks,

I’ve been approached by a borrower to lend funds to purchase a property. I’m not interested in taking risks, so I figure if I limit the loan amount to 80% of the property value, and secure the loan in first lien position I’m going to be safe. I don’t have the time or systems to fully qualify the borrower. The property is a fixer upper which will require the borrower to bring additional funds to repair the property. He intends to hold the property as a long term rental and eventually refinance with bank financing in order to repay the initial loan. Apart from mortgage security, what else should I be concerned with?

This is a great question.

My recommendation is that you work with a licensed mortgage professional. That’s their business. For the listeners to this show, I don’t want you taking what you hear on today’s episode and making loan decisions directly. I’m not a mortgage professional and I don’t profess to be. I’m merely giving you ideas for you to discuss with your mortgage professional that might give you additional protection.

A lender is only ever asking one question. If I lend you money, how will I get it back. The more sophisticated the lender, the more ways they have of asking that same question. How will I get my money back if things go well? How will I get my money back if things don’t go well?

Whether you write one loan or 100, you’re in the lending business. In order for you to have a robust and safe lending business, you need systems and processes. That means being very clear on your lending criteria. I’m going to touch on a few, but there are many more to be considered. These are for example purposes only. Again, consult your real estate lawyer and your mortgage professional.

Let’s talk about the things that can go wrong and how you need to protect yourself in the lending criteria and in the loan agreements. You can learn an awful lot about this business by reading commercial loan documents to see what terms a lender has embedded in the loan documents. Every single one of those terms are there for a reason. They’re there to protect the lender.

You’re correct in saying that by securing your loan on title with a mortgage does provide some protection. But it’s not absolute protection. Only by understanding the weaknesses that a mortgage can have, can you plug those holes that exist.

Let’s start with the loan amount. You mentioned that you were willing to loan up to 80% loan to value. In my mind, the notion of value can be highly subjective. There have been documented cases of appraisals coming in above the true market value. In that case, the unsuspecting lender can be taking on much more risk without even knowing it. My recommendation is that you write your loan terms at a lower percentage. But not only that, you may consider limiting the loan amount to the lower of, say 70% loan to purchase price, or 70% loan to value. Whichever of those two numbers is lower, that would be the maximum loan amount.

You mentioned that the property is a fixer upper. Every time you have someone working on the property, there is risk of a mechanics lien being recorded on title. Your mortgage might be in first position, but a mechanics lien would come ahead of a mortgage in the hierarchy of payment. You need systems and process to control the payment of contractors and subcontractors.

Even with asset based lending there is a certain amount of due diligence that needs to be performed on the borrower. The lending business has a lot of moving parts.

These are just a few of about a dozen things that can go wrong even in the world of secured loans. Again, I’m not a lawyer, nor a mortgage professional. If you’re going to write a loan then you probably want to get into the lending business with all of the systems, processes and protections that come from being in the lending business.

Beware of Mink Mutations Nov 11, 2020

Show notes

On today’s show we’re taking a fresh look at the impact of the pandemic on business activity. Conditions on the ground are evolving rapidly and it’s been some time since we’ve looked at the implications.

We have major parts of Europe back in a full lockdown situation. I have two cousins in Milan who both contracted the disease in the past 10 days. One is doing well, the other one is struggling.

Since the start of November, Covid-19 cases in the US have increase by more than 25%. We have hit record rates of infection in the US even though we’re not yet into the cooler weather across much of the country. The largest outbreaks are in Texas, California and Florida all of them southern states.

According to the data reported by John Hopkins, new daily records were hit in Maine, Pennsylvania, Colorado, New Mexico and Tennessee.

Through the month of September and much of October we saw infection rates increasing dramatically. But there wasn’t a corresponding increase in the number of people in hospital or in Covid related deaths.

That gave rise to a sense of complacency. We’ve been hearing that Covid has been not that big a deal. Well now we have a record number of people in hospital in the US as a result of Covid-19.

The headlines have been promoting the promising results from the latest vaccine trials. But as you know, vaccines only work for a single strain of a disease.

Denmark is home to 5.8M people and 17M mink. It turns out that the Corona Virus has made the leap from humans to mink. Now in order to make the jump from humans to mink, the virus needs to mutate. The Danish government has confirmed that the new mutation of the disease has made the jump from mink to people and there are 12 confirmed cases.

The Danish government has imposed strict lockdowns on those people, including contact tracing. The impact of a new large scale outbreak of this mutation has not received wide news coverage. The potential for this mutation to render a vaccine useless cannot be overstated.

The Danish government are taking steps to cull all of the mink on 207 farms out of 1,000 farms where the disease has been detected. We are talking about killing millions of animals. There has been debate on whether to cull all 17M mink on all of the farms in Denmark. In this day and age, I have no idea why there is a need for mink to be raised in such large quantities on farms. The fact that they’re considering this step tells me that the Danish government recognize the seriousness of the situation.

All I can tell you is that this is a rapidly evolving situation. I know that I’m continuing to take regular doses of vitamin D, and continue to take precautions to limit social contact. The research shows statistically much better outcomes for those with high levels of Vitamin D. Hopefully that’s enough to protect my family. But we also need to be concerned with the global picture from a virus that knows no borders.

So what does this mean for you as a real estate investor, or a business owner? It means that the uncertainty we’ve experienced in 2020 is likely to continue for a while longer. You might have been planning for a period of increasing economic recovery starting now. I’m here to tell you that may not happen.

It’s entirely possible we will see more severe lockdowns and outbreaks of the disease in the coming weeks and months. We have already established that Covid-19 was not just a blizzard that would melt away in a matter of days. It has already proven to be an entire winter. You should be preparing your business for the possibility of a long economic winter.

Don't Break The Dishes Nov 10, 2020

Show notes

On today’s show we’re talking about the dilemma of choosing suppliers and choosing specific products. There is a world of choice and prices vary widely. It comes down to making a value determination whenever you’re choosing a particular product.

The importance of that choice depends on who you are and what you’re going to do with it. If I’m going to play a game of basketball, I’m going to make a difference choice on which ball to buy compared with Lebron James. To me a basketball is worth an hour of recreation. To Lebron, the basketball is worth millions.

On today’s show we’re going to be looking at dishes. You might be wondering why we’re looking at dishes. Well, our team is in the planning phases on a hospitality project. This will require investment in many different aspects. Everything from kitchen equipment to seating and tables for the dining room, to glasses, dishes, cutlery and napkins. There are hundreds of details to be planned in this project.

Even though we’re going to be talking about dishes, as you’re listening to this, I don’t want you to focus on dishes per se. What I want to emphasize is the process that will be used in the final product selection for the dining room.

We believe that everything in the dining room needs to form part of the experience. The design of the menu, the training of the staff, the décor, the room temperature, the comfort of the seating, the manner and speed with which the diner receives their bill. All these details matter. So too does the choice of dinner ware.

The dining room will have a certain theme that is a combination of casual and upscale. So we don’t want a classic white dish. We don’t want an overly formal plate.

We found a supplier in Vermont that had the look we were after. The reviews of the product were excellent, and the quality looks top notch.

But prices were high. A single dinner plate varied in price between $25 to $29 dollars. A serving platter was priced at $82. We would need to spend over $15,000 just in dishes alone.

Research showed that we could order products from China online where prices were $1-$2 per plate. But the minimum order quantity was 1,000. Even if we ordered a quantity of 1,000 and only used 200, we’re still talking about a price of $10 per plate compared with $25. We found a supplier in China that had a product we liked. The look seemed in keeping with the brand and theme of the dining room. If we host a large event and need more dishes, we would have them on hand and would not need to rent any dishes.

But of course you don’t want to make the decision based on price alone. We have to consider the weight of the dishes. If the dishes are too heavy, that could be a workplace safety issue for our serving staff. If the dishes are too heavy they might need to be heated before serving the meal, otherwise the meal will get cold quickly. If the dishes are too light, then they will appear cheap and give the diner the impression that they’re getting less value for their dining experience.

The dishes have to be dishwasher safe and not leach any toxic chemicals. They need to be able to withstand the repeated temperature changes that come from the dishwasher. Those thermal cycles are the #1 thing that shorten the lifespan of a dish. They will eventually get small cracks in the glaze and break. The glaze needs to be robust enough that the plates won’t chip with regular everyday handling clearing the table. The color of the plate needs to complement the food so that when you have a meal on plate, the plate frames the meal and complements the colors of the meal without stealing attention away from the meal.

All of these details are about designing an end user experience. You see, design doesn’t have to cost extra. It just requires you to pay attention to the details and think through the experience from the perspective of the end user. It’s not complicated, it’s just rarely done.

A Nation Divided Nov 09, 2020

Show notes

On today’s show we’re talking about the morning after. We have a nation where nearly half the population is elated, and nearly half the nation is disappointed and maybe downright angry.

If you’re a real estate investor, or a real estate developer, you’re probably wondering what the future holds. You might be wondering if Joe Biden will make good on his election promise to increase taxes on business, and whether he will make good on his promise to eliminate the capital gains tax deferral that has been available in the US under section 1031 of the tax code.

You might be wondering if the push to improve the energy efficiency of housing will bring new incentives to build new housing to replace some of the nation’s oldest and least efficient buildings.

If you’re happy or if you’re saddened by the outcome of the election, both those reactions are linked to your hopes and expectations. I said your hopes and expectations.

Those hopes and expectations have only one origin. They were the product of your own mind.

Neither candidate can influence the election at this stage. It’s simply a matter of counting. The election outcome is reality.

If you’re feeling any stress around the election, it’s because there may be a gap between your expectation and reality. Stress cannot exist without that gap.

When that gap exists most people feel pressure to close that gap. Since there are only two variables, expectation and reality, there are only a few possible choices on how to close the gap.

1) You can change the reality. This is possible in some instances, but it’s rare. It usually involves breaking the laws of physics.

2) You can lie to yourself and others that the reality has indeed changed.

3) You can alter your expectation.

Your expectation is rooted in your belief about the way things should be. Maybe you believe that our political leaders should behave themselves a certain way. Maybe you believe that the laws should be written a certain way so as to make them more fair. Maybe you believe that there is an injustice that needs to be corrected.

Some people are so wrapped up in their belief about the way things should be that when they don’t match, something’s wrong.

We’re here in the middle of November, the weather was sunny this past weekend and the temperatures were in the 70’s Fahrenheit, above 20 degrees centigrade. Earlier in the week it snowed. I heard some people in the neighborhood say how it was too hot this past weekend, or that it was too cold earlier in the week.

Do you realize how silly that statement is? Does mother nature care what you think about the weather? Are you going to tell mother nature that you’re right and she got it wrong? There is no good weather or bad weather. There is only weather. The term good weather is rooted in your expectation and has nothing to do with the weather.

Sometimes you can wait a bit and the weather might change. It’s raining today, so I’ll wait for a sunny day before going to the beach. That strategy is called wait and see.

But sometimes you could be waiting for a long time. If you’re waiting to go to the beach, you might be waiting another 7 or 8 months.

My good friend Robert Helms has a great quote. He says ,”Think and Act is better than wait and see”.

If you apply that thinking to going to the beach, then you might board a flight to a Caribbean Island and get to the beach right away .

Given the current reality, what is the best move that I can make for my business, for myself, for my family and for my stakeholders?

Your current circumstances don’t define your destination. They merely define your starting point. The obstacles don’t define your destination either. They’re simply something to be overcome. You decide your direction, and if you’re truly committed to it nothing will ultimately stand in your way.

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