The Real Estate Espresso Podcast

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AMA - Two Offices or Two Bedrooms? Jun 22, 2020

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This question is from Meg in Westchester NY.

I listen to your podcasts regularly. I find them thoughtful and provoking and love that you get to the point in the short amount of time.

We are residential investors and primarily design and build new single family homes in Westchester NY. We have a very savvy group of buyers. With that, one aspect we have come to understand is that our buyers want functionality and flexibility in their homes and we strive to provide designs that accommodate this.

I was perplexed on your recent podcast when you were discussing how designers should consider supplying 2 offices and 1 bedroom in new apartments as opposed to 3 bedrooms. Maybe that can be an innovative marketing strategy but I don’t see why you wouldn’t want to ensure that all three rooms can be used as a bedroom or office. With the codes as they are, for a room to be a bedroom you have to have an egress window (or sprinklers) but not so for an office. So why not make sure you have the rooms set up so they can be used for either and let a buyer or renter determine what is best? We often end up choosing at least 1 bedroom that we label as bedroom/office to imply this flexibility. It is usually a smaller sized bedroom but very nice size office.

I was confused by your suggestion and was hoping to hear a bit more from you to clarify.

Thank you again for providing such insightful and current information on your podcast. It isn’t easy to find helpful real estate information without gimmicks .

Meg, thank you for a great question.

I love the Westchester area. My family is originally from NYC and I used to have a cousin who lived on Mamaroneck Blvd in White Plains. For the listeners at home, the Westchester area is a bedroom community for NYC and there are a lot of professionals, who live in Westchester and commute into Manhattan.

Meg you are correct that the building code has specific requirements for a room to classified as a bedroom. If you could meet all the necessary requirements for both a bedroom and an office, then naturally it would make sense to do so.

Designers of a bedroom tend to think about the size of room required for a bedroom. You need to support either a single or double bed, a night table, a dresser, and maybe a bookcase. They don’t think through the requirements for an office, or if they do it’s an afterthought.

If you were designing a room to be used as an office, you would be paying close attention to how the office would be designed. What styles of desks could be used in the room? Would the design be on a wall, or in the middle of the room? Would the desk be facing a window? Where would the door be placed? Where would the filing cabinet, the printer and the scanner be located? Where would the electrical outlets be located?, and the hardwired data connections? If there was to be a wireless access point in the room, where would it be mounted?

If the office was going to host regular video conferences, how would the lighting be optimized to provide a good video image? Will the lighting support a full day of computer work, or will there be glare on the computer screen during the afternoon hours?

You see it’s one thing to build a bedroom with a single electrical outlet every 12 feet of linear wall space as required by the electrical code. Its quite another to think through the placement of people and equipment to create a viable work flow. Would the flow be different if the client uses a sit-down desk versus a standup desk?

You see there are lots of three bedroom houses. There are very few one bedroom, two office houses. The person who needs two offices that are truly designed to be offices will pay extra to fulfill that need.

Robert Kiyosaki Jun 21, 2020

Show notes

Robert is the best selling business author of all time and the author if Rich Dad, Poor Dad. He's the host of the Rich Dad Radio Show and you can find out more about him at Richdad.com.

Disrtessed Assets Versus Stranded Assets Jun 20, 2020

Show notes

Today's show is an extract from a keynote address I gave on the 2020 Virtual Investor Summit.

Design is Free Jun 19, 2020

Show notes

On today’s show we’re talking about the difference between price versus value.

So often I see new houses, new apartments that are very “traditional” in design. I have nothing against tradition. But it doesn’t take very much thought to imagine how a family will live in a space.

You can tell those who design based on a spreadsheet. They simply maximize the building envelope to what the zoning code allows. They maximize the height, they maximize the number of units and the number of bedrooms without any regard to how the space will live. They put the minimum sized closet that will legally classify the room as a bedroom. After all, the appraised value for a two bedroom apartment will be higher than for a one bedroom. It’s all about maximizing the appraised value.

Or is it?

Those of you who know me, will know what’s coming next. That’s right. I’m going to bring up the law of supply and demand. But I’m going to focus on a more granular segmentation of the law of supply and demand.

It’s not just the supply and demand of houses, or apartments that matter. It’s the supply of features amenities that matter.

In a dense urban environment like our projects in Philadelphia, we aim to include parking even if there isn’t much land available. You see there is so little parking available in the core of Philadelphia that it’s not just the supply of 2 bedroom apartments that matters, it’s the supply of 2 bedroom apartments with parking that’s the differentiator. Unless our society moves to a post-automobile form of transportation, the shortage of parking in Philly is going to continue for decades to come. If there were ever to be an elevated vacancy rate in Philadelphia, those apartments with parking will still always be fully leased.

The large garden style apartment complexes are increasingly participating in the amenities arms race. They’re adding a playground for the kids, a dog run, a splash pad for the kids, pickle ball courts. The list seems to grow longer with each passing year.

Go back ten years, how many people were taking delivery of goods and services through e-commerce? Is there a place for the delivery of large parcels to be held securely?

So back to tradition. The traditional home has a formal living room, a dining room, a kitchen, guest bathroom, master bedroom with en-suite bath, kids bedrooms, a laundry room, and a front closet.

But today, the hub of the house is the kitchen, larger than kitchens of previous decades. The living room is usually furnished and never used. The formal dining room gets used once every few months, if at all.

A 34% Property Tax Increase Jun 18, 2020

Show notes

On today’s show we’re talking about a morning after shock. No we’re not talking about an earthquake. This is the morning after the City of Nashville voted in a 34% property tax increase.

You’re probably thinking. I’m glad I don’t live in Nashville. Folks, this event should be a wakeup call for cities all over the world.

There are a couple of vitally important questions we need to answer on today’s show.

1) Are the issues that triggered such a massive tax increase unique to Nashville or do they exist elsewhere?

2) What will be the impact to Nashville, the local economy, the price of real estate, and the growth that the city has been experiencing over the past decade?

So why did Nashville face such a massive tax increase?

The Council voted 32-8 to approve an alternative budget proposed by Councilmember Bob Mendes after a night of several failed budget proposals. The Mayor had proposed a budget that called for a 32% tax increase. That motion was defeated.

The Council weighed four different budget proposals, each of which called for a significant tax increase.

The full 9.5 hour meeting can be seen on youtube https://youtu.be/Mm4a_BIfr4oand the link is in the show notes.

At the root of the tax increase was a threatening letter from the State of Tennessee’s financial comptroller. The letter said in plain terms that if the city didn’t put enough money in their rainy day funds, the state could come in and take over the city’s finances. The state called the failure to act would be considered a surrender of the responsibility to govern which would trigger the state taking over the management of the city.

Clearly this is an issue that has been brewing for several months.

The new budget faced calls for defunding the Police and redirecting funds to community outreach. In the end, the full police budget was approved and an additional $2.5M

Council, in a surprise move, approved a plan early Wednesday morning to reroute $8.2 million from the school district's savings to a contingency fund in order to pay for teacher raises.

The budget shortfall was caused by a tornado in March, and the Covid-19 outbreak and over a 16 month period is estimated at a $470 million shortfall.

The problem with this tax increase of course is that the city can’t truly count on receiving all that revenue. At a certain point, families on fixed incomes won’t have the extra cash to fork out. Remember, property taxes are indexed to property value. Over the past decade, property values have increased dramatically in Nashville, as they have in cities all over North America. As property values increase, so too does the amount of tax collected.

Real estate investors who own rental property sign loan covenants that require them to maintain a minimum debt coverage ratio. The property tax increase will cause tens of thousands of property owners into a technical default situation with their lenders whereby they are no longer in compliance with the terms of their loans.

Then there will be those who truly can’t afford the increase. They will eventually lose the property to foreclosure, or at the tax sale for non payment of taxes. The new rate, $4.221 per $100 of assessed value.

We have also seen cases where properties that face high property taxes have in fact fallen in value. Some high tax locations like Chicago have certainly experienced this phenomenon. The city can try increasing taxes, but there is only so much money available in the general population.

Office Market Explained Jun 17, 2020

Show notes

On today’s show We're talking about the legacy of Covid-19 on the office market.

My company used to have an office location in Sunnyvale in the heart of Silicon Valley. My permanent office was near my home in Ottawa Canada. But I used to visit Sunnyvale frequently. I had staff there. The CEO of the company relocated the headquarters from San Diego to Sunnyvale. When I was visiting the Sunnyvale office, I would sit in a spare cubicle outside the CEO’s office next to the CEO’s assistant. When I was there, the CEO would see me and ask me questions, often as frequently as once an hour. My boss had his office next to the CEO. He too would talk with me far more frequently when I was physically no more than 10 feet outside his office door. But if I was in my home office in Ottawa, the CEO would rarely call me. We might speak once every few weeks. The frequency of communication varied dramatically depending on the physical presence.

Was that a failing of my CEO, of my immediate boss? No, they’re just being human.

Senior Housing Report Jun 16, 2020

Show notes

If you’ve been listening to this show for a while, you’ll know that I’m a huge believer in the laws of supply and demand.

On today’s show we’re going to look at what’s happening in new construction of senior housing. In virtually every market I examine, I’m seeing signs of saturation. Despite this, new construction projects are everywhere. The projects completed two years ago aren’t full, and there are thousands of more beds coming into the local market. I’m left wondering what market study the lenders looked at before approving the project.

A new report just published by Marcus and Millichap aims to put some numbers behind what we’ve seen intuitively.

Units under construction represent approximately 10 percent of existing inventory, limiting the potential for a rapid turnaround in operational efficiencies any time soon.

In the most saturated markets, new units represent more than 13 percent of inventory.

Frankly, this boggles the mind. I’m asking myself how any self respecting lender would finance a new project with market numbers clearly showing over-supply.

I’ve been having direct conversations with senior living operators over the past several weeks to try and understand the dynamics in the market.

My take is that operators are vying for market share and are willing to take a hit on operations in the short term in order to be positioned to win the war when the largest wave of baby boomers hit assisted living. The size of the market is expected to nearly double over the next decade. Back in 2012, senior citizens made up 12.8% of the total population. By 2028, they’re expected to represent over 20% of the population.

Cap rates have started to compress. Assisted living assets are highly sought after, which has narrowed the average cap rate relative to independent living levels. Overall, the average cap rate for independent living trades is in the mid-5 to mid-6 percent area, assisted living assets trade for an average be- tween 6 and 7.5 percent, and skilled-nursing properties change hands at an average in the high-11 to high 12 percent area, based on location and quality.

Then along comes Covid-19. The truth is that 93% of assisted living facilities have evaded Covid-19 so far. The care facilities most impacted by the pandemic are those long term care facilities and skilled nursing facilities. Many people in the general public don’t know the difference between a skilled nursing facility versus an assisted living facility.

The memory of outbreaks in long term care facilities is going to remain in people’s minds for some time to come.

Staffing has been one of the largest challenges facing this industry under normal circumstances. Tens of thousands of employees walked off the job because of fear of catching the disease. Those who remained have demanded higher pay. Labor represents the single largest cost in an assisted living facility. Hourly rate increases in excess of 50% are expected later this year in order to attract and retain quality staff. This fact alone will challenge the economic model for assisted living. We are seeing long lasting economic impact to the sector as a result of the pandemic.

Reversal of a trend? Jun 15, 2020

Show notes

On today’s show we’re talking about the reversal of a two decade long trend in a matter of weeks. The question is, will the trend really reverse? Perhaps this is a short term reversal, to be followed by a continuation of the original trend. The trend we’re talking about is urban intensification. Most major cities stopped developing in the downtown core in in the 1960s. The suburbs began to sprawl and sprawl and sprawl. Farm land was gobbled up and replaced by nicely manicured streets with a single tree planted in front of each house. It would take another decade before the tree would look like a tree. That’s how you could tell the age of a neighborhood without looking at the houses. You only needed to look at the maturity of the trees.

The white two story houses of the 1950’s and 1960’s were replaced by more elaborate designs in the 1970’s and 1980’s. The new homes paid tribute to the two-income, two car desires of most households.

Between the suburbs and the downtown core most cities had a band of real estate that was neglected for nearly 30 years. These homes were built in the 1920’s through the 1940’s. It wasn’t trendy to remodel a historic home yet. They were just old and out of style.

But as the baby boomers have been retiring, they’ve been downsizing. They’ve been selling the four bedroom house in the suburbs and moving closer into town. They might be moving into a new condo, or perhaps into a new semi-detached house with a small rear yard and modern amenities like a roof deck. That band between the downtown core and the suburbs now has modern new construction town houses. These boomer buyers don’t want to mow the lawn and they don’t want to shovel the snow. The millennial buyers don’t seem to want the large houses in the suburbs either. It looked like the suburban home was going to become a dinosaur as tastes have changed.

Fast forward to 2020. We have a global pandemic on our hands. People are working from home and need more space for a home office. All of a sudden, that four bedroom house that looked too large is now the perfect house with two bedrooms and two offices where two people can be on a video conference call simultaneously without disturbing each other.

The lockdown situation meant that there were very few new houses listed for sale during the traditional Spring market. April inventory of houses for sale was the lowest on record.

We’ve seen a wave of new listings poised to hit the market in June. Perhaps this is the traditional Spring market, just delayed by a couple of months. For now, the inventory remains low and we are seeing bidding wars in a number of markets.

Major home builders have seen a wave of new contracts since the middle of May. Despite the major job losses, there are some sectors of the economy that seem to be booming. New home construction is setting up to be one of them.

Record low interest rates seem to be a contributing factor creating a large pent up demand. But there are so few homes for sale that would-be sellers are holding on. They could sell, but where would they move?

This was the same dilemma my wife and I faced earlier this year when we made the decision to sell our home. There were only 16 houses for sale in our area, a suburb of 200,000. Even through the lockdown, houses were selling above asking price in multiple offers with only a virtual tour and no open houses.

2020 is shaping up to be one of the busiest summers on record for real estate transactions.

Dr. Amy Novotny Jun 14, 2020

Show notes

Dr. Amy Novotny is from Sedona Arizona. She specializes in helping entrepreneurs manage their stress level. On today's show we're examining some techniques for reducing stress in our daily lives. Amy can be reached at:

pabrinstitute.com.

Ed Rogan Jun 13, 2020

Show notes

Ed Rogan is founder of the Penn Capital Group, a tribute to his native Pennsylvania. He lives in Philadelphia, but invests in Houston Texas and Huntsville Alabama.

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