The Real Estate Espresso Podcast

Latest Episodes:

Unclear Cooperation May 13, 2020

Show notes

On today’s show we’re talking about a major change in the way realtors market properties. In particular, the National Association of Realtors are the defendants of a lawsuit brought by a consortium of agents called Top Agent Network in U.S. District Court for Northern California. Top Agent Network, a San Francisco-based, members-only platform for real-estate agents. The California Association of Realtors and the San Francisco Association of Realtors are also co-defendants in the lawsuit.

At issue is a new policy called Clear Cooperation. The suit seeks unspecified damages and to reverse NAR’s newly enacted “Clear Cooperation Policy,” which went into effect May 1. The new policy requires NAR members to share their listings through the local multiple listings service rather than shopping them privately to a few contacts, a practice increasingly preferred by wealthy and high-profile sellers. Members who violate the policy face punishment, including fines.

The problem with clear cooperation is that in many cases sellers want to maintain privacy. Contrary to the NAR policy which mandates that its always in the sellers best interests to make the property available to the widest number of buyers.

Privacy is sometimes a hallmark a concept called exclusivity. If a property is a sought-after property, like a waterfront property, the seller wants to attract a qualified buyer. The seller doesn’t want to be inundated with showings. They want a small number of fully qualified buyers to come and view the property.

What NAR is saying is that the seller doesn’t have the intelligence, in fact they don’t even have the right to choose how their property is marketed. Last month they had the choice, now NAR says that they don’t.

As I’m recording this episode, I have a gold coin on my desk. Part of what gives the gold coin its value is the scarcity of gold. If gold was as abundant as water, there’s no way it would maintain its value. It’s that exclusivity that gives it value.

When you take something that is rare and commoditize it, you actually lower its value in the eyes of the buyer.

It’s surprising to me that a sales organization like the National Association of Realtors would fail to understand such a basic concept.

The idea of value seems paradoxical. We know that if there are multiple bidders on a property, the value will be higher than if there is just a single offer. Casting the net wider using the public MLS makes it possible for more potential buyers to become aware of the property.

The fact is, realtors have multiple tools in their toolbox. It’s not a one size fits all. Clearly an exclusive listing for a commodity 1BR condo in a building that has hundreds of units might be inappropriate and not in the best interests of the seller. But to outlaw a tool, because it might be possible to abuse a tool seems highly unreasonable.

At the end of the day, the seller should have the choice of which method to market the property.

I Fear For Their Retirement May 12, 2020

Show notes

Incredibly we have seen the stock market rebound in the past week in response to the Federal Reserve monetary stimulus and the government’s fiscal stimulus.

But there are several characteristics about this market rally that are troubling.

1) The volume of shares being traded is way down. Not only that, the market index is being influenced by a smaller number of companies than perhaps at any time in history.

Let’s talk about what thin trading volume means in this context. It means that after the major selloff, there are not that many people looking to execute trades in the market. So a smaller number of buyers or sellers can significantly influence the price of a stock. The prices have gone up in the past week, but the buying sentiment is not broadly based, its very narrowly based. That means its quite fragile. A similar sized sell-off could easily crater prices.

2) Let’s talk about patterns of investing. I’m one of these folks who believes in investing on the basis of fundamentals. There is another school of investing called technical. That’s when you speculate on market timing and market psychology. Terms like bull market and bear market come from the world of technical analysis, where traders aim to time the market. Many analysts are calling this a bear market rally that is a precursor to the big drop.

3) Warren Buffet spoke about a week ago to the shareholders of Berkshire Hathaway. In his remarks, there were three items worth noting.

He is divesting if stocks including airline stocks. He is saying that it’s going to be a number of years before the airline industry recovers. After all, he is 89 years old and he likely won’t be alive to see the full recovery in the airline industry.

In the last downturn Warren Buffet was active in doing deals. For example, helped GE with a line of credit to ensure they had liquidity if they needed it. Today, he’s divesting of certain assets and is holding onto a record amount of cash. He isn’t making the same kind of bullish statements that we heard back in 2008 and 2009.

The Buffet indicator measures the total market cap (TMC) relative to the US GNP. If valuations are going up, and the economy isn’t growing, then the index goes up.

Let’s talk about why the stock market matters. Some people in the press are saying that the stock market is not the economy. That’s absolutely true. It’s as if to say that stock values can drop and it’s only a few wealthy investors who are going to have a smaller cash pile at the end of the day. Big deal. That’s not affecting main street.

Well folks, this is where the connected nature of our world is virtually impossible to escape. You see we have tens of millions of baby boomers who are nearing retirement, or have recently entered into retirement.

Guess where those retirement funds are highly concentrated? That’s right, the stock market. It’s in mutual funds. It’s in pension plans. While I don’t advocate the stock market as a place to invest right now. In fact I have been recommending against it for about 5 years.

When you’re dealing with people who are in their 30’s, they have plenty of time to recover from an investment setback such as we are experiencing right now. But if an investor is in their 60’s or 70’s, they simply don’t have the time to hope they can make it back. If they’re incurring losses, these losses are likely permanent.

The focus has been on job losses in the employment economy. Let’s not forget that the scope of the pain is going to extend far beyond the immediate. If retirees suddenly lose 30%, or 50% of their retirement savings because of a stock market crash, their spending power has been diminished for decades to come.

AMA - Help for Residential Landlords May 11, 2020

Show notes

Brian from Ottawa Canada asks.

I'm wondering if there has been any discussion about the lack of government support for residential landlords? In this environment, it seems like we're one of the forgotten ones. Deferring mortgages seems to be a decent temporary measure but replacing rental income is far more important.

Brian, this is a great question.

Tenants and Residential landlords are both feeling the pinch from the current economic conditions. The economy is facing millions of claims for unemployment benefits. This is the time when you need to be in contact with your tenants on a regular basis to make sure they are clear on the terms of any reduction in rent payment.

Governments all over the world have implemented a moratorium on evictions for non-payment of rent. That is not the same as saying that the tenant doesn’t need to pay rent. All it has done is remove one of the remedies that landlords have to enforce the payment of rent.

If a tenants says that they can’t pay rent, then you need to ask them to produce documentation that supports why they need some rent relief. This includes, paperwork from the government on their new unemployment cheque. They need to demonstrate what their income was before they lost their job, and now what their income is now while they are collecting an unemployment cheque. In many cases, the current income numbers are very close to the previous numbers.

If their income has gone down, then you need to ask the tenant to show you their budget. They can’t just stop paying rent because they feel like it.

In a handful of cases, we have negotiated with our tenants a reduction of their rent for a period of time. The change has been written into a rent forgiveness letter, and the tenant must continue to pay the revised number.

You see, right now the government is stepping in and helping people who are out of work and replacing their income. If their income truly goes to zero and they don’t have the money to feed their family, then that’s a different story. A moratorium on evictions does not mean tenants no longer are required to pay rent.

If a property owner is experiencing a shortfall in revenue, there are a number of different types of discussions that can be had.

In many markets, we are seeing that the city has offered a 6 month deferral of property taxes. This ultimately won’t help with a shortfall of money. The city eventually wants its money. But if you have a short term cash flow problem, a deferral of 6 months in property tax is better than going out and borrowing money.
You want to have a conversation with your lender. If you are experiencing a cash flow problem, you may be able to negotiate a small loan modification that consists of a deferral of the principal portion of your loan. Under that scenario, you would still pay the interest. The loan would be considered current, meaning there would be no default on the loan. The principal would not reduce according to the amortization schedule, and the effect of the principal deferral is that you would essentially be adding, say, 3 months to the length of the loan. Just like there is a moratorium on evictions, there is a moratorium on foreclosures in a number of jurisdictions. That doesn’t mean that property owners don’t need to pay their mortgage all of a sudden. The same logic holds here as well.

While you are correct in saying that there are no programs specifically aimed at residential landlords, this actually makes sense.

You see, the money is needed by the people who lost their jobs at the outermost extremities of the economy. I’m talking about the people who produce through their labour, who have earned income.

Landlords are further up the food chain so to speak. As a landlord, I would not want to see a situation where the government pays the rent to me, but pays nothing to my tenants.

Special Guest Steve Olson May 10, 2020

Show notes

Steve Olson runs the Fourplex Investment Group (website fig.us). He has developed a strategy that is adding value to the market by building new product in areas where the land cost supports a rental rate to reliably recoup the investment, even in today's environment. I love this strategy.

Russell Gray, Part 4 May 09, 2020

Show notes

In this final segment of a four part series, Russ and I talk about how to value assets and in particular real estate. Today's final mind blowing segment will bring home the ideas that underpin how to think about investment.

You can hear more from Russ on The Real Estate Guys Radio show at realestateguysradio.com.

What The Heck Are You Thinking? May 08, 2020

Show notes

On today’s show we’re looking at how investors are investing today.

There’s no question that we are living in uncertain times. The stock market is pushing valuations that can’t be supported by the current level of profitability in the economy. So what’s driving it?

I feel like we need to go back to basics and talk about how investments are made, or at least how they should be made in my view.

Money comes to you through one of three mechanisms

Earned Income
Residual income
Capital Gains

If we’re talking about investing, then it comes through one of #2 or #3 either residual income or capital gains. Residual income, by definition means that a business is generating cash positive cash flow. Capital gains happens either because you bought something at a deep discount to its true value, or the value increased from the time you bought it.

In order to make a good investment, you need to be able to assess which of those is at play. Is there positive cash flow, payable to investors, and if so, how much? If there is a capital gains play, or a value play, are you buying the business at a discount or are they on a trajectory to create enough value from today’s purchase price that you are making a good buy?

If you can’t give an affirmative quantifiable answer to one of those questions, I’m starting to lose track of what you’re doing. That drifts out of the realm of investing into the sphere of speculating.

How on earth are you going to evaluate the value of a company that can’t provide any forward guidance on revenue or earnings? Many publicly traded companies in their most recent investor communications have declined to offer forward guidance. Don’t get me wrong, the executives are doing the right thing. They really have zero ability to provide meaningful guidance. If they gave a number, they’d be making it up out of thin air.

So why have people been piling back into the stock market in recent weeks? It makes no sense to me.

Quite simply, the investments are being made based on a belief that the Federal Reserve, and the Treasury will print as much money as it takes to save key sectors of the economy. If you believe that the airlines will be saved by the government, then Delta Airlines and British Airways must be a good investment, right? Or if you believe that the cruise lines will be saved, then Carnival Cruise line must be a good investment right?

The only thing that makes the investment a little better than another is the notion that the Fed is going to save the company, no matter what it takes. But folks, that’s not the same thing as investing in a company based on fundamentals. In a few short weeks, the stock market has gone from one where investors invested in companies, to one where investors are front running the Fed expecting that if the Fed is going to pump money into it, it’s a good investment at any price.

The Fed doesn’t have the power to grant money. They only have the power to lend money. The money actually will be coming from the government and the terms of those cash infusions haven’t been fully disclosed.

What I’m seeing in the market right now is that people are making investment decisions based on who is getting a government handout. The government handout that is being helicopter dropped from the sky, falling upon some and leaving others behind.

Don’t get me wrong, survival is a good thing. If you’ve decided that you want to hold onto a liquid investment, like shares of your favourite public company, then you definitely want to understand the story. But that’s not the same thing as making a new investment, expecting that you will get residual income, or perhaps you’re secure in the knowledge that you are buying a bargain at today’s price.

I’m parking funds on the sidelines in physical metal, or in real assets where I feel confident in the earnings from those businesses.

Where Are The Bright Lights? May 07, 2020

Show notes

On yesterday’s show I spoke about using the energy of the market to aid you in your quest. Use the energy of the market to your advantage as you evolve your investment strategy.

On today’s show we’re going to look at a few asset types that we believe are eventually going to do well once through this period and once this pandemic recedes and we are into a recovery phase.

My analysis of various segments of the market show that some sectors are feeling tremendous pressure, and others are just ticking along like nothing has happened.

The ones that are doing poorly are will probably come as no surprise. But even in these segments, there are some bright lights.

The worst performing asset class right now is hospitality. Hotel occupancies across North America are averaging below 10%. According to a report from Colliers, most hotels have laid off much of their staff and are either closed completely, or are operating on a skeleton staff.

Short term rentals are a segment that overall have been hard hit. We’ve seen some announcements from AirBnB in recent days of large workforce reductions and cost cutting measures in response to the fall in bookings. But some short term rentals have done surprisingly well. In those locations, they’ve filled a particular need. Our own portfolio of short vacation rentals had very low occupancy in April, which in a normal year would also have very low occupancy. April is between seasons in the mountains. It’s after ski season has shut down and before the summer vacation season. As of last weekend, we’ve seen a flurry of bookings as lockdown orders have been relaxed.

Retail store front real estate is also struggling. The social distancing requirements have closed down most non-essential businesses. This includes clothing stores, restaurants, bars, many primary health care locations including dental clinics, massage therapists, and hair stylists. We’ve seen a 50% drop in our commercial rent collections.

Commercial office space is also struggling. This is particularly true in the co-working office model. These businesses operate on very thin margins because their operating costs are high, higher than regular office space because they carry more staff.

Many companies are re-examining their office space as they’ve continued to operate with large parts of their workforce remote.

Residential multi-family continues to do well. But the huge impact to the economy means that many having lost their primary source of income will eventually lose the means to pay rent. Unemployment benefits are closing the gap. But the moratorium on evictions could have the effect of encouraging non-payment of rent. Multi-family remains a good asset class, but the degree of leverage will determine how well these assets perform under these challenging market conditions.

There are three asset classes that are actually performing as if nothing has happened.

Warehouse and distribution centres that serve essential businesses continue to do well. These include grocers, online retailers that have been less impacted by the shutdown. Online retail sales are up 10% year over year in March as residents leverage deliveries to purchase essentials to set up home offices.

The operators I’ve spoken with in the Self Storage segment have seen no measurable drop in rent collection. That doesn’t mean this segment is fully insulated. If people are looking to cut costs, this might eventually become an area of cost cutting. But for the moment, it has not been the first to be cut.

Boat and RV Storage also continues to operate with no measurable change. This might change if and when people look to sell their boats or RVs in order to raise cash. But even if they sell, the boats and RV’s still exist and will simply change hands.

There are other asset classes that we have not analyzed yet. But for the moment, these are an initial analysis of the landscape.

Flip The Thug On His Back May 06, 2020

Show notes

When I was a young boy, I studied martial arts. But not any martial art. The fashionable ones at the time were Karate and Kung Fu. They were full of very flashy strikes and kicks.

No I studied Judo, the Japanese art form. One of the things we learned in Judo is that if someone is coming at you, you could expend a lot of energy trying to stop them.

Instead, in Judo, you use the energy of your opponent to their own detriment. In the simplest example, you might have someone coming at you at very high speed. If you stick out your foot and trip them, they are probably going to fall flat on their face. Or you could rotate them over your shoulders and flip them onto their back on the ground when you can easily pin them down.

They’re too big and heavy to pick up slowly, rotate in the air above your head and then place them down on the ground on their back. But if they’re coming at you, it doesn’t take that much energy at all.

Many people I speak with are trying to push against the system.

We’re starting to major defaults across many industries.

We’re seeing J Crew, JC Penny, Hertz Rental Car, Neiman Marcus, all filing for bankruptcy protection, or on the verge of filing for such protection.

There are a lot of people out there fighting against the tide. They’re resisting the tidal wave of energy that is coming at them.

My advice is don’t fight it. That doesn’t mean you shouldn’t fight to save your business. Absolutely you should. When I say don’t fight it, what I mean is don’t enter a state of denial. If the energy in the system is in the direction of an economic downturn, then lean into the downturn.

When I say don’t fight it, what I really mean is to align yourself to take advantage of the energy in the system, to use that otherwise destructive energy to your advantage. You literally want to perform a judo flip on your investments.

AMA - What Are Your Sources? May 05, 2020

Show notes

Ryan from Arlington Texas asks

Hi Victor,

You always seem to be ahead of the curve, and you do a wonderful job informing your listeners about the trends you see in real estate and current events.

Where do you like to get your news? What are some of your bookmarked websites (or other mediums) that you refer to most often?

Love the show. Thanks for all the great content.

Ryan,

This is a great question. I produce several different types of segments on the Real Estate Espresso Podcast.

Evergreen content
Trending Stories
Journaling - These are stories from direct observation of my own projects
Interviews
Book of the month
AMA episodes

Your question relates most strongly to those topics that are trending in the industry. These shows require the most research. They are those that somehow tie into something that is happening in the broader economy.

For that, I have numerous sources. I tend to stay away from the headline sources like the NY Times, and the Washington Post. I almost never look at USA Today or CNN or Fox News.

I find that when it comes to commercial real estate, the Wall Street Journal does a dreadful job. So I rarely look to the Wall Street Journal for real estate, but they are a source of good economic, and geopolitical information.

I have many go-to sources. They include the World Economic Forum, Business Insider, and the newsletters of various economists.

I go to the research departments of the major brokerage houses like Colliers, CBRE, JLL, and Marcus and Millichap. I use the economic research from the big 4 accounting firms.

There are a number of people I follow regularly, many of whom I know personally. I’m thinking of folks like Peter Schiff, Simon Black, Dr. Doug Duncan, John Mauldin, Ray Dalio, and Harry Dent.

While I may not quote them directly, the information I receive from them gives me a thread to follow. So for example, if the story is something on, say, demographics and the story references an updated data set in the census data. I’ll go find that census data, download it onto my computer, bring it into Excel and calculate a new slice of the data that would be relevant to our listeners.

In your question, you talked about my reporting being ahead of the curve. It’s true that I’ve made numerous predictions this year that have appeared in the podcast days or weeks before they’ve appeared in the news. Whenever that happens, it’s the result of some analysis. I rarely just report the news without adding any value. Thought leadership involves using my own intellect to add value. That’s an exercise in connecting the dots.

For example, on January 29, I predicted that we were going to experience a deep recession as a result of Covid-19. At the end of January, this was hardly headline news anywhere. Connecting the dots frankly was easy. If you go back to the impact of travel reductions in 2003 due to SARS, the GDP in the US fell 1.5%, solely from the impact to travel and hospitality. The scope of travel reductions and supply chain disruptions by the end of January were already looking to be larger in impact than 2003. Predicting a recession was as plain as day.

I’m going to go out on a limb and make one more prediction. I’m going to predict that once social distancing requirements are eased, people who have been stuck at home for nearly two months will be looking for a get-away. But it won’t be the charter flight to an all-inclusive resort. It’s going to be a while before people have the confidence to jump on crowded flights.

The vacation of choice will be a cabin on a lake, a chalet in the mountains, far from the crowd, or perhaps an RV vacation. If you own a short term rental within driving distance of a major center, you are well positioned to fulfill the demand that will return with a vengeance.

Statistics Can Prove Anything May 04, 2020

Show notes

On today’s show we’re going to do an analysis that show how you can use numbers from the same data set to construct virtually any story that you want.

We are continually exposed to data in the news and the news source will provide an in-depth analysis with lots of supporting data.

Let’s say that you wanted to create a narrative on which country is experiencing the worst outbreak of Covid-19. For the purpose of today’s show, we’re going to rely on data that is available on worldometer.com. This website collects all kinds of global data like population data, global oil reserves, coal reserves, the number of bicycles manufactured each year, and yes, statistics related to the Covid-19 outbreak.

Of course the conclusions you draw from the data are only as good as the data collection that supports the numbers.

But on today’s show, we are going to also examine which measures provide meaningful insights, and those which are completely useless.

So back to our question, “Which country has experienced the worst outbreak of Covid-19?”

If we go to world-o-meter, you would see that as of today, May 4, 2020, the United State has more reported cases than any other country. The data shows that of the approximately 3.5M globally reported cases, approximately 1.2M are in the United States.

But we know that testing and reporting has not been uniform across the globe.

There is a clear correlation between testing and reported cases. If you’re not testing, then the reported numbers would be low. So let’s take a deeper look at the testing numbers and see if that can give us a clue.

The USA reports having performed more than 7.1M Covid-19 tests, more than any other country. Russia is a close second with 4.1M tests. So perhaps the numbers are accurate, the US has the worst outbreak in the world.

Let’s take a closer look and see how the testing compares against other countries. So far, the US has performed 21,400 tests per million of population. That would place the US in 42nd position out of all countries in the world for extensive testing.

So maybe that’s not the best metric. Perhaps we need to look at the number of serious cases and compare that with the ability of the health care system to handle the outbreak. Next down the list is Brazil with 8,300 serious cases. They have far fewer critical care beds and have experienced significant outbreaks in areas with very poor health care infrastructure. Perhaps Brazil is the hardest hit country?

What about deaths? Which country has experienced the most deaths? Maybe that’s a better measure. So perhaps let’s look at the number of deaths due to Covid-19.

Here too, the US leads the world with the largest number of reported deaths due to Covid-19 with 68,200 deaths. Clearly, the US is the hardest hit country.

But wait a minute, perhaps that’s not a meaningful measure. The US has a large population and a huge land mass. Perhaps the number of deaths per million population would be a better measure. If you look at deaths per million, then San Marino leads the world with the most cases per million population at 1,208 deaths per million. But of course San Marino has a tiny population so even their small cluster outbreak which killed 41 people could provide a skewed statistic. Let’s see who’s next. Next on the list is Belgium with 7,844 deaths and a whopping 677 deaths per million population. The US which has more deaths at 68,000 deaths has 207 deaths per million, less than a third of Belgium.

The next major countries after Belgium include Spain, Italy, the UK and France having the most deaths per million population.

So the top 5 hardest hit countries are Belgium, Spain, Italy, the UK and France.

Our TOPPODCAST Picks

Follow Us

Stay Connected

The Real Estate Espresso Podcast

Related Podcasts

Links

Stay Connected