The Real Estate Espresso Podcast

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AMA - Is It A Deal? Mar 24, 2020

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This question is from Dan in Alberta Canada

I just put an apartment under contract and working through the DD.

It’s a 32 unit 4 storey for $50,000/door in a town with heavy reliance on the oil industry. At present the gross monthly revenues are 17k. The property was mismanaged and vacancy is 45%. The rest of the market has about 20% vacancy. Rents are now 20% less than the present market rents. In it’s peak days, gross rents were 60k.

I’m having mixed thoughts In these uncertain times... What are you suggesting?

1. Wait and see

2. Buy during these fearful times, as deals are best.

Dan this is a great question.

On the surface, when you look retrospectively, it looks like the property might be a deal. The purchase price is well below construction cost, and the market has delivered stronger performance at this property in the past. That’s all in the rear view mirror. We would both agree that driving a car using the rear view mirror alone for guidance is a recipe for disaster.

We are about to embark upon one of the largest economic slowdowns in our lifetime. The impact of this is unknown in many respects.

We don’t know what the credit markets will look like in 15 days or 30 days, let alone six months.

You mentioned that the local economy is driven by the oil industry. The oil industry is in the middle of a price war and the community that depends on oil production for its lifeblood will very quickly experience even greater reduction in workforce if prices remain anywhere near current levels. We’ve experienced a massive drop in global oil demand over the past two weeks which has caused prices to drop as stronger players aim to protect their income streams at the expense of weaker players. At a certain point with prices near levels we haven’t seen in over 20 years, these companies are losing money. The price of oil varies widely based on the cost of transportation. In places like Alberta where the transportation costs are high due to the lack of pipeline infrastructure, oil prices hit a low $7.23. Let’s let that number sink in for a moment. Even the OPEC price of $27.31 is at extremely low levels we haven’t seen in decades. So much of the global oil industry has been financed with debt. Many companies will end up defaulting on their debt and the stronger players hope that will result in a drop in supply.

If you don’t have an influx of population into the market, it’s hard to see how you’re going to implement a turnaround on this property in the current environment.

Making investment decisions requires a measure of certainty in the market conditions. There’s always a degree of risk in any market. But today we have so many risks that it’s virtually impossible to quantify the impact of each of the individually, and then in combination, it’s well above my analytic ability.

The key to answering this question. How long will this economic disruption last? The true answer is that nobody knows. There have been a few promising announcements that chloroquine, a 70 year old anti-malaria medication has been shown to be effective in treating patients with Covid-19. If that’s the case, and the clinical trials prove positive, we might be looking at a shorter period of economic disruption. That depends on whether this drug, or perhaps another, or a combination of drugs proves effective.

The chances are high that this situation will precipitate a credit crisis. Government backed loans only represent a small proportion of all lending activity. If there is a crisis in the private lending market, then we can expect a fall in asset prices just like we saw in 2008.

This particular building may be a deal, but I personally would advise you to be patient and continue to monitor the situation. You might find an even better deal in the weeks and months to come.

The Prepared Pantry Mar 23, 2020

Show notes

On today’s show we’re talking about preparation for the next several weeks. It’s stunning to me that I still talk to people on a daily basis who have made zero steps to prepare for a possible period of complete social isolation. Many who I spoke with in the past week had less than a week of supply in their pantry.

We’ve starting preparing for the possibility of a social lockdown over a month ago. As of now, we have about 8 weeks of supplies such that we can remain isolated for 60 days without going shopping if we need to. We are still going out to the grocery every few days and making sure we keep the pantry topped up.

We’re also mindful that as the disease spreads through the community, so too does the risk of going out even for a trip to the grocery store. Sooner is lower risk than later. Our latest visit to the grocery shows that the shops are empty of many essentials at this point. There is no flour, very little in the way of paper products like toilet paper, no rice, no coconut milk, no tofu.

We made sure to have a large supply of canned items and dried goods that have a long shelf life. Canned goods have the benefit of being easy to trade if there’s something you need that someone else has.

In our family, we have a Vegan diet which means no meat and no dairy. At some point if we face a lockdown situation we may have to rely upon what food we have in our house completely for an extended period of time. We will be relying on beans as a primary source of protein. So we have a lot of chick peas, lentils and beans that we can use in preparing meals.

We also purchased a fair bit of frozen vegetables. This is not something that we would normally consume, but if we are not going out, they will come in handy in meal preparation. We have a healthy supply of spices. When we speak about food tasting good, that has more to do with the seasoning of the food than the taste of the underlying ingredients. We recognize that part of our own emotional well-being will center around how we care for ourselves and how well we eat.

We have a few meals of prepared foods that are frozen and can be quickly heated and served. We don’t have a lot of these because they take up a disproportionate amount of space in the freezer.

We have dried foods like Rice, and Pasta. Some wonder how to calculate how many days of food are in their cupboard. For example, a one pound package of pasta will feed about 4 people, or about 100 grams per person if you do the math using the metric system.

There are some things we have not purchased. For example, we have not bought freeze dried foods, what some people call astronaut food. It’s partly because these portions are about 4 times the cost of regular food. They have a long shelf life, but it’s far from something we would normally eat. We felt that sticking as close to real food was the best choice for our family.

We have made certain assumptions about what will remain operational. For example, we expect that running water will continue to function, and that electricity will be reliable. So far we haven’t seen any cases of mass outages in the West. There is some risk. If you’re relying on your own well water for drinking water, then you should definitely stock up on drinking water. If you faced an equipment failure, it could be a long time before you got service to come and fix your pump.

We made sure we have about a two month supply of soap for the dishwasher and for the laundry. We do laundry on a regular basis, and this will be even more important if we go out for any errands. When we come back in the house from the grocery, the clothes go straight into the laundry and we go straight into the shower.

If you do the math on the social isolation required to protect our healthcare system, you quickly conclude that the period of social isolation we’re talking about is not measured in weeks. It’s measured in months.

George Ross on Covid-19 Mar 22, 2020

Show notes

Mr. George Ross, now 92 years old was Executive Vice President in the Trump Organization and Donald's right hand man for close to 47 years. On today's show George shares his perspective on the Covid-19 outbreak after having spoken with The President earlier in the week.

Covid-19 With Dr. Chris Martenson Mar 21, 2020

Show notes

Dr. Chris Martenson has a PhD in Pathology from Duke University and is one of the founders of Peak Prosperity along with Adam Taggart. Chris was one of the first people in the West to flag Covid-19 as a major global health issue on Jan 23. Today's conversation with Chris covers the outbreak from a scientific perspective. To find out more, connect with Chris at peakprosperity.com and check out his YouTube videos on Covid-19.

The Massive Bailout is Coming Mar 20, 2020

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There are so many aspects to cover these days. The entire world is truly in uncharted territory. It seems almost trivial to wonder whether tenants will pay rent on April 1, and May 1 and June 1? Landlords truly don’t know how many tenants will have been laid off, and how many will simply not pay rent in anticipation of the need to conserve cash. These things may happen.

We are in a moment of crisis, globally. It’s far more important to focus on staying healthy and keeping people who have existing health risks well isolated from any possible path of infection. The heartbreaking stories circulating the news services are incredible. There’s the story of a A Japanese man from Gamagori in central Japan with liver cancer and the new coronavirus wanted to enjoy a last night out before going to the hospital. He held hands with a hostess who so far hasn’t tested positive but he ended up infecting another employee at a karaoke bar and causing a national uproar. On Wednesday, he died, just two weeks after what turned out to be his last song.

There’s the story of an Italian nursing home with the small town of Cremona. I’ve visited that town many times. This nursing home has 460 beds. In the past week there had been 18 deaths at this facility of patients with respiratory difficulties - symptoms associated with the coronavirus on just a single day. None of these residents had been tested and therefore none of them fall into the official Covid-19 death-toll. So far in Italy, about 8% of healthcare workers have been infected. In the United States, the Center for Disease control has advised health care workers that if they exhibit symptoms of the virus, to put on a mask and gloves and get back to work.

It’s amazing to me that there are still people out there thinking this Covid-19 thing is totally overblown. I’m seeing people lose friendships over a difference of opinion about this outbreak. It’s amazing how this is challenging some closely held beliefs for some to the point of rupturing life long friendships. I think this is because the most basic of human survival is at stake.

On today’s show we’re talking about how you as landlords can open a dialog with tenants and how the government is making overtures that they plan to make direct cash payments to the population within the next month. You have an early warning that you need to take action to strengthen your balance sheet. If you have access to lines of credit, I recommend that you draw on those funds before the lines get pulled back.

The White House has proposed nearly a trillion dollars in emergency funding, and up to $250 billion of that trillion dollars going directly to citizens. This spending will require an act of Congress, and details are still being worked out.

The Canadian government has recalled Parliament and is expecting a bailout package for ordinary citizens that will be available in the next two to three weeks. While many programs discussed publicly have focused on employees, we have to remember that the economy has an increasing number of self employed workers. These include the entire spectrum from lawyers, doctors and dentists, to folks who drive for Uber and Lyft. None of them would qualify for traditional unemployment insurance benefits. Oh yes, that also includes real estate investors.

It reminds me of a simple example where if you, as a single landlord run out of cash, you might be forced to declare bankruptcy. In that situation, you have a problem. But when tens of millions of people run out of cash, then the banks have a problem, and the government has a problem.

There will be an increasing number of programs coming available. Banks will be asked to do their part to help their customers. The banks will only do so if they believe the government will backstop any financial commitments made.

Will This Be An Economic Winter? Mar 19, 2020

Show notes

Despite all the public warnings from governments and health experts all over the world, there are still people out there thinking that the SARS Cove-2, also known as Covid 19, the entire situation is being over-blown, that this is no more dangerous than the flu. The UK government was taking a very passive role up until a couple of days ago when they made a dramatic shift in strategy. The clearly saw some new information, some studies that scared the heck out of them and decided a change was appropriate.

Think about it, Italy had 4,200 new cases and 475 deaths yesterday, and has been averaging about 350 deaths a day for several days before that. These are huge numbers. If we scaled that up to the size of the United States, we’re talking deaths of over 2,000 people a day, and many times that in intensive care. These are huge numbers. Their health care system is crumbling under the weight of the new cases coming in requiring intensive care. Clearly some action is needed to slow down the progression of the disease to protect the health care system. Governments have been telling people that they need to eliminate social interaction for the next two to three weeks. The general population can handle a few weeks. They’ve been told that they don’t need to stock up for more than just a few days.

On today’s show we’re talking about the scope of the economic shutdown that we’re currently in the middle of. Many people are asking the question “How long?”.

I’m wondering, is this an economic blizzard, or an economic winter? In an economic blizzard, everything grinds to a halt, the community bands together, cleans up the situation and not long after, life is back to normal. An economic winter is an entire season. It could be a deep freeze, and hopefully not an ice age.

In a world of social distancing, businesses all over North America and Europe are either closed or operating with telecommuting. Some areas have allowed restaurants to remain open at 50% capacity.

The mortality rate is incredibly high compared with the flu. Since we don’t have a cure, nor a treatment, social isolation is key to prevent the spread of the disease. The big question is how long. If the goal of the isolation is to completely suppress the virus and eradicate it much like we have managed to do with Polio, then it will take an extensive period of social isolation, aggressive testing and aggressive contact tracing. Only when we have a vaccine that has been proven and manufactured in quantities will we be able to resume normal social interaction. But that’s at least nine months away, even if we had a vaccine today which we don’t. The process of introducing a vaccine requires a pre-clinical trial for 90 days, followed by a limited clinical trial, followed by volume manufacturing, and then the time it takes to immunize millions of people.

In mitigation, the virus is present in the population. As soon as you allow people to interact again, the rate of infection picks up where it left off and we will overwhelm the healthcare system in a matter of weeks.

So here too, the period of isolation ends up being extended for quite a while. While governments have not been sharing this perspective with the general population, the mathematical model to simulate the spread of the virus through the population is no great secret. The simulation is quite straightforward. If unchecked, the virus would envelope the population in 120 days, and governments aren’t trying to prevent it from happening. They are only trying to slow it down. So let’s say they’re trying to slow it down to no more than one percent of the population gets infected in a single week. That would take 100 weeks, or nearly two years. Italy’s health care system has been crushed in a very short time period. And penetration of the population is estimated to be no more than 1%.

$50 Billion Request For The Airlines Mar 18, 2020

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The airlines are critical to virtually everyone in society, including real estate investors. So today we’re talking about the airline industry. I’ve traveled extensively over the years for business and pleasure. Despite the recommendations from government to reduce travel,

There are currently 90,000 passengers on cruise ships around the world whose fate is uncertain when their cruises end. Even once they’re back on land, the reality of flights home may be far different than when they boarded the ship.

Most airlines have already announced massive reductions in capacity in recent days. Many international routes have been cut by 85%, in some cases 100%. Domestic routes have been cut by anywhere from 10% to 50%.

Westjet flight attendants union announced that they expect layoffs of 50% of the airline’s staff in the coming weeks.

So far a consortium of airlines Industry trade group Airlines for America, or A4A, have asked the US Federal government for an aid package of $50 billion. This is a combination of loans, loan guarantees, and grants. The trade group argued that roughly half of the proposed assistance—$25 billion—should come in the form of direct grants to airlines. The proposal also outlines a $25 billion program in which the Federal Reserve would purchase financial instruments from, or provide interest-free loans or loan guarantees to, the carriers.

United Airlines alone estimating its revenue would be down $1.5 billion in March from a year ago. United Airlines cancelled their new pilot training program, but Air Canada is looking past the current business interruption and continuing to hire and train pilots.

A4A, also proposed $8 billion in grants and guarantees for cargo carriers. U.S. airports are separately seeking $10 billion in assistance to counter forecast full-year losses already approaching $9 billion. The airports collect their revenue through landing fees that are charged to each passenger as a supplement to their airfare. This pays for the operation of the airport and the debt due on any airport improvements.

In a matter of days, American Airlines managed to reach an agreement with its pilots union. These negotiations typically take months of dialog and the can gets kicked down the road many times.

When this downturn ends, the airlines will need to spin up to capacity very quickly. But in order to do that, pilots need to remain current. They need to complete at least 3 landings as pilot in command in the past 90 days. They also need to remain current on their medical and any flight tests. When a pilot is qualified to fly, they are certified on a single aircraft and only that single aircraft. You’re not going to have a Airbus A320 pilot all of a sudden switch to a Boeing 787. That’s a completely different equipment rating. You can do all of this work in the simulator.

The big question is how long is this disruption going to last? Like we said on yesterday’s show, is this an economic blizzard or an economic winter?

Some estimates I’ve seen have suggested that if the lockdowns we are seeing in the economy are successful in slowing the spread of Covid-19, the time that will be required to limit the spread through the population will be extended. That means possibly an extended period of reduced social contact, and therefore an extended period of economic slowdown.

Will the airlines undergo a substantial long term shrinkage in the industry as a result?

The White House has been clear that maintaining the airline industry is a priority as a matter of national security. Some lawmakers have opposed the bailout saying that protecting workers is a priority above protecting corporations. Perhaps those elected officials don’t realize that the path to paying workers is through the companies, without which there is no employment.

Managing Cash Flow During Covid-19 Mar 17, 2020

Show notes

On today’s show we’re talking about the challenges that many property owners will be facing during this unprecedented time in modern history.

We don’t know if the Covid-19 crisis is merely a blizzard or an entire winter. Depending on the answer to that question, the extent of the economic damage can vary widely. Most people can survive an economic blizzard. Things slow down for a few days. Everyone gets their shovels out and digs out. A few days later life is back to normal. In an economic winter, a different approach is required.

Today’s discussion is a microcosm of the hundreds of similar situations that are happening in industries all over the world. If you’re in the restaurant business, if you’re a taxi driver, if you’re an airline pilot or flight attendant. Hundreds of millions of people are being directly affected economically by the current outbreak. The real estate example we’re focusing on today is short term rental properties.

I’m an owner of a portfolio of properties in the Rocky Mountains. A current search shows over 300 listings available for next week. Normally at this time of year, we’re running about 80%-90% occupancy.

This past weekend, AirBnB changed its extenuating circumstances cancellation policy. This policy over-rides the policy that each AirBnB host lists for their properties.

We have seen a flurry of cancellations over the past three days. In many of those cancellations, guests have been making false claims in order to qualify for a full refund. The AirBnB policy says:

“We may be able to give you a refund or waive the cancellation penalties if you have to cancel because of an unexpected circumstance that’s out of your control. Below is a list of circumstances covered by our Extenuating Circumstances Policy. Before you cancel, check that your circumstance is included in the list below and that you can provide the required documentation.”

Unexpected serious illness or injury
Government-mandated obligations
Transportation disruptions
Travel restrictions
Epidemic disease or illness

In my case, my properties are not in a location that has identified any Covid-19 cases. As such, unless the guest is unable to get to the location due to, say, a flight cancellation, they would only be entitled to a 50% refund and not be entitled to a 100% refund.

As an AirBnB host, we want to be sympathetic to guests who are genuinely afraid of traveling in today’s environment. I cancelled two trips to Europe and paid a 50% cancellation fee to the AirBnB host in Rome.

There are three main questions that need to be answered.

1) Are we going to be unsympathetic to guests who want to cancel?

2) Has the guests false claim that the property is infected going to stigmatize the property and lead AirBnB to improperly flag the property as having a problem?

3) How will the property pay its bills in the coming weeks and months?

Some people may experience travel disruptions due to flight cancellations.

Clearly we are sympathetic. I would not choose to be traveling right now. At the same time, we have bills to pay, condo fees that are due and mortgage payments that are due.

In our case, we have a cash reserve that will carry us for a period of time. But that cash reserve never contemplated 0% occupancy for an extended period of time. We are probably not alone in that regard. We will have to tap additional resources in order to cover the negative cash flow.

A 2019 report by the JPMorgan Chase looked at 1.4 million small businesses with a business account at the bank and found 29% were unprofitable, and 47% had less than two weeks of cash liquidity. That means that nearly 76% of US small businesses could be insolvent in less than a month.

You should take immediate steps right now to reduce expenses and conserve cash.

Money is Free Now, Sort Of Mar 16, 2020

Show notes

The markets woke up this morning to a new era of zero interest rates in the US, and a coordinated effort with 5 other central banks to ensure liquidity in international markets.

The Federal Reserve slashed its benchmark interest rate to near zero on Sunday and said it would buy $700 billion in Treasury and mortgage-backed securities in an aggressive bid to prevent market disruptions from aggravating what is likely to be a severe slowdown from the coronavirus pandemic.

The Fed’s rate-setting committee said in a statement Sunday “The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses.”

As we’ve talked about before, it’s not entirely clear what these moves are intended to accomplish in the broader economy. The slowdown wasn’t caused by a lack of liquidity in the market. We have an unprecedented simultaneous drop in both demand and supply due to the corona virus outbreak.

It’s not like the drop in interest rates is going to stimulate me to hop on a cruise ship next week.

The Federal reserve is basically allowing the banks to buy treasury bills, up to $500 billion worth. In addition, they’re going to take $200 billion in mortgage backed securities onto the Federal Reserve’s balance sheet.

In his remarks, the Federal Reserve Chairman Jerome Powell said that he was seeing stresses in the market for Agency Mortgage backed securities, specifically Fannie Mae and Freddie Mac. He said this was necessary to enable refinance activity and enable buyers to continue to buy new homes.

So the Fed is clearly seeing a credit crisis emerging from the economy screeching to a halt in a matter of days.

The Fed also said firms could use their capital and liquidity buffers to lend, and reduced reserve requirement ratios to zero percent effective on March 26.

That’s an astounding statement. Think about it, the banks are no longer required to maintain a deposit reserve. The Fed is going to print an infinite amount of money, and it’s going to allow the banks to print an infinite amount of money, backed fully by the authority of the US Federal Government.

Fed said the financial institutions should feel comfortable tapping into the discount window as a tool for addressing “potential funding pressures.” In the past, banks have been hesitant to tap into the direct lines of funding because of the stigma associated with relying on the Fed for emergency funds. The Fed also reduced the interest rate for the discount window to 0.25% and these lines can be accessed for up to 90 days.

We’ve seen the Federal Reserve pump over $400B into the Repo market earlier this week.

Despite the aggressive move, the market’s initial response was negative. Dow futures on Sunday pointed to a decline of some 1,000 points at the Wall Street opening on Monday morning. The stock futures hit a limit which automatically stopped trading activity whenever there is a decline of 5% or more.

Treasury Secretary Steven Mnuchin said his agency would advance funds to businesses so they can meet paid sick-leave requirements under a new House bill to combat the Covid 19 outbreak. He said employers will be able to use cash deposited with the IRS to pay sick-leave wages. In essence, the funds on deposit with the IRS for payroll could be used as a line of credit for paying sick leave. For businesses that wouldn’t have sufficient taxes to draw from, the Treasury would make advances to cover the costs, he said. It’s important to remember that this sounds like a loan, and the terms for repaying the loan are not at all clear.

Now is the time when businesses need to be taking the necessary steps to conserve cash and reduce expenses.

Live Coaching Session with Adam Gower Mar 15, 2020

Show notes

On today's show we take a live look at my own website from a digital marketing perspective. Adam has some powerful insights on how content can be repurposed to create additional searchable content that can expand the digital reach. Adam can be reached at gowercrowd.com.

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