The Real Estate Espresso Podcast

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Investment Metrics - The Equity Multiple Oct 07, 2019

Show notes

I often have both investors and consulting clients ask me about various metrics contained in the executive summaries we prepare.

In order to maximize the benefits, investors need to know how to effectively compare opportunities. That’s often easier said than done, because the entire concept of valuation is often highly subjective. So while it’s certainly possible to gauge the potential returns, security and performance of any given property, investors need to know how to use the right tools to do so.

A lot of investors use the cap rate as a measure of the attractiveness of an opportunity. But the cap rate really only talks about the profit potential for a project, independent of how you might finance a project. Clearly the operating performance of an apartment complex at a 7% cap rate is not going to depend on the financing. But the rate of return to the investor will depend heavily on the financing structure. If we’re paying a 9% interest rate for debt versus a 4% interest rate, it makes a big difference. In order to capture that, we use two metrics. The Internal Rate of Return is the most often used metric. On today’s show we’re focusing on the equity multiple.

In fact, along with Internal Rate of Return, we believe equity multiple is one of the most effective ways to compare the attractiveness of specific real estate investments. Here is what you need to know in order to effectively use this metric.

Equity multiple is a metric that calculates the expected or achieved total return on an initial investment. It’s calculated by dividing the total dollars received by the total dollars invested.

Equity multiple is an easy comparison tool because it provides a quick glimpse into the total profit investors can expect to earn on a particular investment, if successful. However, while equity multiple is important when analyzing deals, it is by no means a one-size-fits-all solution because it ignores one critical factor — time.

To thoroughly evaluate a potential investment, investors should pair equity multiple with other industry metrics — particularly the Internal Rate of Return (IRR).

Special Guest, Jens Nielsen Oct 06, 2019

Show notes

Jens Nielsen came to the US from Denmark. He now resides in Durango Colorado and invests in New Mexico. Like many, he made the transition from corporate life to full-time real estate investing.

How To Raise Money - Live Talk Oct 05, 2019

Show notes

On today's show I'm in front of a live audience in Dallas talking about the principles of raising capital.

AMA - Which News Sources Do You Trust? Oct 04, 2019

Show notes

Leon from Ottawa asks, ”I listened to 7 of your podcast episodes in the past week. One thing that stood out to me was when you made the point about how the mainstream media sell sensational media. My question is Which news, info media resource outlets do you trust and read to get real info of what’s going on? I’d love to hear your thoughts on the podcast.”

Well, Leon, that’s a great question. I don’t profess to have all the answers on this one. It’s a huge topic. What I can say is that I do rely on multiple sources. I also try not to dive into topics where I have no expertise.

It’s easy to be opinionated on things. In fact, everyone has an opinion. That doesn’t make them an expert, nor are they qualified to offer an opinion.

So you won’t see me offering legal advice on the podcast. I’m not a lawyer. I might interview a lawyer and have them offer some ideas and education that could enable you the listener to have a dialog with your attorney on your specific situation. But that’s about as close as I would want to get on that topic in a public forum like this.

In terms of the news media, I’m also no expert on what’s real and what’s not. But I do have some first hand exposure to the news media and have witnessed the process first hand. I can offer a perspective from my vantage point.

I know several TV producers and have observed how they make decisions on what to air on TV. They have a specific time slot to fill on a daily show. The segments are anywhere from very short stories that form part of the news broadcast. This might be as short as 30 seconds. The second could be a special feature or interview that is between 4-5 minutes in length. The producer uses what is called a hook in the industry jargon. Unless people are watching, their sponsors won’t want to pay the dollars to advertise on the news show. Sponsorship is what funds the production of the show, so the producer can’t veer too far from topics that will keep viewers watching. Otherwise they’ll be out of business, and the producer will be out of a job. In a world of shrinking TV viewership and falling newspaper subscriptions, TV News programs are being cancelled and newspapers are shutting down all over North America. This is the stark reality.

So what is a hook? A hook is designed to draw in the viewer. Let’s imagine for a moment that you Leon were about to be interviewed on the morning show on real estate. The show host might say something like

Coming up after the break, Leon is going to be here to talk about how to make money in real estate. If I heard a hook like that, I’d probably change the channel. That sounds as boring as you know what.

On the other hand, if the show host said, And coming up after the break real estate expert Leon is going to be here to tell us that if you can’t afford to buy a house, you should in fact buy two.

Now that sounds intriguing. I’ll definitely want to watch through the commercial and wait for the next segment. When the host has a strong hook, viewers will watch the advertisement, and that is what the sponsors want.

So Leon you’ll go on the show and tell the audience that they should buy a duplex and use the rental income from the second unit to subsidize their home ownership cost. They may not be able to afford a single family home, but if there is an income property attached, the numbers could work in their favor.

So back to your question, which news media are trustworthy? The answer is it depends. I find that many stories in the Wall Street Journal are well researched and well written. But even they are not without bias. I find that the Wall Street Journal’s coverage of real estate is very weak. I prefer sources like the research team from Fannie Mae.

If there is a news story, I’ll often check several sources including the BBC, NBC, CNN and Fox. The coverage of the same story tends to vary widely.

Segmentation of Supply and Demand Oct 03, 2019

Show notes

Manhattan is one of the most dense markets in the world. Over the past 7 years there have been more than 16,200 units completed in New York in 682 new buildings. But today, roughly one in four of these remains unsold. This is astounding when you consider that the traditional model for condo development is to have a high percentage of units pre-sold prior to breaking ground on the project. Some lenders require 80% of the units must be pre-sold. Clearly that hasn’t happened.

Prices in some of the newest towers are being reduced.

At the same time we hear continually that there is a lack of affordable housing in the New York area. It’s true, housing in NY is hard to come by. Many people who have a six figure income will rent, others will have a room-mate in order to make ends meet.

Much of the vacancy is in the luxury and ultra-luxury segment. Manhattan, like some other gateway city markets, notably Miami and San Francisco have seen a boom of investment from outside the US. Much of this has come from mainland China and Hong Kong. Today, there is a significant slowdown in money coming from abroad. While the US remains one of the most desirable places for global investors to park cash, various headwinds have made the flow of money slow to a trickle.

According to a report in the New York Times this week, there is also a shadow inventory of units for sale. This inventory is held by the developer and doesn’t appear on the market. If you include these units, local experts estimate that there are as many as 9,000 unsold units.

Across New York City, the rental vacancy rate was most recently recorded at 3.63 percent, which translates to about 79,000 units. That is much lower than the national vacancy rate, which was last recorded at an average of 6.9 percent.

The vacancy rate is the highest in Manhattan at 4.73 percent and the lowest in the Bronx at 2.71 percent.

The NYC vacancy rate varies greatly by price with higher vacancy rates among more expensive apartments and lower vacancy rates among less expensive apartments. The vacancy rate for apartments over $2,500, for example, is 8.74 percent.

New York continues to add a lot of high quality jobs. Despite Amazon’s announcement to pull out of its planned expansion into the Long Island City location, several other tech businesses are expanding their presence in NYC including Google, Facebook, Twitter and salesforce.com.

So what does this have to do with supply and demand? We are seeing the top end of the market as being over-supplied and the middle of the market and below as dramatically under-supplied. There’s no really good reason for New York to be that much more expensive than the rest of the country. Building materials cost the same pretty much regardless where you put them. But the underlying land is incredibly expensive and the cost of labour doing construction in New York is much higher than the rest of the country.

I’m definitely in favour of development. Probably 90% of our business consists of new construction. But I’m not in favour of building in areas where the delay between concept and completion is so large. There’s simply too much risk that the economic conditions, specifically the balance of supply and demand can change dramatically over that time period. Make sure you segment your market to understand the balance of supply and demand within a market segment. The averages don't really exist.

AMA - Can New Supply Stimulate Demand? Oct 02, 2019

Show notes

Robert from Detroit says, ”Victor, I love how you talk about real estate from a business perspective. It’s fresh, clear and its devoid of the industry jargon.

The question was if you’re in an area where there is a lot of new investment going into an area, such as downtown Detroit. This large scale development seems to be attracting new residents. It seems like the new development is creating new demand. Is this an area that would be a candidate for your buy on the line, move the line strategy?”

Robert, thank you for the kind words. This is an outstanding question. There are a number of forces at play here and we need to take all of them into account. You are correct in noticing that real estate is hyper-local. The revitalization of the downtown in Detroit is an ambitious project and I truly hope it is successful.

As you’ve hear me say many times, successful business always follows the laws of supply and demand. The revitalization project is creating new supply. What I want to see before I would invest in an area is the demand that will absorb all that new supply, plus a bunch more excess demand left over that didn’t get satisfied.

What I’m worried about in Detroit is that it’s a shrinking city. There is not the inflow of jobs that is creating additional demand. So this new supply will compete with existing supply in the market. It will steal market share from other properties and you will likely see other areas become run down as residents leave those areas. It becomes a game of substitution for one product over another.

Some people think that lots of brand new supply can stimulate demand. Here’s how I think about it. Imagine if you were a city planner and you were tasked with creating a public transit system. It might be light rail, or busses. Imagine for a moment that you decide to start small and you are going to put one bus per hour on each bus route throughout the city. Even though you added supply, I don’t believe it would get used very much. People would still use other forms of transportation. The new busses would be too inconvenient. If you realized that insufficient frequency of service was the problem and you decided to invest very heavily and now you have a bus or train coming every three minutes like they do in Tokyo. You would get a lot of riders using public transportation. It would be way more convenient, it would cost less than driving and parking your own car, and it would be faster because you would avoid all the rush hour traffic. More people would use public transit than ever before.

But notice, nowhere in this example did the demand for transportation increase. What happened was a substitution of public transit over other modes of transportation. Investment in a new product and bringing a lot of new supply of that new superior product can cause substitution. But it’s not creating additional demand that didn’t exist in the first place. So if your city has a shrinking population, the need for housing is actually going down. In a shrinking market, prices will eventually fall. They have no choice but to fall. That’s why you can buy houses in Detroit for under $20,000. Yes, eventually over time these houses become distressed, the city forecloses on them for unpaid property taxes and the homes become condemned and eventually disappear from the market. Now you’re left with vacant land in the core of the city. It’s a modest improvement, but not much.

You can get some local market effects happening when there is development in an area. I would definitely look for those types of conditions to see if there truly is demand. Otherwise it’s just a bunch of developers who have too much money on their hands and they don’t know what to do with it. The landscape is littered with major projects that have resulted in over-building.

The problem is a failure to properly assess the demand.

Book of the Month - Presuasion by Robert Cialdini Oct 01, 2019

Show notes

On today’s show we’re focused on the book called PRE-Suasion by Robert Cialdini. Now it’s not persuasion, it’s a made up word pre-suasion.

The main idea behind the book is that we as humans are often easily swayed by momentary framing of attention. That framing seems to have a disproportionate importance in how we make decisions in the moment.

The author spent many years understanding the process of influence, attending training classes on sales technique, shadowing sales professionals on their sales calls and observing what made some sales people disproportionately more successful than their peers.

His research uncovered a massive blind spot that most of us humans possess. What happens In the moment before we are asked to make a decision has a disproportionate impact on the decision.

In a very simple example from the book, researchers looked at the problem of getting consumer survey data. Most consumers are overwhelmingly very reluctant to respond to surveys. In an effort to get better data, or in fact any data at all, you sometimes encounter people in the shopping mall or a supermarket who are holding a clipboard asking for a few minutes of your time to answer a quick survey. Some surveys offer a free gift, what is essentially a bribe, albeit an ethical bribe to get you to answer a few questions.

A bigger more enticing gift surprisingly has little impact on the response rate to the survey. Researchers found that about 29% of people approached would agree to participate in the survey. This is a significantly higher response rate than you might get if the request for a survey came by email.

But here’s the surprising fact. When shoppers in the supermarket or the shopping mall were asked a simple question. “Do you consider yourself a helpful person?”, almost all respondents said “Yes”. When they were asked a second question to help with a few minutes to respond to a survey, the percentage who agreed to respond to the survey jumped to 77%. That’s a remarkable outcome. What is it about the question “Do you consider yourself to be a helpful person?” That compelled the majority of people to respond to the survey compared with those who were asked to participate in the survey directly?

When people who were asked to participate in a taste test of a new product, the affirmative response rate jumped dramatically when shoppers were asked another simple question. Not only that, 2/3 of respondents declined to give their email address. But when asked a simple question. “Are you an adventurous person?” 97 percent said they were adventurous! That’s clearly a ridiculous response, 97% of the population are not adventurous. But after answering yes to are you adventurous, not only did the number of people who participated in the product taste test jump, the number of people willing to give their email address jumped from 33% to 75.7%. Think about it, some stranger walks up to you in a mall and asks for your email address. Are you going to give out your email address?

The data says that 75.7% of the time you will igive your email address f you are asked if you are adventurous as a framing question. You probably have no idea that you were even open to being influenced in that way. For the ethical business, the ethics versus effectiveness question must be asked. But for the unscrupulous business, you are open to being manipulated, unless you have a high degree of awareness.

If you haven’t read Pre-suasion, you I would recommend that you read it and wake up to how you are being influenced in ways that you may not be aware of.

International Podcast Day Sep 30, 2019

Show notes

Today is Rosh Hashana, Jewish new year. Happy New Year to all our listeners of the Jewish faith. Today is also International podcast day.

Today is a great time to celebrate the podcast medium, which is really quite new. Think about it. The entire genre was invented by Apple with the advent of the iPodThose large clunky music players that had a tiny 1” spinning hard disc in order to get the storage density. I still have one of those ipods and it holds my entire music library. You had to plug it into a computer via USB cable in order to download your music or your podcasts. Today it streams wirelessly onto my phone, computer or tablet.

Some of the first podcasts I listened to back in the day were the Entrepreneurial Thought Leader Series, live recordings of lectures co-produced by the business and engineering schools at Stanford University.

Producing a daily show is a massive commitment. But it’s one that I take seriously. This weekend I was speaking at an event in Dallas hosted by the Real Estate Guys Radio Show. There were about 300 people in the audience and at the end of the talk I received a strong round of applause that lasted about 15 seconds. When you have the opportunity to speak in front of a live audience and they laugh at your jokes and they’re nodding in agreement with what you’re saying is a wonderful experience. As a speaker you get to know that your words were having an impact.

With a podcast, there are no applause. There is much less in the way of interaction. I will get a half dozen emails a week from listeners who let me know that a particular episode had a real impact on them. I’m truly grateful to receive these messages.

I’m also mindful to visualize the audience out there in cyber space. I see you all seated in a large auditorium of a few thousand seats, five or ten times the size the room that I spoke in on Friday in Dallas. I visualize every seat is taken and even a few people are standing in the back. The room is full. When the room is empty, there is an echo off the back wall. But when every seat is taken, the room absorbs the sound and there is no echo. I visualize people in the first few rows nodding in agreement as I’m speaking.

Just like in the large room, I recognize that not every episode will penetrate and connect with ever member of the audience. If your interest is self storage and on a particular day I’m talking about senior housing, I recognize that that particular episode may not be perfect for you. That’s OK. The purpose of each episode is to enter into a conversation. A conversation that stimulates thought. In each episode there ideally is something that is simultaneously both specific and universal. You may not connect with the specific example, but perhaps you will connect with the concept. Perhaps the idea has a parallel application in your domain.

The podcast medium is changing. There are more shows than ever before, and professional media companies have expanded their investments in podcasting. Celebrities from TV are also getting into the podcast game. Some of the most widely followed podcasts offer very little in the way of education. Some are purely entertainment. They may be story telling, mystery, comedy, drama, a love story, or perhaps something a little more racy.

If you’re listening to this show, you probably are interested in business, entrepreneurship, personal development, social psychology, and of course real estate.

The average new show fizzles after only 8 episodes. When I do speak at live events, I get to connect with many of you in person. It’s through that personal connection that it becomes a two way conversation. It’s through the AMA episodes, that we have a two way conversation. When a listener asks a question, I can guarantee that others have the same question too.

Special Guest, Josh McCallen Sep 29, 2019

Show notes

Josh and his wife Melanie come from Philadelphia where they specialize in repairing distressed resort properties. This talk is a fascinating conversation about the resort business and how they have built this from deeply distressed properties as a starting point.

George Ross on Disclosure Sep 28, 2019

Show notes

George is a frequent guest. On today's show, we're getting George's thoughts on the responsibility for sponsors and syndicators to disclose news. This was driven by news this week that securities related charges were levied against three top executives at VW.

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