The Real Estate Espresso Podcast

Today’s question comes from Eric in Dallas Texas. I am invested in a value add apartment building that closed in the first quarter of this year. It’s a C-class asset, purchased at a 5% cap rate. I am on a variable rate bridge loan and have not yet converted to permanent financing. I’m now thinking that I should have waited to see what happens in the market. I’m hearing that prices can be expected to fall in the near future. Did I over-pay? What are your thoughts? ---------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are talking about regulation. Cities have a habit of making short term decisions to help citizens. But when they create an environment that discourages investment, they are making a long term decision to reduce supply in the market which ultimately causes rising cost of housing, the very thing that municipal politicians are trying to combat. Money seeks the place where it is treated the best. ------------------ Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are taking a look at why the housing demand in the market has defied demographic predictions. In the wake of the great financial crisis many demographers were predicting that the large detached homes belonging to the parents would become dinosaurs in the market. A multi-generational household is defined as a household in which at least three generations of a family live under the same roof. Despite the recent growth, this style of living is really not new whatsoever. If you go back to the 1800’s this was extremely common. Though many young adults dream of moving out of their parent's home to start life on their own, many more are now considering multi-generational living as the more realistic option. This trend is growing especially fast as the high cost of homes in major urban centres continues to rise, and the pandemic causes many to reexamine their living situations. A multi generational home is cheaper on a per person basis than two separate detached homes. But even more important for the younger generation is the financial contribution to the equity from the parents. --------------- Host: Victor Menasce email: podcast@victorjm.com

Brien Lundin is the chair of the New Orleans Investment Conference, the longest running investment conference in the world. He is also the editor and publisher of the Gold Newsletter. Brien is an expert in precious metals and commodities. On today's show we're talking about the economic cycle and how it is impacting our lives as investors. ------------------- Host: Victor Menasce email: podcast@victorjm.com

Garrett Sutton is a corporate lawyer based in Reno Nevada. Garrett is famous as one of the Rich Dad advisors. His company corporate direct specializes in helping real estate investment companies with their corporate structures and maintenance of their corporate entities. He has a new book entitled "Veil Not Fail" which describes the pitfalls that can cause the corporate veil to be pierced thereby negating the limitations of liability that would otherwise be inherent in the corporate structure. You can get a copy of his new book on Amazon or wherever books are sold. To book a free 15 minute consultation with a paralegal, visit corporatedirect.com. ------------------ Host: Victor Menasce email: podcast@victorjm.com

On today’s show we’re talking about the impact of changes in the currency markets on global economic stability. We have endured supply chain disruptions as a result of the pandemic over the past two years. What I’m about to share could have an even larger impact than anything we have seen in the past two years. There is nothing that says the US dollar must have an exchange rate of 75 cents to the Euro, or the Canadian dollar should be 74 cents to the US dollar. If the Euro is at parity with the US dollar, that’s not a problem in and of itself. The world is used to adapting to whatever becomes the new normal. What the world has a very hard time with, are rapid changes. Those rapid changes seem to be everywhere. Today for the first time in over twenty years, the Euro dropped below $1 USD. Not only are we experiencing changes in currency values, we’re experiencing many of them at the same time. We have seen what the strengthening US dollar has done to numerous economies around the world. I’ve traveled to Japan so many times. The traditional simple math has been about 100 Yen to the US dollar. In fact, when you travel in Japan, they have a 110Y store. This is the equivalent of the Dollar store in the US. Some things transcend culture. But as of today, the change rate Yen reached 139 yen to the US dollar. Big changes like this can affect the economics of contracts that span borders. Some of those contracts would never have anticipated a 36% swing in foreign exchange in less than 18 months. Some international trade contracts simply cannot be honoured at those prices, depending on how they were written. This is not an issue of manufacturing capacity. It’s an issue of profitable global commerce. These changes will create supply chain disruptions, the likes of which we have not been imagining or predicting. When you conduct a historic retrospective about social unrest, about violent conflict within a nation, the vast majority of people never saw it coming. In times of unrest, you see it first in the weakest nations first. But now we have protests in Sri Lanka as people are starving and have no fuel. We are seeing protests expanding from Peru into Ecuador. There farmers in the Netherlands are protesting their government’s recent moves to tax farmers for the methane gas emissions from livestock. If the farmers refuse to sign up to new and draconian emissions standards which will effectively put them out of business, the government will seize their farms. If you had told me in 2019 that we would have protesters occupying my home city for weeks in the depth of the coldest days of winter, I would said no, that’s unimaginable. How many would have predicted the events of January 6 at the US Capitol? Yet, here we are. These are things that would have seemed unthinkable, but now are more obvious in retrospect. En masse, we don’t have the economic adaptability to react to rapid change. If you can adapt to rapid change individually, then you are going to be ahead of the pack. But more importantly, if you can connect the dots and anticipate the links between all of those interconnected economic systems, you can be better prepared to adapt.

On today’s show we’re talking about the coming economic winter. The US Commerce Department reported new inflation metrics for the month of June, showing that inflation metrics are accelerating. The official current inflation rate is running at 9.1% in the US. In Canada, the inflation rate topped 7.7% in May and is expected to average 8% in the second and third quarter. Only a month ago, the bank of canada was predicting inflation would remain around 5.8%. Clearly that was incorrect. This means that inflation is actually ramping up. But we need to look deeper at the numbers to truly predict what is going to happen. The Bank of Canada increased interest rates on Wednesday by 1%, compared with the 0.75% that had been leaked to the press in the weeks leading up to the announcement. I’m going out on a limb and say that inflation is going to be even higher in the coming months than either the Fed or the Bank of Canada have been predicting. We have some economists predicting that the fall in oil prices over the past two weeks will translate into lower inflation. I don’t agree with that assertion. The reason that I’m not agreeing with economist predictions is that the producer price index is currently running much higher than the quoted rate of inflation. If the producer price index is running at an annual rate of 16.8%, does it make sense that inflation is only 9.1%? Those two numbers seem too far apart for them both to be correct.

On today’s show we’re talking about the rising risk of defaults in the US residential real estate market. There is a real estate data company called ATTOM. They’re based in Irvine California. The specialize in correlating data from numerous sources to create data that is uniquely useful in ways that raw data might be more difficult to use. They just issued a new report on distressed properties in the US and they’ve highlighted which counties in the US have the highest rates of defaults and foreclosures. This risk report shows which counties are at highest risk. The report shows that New Jersey, Illinois, some of the inland counties in California are home to 30 out of the top 50 counties in the US most vulnerable to potential declines. Eight of these counties are in the Chicago area, six are near NYC and 10 sprinkled through northern and central and southern California. If you want to be ahead of the game in the upcoming downturn in the housing market, it might be worth researching those counties that are most at risk and putting your systems in place to capitalize on helping owners those markets. -------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we’re talking about Inclusionary Zoning. This is a new term that you might not have heard before. Inclusionary zoning is code for building affordable housing. Many North American cities, including Vancouver, New York, San Francisco, and Boston have implemented inclusionary zoning. In fact there have been hundreds of inclusionary zoning initiatives around the world. The City of Toronto has just implemented their inclusionary zoning rules and adopted the principles in their official plan. According to the city, only 2% of the housing built in Toronto in the past 5 years has been affordable. That metric is not at all surprising given the cost of construction. As someone who underwrites these projects on a regular basis, there is no way to create new affordable housing without a builder losing money. Unfortunately, this is one of those initiatives that simply erects another barrier to development. The net result will be even fewer new units constructed which will ultimately reduce the supply without addressing the demand side of the equation. This is a selective tax on developers. It basically says, you rich developers are making too much money. So we’re going to tax you by forcing you to include affordable units. But the problem with this thinking is that government can’t force developers to undertake a project. If the project doesn’t meet the financial metrics, then they’ll go develop somewhere else where the numbers make sense. There is nothing forcing a developer to build in a specific location. If Toronto doesn’t make sense, a large developer like Minto will go build in West Palm Beach. It’s not like they haven’t built in West Palm before. City councils are constrained by municipal boundaries. Developers are not. This seems like an initiative that is designed to get votes and win political points. Politicians want to be seen as doing something, anything even if the net result is zero. ----------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are looking at what is going on in global commodity markets to try and understand what it means for our economy and how it will affect the domino chain of interdependencies throughout our economy. In the past two weeks we have seen a sharp drop in commodity prices across a wide range of commodities. This includes oil, copper, steel, silver, cobalt, tin, nickel. The broad interpretation is that these price drops signal the drop in future demand that will come from the current economic recession. But we also need to look at the point of reference. These commodities are priced in US dollars. The US dollar has surged against many global currencies. The US dollar is now hovering at par against the Euro for the first time in nearly 20 years. The threat of energy insecurity in Europe is cited as the biggest factor. If Russia were to weaponize the sale of natural gas to Europe, it would negatively impact the economy in Europe in a significant way. The Euro has fallen in value against the dollar by nearly 20% in the past year. So even if commodity prices were static against the US dollar, they appear to have gone up by 20% simply by virtue of being priced in US dollars. -------------- Host: Victor Menasce email: podcast@victorjm.com