The Real Estate Espresso Podcast

Today's question comes from Atisha in Philadelphia. I was blind-sided with the news that my recently bought two-family home is legally a SINGLE FAMILY dwelling. I closed on the home in November of last year. It appraised for $300,000. I live in one unit and rent out the other on a short-term basis on Airbnb. I now have to obtain a Limited Lodging License in order to continue renting on Airbnb. I went through the process in order to do so and was blind-sided at the L&I office with the news that the property I bought is not actually a multi-family home, but a single family home. The seller applied for RM1 classification but never obtained any permits to do the work of flipping the home from single-family to multi-family. All of the work that the seller did to the property was done ILLEGALLY, without any approval or permits. I went through the process of purchasing this home; having extensive credit checks done on me, paying for home inspections, paying for appraisals and expecting the utmost due diligence from my lenders, the appraiser they hired, my title company and realtor. Now, I am here today with the information that there was fraud somewhere along the line and I now cannot LEGALLY rent out my home for the purpose it was purchased. I am kindly asking for your advice on what steps I need to take moving forward. I am in need of an attorney who will be able to fight on my behalf. Atisha, I'm sorry to hear about your troubles. First of all, I’m not a lawyer and I don’t want to be in the role of providing legal advice. I can make an introduction to two lawyers in the Philadelphia are who I would trust to help you with issues of this sort. ----------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are talking about why interest rates will continue to rise until more people lose their jobs. It sounds strange to say this, but the Fed wants to see people lose their jobs. On today’s show I’m going to describe why that is. On yesterday’s show we reviewed a new book written by Ben Bernanke, former chairman of the Federal Reserve. It was only after reading that book that I fully understood the comments being made by current Fed chairman Jerome Powell. There are two mandates at the Federal Reserve. 1) Help the economy achieve full employment 2) Maintain stability in financial markets including price stability. The second mandate really means managing inflation. It’s no secret that we are experiencing a global inflation phenomenon. This is not limited to the US. But the theory is that when inflation becomes entrenched, then the expectation of inflation becomes much more difficult to overcome. The result is a wage and price spiral. We are now seeing employees demanding cost of living adjustments to cope with inflation. These adjustments were not happening on a large scale in 2021, but we are seeing both individual and collective agreements where employees are seeing wage gains in excess of 10%. The theory goes back to the inflationary period of the 1970’s and 1980’s. In those days the expectation of inflation became entrenched in society and a wage and price spiral took hold. Prices increased and employees demanded higher pay in order to keep up. Higher wages would translate into higher expenses which drove higher prices in an endless cycle. Unemployment is currently running at 3.6%. This is the lowest unemployment since the 1950’s. Unemployment below 4% is considered to be full employment. So the economists at the Fed know that until unemployment jumps to maybe 5-6% we will continue to see an upward spiral on both wage and price growth. The current chair of the Federal Reserve must be very guarded in their language. Their words have the power to influence the market in both the short term and the long term. But a past Federal Reserve Chairman is not bound by the same constraints. In my view, after reading Ben Bernanke’s book, I believe I understand the relationships that are at the core of the economic models they are using the to explain how our economy functions. The Fed’s dual mandate is to deliver full employment, and to manage price stability. They must have both, not just one and not the other. If they have to sacrifice one of those two metrics temporarily in order to get both, I’m convinced that they will allow unemployment to rise in order to stop inflation. -------------------- Host: Victor Menasce email: podcast@victorjm.com

I met G Edward Griffin about six years ago. He’s a documentary film maker who wrote the book “The Creature From Jeckyll Island “ This book is a historical account of the formation of the federal reserve back in 1913 and the clandestine manner in which the Fed was conceived. As real estate investors we hear reports about the Fed and how it influences so much of our investment environment. There is no shortage of people opinionated about the Fed. But how many truly understand the Fed and how it operates. So when Ben Bernanke, chairman of the Federal Reserve during the financial crisis of 2008 and it aftermath wrote a book about the Fed and his personal perspective on the way in which the Fed plays a disproportionate role in influencing our economy, I just had to read it. I also decided that I would share it with you. I’m not here to say that I endorse or promote everything that he has to say. But he has a perspective on the Fed that few others do and I feel strongly that something so vital to the underpinning of our financial system is worth understanding. The book starts with a historic perspective from inception and how the role of the Fed has evolved over the years, through the Great Depression, two world wars, the entrenched inflation of the 1970’s and 1980’s, the financial crisis of 2008 and now most recently the pandemic and an unprecedented period of financial liquidity. Fast forward to the pandemic, and it’s clear that the Fed didn’t have the tools to help the economy directly from the disruption of the pandemic and the lockdowns associated with it. The tools employed by the Fed are new. Lowering interest rates would not put food on the table for those people who were forced to stay home for months during the period of social isolation. Ben Bernanke was not at the helm during this momentous time. But he still has relationships with many of the people who continue to be directly involved in the decision making. He understands what rules needed to change in order to attempt bringing stability to the financial system. He is very quick to point out where the Fed has made mistakes in the past and made economic matters worse instead of better. His perspective is current to today’s dilemma of how to fight the inflation that has surfaced as a result of overshooting the stimulus initiated to fight the pandemic. --------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are looking at the question of whether globalization is dead. The conflict in the Ukraine has made it clear that some global supply relationships may be severed for years to come. The rise of China’s power and influence globally has given some reason to pause and question whether western countries should be manufacturing in China. There is no question in my mind that globalization is changing, but the question is how? If we look at the forces that affect globalization, they are best encapsulated in the concepts of the ground-breaking book “The World is Flat” by Tom Friedman. This book was originally published in 2005 before the advent of Facebook, or AirBnb, or Twitter or a host of things that we now take for granted. The trends he identified in that book have played out in a way that you would have think he scripted the outcome. When we speak about globalization, we need to define it a bit better. Are we talking about finance, manufacturing, travel, real estate, agriculture, transportation, construction. Historically, to act globally, you needed to be a country. Then as the industrial revolution progressed, you needed to be a company. Today, for the first time in history, it is possible for individuals to operate globally. This a world where an entrepreneur like Elon Musk can subvert attempts by the Russian military to knock out the Internet in the Ukraine. Shortly after a tweet, there are hundreds of Starlink terminals in the Ukraine. Now there are more than 10,000 Starlink terminals and another 5,000 are on the way. More than 150,000 users from Ukraine are on Starlink on a daily basis. ---------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are talking about getting ahead of demand. We have seen many businesses anticipate continuing growth and no changes to market conditions. It happens in virtually every Industry. Even the most analytical companies in the world can get it wrong. We saw several retail giants experience adverse conditions in the past quarter. Walmart, Target and Amazon were the most visible of these announcements. Amazon surprised Wall Street with its first quarterly loss since 2015. That happens when expenses exceed revenues. So how did Amazon get it wrong? Did they hire too many people? Did they make too many financial commitments? The company has been expanding quickly making investments in expanding their fleet of aircraft with their growing captive airline called Prime Air. They have been growing their network of distribution warehouses and fulfilment centres all over the world. Some of these facilities are company owned, but in fact many are leased from developers who built these giant buildings to Amazon specifications. It seems that Amazon’s construction of fulfillment warehouses has gotten ahead of current demand. Amazon spooked investors last month after reporting slowing growth and a weak profit outlook that it attributed to overbuilding during the pandemic when homebound shoppers stormed online. At the end of 2021, Amazon leased 370 million square feet of industrial space in its home market, twice as much as it had two years earlier. ---------------- Host: Victor Menasce email: podcast@victorjm.com

Fabian Fraser is a big city guy who moved to a small city and discovered opportunity for multi-family investment in unexpected places. On today's show we're taking a look at how affordability has pushed people to smaller communities where the vacancy rate has been very low and rent growth has been well above market averages. To connect with Fabian, email him at fabian@yadagroup.ca -------------------- Host: Victor Menasce email: podcast@victorjm.com

Sandhya Seshadri is based in Dallas Texas where she specializes in repositioning multi-family apartment complexes. She too made the transition from the world of micro-chip design into the world of real estate investing. To connect or to learn more, visit multifamily4you.com ------------------- Host: Victor Menasce email: podcast@victorjm.com

It seems like we can’t go more than a few days without talking about inflation or interest rates. On today’s show we’re taking another look at how interest rate policy can be effective at fighting inflation, and where higher interest rates will make no difference at all. We keep hearing from the Federal Reserve board of governors that they will continue to increase interest rates until inflation is brought under control. It’s as if there is a scientific relationship between higher interest rates and lower inflation. On today’s show we’re going to look deeper at this question and see if we agree with that notion. In my mind, Interest rates affect capital expenditures, and they affect the cost of financing operating capital. If interest rates go up, my costs go up as a business owner. It means that I may have less money to spend on my business for things like staff and labour. It means the cost of borrowing go up. The biggest costs for borrowing are on buildings, equipment and inventory. In the broader economy, interest rates can also affect consumer spending on discretionary items. That’s partly why an increase in interest rates will cause a reduction in GDP and risks pushing the economy into recession. The increase in fuel prices is a global phenomenon, that has more to do with global supply and demand, geopolitical factors involving Russia, and less to do with loose monetary policy by the Fed. Cheap money would theoretically help the oil industry increase production, but we have had cheap money and money printing for more than a decade and frankly that has not benefited the energy industry very much at all. So raising interest rates won’t cause the price of oil or natural gas to go down. Some items in the economy can be considered highly inelastic with price. For example, if your distance to work is 20 miles, you are going to drive 20 miles to work, even if the price of gas goes up by 50%. This may reduce your spending elsewhere in your monthly budget. But if the Federal Reserve raises interest rates, you are not going to drive a shorter distance to work, and you are not likely to change. To that extent, the change in interest rates won’t affect the price of energy. Since there is a direct connection between economic output and energy consumption, an increase in energy prices will always cause prices to increase across the board in virtually every sector of the economy. ----------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we’re examining why the stock market has fallen so quickly. If you go back to 2008 and 2009, when the market conditions changed in real estate, why did prices seem to drop quickly? It turns out that when you make a decision to purchase any investment, most investors have a due diligence process that they follow. In our case, our due diligence checklist consists of two checklists. The first checklist is designed to kill the deal quickly. If the deal isn’t dead after the first checklist, then the second checklist kicks in. There are a total of more than 50 items on the two checklists. For complex deals, there are additional checklists that need to be adhered to. Making a buying decision requires a lot of work. It’s a slow process that takes weeks, and sometimes it takes months in order to get to the point where all of the criteria are met. By contrast, when we make a decision to sell, there are only two questions to be answered: How much will we get for the sale? When will we get our money? Both these questions are relatively easy to answer compared with all of the effort associated with a purchase. The net result is that a purchase happens very slowly, but a sale can happen very quickly by comparison. --------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are going to take a fresh look a money. It used to be the case that a nickel was a nickel was a nickel. It was made of nickel. It was worth 5 cents and you could buy bubble-gum with it or take a short bus ride. But today we are taking a dive into the various new types of currency that are in existence or being proposed. These are new types of currency are all different. First of all, the biggest question underlying any currency is trust. Currency ceases to be effective as a means of exchange or as a temporary store of value of the confidence is not there. There are numerous checks and balances that governments have put in place to instill that confidence. We can debate whether that confidence is deserved, but that might be a topic for another day. We have cash dollars Dollars in a bank account Dollars in a payment account like Paypal or Venmo Money market funds held by a major bank Digital currency Crypto currency Stable coins Programmable coins If you are holding a $100 bill, you can go fill your gas tank with that $100 bill. We don’t need to spend much time on cash currency. But what about all these others? How are they different from each other? -------------------- Host: Victor Menasce email: podcast@victorjm.com