The Real Estate Espresso Podcast

Our book this month is called “Atomic Habits: An easy and proven way to build good habits and break bad ones” by James Clear. I was introduced to this book by Kelli Calabrese, one of the members of a mastermind that I’m part of. I have to say that the book has been impactful for me as I’ve been examining my own daily habits in the areas I’m seeking to redefine. Habits are the compound interest of self-improvement. The same way that money multiplies through compound interest, the effects of your habits multiply as you repeat them. They seem to make little difference on any given day and yet the impact they deliver over the months and years can be enormous. It is only when looking back two, five, or perhaps ten years later that the value of good habits and the cost of bad ones becomes strikingly apparent. One of the core concepts in the book is that small changes can compound. A 1% change can seem small. But if you start doing push-ups. On the first day you do one push-up. On the second day you do two. On the third day you do three. After 100 days you’re doing 100 push-ups. We often dismiss small changes because they don’t seem to matter very much in the moment. If you save a little money now, you’re still not a millionaire. If you go to the gym three days in a row, you’re still out of shape. If you study Mandarin for an hour tonight, you still haven’t learned the language. We make a few changes, but the results never seem to come quickly and so we slide back into our previous routines. Unfortunately, the slow pace of transformation also makes it easy to let a bad habit slide. Your identity emerges out of your habits. You are not born with preset beliefs. Every belief, including those about yourself, is learned and conditioned through experience.* More precisely, your habits are how you embody your identity. When you make your bed each day, you embody the identity of an organized person. When you write each day, you embody the identity of a creative person. When you train each day, you embody the identity of an athletic person. The labels “good habit” and “bad habit” are slightly inaccurate. There are no good habits or bad habits. There are only effective habits. It turns out that habits are anchored in several loops of human behaviour. The first is the notion of conserving mental energy. Items that require conscious mental effort to bring to reality are not habits. Getting dressed in the morning, making a cup of coffee, emptying the dishwasher, all can be habits that don’t tax the conscious mind. People who try to form habits operating exclusively from the conscious mind are destined to fail at habit formation. Habits, both good and bad don’t require a lot of mental energy. How much energy does it take to check your news feed in social media? Forming new habits can often be accomplished with habit stacking. For example, if you do 20 pushups as part of making your morning coffee, then you will have a much easier time forming a new habit because it is associated with a pre-existing habit. Brushing your teeth with your morning shower adds one more step to an existing habit, but doesn’t require a new separate habit to be formed. It turns out that your environment contains powerful cues that are mentally associated with repeated behaviour patterns. If you can make a radical change to your environment, so too can change the patterns. Often a return to a previous environment will cause old patterns to re-establish because the cues are encoded in your memory as being associated with those patterns. As I read the book, my awareness of my own autopilot behaviours became crystal clear.

I have listened to every one of your podcasts since Dec 2018 and because of your influence in my growth as a real estate professional I'm now working with an experienced developer and we currently have 83 acres under contract. I’ve attached the details to this email. I personally would like to develop a community designed for resilience. What are your thoughts? John, This is a great question and one that often perplexes new developers. The specifics of your proposed development project don’t work in the current market conditions. The land can be seen as a bargain. 83 acres for $900,000 comes to $10,800 per acre or about $0.25 per square foot. That’s not quite free, but it’s a very attractive price for raw land. The problem with the specific proposal you sent is that comparable sales in the area range from about $135 per SF to about $180 per SF. Since new home construction in today’s market is costing about $150 per SF, and you also need to build the entire subdivision including roads, utilities, storm water management, landscaping and so on, the values in the area are not supporting new construction at this time. The infrastructure is going to cost you anywhere between $30,000 to $75,000 per buildable lot. Some items can really add to the cost. Don’t forget you need to bring fiber internet service at a cost of $7.00 per linear foot to each property. All of these costs are significant and it would cost you more to build these properties than the current local market is attracting in sales prices. But by far the biggest cost is the site work and offsite improvements required to bring the infrastructure to the site. Many of the lots are larger lots. Even though the land is inexpensive to purchase, the cost of creating a shovel-ready lot can still be considerable. The value of the particular property about 30 minutes outside Dallas will vary as a function of time. There has been some growth in the local area in recent years. Most major cities tend to grow outwards. Eventually those outlying areas become close enough to the city that people are willing to move there. People move to the outlying areas for two major reasons. They’re in search of lower cost real estate because the city has become too expensive. They prefer to have more space and be outside the city. But they want to be close enough that they can drive into the city whenever they want to. I find it useful to examine what major developers have done historically. They know that the land doesn’t support development today. So they will purchase land a few years ahead of their planned development and simply land bank it. Land banking is extremely effective, but it ties up cash. Land doesn’t generate cash flow. So the entire investment will likely be made with equity and zero debt. The major developers plan a few decades ahead in their land acquisition. They will buy land inexpensively and sit on it until it becomes worth developing. At that moment, they look like geniuses. Land will sell for 100 times what they paid for it. But remember, they took the risk, tied up a bunch of cash and sat on it for a long time waiting for the growth of the city to create the value in the outlying area. In retrospect when you run the math on the initial investment, the annualized rate of return looks incredibly healthy. But it’s a bit like melting ice. You might start out with a block of ice at -40 degrees. You start by adding heat. The temperature rises slowly, bit by bit. After a bunch of years, the ice is still 10 degrees below freezing. Then one day, you reach a tipping point and the ice melts. But you have to keep applying heat and have faith that the ice will melt a long distance into the future. So it goes with land banking. 

Glen Sutherland is a Canadian investor who has gone into lower priced US submarkets in search of greater value. On today's show we're talking about how he has decided where to invest. Glen is also the host of "A Canadian Investing in the US" podcast. 

Megan Lamke made the leap from home owner to investor to multi-family investor to syndicator. Today she runs a portfolio of properties across multiple markets. There are some innovative ideas in today's discussion that every multi-family investor should pay attention to. To reach out to Megan and to learn more, visit meganlamke.com. You can download a copy of her free book at https://meganlamke.com/grit

On today’s show we’re talking about J-walking. J-walking is when you take a small risk and cross the street where you don’t have a traffic light for pedestrians. We’ve all done it. It’s breaking some rules, but as individuals we take some calculated risks. The idea of J walking brings me to discussing building extra apartments into a property. In the city of Chicago there are many 50 foot wide 3-story buildings with six apartments. These lovely old buildings were built in the 1920’s. There are thousands of them. Remember the roaring 20’s? That was the period after WW1 and after the Spanish Flu pandemic when the economy took off and expansion was happening everywhere. It was the precursor to the Great Depression that started later that decade. These 1920’s buildings were made out of stone and brick with wood framing on the interior structure. The foundations were made out of stone and cement. Most foundations were 5 feet deep. But the basement typically had windows at the front and back which mirrored the look of the stately windows of the units above, even though the basements were largely unfinished. In some cases, owners would finish the basements in order to create storage space for residents in the basement. That space also created the opportunity for two more apartments. Many enterprising building owners did in fact create two more apartments in the basement. Some were done properly. But many were not. For some reason, these basement apartments are called garden units. I don’t know why they call them that, because there’s nothing garden about them. They’re a basement apartment. If you visit Chicago and hear people talking about garden units, you need to translate that into meaning basement apartments. If you look through the real estate listings for these types of buildings, you will also see mention of “legal garden units”. That means that a building permit was issued for those basement units. The problem with these illegal units is that, unbeknown to the building owner, they are at risk of not having any insurance coverage. You see most insurance companies will not insure properties that were not legally built. I can see their point of view. They don’t have the opportunity to inspect properties before providing insurance coverage. If there were no bounds on the insurance, then property owners would be free to continue expanding their property illegally and the insurance companies would be on the hook with virtually unbounded liability. Let’s be clear, the insurance company will happily collect the insurance premium from you. They will take your money. But when there is a claim, the property owner and the insurance company become legal adversaries. There will be a review of the policy by the insurance company’s legal team and a determination on the limits of coverage will be made after an examination of the facts surrounding the claim. That includes an investigation. The insurance company may look to see if there are any building permits that were opened on the property and never closed out. They might do the same for any electrical permits. They may examine whether any additions were made to the property without a permit. Insurance companies will likely do anything they can to get out of paying out on a claim. Now I’m not an insurance professional, and I’m not here to provide insurance advice. If you want to get a proper opinion, then I recommend that you connect with a lawyer who specializes in litigating insurance claims. They can usually set you straight on where your points of vulnerability might be. When you J walk, you are taking a risk. Yes, everybody does it from time to time. But J walking is done selectively. Owning an illegal unit is a bit like J walking every minute of every day, 7 days a week, 365 days of the year.

On today’s show we’re taking a look at a front page article in the Wall Street Journal. I’m not one to rant very often about articles in the mainstream media. You could build a career out that endeavor. But this prominent article in such a widely read newspaper was particularly offensive. The article was entitled: "Investors Buying Real Estate to Beat Inflation May Find Tactic Backfires" I was a more offended by the slant of the article than by any of the detailed points in the article itself. The article seemed to imply that real estate is a bad investment in the current inflationary market environment. I quote directly from the article. There is no question that there are risks in any asset. But the article seems to criticize investors for piling into real estate and completely neglects the pricing of certain tech stocks and the stock market indices. Of course any investor needs to properly analyze any investment opportunity and recognize where there are risks. Rent controlled properties can face situations where expenses rise faster than rents in an inflationary environment. This can be death to an investor. Real Estate isn’t the problem. Buying property in a rent controlled environment can be a bad idea. For example, I’ve been a landlord in NY state in the past. I learned my lesson and I won’t do it again. There is no question that some assets in some locations may experience a rise in vacancy. Yes, it’s more difficult to raise prices to match inflation in an oversupplied market condition. The author of the article seemed to dance around one central issue without coming out and stating it. Real Estate values follow the laws of supply and demand. News flash, you have to pay attention to the law of supply and demand. Since when did ignoring the law of supply and demand result in a good investment, of any description. Show me any investment asset that operates completely independently of the law of supply and demand. All the author needed to say is that any investor needs to pay attention to the law of supply and demand when making investment decisions. Instead, he tried to paint the possibility of oversupply as a problem which in some markets makes real estate a bad investment. He also tried to paint longer term leases as a reason not to invest in real estate in an inflationary environment. There are so many things wrong with this article that I almost don’t know where to begin. The fact is, we have experienced rapid devaluation of the currency steadily for the past 50 years, dating back to the early 1970’s. Yes, we are in a period of heightened inflation. Who knows for how long. But a broad retrospective look at real estate over the past 50 years shows that almost all asset classes have experienced dramatic resilience against inflation. Three things get wiped out in inflation. purchasing power for those on fixed income Savings gets wiped out Debt gets wiped out Since real estate investors tend to use a high proportion of debt in their investments, they almost always end up being the beneficiary of inflation because those long term loans get devalued disproportionately compared with all the other elements associated with real estate. Rents go up in price. Operating expenses go up in price. New Construction goes up in price. It’s the last item that causes existing real estate to rise in price. Since the loan on a property doesn’t go up due to inflation, the increase in price is always to the benefit of the equity holder. Therein lies the inflation hedge.

On today’s show we’re talking about the seller who knows very little about their own property. It makes sense, the seller of a property had no reason to know about the development potential of their property. They’re an owner. All they do is live in a house on a property. This week I was involved in a dialog with a seller who was offering their property at a good price. The purchase made sense. That is, it made sense until I was able to check the government regulations that would come into play. In this particular location, the minimum lot size was larger than the current property. That meant that any changes to the existing structure on the property would require a zoning variance. The existing structure is in derelict condition and is not worth salvaging, hence the good purchase price. But further examination found that the property is located across the street from an environmentally protected zone. That was the trigger to go and investigate whether the conservation authority over the environmentally protected zone also had jurisdiction over what could be built on this property which is outside the environmentally protected zone. Two minutes of search with the address showed very clearly that the property was on the edge of a flood zone where 1/4 of the property was fully within the flood zone. The remaining 80% of the property was within the regulation limit of the conservation authority. The regulation limit of the conservation authority extends another 90 feet beyond the edge of the flood zone and the environmentally protected zone. So what does this mean? It means that permission would need to be granted simultaneously by two different bureaucracies for anything to be built on the property. That means simultaneously satisfying two different sets of rules, one of them clearly written, and the second one not written. Naturally, I declined to purchase the property.  The best I could offer was that if the redevelopment permit could be obtained while the property was still in the hands of the seller, then I would buy the property with the entitlement as a condition of purchase. It’s possible that someone who doesn’t perform due diligence might buy the property. In an environment of people offering over the asking price, someone with more money than sense might come along. But the seller is now facing a choice. Nobody who knows what they’re doing will buy this property in its current state. It’s the seller who has the problem, not the buyer. In another case, the seller looked on his tax bill and assumed that just because his tax bill said that his property was residential, he assumed that it was zoned residential. Imagine his surprise when I let him know that the property was not in fact zoned residential. That meant that redevelopment of the property would require a zoning change since the existing zoning would not permit any form of development on the property. You see these are not isolated cases. Sellers rarely know what they own. Sometimes the zoning is changed without their knowledge. Sometimes they knew that the zoning was going to be changed and were unaware of the consequences. Property owners often assume that since the property exists, it’s allowed to exist. I’ve seen additions to properties that do not conform. The owners of the property never even bothered to check whether a building permit had been issued when they bought the property. Imagine their surprise when I told the seller that the back half of their property was not legally permitted and if there was ever a fire, the insurance company would not pay out on the claim. That’s right, insurance companies will only insure property that was legally built. If it was built without a permit, their attitude is that it’s not a legal property and therefore they’re under no obligation to insure an illegal property.

On today’s show we’re looking at a potential backlash to the work form anywhere wave that we’ve experienced as a result of the pandemic. There are several factors that have been largely ignored in the narrative over the past year. There are numerous businesses predicting a massive reduction in business travel, and traditional office co-location. I’ve been reflecting on the majority of my career, in the world of real estate investing, and in my prior career in the high tech industry. In the tech industry we had video conferencing readily available from the early 1990’s. We used it frequently. There are lots of people for whom 2020 was the year of zoom meetings. Before zoom we had Webex, and GotoMeeting and a host of other platforms. You could screen share a powerpoint presentation. The audio quality was good and the video quality was also good. But even then, I would travel on average about twice a month for business. I had status on several airlines, and my number one business expense was travel. The question is, why did I travel so much? How did I justify all that travel when seemingly, so much was accomplished in 2020 and in the first half of 2021 with virtually no business travel? What was it about physical proximity that made business so much more effective? Will we experience a zoom backlash and a return to physical meetings? I believe that the answer is yes. We will rediscover all the reasons why physical meetings are valuable. Employee training Mind share The acceleration that results from physical proximity Regulatory and tax consequences Let’s look at all four of these elements. 1) Employee training. When people are physically separated, the time period between touch points can increase. Junior people who have not established the relationships and confidence to interrupt a senior leader have trouble knowing when to ask for help. The result is a tremendous loss of time before a problem is noticed and a course correction is initiated. Active management of people requires frequent check-ins of short duration. It takes a mature organization to learn how to do this well. 2) I find that when I travel and meet someone face to face, I get more attention from the person I’m visiting than if I were attempting to speak by scheduling a phone call. Many people don’t like to spend that long on the phone. They don’t have the mental stamina to spend two hours on the phone. But you can easily imagine having a white board discussion to plan out a project in a face to face setting. Even a two hour zoom meeting can be exhausting for many. You simply get a lot more done by meeting face to face. By meeting in person you get mind share, free of interruptions. 3) Despite the time involved with physical travel, I find that mistakes get uncovered faster, and misunderstandings get resolved when people meet face to face. While it is possible to have zoom meetings and those meetings can be productive, there is much more accomplished in a face to face meeting. 4) Many companies are taking the step to accommodate workers’ desires for more flexibility, but if employers aren’t careful, companies could open themselves up to costly tax headaches. Companies also have to shoulder the compliance burden involved with navigating a complex patchwork of local, state and, potentially, international tax laws. Someone who resides in one state, but has their place of employment in another state faces multiple tax jurisdictions. But if they’re now working from home, where is their place of employment? If you’re the sole employee in that state, or in that city, did the company just open a new branch office?

 On today’s show we’re talking about something we take for granted. Water is ubiquitous. There is so much abundant water that it only becomes conspicuous by its absence. Right now, drought is afflicting 88% of the American West, up from 40% a year ago, according to the U.S. Drought Monitor. In California, the mountain snowpack is at 58% of normal, largely as the result of one of the lowest statewide precipitation totals on record and an unusual spring warm-up.  Most of the big reservoirs in California have sunk below half of their capacities. This is profoundly affecting agriculture, and now real estate. We will feel the impact later this year as yields for many major crops including tomatoes, rice, lettuce, wine, almonds, and garlic all rely on water from this region. Reservoir levels across the Southwest have been falling. The biggest of those reservoirs, Lake Mead, is 41% full after years of declining flow from the Colorado River. Federal officials are warning it is on track to slip below a threshold of 1,075 feet over the next two years, which would trigger government-mandated water cuts to millions of users. The Colorado River also supplies water to Mexico. Sadly, the river has been so taxed for agriculture and human consumption along its path, that the river no longer even reaches the Pacific Ocean. Complicating matters is the Southwest’s explosive population growth. There seems to be a willingness to build cities where one of the essentials for living is missing. Why would you build a city like Las Vegas with a population of 2.7M in the middle of a desert. Why would you build a city of 4.6 million people in the middle of a desert. Of course I’m speaking of Phoenix Arizona. Even coastal cities like Los Angeles are experiencing water shortages. But at least if you’re next to an ocean, you can get fresh water through desalinization. It’s expensive and consumes energy to produce fresh water from the sea, but at least it’s possible. The Colorado river supplies much of the irrigation to California, the water supply to Phoenix Arizona and the surrounding area through the Central Arizona project which is a diversion of the river through central Phoenix. There is another aspect to the drought in an area that has traditionally produced food in the US than any other region. 80% of the world’s production of almonds comes from the central valley in California. This crop is a huge consumer of water accounting for three times the water consumption of the city of Los Angeles. About 2/3 of those nuts are exported outside the state. When we talk about real estate, we rarely worry about access to water. It’s almost taken for granted.

Tony Javier is a specialist in using TV to market his real estate investment business. On today's show we're talking about the nuances of using this non-traditional marketing channel to generate interest with clients. You can connect with Tony at TonyJavier.com or at RealEstateMastersTV.com.