The Real Estate Espresso Podcast

Cory Boatright hails from Oklahoma City where he has created a volume wholesaling business. In addition, Cory has also amassed a sizeable multi-family apartment portfolio. What sets Cory apart is that he is an expert at the art and science of marketing. On today's show we're talking about how to use split testing to refine any marketing campaign.  You can connect with Cory at REIProfits on Instagram or investingcapitalgroup.com to learn more about his apartment syndication business. 

One of the widely accepted principles in the tax code is that you should be taxed on money you actually received. But there are a few examples of taxation on phantom income. The problem has the potential to get much bigger. On today’s show we’re talking about the concept of a deemed disposition. It’s pretty clear in the tax law of most western countries that if you sell an asset and you make a profit, that sale might be subject to capital gains tax. But recently Janet Yellen, the new Treasury Secretary and former Fed Chair has been advocating that the government consider taxing unrealized capital gains. The latest incarnation of this concept is called the “Sensible Taxation and Equity Promotion” Act of 2021, or STEP for short. Wonderful! Another catchy acronym for yet another destructive law. Based on current US federal estate tax law, if someone dies today, his/her assets are exempt from federal estate tax up to $11.2 million, or $22.4 million for a couple. That’s a hefty exemption that covers more than 99.9% of the population. If it passes, the value of a newly deceased person’s estate will be valued at Fair Market Value. Then, any unrealized capital gains would be taxed based on that person’s original cost basis. Essentially they’re treating you as if, on the day that you died, sold all all of your assets and had to pay capital gains tax. But they’ve dropped the exemption all the way down to $1 million. Just about every asset is included, ranging from real estate to a small family business. They even specifically included collectibles like art, gold, and rare coins. Some other countries like Canada don’t have inheritance taxes. But in Canada, there is a deemed disposition upon death and if any capital gains taxes are due, they need to be paid at that time when the terminal tax return is filed for the deceased person. The result has been that often the children will inherit a property that has been in the family for decades. The cost of the property was close to zero compared with today’s valuation. The new owners face a hefty tax obligation, or risk losing the property. In many cases, the next of kin will need to get a bank loan to pay the taxes in order to hang onto the property. The only other choice is to sell the property and pay the tax on an actual disposition. In many cases, it’s preferable to transfer the property at a predetermined price while the parent is still alive in order to reduce the tax burden. 2021 could be the year of strategic tax planning. 

Today is the first of the month and on the first day of each month we review the book of the month. The book this month is by two of my favourite authors. Chip and Dan Heath are two brothers who are both university professors. One is at Stanford and the other is at Duke University. Together they have written multiple best selling books including Made to Stick and Decisive. Our book this month is called Switch. The book is dedicated to answering the question of how to change things when change is hard. The mind is governed by two different systems, the rational mind and the emotional mind. The rational mind wants that great beach body and the emotional mind wants that OREO cookie. But this book is different than what you might be expecting. It examines change at the individual level, the organizational level and at a societal level. The book is well researched and shows the path through stories and examples. It doesn’t preach at you, but rather guides you to solutions that you discover yourself. One of the central concepts of the book is the notion of bright lights. Bright lights are those shining examples of success that you can copy. The concept of a mentor who has walked the path before you is one possible bright light. But there are many others. One of the best and most powerful bright lights can in fact be your own experience. You could have a shining example of something that worked well in your past. That shining example can be a beacon of light for you to replicate that success, perhaps with a minor adaptation suited to the current circumstance. In the book Switch, the authors share the story of how Robyn Waters a merchant buyer with little to no authority transformed Target from a lagging department store that low cost copied Walmart and Kmart, to a fashion leader. Robyn understood that she had no authority. If she was to transform the way purchasing decisions were made, she had to tap into the buyer’s emotional drive. The company culture was completely data driven. Sales of last years fashion products were used to determine purchasing decisions this year. By definition, the company would always be a fashion laggard. Their process was overwhelmingly Analyze - Think - Change. She transformed the culture into a See-Feel-Change decision making that was supported by the analytical approach. Early wins would be measured to make faster decisions on how to procure new products. When the organization is so large and so heavy with momentum, change often seems impossible. We often rush to judgement about people. Someone who inherently is a good driver, can become a bad driver if you put them in a traffic jam, 20 minutes behind schedule to catch a flight for a family vacation. They aren’t a bad driver per se. But the environment created the bad driver. It’s too easy to focus on the driver and make the driver the problem. But often the root cause is the environment. If you want to change the outcome, you could try changing the driver. But it might be more effective to change the environment. One of the core concepts in the book is that the emotional side of the mind is a six ton elephant. The logical side of the mind is the rider. The rider attempts to steer the elephant by issuing commands and pulling on the reigns. But if there is a disagreement between the rider and the elephant, there’s little question as to which one will win. If you simply convince people logically, they will agree with you. You will have direction, but without motivation. That is the key insight. Your head and your heart must be in alignment.

On today’s show we’re talking about the real estate shortage. The obvious question is that if the population has not been growing significantly, and immigration has been curtailed significantly as a result of the pandemic, then why do we have a housing shortage in such a big way. The fact is, we have seen migration that has produced the shortage. There are surpluses in a few areas like NYC, San Francisco, Seattle. But migration, combined with a small number of people listing their properties has created real estate gridlock. Unless people list their homes for resale, there are not that many homes available for purchase on the market. While there are not than many distressed properties in the owner occupied market as of this point. Many of the properties that had their loans in forbearance have managed to exit their forbearance agreements and get back into good standing. But the real story is the nearly 8M rental properties where the tenants are seriously delinquent and the landlords have not been able to collect rent, nor have they been able to evict. Some of those properties are a ticking time bomb and they need to be factored into the housing equation. They’re being artificially held off the market as a result of the moratorium on evictions. The gridlock in the single family home market is such that demand exceeds supply in many markets. On a national basis, real estate sales for single family homes and condos have jumped 9.1% in February compared with 2020. Home prices are up 16.2% YOY. Inventories are at historic lows across most of the US and Canada. Normally when that happens, construction activity ramps up. But we have actually seen a drop in construction activity since the start of the year. New home construction has been hovering around 1M units a year for much of the past decade. The entire construction industry shrunk in the wake of the 2008 financial crisis. If you go back to 2006, the construction industry in the US was producing over 2M home a year. The current construction industry simply doesn’t have the capacity to produce that many homes any longer. Supply chain disruptions during the pandemic have pushed construction prices up. Hard construction costs are up 11.4% compared with this time last year. Oddly, there is a surplus of trees for softwood lumber, but a shortage of finished construction lumber. Tree growers are getting near historic lows for their trees, and the lumber mills are getting near historic highs for cut kiln dried lumber, nearly triple the price compared with this time last year. The biggest driver of demand is the number of new millennial buyers. There are now over 45 million people in the 30-39 year age range. This is part of the so-called echo boom generation. The age of first time home buyers keeps increasing and now sits at 33 years of age. That’s two years older than the previous generation. Over the next five years, the number of people entering that age group is expected to grow to nearly 47 million people. There is an expectation of 2.5 million new household formations in each of the next two years. This will place a lot of pressure on housing stock. The folks at Goldman Sachs have predicted an 8.1% increase in GDP for 2021 in the US. This would be the largest economic spike since 1951. Goldman is predicting that unemployment will fall to 4% and inflation will remain in check at 2.1%. The Federal Reserve had a slightly more cautious forecast for 2021. They’re predicting a 6.5% growth in GDP, unemployment at 4.5% and inflation at 2.4%. All of this suggests that the boom in the housing market will continue for at least another two years.

Today’s show is another AMA episode. Except, on today’s show I’ve had virtually the same question from several listeners in different geographies. I’ve synthesized a composite question which basically aims to cover the landscape of the question. The question is how to determine the density of apartments that you can build on a site having rather large dimensions. In one case, the property is in a dense urban location and measures about 200 feet by 500 feet. How many apartments can I get if the building is limited to 5 stories in height? This is a great question. Of course each municipality has rules that determine the setbacks of the building from the property line, front, back and sides. But the setbacks are not the constraint in this case. When you’re evaluating the utility of a building site for residential apartments, you need to think about the basic apartment as a building block. A one bedroom apartment is going to need about 22-25 feet of perimeter space on the building exterior in order to have windows in the living room and the bedroom. A two bedroom apartment is going to need about 35 feet of exterior wall space for two bedrooms and a living room. Apartments are not that deep. On the interior, you’re going to locate the kitchen, the bathrooms, closets, hallways, laundry facilities. None of those items require windows. Your most expensive real estate in an apartment building is the exterior walls because that’s where you have windows. At most, your apartment is going to be 30 to 40 feet deep. If you allow 6 feet for a hallway between apartments, then at most your building will be 85-90 feet deep from one side of the building to the other. If the property is too large, you have space in the core that is not really usable. Making a larger laundry room in an apartment is only going to add cost and is not going to bring you additional rent. So there are certain land dimensions that naturally lend themselves to building an apartment building, and then other dimensions that are just plain awkward. So if you have a property that is deeper than you need it to be for an apartment building, you’re not naturally going to be able to make use of that extra land. A site that is 200 feet deep is too deep for a single building to span the entire depth of the site and not deep enough to have two towers. You can use some of the extra depth in a dense urban setting to create a sense of open streetscape by setting the building further back from the street. You can also make a larger footprint on the ground floor for the amenities like the lobby, the party room, parking entrance, a gym, and so on. But carrying that extra depth up the to the top of the tower is wasteful. I’ve seen many rookie developers multiply the width of the property by the height restriction in and then divide by the size of an average apartments order to determine how many units are possible. But this simple calculation neglects the real constraints in designing an apartment building. A property that is 400 feet deep may be a candidate for two towers on top of a podium ground floor with a space between them. Perhaps a horseshoe shaped or U shaped building on top of a podium. The goal is to maximize the perimeter area of the building so you can get as many bedrooms and living rooms on the exterior of the building as possible. That one constraint is usually the limiting factor on the number of apartments that are possible. The second limiting factor for any apartment building is going to be the parking ratio. The city will determine the minimum parking allowed in the zoning code. But you also need to take market demand into account as well. If your building height and perimeter calculations can allow, say, 200 apartments, but you only have space for 100 cars, you might be limited by parking.

On today’s show we’re talking about how some businesses were largely left out in the cold over the past year, despite being mandated to close, or drastically scale back their business to prevent spread of the pandemic. A number of new initiatives have been brought forward since December and again most recently in the past month. Last week the SBA revealed the much anticipated timeline for $28.6B grant program for restaurants hit hard by the pandemic. This is one sector that has seen thousands of businesses close permanently. Those that remain are hanging on by a thread. I’ve spoken with several restaurant owners in recent weeks about how they have fared during the pandemic. It didn’t matter whether they were located in the US, Canada or the UK. The story has been pretty much the same. Naturally, they’ve laid off staff in order to survive. The biggest issue has been whether their landlords have been willing to work with the business or not. In cases where the landlord insisted on getting paid full rent throughout the pandemic, many restaurants have been forced to close. Many of the owners I’ve spoken with have adapted their menu and have created new menus specifically optimized for the take-out experience. But in most cases, these businesses have needed more than just a pivot to take-out business. Survival has required a combination of rent relief from landlords or government assistance. Those restaurants that are still left standing after the pandemic is over will in my opinion do a booming business. The Small Business Administration in the USA is planning to roll out the Restaurant Revitalization Fund grant program within 30 days. Those who are in the performing arts have also been stripped of their income in the past year. This includes musicians, actors, comedians, magicians, and all of the supporting businesses that form part of the performing arts. We’re talking about lighting and sound technicians, directors, ticket agents, ushers, and the food and drink concessions that form part of most performing arts venues. Earlier this year The SBA only recently announced the rollout of its Shuttered Venue Operators Grant program, first passed into law by Congress in December. The SBA said potential applicants must be registered in the federal government’s system for award management (SAM) in order to receive a grant. I can tell you from first hand experience, that getting a SAM number is a bureaucratic process that has a few stumbling spots in the process. Eligible businesses include live venue operators, promoters, theatrical producers, live performing arts organizations, museums, zoos, aquariums and theaters themselves. But even with the April 8 start date, eligible businesses will have to wait in line. The SBA has said the first 14 days of this program will only be open to venues that suffered a 90% or greater revenue loss between this past April and December, due to Covid-19. The subsequent 14 days will be reserved for venues that suffered a 70% revenue loss or more in that time. Only after the first 28 days can venues that suffered smaller losses be considered for the grants. Grants are sized by the average monthly gross revenue for each full month a company was operational, then multiplied by six and capped at $10 million. Funds can be used for a wide variety of expenses, including payroll, rent, utility payments, scheduled mortgage and debt payments, personal protective equipment, independent contractor payments, admin costs, state and local taxes, and even insurance and capital. We’re starting to see the return to normal for many businesses as the number of vaccinations increase. Some restaurants are now more than 50% full during dinner hours. The patterns have changed. It used to be the case that Friday lunch hour was the busiest. Now Monday and Tuesday lunch hours are the busiest.

Today's show is an excerpt of a talk I gave at a podcasting workshop earlier this week. We're talking about how to provide an effective pitch to a show host or show producer and what makes a good guest.

On today's show George Ross and I are discussing how to handle inflation of construction material prices. 

On today’s show we’re taking a retrospective look at what’s happened in the world of senior housing in the past year. Unlike other multifamily asset classes, senior housing follows completely different demographic and adoption patterns. That is certainly born out in the data over the past year. Rental properties have seen very little change in vacancy during the pandemic. Sales and refinance activity of rental properties have been brisk. According to data from NIC, seniors housing occupancy fell to another record low in fourth quarter 2020, though the rate of decline eased from earlier in the year: Occupancy declined 7.0% in 2020 to 80.7%. Underlying segment trends were similar: Majority Assisted Living (AL) declined 7.7% to 77.7% and Majority Independent Living (IL) declined 6.3% to 83.5%. Nursing care occupancy averaged 75.3 percent in the fourth quarter. Inventory growth also slowed to just 1,626 units added in NIC’s top 31 metropolitan markets, the slowest pace since the third quarter of 2013. Personally, I’m glad to see that new supply is slowing down. In my opinion, the majority of primary markets are oversupplied. The opportunity exists in secondary and tertiary markets. That means paying close attention to the hyperlocal market conditions. We’re talking about the demand side of the equation, and the income demographics to support the senior housing economic model. Of course averages don’t tell the full story. Results varied widely among metropolitan regions, according to NIC MAP, which found that the West Coast cities of San Jose, Calif., San Francisco and Seattle reported the highest occupancy rates at 88.5 percent, 86.8 percent and 84.8 percent, respectively. Houston, Cleveland and Miami saw the lowest occupancies at 73.5 percent, 76.6 percent and 76.7 percent. We have an 80 bed assisted living facility scheduled to open in the next couple of months and we should be in a position to start taking reservations for residents in the coming weeks. My partner in that project also operates a number of facilities in the Dallas market. In that portfolio, there is a 1.6% vacancy rate as compared with a nation wide market average of nearly 22% vacancy. The obvious question is what is being done differently in these facilities that is resulting in such a dramatically different vacancy rate. I believe it comes down to a few key differences. These homes are built on the residential care model. These homes are smaller facilities with 12 to 16 residents per home. That contrasts with the big box model of hundreds of beds in a single building We have not had any Covid-19 outbreaks in any of the facilities. We had a single staff member test positive for Covid-19 and they were immediately isolated from the rest of the staff and residents and fortunately we had no propagation of the disease into the homes. This emphasizes the importance of having a highly differentiated product in the market. When we perform the intake interview for most new residents, they’re not coming from their own home. They are typically coming from an existing big box care facility and they hated it. It is clear that there will be opportunities to acquire distressed assets in the coming months. Some have already appeared on the market. But success in the market starts with understanding the operating model for success, not just the averages.

On today’s show we’re talking about how Elon Musk could change the dynamics of real estate for ever. Now you’re probably thinking that is a bold statement. You might be thinking that I’m talking about electric cars. But I’m not. You see the value of real estate is determined by location, location, location. Location matters for several reasons. People want to be close to certain amenities. They don’t want to have to travel too far to get their groceries, eat a nice dinner in a restaurant, or commute to work. Many people view their house is a sanctuary, a place to get away from the density and hustle of the big city. But rural properties suffer from a number of problems. Unless the city has brought the infrastructure to your property, the cost of building and maintaining your own infrastructure is less appealing than using city services. We’re accustomed to having seven utilities at our property. We expect electricity, water, sewer, natural gas, TV, phone and internet. If even one of those are missing, the property is less desirable. The cost to bring those services to your property can be prohibitive. Well a little over a year ago, SpaceX launched its first satellites for its Starlink service of low earth orbit satellites. This mesh of satellites will enable global rural communications. Eventually, SpaceX hopes to launch 42,000 satellites to service rural internet in virtually every corner of the globe including the high arctic. Today’s satellite internet service uses geostationary satellites. But in order to match the earth’s rotation, the satellites must be 22,236 miles from the earth’s surface. Even at the speed of light, it takes about 1/9 of a second to reach the satellite from earth. Sending a round trip message to a satellite, another destination on earth and back takes about half a second. That’s a long delay in the world of computing. That’s just the travel time. Computers need time on each end of the link to process information. So satellite internet traditionally has been very slow. The Starlink service has already over 1,000 satellites in service. Each launch of the falcon 9 rocket carries another 60 satellites. Friends of mine are already participating in the limited beta trial of the Starlink service. The downlink speeds of 70-80 Mbps are pretty respectable. Uplink speeds of 20 mbps are also quite acceptable. The service today is prone to short term dropouts. Uptime statistics are reportedly between 98.5% and 99%. These brief outages are the result of gaps in coverage. As more satellites are launched, these brief periods of downtime should disappear. If the launch schedule is maintained, there should be 12,000 satellites circling the earth at a distance of 340 miles by 2024. The price for a receiver is $450 USD and the service costs $99 a month. I just purchased a rural property for my wife and I and the Starlink website indicates that I should be eligible to get a Starlink receiver later this year. If I can get respectable internet service for under $500 in up front investment and $99 a month, pretty much anywhere, then the choice of property location opens up dramatically.