The Real Estate Espresso Podcast

On today’s show we’re going to pick up on a story that we covered several months ago. The headlines these days are about Covid-19, it’s impact, and the slow vaccine rollout. The papers are headlining updated economic stimulus plans, the surging price of silver, surging AMC stock prices and the military coup in Myanmar. Frankly, these are all important, but there’s something far more important to pay attention to, and it’s not making headlines. I’m talking about the handling of the situation in Hong Kong. Depending on how the world responds to the Hong Kong situation, will likely determine how China acts when it comes to Taiwan. Hong Kong is the dress rehearsal for Taiwan in my opinion. You might be wondering what all of this has to do with real estate investing. Stay with me and I’ll make the link in just a minute. One of the things that can dramatically affect local real estate is migration. When people pick up and leave due to political situations, we can see large scale migration. Two weeks ago the Hong Kong government told UK citizens that they will need to choose between the having British status or Chinese status. The new policy was in reaction to the British Government’s decision to allow people with BNO status, which is British Nationality Overseas status to apply for a visa and have a path to citizenship where they would eventually get a British passport. China stated that as of Jan 2021, the BNO status will no longer be recognized. The British government estimates 5.4 million Hong Kong residents are eligible for the scheme, that's about 72% of its 7.5 million population in Hong Kong. These include: 2.9 million BNOs 2.3 million dependents of BNOs 187,000 18-23-year-olds with at least one BNO parent It is difficult to say how many eligible people will actually come to the UK. The latest estimate from the UK government puts the number expected to take up the offer at 300,000. There are about 80,000 people in Hong Kong who hold US passports, and 300,000 in Hong Kong who hold Canadian passports. The unofficial number suggests that as many as 500,000 Canadians may reside in Hong Kong. So the question is, how many people may choose to leave Hong Kong in favour of their second passport. It’s hard to believe that things will get better for foreigners living in Hong Kong. It’s not like the climate will get more business friendly, or that individual citizens’ rights and freedoms will improve in the coming years. So the question is, how many will leave and how soon? So what does this mean for real estate investors? We could see a significant influx of residents from Hong Kong in the coming months. It’s most likely that they will move to a coastal city that already has a large Cantonese community. Remember, people in Hong Kong don’t speak Mandarin. They speak Cantonese. This is a different language. The culture is different. We can expect people to favor cities like Vancouver, Toronto, San Francisco, Seattle, and a few others. If 300,000 Canadians were to land in Toronto, or Vancouver, where would they go? Yes, there is some vacancy, but not enough to absorb 300,000 people. If 80,000 Americans were to land in San Francisco, Los Angeles or Seattle, where would they go? I believe there is a window of opportunity for investors that are paying attention, who can clearly identify the needs of Hong Kong residents looking to relocate in North America, to deliver a product ideally suited to the needs of someone coming to the US or Canada in a hurry. Maybe they’ll send the kids across first and then follow later in 6 months when personal and financial affairs are in order.

On today’s show we’re talking about a book that has changed numerous lives of friends of mine, and quite frankly I’m embarrassed to say that I waited a long time to read it. I waited even longer to recommend it. But we’re here to correct that this month. This weekend I had the privilege to spend an hour with the author of this month’s book on a zoom call. The author’s name is Bob Burg and he was coming to us from his home in Jupiter Floria. Bob is the author of 8 books and has sold over 2M copies. Some of his books have been translated into 29 languages. Bob has been named one of the 200 most influential authors in the World by Richtopia. The book is “The Go Giver; A Little Story About a Powerful Business Idea” I’ve long been a believer in abundance mentality. If you’re a listener to this show, chances are good that you’ve been certainly exposed to it, if you’re not a full convert to the mindset of abundance. The opposite of abundance mentality is scarcity mentality. That’s the mindset that says “The pie is only so big. If I’m going to get my fair share, I have to take it from someone else.” The abundance mindset says that, rather than taking from someone else, focus instead on making the pie bigger. But the book the Go Giver is much deeper. You are probably thinking that you understand the abundance mindset. But there are many other factors that go into the true giver mentality, rather than focusing on abundance. Bob Burg breaks it down into 5 principles, as if they’re almost laws of nature. The book is written as a narrative, as a fable with Joe, the super aggressive salesman trying to meet his sales quota for the quarter. He keeps losing deal after deal. He’s focused on the prize. He’s focused on meeting his sales quota. There’s a week remaining in the quarter and he’s getting desperate. In the course of the week, our salesman Joe meets a mentor who takes him through a series of five lessons, each with daily homework. The power of this book is in its simplicity. Bob Burg doesn’t just give you the information. He wraps it in a story. We learn through stories. We are taken through a narrative that transforms the main character in the story, bit by bit. Each lesson results in a shift. But still pieces of the puzzle are missing and the picture isn’t clear. You see some businesses are focused on just giving enough value to make the trade a fair trade. If you get a decent cup of coffee for $2, that’s a fair trade. But you’re not going to become a global leader with that. You have to deliver a coffee experience so great, that the customer feels like they’re getting a massive bargain at $2. But even if you deliver incredible value, it will still be a small business unless you truly aim to serve a lot of people, and serve them really well. That’s why a rock star gets paid so much more than a great musician who plays on Friday night’s in a bar band. The rock star has focused on impacting many more people. I’m not going to give the entire book away. What I discovered is that those people who are takers show up as plain as can be. Spending time with the author Bob Burg was very special. It was clear that even though the book has a few simple ideas, it doesn’t mean they’re all easy to implement. Social conditioning can run deep for many. The ideas in this book can challenge core beliefs for some. The discussion took us much deeper than the book itself. Bob started quoting Benjamin Franklin and other great thinkers that came before. The ideas in the book are really designed to be timeless. Even though this book was first published in 2007, and then later updated in 2015, this book is destined to become a timeless classic.

Martin Saenz is a specialist in buying distressed notes in the secondary market. These loans can be the source of huge profits when they are modified and restored to performing status. This is another incredible conversation about investing strategy. To learn more, you can connect with Martin at bqfunds.com

Sam Bates is undertaking a value-add multi-family apartment investment project. The usual tactics of adding value through improvements form part of the forced appreciation. But the addition of a captive high speed internet service is bringing an additional high margin revenue stream which adds nearly $1M to the value of the property while being minimally invasive to the operation of the property. This story contains a powerful lesson on how to improve the property with minimal impact.  

Some people think that putting money in the stock market is investing. But in the past week we’ve seen the power of social networks to mobilize large numbers of people to undertake an otherwise un-natural transaction en mass, all at once. The nearly dead company GameStop has been making headlines in recent days. A number of people are probably wondering why Gamestop’s stock has been surging. It doesn’t quite make sense. So before I explain what happened to Gamestop, you need to understand short sales in the stock market. So imagine you think that a company’s stock is going to fall. Pick a company, any company. You might choose Boeing. Boeing is trading around $197 per share. Let’s say that you want to short Boeing, you borrow a share from a broker and sell it immediately at its current price. You then hope that the stock’s price is going to fall so that you can buy it back at a lower price and return the shares you borrowed to your broker. You make money on the difference. So if Boeing shares fall to $190, then you could buy the stock for less than you sold it and and profit on the difference. You decide to cover your short position by purchasing the stock and $190 and now you’re in a safe position with a profit of $7. But if instead of the $197, the stock shoots up to $205, you still need to return your borrowed share to the broker, except now it’s going to cost you $8 to buy back the stock at the new higher price. You would be facing a loss of $8. Since the stock could continue to rise indefinitely, the losses for a short seller can continue to increase indefinitely. You have to replace the borrowed share and the more the price rises, the bigger the loss. For Gamestop, a few weeks ago someone on reddit on the wallstreetbets page noticed that a hedge fund had taken a massive amount of short trades against Gamestop. The one reader convinced everyone on the thread to join forces to buy as much of the Gamestop stock as possible. This pushed the price up in the short term. The short seller was immediately exposed to billions in potential losses. Eventually the losses grew beyond the $13.1 billion that the hedge fund was worth. Eventually the hedge fund was forced to declare bankruptcy. Now we have the reddit thread combing through other hedge fund positions with massive short exposures so they can short squeeze them into bankruptcy as well. We’re now seeing similar assaults on share of AMC Entertainment which nearly tripled in value on Wednesday. Now folks, this isn’t investing. This is called gaming the market. But it’s pitting massive distributed liquidity against concentrated liquidity in the brokerage houses. Today, 90% of the trading volume in the market is based on large computer based trades that are aiming to squeeze out small profits. The initiative for these trades are software programs written by quantitative analysts. These guys and gals are mathematicians who analyze the performance of the markets and they try to develop algorithms that give a brokerage house, a hedge fund, or an investment bank a quantitative edge in the market. So as a simple example, a computer program that looks at the price of Boeing on the London stock exchange might notice that the stock is trading a few pennies higher in London than on New York. The software would then exploit the price difference by purchasing the stock in New York and immediately selling in London and making a few cents profit on the trade with very little risk. You don’t make a lot of money on each trade unless you through huge volumes at it. Throw too much money at the trade and now you risk eating your own lunch and negating the very price difference you were aiming to exploit. There are dozens and dozens of algorithms that have been created to try and outsmart the market. The folks who do this are affectionately called quants. To the untrained eye, this is strange. Now you know why. 

On today’s show we’re talking about the work from home trend that the pandemic seems to have amplified. Long before the pandemic, the warning signs were there in many industries. On today’s show we’re going to take a closer look at one company that was formed purely with the assumption of zero bricks and mortar locations for the entire company. This company was newly formed EXP Realty, now a public company that has nearly 40,000 agents in the company. The company was formed in 2009 and has been slowly quietly building to create a breakout transformation of the industry. If you consider that each employee in a traditional company would allocate anywhere between 200-300 square feet per employee, the annual cost of office space at $30 per square foot gross is about $6,000 per employee. For the company with 40,000 employees that amounts to a cost saving of 240 million dollars a year. That’s a real saving of hard cash that can better be put toward creating a more competitive company. The fact is, almost every real estate broker or agent has a home office, or at times a mobile office. What they need are strong systems. They need to be in the field with their clients. The incredible part of their story is that they have been able to scale much more quickly than most other companies. The effort to onboard a single employee is much greater when they need to have a physical space, a physical desk. The company is growing fast. Last year, the company grew from 500M in 2018, to 980M in 2019, and 1.46B in 2020. Imagine if the company had a bricks and mortar footprint, would they have achieved the growth in 2020 in the middle of a pandemic? The point of this episode is to highlight a business that is all about real estate, that has zero real estate. Think about it. That’s a pretty strong contradiction in terms for some. It might be ironic for others. But they own no real estate. This is not something that just happens. In order for a company to grow to 40,000 strong requires strong systems. It’s a little like the McDonalds philosophy. When Ray Kroc bought the original McDonalds locations from the McDonalds brothers, he didn’t focus on making a better hamburger. He focused on the systems and processes that would allow the business to scale. The systems would have to be strong enough to allow a Big Mac to taste the same in Tokyo or Tasmania, in Santiago or San Francisco. That means an emphasis on training and onboarding of new staff, on having systems for routine transactions, and more importantly for having systems for managing exceptions. After all, why do we need physical offices? Some would say that physical proximity is needed for training. Well, that’s not strictly true. Some would say that you need to be able to walk down the hall and ask the boss a question when you have a problem. That’s not true either. You need a place to store all your physical files for security. Well, yes you do, but nothing says the file storage has to be centralized. If you have a system of electronic records storage, that data center is going to be internet connected anyway. Real Estate as a business is hyper local. Being an agent or a broker in a particular area is hyper local. But operating a brokerage is geography independent. You need to localize certain forms to comply with local regulations, but the steps involved in a transaction are the same. So the question remains, how many other industries can be virtualized? Does a law office need to have a physical office?

On today’s show we’re talking about relationship building in an era of social isolation. We’re social creatures and there’s nothing like speaking with people and having real conversations with people. I see it with kids who are interacting on role playing games where they will be playing the game in teams, connected by headset and conversing with friends across town or sometimes on the other side of the world. Well now the adult version of that is taking the business world by storm. It’s a new social media application called clubhouse. Some of you may have heard of it. Most of you are probably unaware of what it’s all about. So today’s show is dedicated to bringing you into the current decade kicking and screaming. I’m here to tell you that this new way of interacting is going to be as huge as Facebook or LinkedIn. No doubt, Twitter, Facebook and LinkedIn will respond with a competitive offering of their own. Who knows, maybe Google will jump into the fray. But at a time when several social media companies are under federal anti-trust investigations, it would be difficult for any of these entrenched companies to grab a dominant position in an emerging technology especially if they try to do it by acquisition. There is no way the regulators will approve the industry consolidation while there is an anti-trust suit against these companies. OK. So what is clubhouse. Think of a social media app that is somewhat like Facebook, except the only way to communicate is by talking. The only way to talk is by being in a room. There are three types of rooms. Rooms can be created by any member at any time. You can invite people who follow you to join you in a room. You can also schedule the opening time for a room and notify the community that at 8PM, there is going to be a room dedicated to talking about fishing. So all those members who have indicated an interest in fishing will be made aware of the upcoming meeting on fishing. They won’t see notifications about rooms dedicated to travel to Paris unless they’ve listed travel to Paris as one of their interests. Some members who have been consistent room hosts will have the right to apply to create a club. A club is a little like a Facebook group. There might be a club dedicated to, say, commercial real estate, or fundraising. If the room isn’t a club, you’ll only see it as an open room to join if you are connected with people who are in the room. Once you’re in the room, there are two parts to the room. There is a stage and an audience. Only the people on stage can speak. When you’re in the audience, you can be invited on stage by the moderators of the room. Once you’re on stage, you can join the conversation. In many of the clubs, the moderators are there to have a panel discussion and answer audience questions. In many of the rooms I’ve attended the moderators ask audience members to put up their hand and come onto the stage to ask a question or make a comment relevant to the chosen topic of the room. In my experience, some of these rooms are open for hours. Some of the people I spoke with on the weekend said that they came onto Clubhouse intending to stay for an hour, and instead stayed four hours. I’ve engaged in several conversations that have been incredibly powerful in just a few days. Several people I’ve spoken with have managed to already translate the connections they made in Clubhouse into real live offline relationships that have monetary value. The software is in Beta release so far. They just announced a $100 million capital raise at a $1B valuation. Leading the fundraise is Andreessen Horowitz. Let’s put this in perspective. This is for a company that has zero revenue. They reportedly have about 2 million active users on a weekly basis.

Today’s another AMA episode, ask me anything. Nicolas from Washington asks: “If I may ask, how do you move things forward and get things accomplished without causing pain or hardships to those around you (in my case my wife) when they are in a slower lane?” Nicolas, this is a great question. I understand that you’re currently trying to balance a full time job, self-care, family, friends and investing. What you’re describing is a common problem. I can’t say that I do this perfectly. Some days I’ll be recording a show after my wife has gone to sleep. It’s a matter of choosing what to put in your calendar and aligning it with your goals. The first word that comes to mind from your question is the word stress. It feels like you’re experiencing stress. My definition of stress is the gap that exists between expectation and reality. Stress lives in that gap. If there’s no gap, there can be no stress. Since there are only two variables, you’re choices are to focus on aligning expectations, or alter the reality. There’s not much else. In the case of your wife, this is an exercise in determining how to involve your wife in the decision-making process around investing. The points of stress can be many: 1) It might be around the time required to manage an investment 2) It could be whether investing in this particular asset class is a safe investment. 3) Some people simply have no entrepreneurial genes within them. They don’t understand it. They think that business owners are pushy people and they would just rather go to their 9-5 government job and trust that the system will take care of them. 4) Maybe your wife has a belief system that investing is risky and the only safe thing is to keep your money in the bank. I don’t know in your specific case where the disconnect is. But I will say that you need to invest time in gaining alignment with your wife. That is a process. Sometimes a spouse says. I don’t understand all this real estate stuff. You can go ahead and do what you want as long as it doesn’t take time away from the family. Again, I don’t know your specific circumstance. If there’s something that’s important to you, then you may simply want to ask her to make an investment in time to understand it enough so that you can both be aligned. You’re not asking for her to become immersed in it, not to make it her hobby or her passion. Maybe there something she’s into that is not your passion. Maybe she’s interested in lilac trees or quilting. You may want to reciprocate by showing genuine interest in something that’s important to her. Again, it’s not going to become your passion. You commit to understand it enough that you get a deeper understanding of her. There’s no absolute right or wrong way to do this business. Some people are happy owning three vacation rentals that earn as much net income as a 10 unit apartment building. Others want to be active part owners in a portfolio of 100 apartments, and still others want to be passive investors in a portfolio of 1,000 apartments.

On today’s show we’re going to take a short trip through the history books. We’re not going back to Roman times, or ancient Greece. Although there are numerous powerful lessons in history that we could easily apply to today’s environment. No. On today’s show we’re going back to the fall of 2019, and then we’re going to go back to the fall of the year 1999. 2019 seems like a distant memory. The economy seemed to be humming along nicely. Unemployment was at a historic low. Stock market valuations were considered irrationally high in 2019. We were in the 4thquarter of one of the longest albeit slowest  economic expansions on record. Extrapolating continued expansion seemed foolhardy at best. But today’s wounded economy is totally different: only partly recovered, possibly facing a double-dip, probably facing a slowdown, and certainly facing a very high degree of uncertainty. Yet the market is much higher today than it was in 2019 when the economy looked fine and unemployment was at a historic low. Today the P/E ratio of the market is among the highest in history and the economy is fragile to say the least. Let’s go back to 1999. My company Tundra Semiconductor went public on February 8, 1999 on the Toronto Stock Exchange. The Shares priced at $9.25 but were in such demand that they opened at $13.10 and closed their first day of trading at $13.24. We were part of that .com euphoria. We didn’t know it. We were too wrapped up in counting our rising daily net worth. At one point, my stock options were worth millions. By March of 2000, the stock hit a high of $78. We were all on top of the world. We were extrapolating to when our stock might be worth $300 to $400 a share. We were absolutely delusional. It was a very powerful and humbling lesson in greed and the dangers of the echo chamber of groupthink. Everyone in the tech industry was rationalizing the valuations. The idea that people would skip the pet food aisle at the grocery store and order their pet food from a separate specialty retailer online was clearly nuts. But those companies still managed to attract stock valuations in the billions. When the bubble burst, most of that paper wealth, that monopoly money wealth evaporated. I know of some people who exercised their options, triggering a tax obligation, and then didn’t sell the stock. So they were left with stock that was worth far less that when they exercised. The remaining value wasn’t even enough to pay the tax obligation. Some people had to mortgage their house to pay the tax bill on money they never got to put in their bank account. That’s how confident people were in the valuation of these companies. I think about an interview with Scott McNealy, former CEO of Sun Microsystems. He said “What were you thinking?”.  He was asking this of investors paying a “ridiculous” ten times revenues for his stock at the height of the .com mania. If you bought Sun Microsystems stock in 1994, you would have seen a 100x increase in value by the time it hit the peak price of $253. So here we are. Tesla stock is trading at 1600 times trailing 12 month earnings. It has an enterprise value of 802 billion dollars.  The stock is trading at 28 times revenue. Sun Microsystems was a relative bargain at only 10 x revenue. When the world finally woke up and said this is nuts. The stock came back to earth. By 2008, the stock had lost 98% of its value compared with 2000. $1.3T worth of paper value was wiped out in the .com bubble burst. The resulting economic recession was partly caused by the difficulty that many companies faced in raising capital needed to expand their businesses. It forced contraction in thousands of businesses which resulting in economic contraction. So here we are. We are in a major bubble. That is as plain as day.

On today’s show we’re going to be replaying a conversation that I had with Adam Taggart on the Peak Prosperity Youtube Channel. Peak Prosperity is an organization run by my good friends Dr. Chris Martenson and Adam Taggart. The Peak Prosperity movement has over 1 million followers and they’re dedicated to helping people build resilience into their lives. I love speaking with Adam. He’s been a guest a few times on the podcast as has his partner Chris. Dr. Chris Martenson holds a phd in pathology from Duke University and he was one of the first people to sound in the alarm about the Covid-19 outbreak back in January of last year. He’s been consistently weeks or months ahead in his reporting compared with the information coming out of government agencies. Adam, similarly has been active in seeking out analysts in the financial markets to understand what is happening beneath the surface that we see reported in the mainstream financial press. Adam and Chris both continue to make fundamentally life changing contributions to the world of business resilience and human resilience. When we talk about capital, people often just focus on what is in your bank account. Adam and Chris believe that there are 8 forms of capital that make up your life and that if you only focus and cultivate one or two of those forms of capital, you’re not going to make it. Definitely you’re going to want to check them out at peakprosperity.com.