The Real Estate Espresso Podcast

Chris Miles is based in Salt Lake City Utah. He made the transition from the monolith world of insurance and financial planning to main street investing in hard assets. He's committed to stopping the speculation and leveraging boring proven strategies that work repeatedly and predictably. You can reach Chris at moneyripples.com or listen to the Chis Miles Money Show on your favorite podcast platform. 

Danielle asks: "I am considering purchasing a 4 unit apartment building that is approved for higher density to six apartments. How do I know what is a fair price to pay for the property?" Danielle, this is a great question. When we buy real estate for a long term hold, or a quick sale we use a very similar approach that is pretty standard in the industry. The method is called “Residual Land Value Analysis “. Click HERE for a copy of the spreadsheet It’s a fancy term that basically means you need to work backwards from the answer to the question, or work backwards from the value of the finished product to the raw material that you are starting with. On yesterday’s show we looked at the case of a simple new construction project or a flip. We did a bunch of math to explain how the residual land value analysis works. For those of you that want to follow along with a spreadsheet, there is an example you can link to in the show notes for this episode. Just go to the show notes, click on the link and you’ll get a copy of the example. The same spreadsheet that we used for yesterday’s show has a second sheet embedded in it with the buy and hold analysis. On today’s show we are going to look at the case of a 4 unit apartment building in a hot area. The first thing you need to assess is the as is value. That’s based on the current rent. For your specific property, the rents are quite low at about $1,050 a month. The taxes are high and the expenses will probably run near 50% based on a building of that age. If we valued the property aggressively at a 5% cap rate which would be high for that quality of asset, you would find that the property is worth no more than $500,000. That is a long way from their asking price. So now we are going to look at the residual land value analysis assuming you redevelop the property into a six unit apartment. The property you found is in a great area that is in high demand. Rents for new product in the area are running at about $2.30 per square foot. We are going to build 4 apartments at 900 SF each with an additional overhead of 20% for the common area. We only charge rent on the rentable area of 3,600 square feet. Gross rent will be $100,000. I’m going to cut a few corners here in the rental analysis like accounting for vacancy. The point is not how to model a rental, but the residual land value analysis. The expense ratio is going to be much lower than the previous case because the rents are higher and you have a new building. We will assume a 35% expense ratio. We will use the same 5% cap rate as before. Once built, the building should be worth 1.4M Your business is going run as a healthy business and I recommend that you set the profit margin for your business somewhere between 25-30%. I would start at 30% and as you get more experienced with strong and predictable systems you can lower your margin requirement. Except in this case the notion of margin is different. We’re not selling the property. Instead we are going to refinance. We want to target a refinance at 70% loan to value so that you can recover 100% of the initial investment in the refinance. If we take 70% of the value, then our maximum investment is $980k. Our loan closing cost is going to be about 3% of the loan amount or $35,000. We are now down to 935,000. We are facing a year of holding cost, so we can budget $60,000 for that. We are now at 835k. Just like the case yesterday, we need design engineering and permit for $30k. We can build a good quality B+ product these days for about $126 per square foot in many markets. We subtract the hard construction, foundation, and site servicing costs and that leaves a residual land value of $331,400. This exact same calculation that applies to a flip or a new construction project for sale . Go to the show notes with this episode to download the spreadsheet example.

Today is another AMA episode - Ask Me Anything Danielle asks: "I am considering purchasing a 4 unit apartment building that is approved for higher density to six apartments. How do I know what is a fair price to pay for the property?" When we buy real estate for a long term hold, or a quick sale we use a very similar approach that is pretty standard in the industry. The method is called “Residual Land Value Analysis “. Click HERE to download the Excel example for today's episode. It’s a fancy term that basically means you need to work backwards from the answer to the question, or work backwards from the value of the finished product to the raw material that you are starting with. So let’s construct a simple example of how to conduct residual land value analysis. For those of you that want to follow along with a spreadsheet, there is an example you can link to in the show notes for this episode. Just go to the show notes, click on the link and you’ll get a copy of the example. We are going to run through the example twice. On today’s show we are going to examine the simpler case of a sale of the finished product, and on tomorrow’s show we look at the second case which has a couple of additional calculations when you are doing a long term hold project. Imagine you found a property that is in a great area that is in high demand. You know that houses in the area are selling for $1,000,000 for a 2,000 SF home. How do you know what you can offer for the property in order to have a profitable project? Let’s say that you have completed the comp analysis and you have a high degree of confidence in your ability to sell a quality product at that $1,000,000 price tag. Your business is going run as a healthy business and I recommend that you set the profit margin for your business somewhere between 25-30%. I would start at 30% and as you get more experienced with strong and predictable systems you can lower your margin requirement. So now you know the sale price is 1,000,000. If your margin is 30%, then your total investment should be no more than $700,000. That’s going to get you a profit of $300,000. You need to subtract your transaction costs associated with selling the property like the realtor commission, the land transfer tax, the legal fees and so on. Let’s put all of that together and estimate it at 8% of your sale cost or $80,000. We are now down to $620,000. You expect to hold the property for a year and you are going to be paying interest on that money, as well as paying for property taxes and insurance. Let’s estimate that at $60,000. Now we’re down $560,000. You will need to pay an architect and engineers for the plans and permits. Let’s estimate that at $30,000. We’re down to $530,000. We said the house is going to be 2,000 square feet plus a foundation and a garage. Our hard construction cost might be $150 per square foot for a product with somewhat better finishes and the foundation may cost an additional $50,000 to dig and pour. When we add all that up we are looking at $350,000 for the construction. There is additional site work to bring utilities from the edge of the property line to the foundation. We estimate that at $20,000. So now our total construction cost is at $370,000. We subtract $370 from our earlier subtotal of $530,000 and we get $160,000. So the maximum price we would be willing to pay for the land in that instance is $160,000. This exact same calculation applies to a flip. Your starting point might be a older home that needs a major renovation instead of a brand new construction. But the analysis is exactly the same. On tomorrow’s show we are going to be going through a similar analysis for the case of a property that is a long term hold instead of a quick sale.

On today’s show we’re talking about whether diplomats from a foreign country are immune from complying with landlord tenant rules. When a foreign diplomat approaches your property manager seeking to rent a house or apartment from you, several thoughts might cross your mind: What do I do if this person defaults on the lease? Will I ever be able to get them out of the property? Do I have to rent to them? What should I do? If you refuse to rent to them because they’re a diplomat, then are you contravening laws against discrimination due to profession? After all, being a diplomat is a valid profession. When faced with this situation, you have three options available: Enter into a lease with the individual Enter into a lease with the embassy or diplomatic mission directly Don't rent to them at all.  Each option has different benefits and drawbacks, and you should carefully weigh all factors before making a decision. You might be thinking I don’t live in a capital city therefore I don’t have to worry about this. But remember, the laws around diplomatic immunity don’t just apply to a employees of an embassy. There are diplomatic missions all over the country. Major cities contain consulates in order to provide consular services for foreign nationals all over the world. Embassies and consulates can be great tenants. They are generally willing for high quality properties in great locations and are willing to pay top rental rates. In a case back in 2018, an Ottawa based landlord upgraded the security for a tenant who was an employee of the US embassy in Ottawa to include bomb-proof windows and double bolt locks on the doors. The tenant was repeatedly causing a disturbance for other occupants in the building. The tenant stayed past the agreed date to vacate the unit, and then skipped out without returning keys and still owed two months rent. Attempts to collect through the standard means were met with a letter from the tenants lawyer claiming diplomatic immunity. About a month after receiving this response and the threat of a counter-suit, the matter was taken up in Ontario Superior Court. The Judge in the case sided with the landlord and said that diplomatic immunity didn’t apply when it came to rent. The court ultimately issued an order to garnish wages from the employee of the embassy. Today’s there’s a new story is about a home located in Ottawa Canada. This time the roles are reversed. The property is owned by Saudi Arabia’s top diplomat in Canada.  The tenant in question is An Ottawa military. They allege that their former landlord — Saudi Arabia’s top diplomat — acted in bad faith when he gave them a notice of eviction, claiming he intended to move into the home with his own family. Under Ontario’s landlord tenant laws, owner occupancy is one of the few legitimate reasons for eviction under the law. The tenant was surprised to see the property listed for rent a few weeks later for $500 more per month. When confronted, the landlord offered for the tenant to remain in the property for an extra $500 per month, clearly in violation of the law around both evictions and rental increases. The tenant filed a suit in the landlord tenant tribunal seeking damages of one year worth of rent. So the question is whether the landlord will claim diplomatic immunity. The question is whether diplomatic immunity applies to cases involving real estate law and in particular landlord tenant laws. If you’re going to be doing business with a foreign diplomat, you want to get legal advice from someone who is knowledgeable in the field. The considerations are a little different from your average tenant. The possibility of claiming diplomatic immunity significantly weakens your recourse with any contract that is signed.

Our Book of the month is “To Do List Formula: A Stress Free Guide To Creating To-Do Lists That Work “ by Damon Zahariades. This is one of 11 books by the author. All of his books are centred around the topic of personal productivity, a topic that he clearly has studied deeply. We’ve all experienced the frustration that comes from having that 15 minute task that ultimately took 2 weeks to complete. If you are like many people, you have probably tried many different management systems for organizing your daily life. There are so many and quite frankly almost all of them have pitfalls and break down in some way. Our book this month takes a deep look at 10 of these systems and provides insight as to why a particular approach doesn’t work in a sustainable way. It starts with the simplest to-do lists and examines the more capable approaches to the more sophisticated systems like “Getting Things Done” by David Allen. Todo lists suffer from a basic problem. They are often mixing tasks of differing sizes, differing importance, and rarely are they scheduled on the calendar in the way a meeting or a dental appointment would appear on the calendar. If you’ve been listening to this show for a while you will remember that the book “Getting Things Done” by David Allen was the book of the month back in... Todo lists either capture too little, or they create overwhelm. There doesn’t seem to be a happy middle ground. The problem with many of the to-do systems out there is that they don’t help you establish a meaningful context. Years ago, Stephen Covey built a todo system around the concept of first things first. That’s based on the idea that items can be categorized in terms of both urgency and importance. That defines a 2x2 matrix of items that are urgent and important, important but not urgent, urgent but not important, and neither urgent nor important. While maybe academically useful, there is no connection to projects, Effective Task management requires gaining clarity between what is a project, a wish, a trivial task, an outcome and a task. Sometimes I see resolutions on a todo list. Resolutions are different than todo items since they usually involve a change in habit versus a normal todo item. Outcomes that have multiple steps are not tasks, but projects and only tasks should make it on your daily todo list. Projects should have a project plan and a todo list is a poor substitute for a project plan. I’ve personally experienced the many pitfalls that various todo list management systems have intrinsic to their design. They have left me feeling like I can’t keep up.  The book doesn’t prescribe a single specific one size fits all solution. Rather, it takes you through the thinking process that enables you to gain clarity on how to define a task for your todo list. If you have multiple projects that are competing for your attention on a daily basis, you will inherently experience conflicting priorities. Many todo lists capture trivial tasks lasting 2 minutes in duration. The satisfaction of crossing something off the list creates a false sense of accomplishment when that big important task gets procrastinated. Standard todo lists don’t distinguish between items that require input from others compared with items that can be completed in isolation. David Allen proposes a separate waiting-for list. But this additional list adds another layer of task management. Systems that are overly complex ultimately don’t get used because they are too cumbersome. If you have a well-oiled system in place, your lists will help you to get important work done faster and with more efficiency. If your system is faulty, your lists can actually hurt your workflow, sabotage your time management, and demolish your productivity.

On today’s show we’re talking about Radon, but there are a number of examples of things that  that cost far less to build into the design of a new project when compared with adding them after the fact. Radon is a colorless odorless radioactive gas that exists in the ground, almost everywhere. It poses a health risk to humans because in today’s highly insulated homes, you can get a buildup or radon gas inside the home over time. Long-term exposure to radon is the 2nd leading cause of lung cancer after smoking and the leading cause of lung cancer for people who have never smoked. If you’ve heard of someone getting lung cancer, who never smoked in their life. You might be wondering how it happened. It could be that Radon is the culprit. As radon breaks down it forms radioactive particles that can get lodged into your lung tissue as you breathe. The radon particles then release energy that can damage your lung cells. When lung cells are damaged, they have the potential to result in cancer. Not everyone exposed to radon will develop lung cancer, and the time between exposure and the onset of the disease can take many years. Radon occurs naturally. It forms when uranium, thorium, or radium, (radioactive metals) that are present in the earth breaks down in rocks, soil and groundwater. People can be exposed to radon primarily from breathing radon in air that comes through cracks and gaps in buildings and homes. Because radon comes naturally from the earth, people are always exposed to it. The CDC published a paper in January of this year in which they note that Radon is so pervasive, the CDC recommends that all houses get tested for it. That’s right, they recommend that every single house in the nation gets tested. Radon gets into the indoor air primarily through pores and cracks in the foundation under homes and other buildings.  Usually, the air pressure in homes and buildings is lower than the pressure outside in the soil around or underneath the foundation.  The pressure difference will create suction.  Radon will come into the house through cracks in the foundation due to that suction. There are numerous paths. The most common and effective method for reducing the risk of Radon poisoning is the installation of an active soil depressurization system. This method involves installing a pipe through the foundation floor slab and attaching a fan that runs continuously to draw the radon gas from below the home and release it into the outdoors where it is quickly diluted. This system also reverses the air pressure difference between the house and soil, reducing the amount of radon that is drawn into the home through the foundation. One, or sometimes multiple, suction points are inserted through the floor slab into the crushed rock or soil underneath to effectively reduce the radon level in the home. I recently saw a quote for the retrofit of such a system in a single family home for $4,600. We’re talking about the installation of a PVC pipe through the concrete slab of the foundation with an active blower type fan that runs continuously. The fan costs about $250 to buy and has a 5 year warranty. We’re talking about 16 feet of PVC pipe which costs about $1 per foot. The installation of the entire system during the time of construction is almost zero. A vapor barrier across the crushed stone is also inexpensive and costs no more than a hundred dollars for an entire foundation slab.  If a property fails a Radon test, the rules in most real estate boards say that the realtor must disclose the result to a prospective buyer. The impact of a radon problem on resale value and marketability of the property should be clear. The simple addition of these inexpensive remediations before you even know you have a problem can be a cheap insurance policy for maintaining the future value of the property.

Lisa Haisha is an author, actor, model, real estate investor, producer, director, angel investor, philanthropist, therapist, coach. It's rare to find someone who can effectively operate in so many different domains. Today's show is not real estate focused, but rather spending time to understand Lisa's journey and how opportunities opened up for her. Her approach is so unconventional that there are some powerful lessons on how to live. You can reach Lisa on Twitter at @LisaHaisha.  

On today's show our guest Christian Szpilfogel is talking about how some of the newest innovations in automation can make the life of a property owner so much easier. We're talking about smart connected devices like thermostats, cameras, water meters, and a large variety of alarms. You can connect with Christian at christian@aliferous.ca.

On today’s show we’re talking about what happens when there are multiple levels of government involved in the purchase of a property. It’s common these days to find properties that are outside the boundary of a municipality. In that case, the rules are set by the county in which the property resides. But there are so many cases where multiple levels of governing bodies are involved and it’s incredibly easy to make assumptions about whose rules you need to meet. Let me give you a few examples because I want you to be sensitized to the web of complexity the exists in reality. Imagine you had a property that was legally in the county, but a city street needed to access the property was located in the city. The zoning and construction in that case would be approved by county as you would expect. But there could be an extra layer of city approval required since the property would rely upon a city service in order to access the property. The city may require you to conduct a traffic study in order to approve the extra traffic that would be in the future be loading the city owned street. But the city may overload its traffic approval by imposing additional requirements that have nothing to do with traffic whatsoever. This may seem unfair at first. After all, the city has no jurisdiction over the property. But cities have a tendency to grow. When that happens, they want lands that are annexed into the city to follow city guidelines. So often these rules are imposed by contemplating the future possibility of annexation by the city. I’ve seen cases where the property in the county may require you to drill a well and septic. City services for water and sewer may be close by. In order to use those services, you might be required to meet the city’s zoning rules for a property that is not in the city. These examples of government over-reach exist all over the place. Earlier this week I had a conversation with the Mayor of a town. He acknowledged that the property was in the county. But the services were provided by the city, and the road is owned by the state. In order to gain access to the services, the property would need to be annexed into the city, and the state would need to approve access to the road. So if you wanted to put in an extra driveway, approval from a third level of government would be required. We had another conversation with the planning department of a city in Texas. They acknowledged that the property was in the county. Subdividing the property would fall within the approvals of the county. Zoning would be approved by the county. But the property falls within the extraterritorial jurisdiction of the city. That’s an important term that you need to become familiar with. Extraterritorial jurisdictions are the legal ability of a government to exercise authority beyond its normal boundaries. Any authority can claim ETJ over any external territory they wish. For this particular 9 acre property in question, the county would happily approve the subdivision of the land into two parcels. The back parcel would gain access to the road with the granting of an access easement, a 40 foot wide strip of land for a nice wide driveway. So far so good. Everything seemed to check all the boxes. But then the city planner notified us that the property fell under site plan control of the extra-territorial jurisdiction. In order to build on the property, it would require a minimum of 130 feet of frontage on the road. Anything less and the building permit would not be approved. As you think about that, pay very close attention to all the different government and regulatory bodies that could control what you build on your property.

Happy Thanksgiving to our US listeners. Canada has its Thanksgiving about 6 weeks earlier. That’s because our growing season is shorter than the US with our more northern climate. The concept of Thanksgiving exists in most cultures around the world. The Harvest Festival of Thanksgiving does not have an official date in the United Kingdom; however, it is traditionally held on or near the Sunday of the harvest moon that occurs closest to the autumnal equinox. Japanese Thanksgiving is called Kinrou Kansha no Hi and this year it fell on November 23 earlier this week. Traditionally, the concept of thanksgiving is rooted in thanking for the bountiful harvest. Some people are grumbling that they can’t get together with family during this time due to the pandemic. Some are grumbling that they can’t travel. If that’s your experience, it’s because you have an expectation that differs from the current reality. I am present to that which I’m enormously thankful for. I take the time each day to pause and reflect on what I’m grateful for. I’m grateful for my health, for my family. I’m grateful for waking up next to my loving wife every morning. She is a source of love, support, inspiration, sage advice, and the occasional poke when I’ve got it wrong. I’m grateful for the opportunity to contribute to this world in a meaningful and positive way. I’m grateful for the journey that this life has given me so far. Has it been perfect? No. I’m grateful for the support of my team members who are genuinely working to pick up the slack for the benefit of moving the projects forward. I’m grateful for their skill when we’re working with outside clients as well. I’m grateful for our investors who have put their trust in us. We’re working tirelessly to protect their investments. I’m grateful to you the listener for dedicating a few minutes so we can spend time together every day. I’m grateful to those of you who have reached out to me for help with your projects. I’m grateful for the opportunity to contribute. In several cases we’ve saved families from financial ruin. Those opportunities are particularly gratifying. We actually get approached on a regular basis is to provide consulting for investors and sponsors who are having trouble with their projects. These requests have been so regular that we’ve decided to expand our business so that we’re properly equipped to provide excellent service, rather than just casually helping out on an exception basis.  We have formalized our Consulting Division. It turns out that the needs of our consulting clients are often the same as for our own business. Frankly when we find and fix a problem that the client didn’t even know they had, that makes for a very good day. I’m grateful for the opportunity to help aspiring developers get to the next level. We’re not making any formal announcements at this point about the launch of the consulting division. That will come before the end of the year.  Have a wonderful thanksgiving