The Real Estate Espresso Podcast

On today's show we're talking about goal setting for 2021. This is an exercise that needs to start now, not on December 31. Marc and Nicky are repeat guests on the show. They're having a one day virtual business goal setting workshop on November 28.  You can connect with them at ecircleacademy.com/appointment

Ali Boone is CEO at Hipster Investments where they specialize in turnkey investments. On today's show we're talking about Ali's new book, "NOT Your-How To Guide to Real Estate Investing". Connect with Ali and get a copy of her new book at https://www.hipsterinvestments.com/espressobook

Ramon from Los Angeles asks, I am in contract to purchase a 6-unit value-add multifamily property in a rapidly gentrifying area of Los Angeles. It is a rare true off-market deal that is well priced (at least pre-covid). With 5 of the 6 units vacant I can immediately renovate most of the units. I own other property in the area and posted test ads so I feel like I have a good sense of the current rents. I am projecting a pro forma 6.3 cap rate, mid-to-high single digit cash on cash return and mid teens 5-year iIRR with further upside as the area improves and if I can bring the one currently occupied unit to market rent. Pre-covid this definitely met my investment criteria. However, given all the risks around covid, I am struggling with those criteria. Rents might continue to fall if vacancy increases. Assuming, I am able to lease up at my projected rents, collection risk is much higher than usual in this weakened economy. In addition, if foreclosures start to hit the market there may be there may better deals in the next 6 to 12 months. All that being said, this deal is trading below the price of comparable properties with low-paying tenants, the ability to execute my business plan immediately as a result of the vacancies is very rare, interest rates are low and I can hopefully benefit from the growth in this sub market for years to come. One way to think about all of this is as short-term noise - that it makes sense to buy a solid deal and not try to time the market? On the other hand, should I be getting "paid" more for all of this risk? Based on other deals that are selling the market doesn't seem to think so. I once heard a saying that if the answer isn't "hell yes" then it's a "no". Maybe that is good advice in this situation. Ramon this is a great question. Real Estate as always is hyper-local. I don’t know the specifics of the neighborhood you’re working in. We’ve seen that during the pandemic there has been migration. That has meant migration from more expensive cities to less expensive cities. It has meant migration from the most expensive areas to more affordable areas within the same metro area. There are a couple of factors that can play in your favor. 1) If you design a product that is going to be more desirable than competing product in the market, you have a distinct advantage that will take a long time for the rest of the market to copy. That isn’t to say that the rest of the market can’t copy it, just that it takes time for the rest of the market to catch up. The quality of the property management can be a game changer when it comes to having a better product in the market. Most of the time when people leave a property, a disagreement with property management has been a factor in the decision. Good property management can give you above average results and poor property 1) management can completely destroy your investment. These are timeless fundamentals. What I’m going to share with you now is another test that you can apply. Congratulations on test marketing rents in the area. What if you went to the investor community in your area and offered to sell the project to other investors, complete with your design concept, financial model? You could wholesale the deal to them. Now you don’t have to actually sell the deal, but use the process of offering the deal as a source of feedback to see what others think of the deal. But when you offer the deal, don’t set your assignment fee in the deal. Simply show them your analysis for the finished product and ask them what they would offer you for the deal. Some may offer less than you paid for it. Others may offer you $5,000 more than you paid. Others may offer you $50,000 more than you paid for the deal. The information in that feedback is like gold. You have a choice. You might choose to wholesale the deal, or keep it for yourself.

Today is another AMA episode (Ask Me Anything). Kara asks, I’ve been approached by a borrower to lend funds to purchase a property. I’m not interested in taking risks, so I figure if I limit the loan amount to 80% of the property value, and secure the loan in first lien position I’m going to be safe. I don’t have the time or systems to fully qualify the borrower. The property is a fixer upper which will require the borrower to bring additional funds to repair the property. He intends to hold the property as a long term rental and eventually refinance with bank financing in order to repay the initial loan. Apart from mortgage security, what else should I be concerned with? This is a great question. My recommendation is that you work with a licensed mortgage professional. That’s their business. For the listeners to this show, I don’t want you taking what you hear on today’s episode and making loan decisions directly. I’m not a mortgage professional and I don’t profess to be. I’m merely giving you ideas for you to discuss with your mortgage professional that might give you additional protection. A lender is only ever asking one question. If I lend you money, how will I get it back. The more sophisticated the lender, the more ways they have of asking that same question. How will I get my money back if things go well? How will I get my money back if things don’t go well? Whether you write one loan or 100, you’re in the lending business. In order for you to have a robust and safe lending business, you need systems and processes. That means being very clear on your lending criteria. I’m going to touch on a few, but there are many more to be considered. These are for example purposes only. Again, consult your real estate lawyer and your mortgage professional. Let’s talk about the things that can go wrong and how you need to protect yourself in the lending criteria and in the loan agreements. You can learn an awful lot about this business by reading commercial loan documents to see what terms a lender has embedded in the loan documents. Every single one of those terms are there for a reason. They’re there to protect the lender. You’re correct in saying that by securing your loan on title with a mortgage does provide some protection. But it’s not absolute protection. Only by understanding the weaknesses that a mortgage can have, can you plug those holes that exist. Let’s start with the loan amount. You mentioned that you were willing to loan up to 80% loan to value. In my mind, the notion of value can be highly subjective. There have been documented cases of appraisals coming in above the true market value. In that case, the unsuspecting lender can be taking on much more risk without even knowing it. My recommendation is that you write your loan terms at a lower percentage. But not only that, you may consider limiting the loan amount to the lower of, say 70% loan to purchase price, or 70% loan to value. Whichever of those two numbers is lower, that would be the maximum loan amount. You mentioned that the property is a fixer upper. Every time you have someone working on the property, there is risk of a mechanics lien being recorded on title. Your mortgage might be in first position, but a mechanics lien would come ahead of a mortgage in the hierarchy of payment. You need systems and process to control the payment of contractors and subcontractors. Even with asset based lending there is a certain amount of due diligence that needs to be performed on the borrower. The lending business has a lot of moving parts. These are just a few of about a dozen things that can go wrong even in the world of secured loans. Again, I’m not a lawyer, nor a mortgage professional. If you’re going to write a loan then you probably want to get into the lending business with all of the systems, processes and protections that come from being in the lending business.

On today’s show we’re taking a fresh look at the impact of the pandemic on business activity. Conditions on the ground are evolving rapidly and it’s been some time since we’ve looked at the implications. We have major parts of Europe back in a full lockdown situation. I have two cousins in Milan who both contracted the disease in the past 10 days. One is doing well, the other one is struggling. Since the start of November, Covid-19 cases in the US have increase by more than 25%. We have hit record rates of infection in the US even though we’re not yet into the cooler weather across much of the country. The largest outbreaks are in Texas, California and Florida all of them southern states. According to the data reported by John Hopkins, new daily records were hit in Maine, Pennsylvania, Colorado, New Mexico and Tennessee. Through the month of September and much of October we saw infection rates increasing dramatically. But there wasn’t a corresponding increase in the number of people in hospital or in Covid related deaths. That gave rise to a sense of complacency. We’ve been hearing that Covid has been not that big a deal. Well now we have a record number of people in hospital in the US as a result of Covid-19. The headlines have been promoting the promising results from the latest vaccine trials. But as you know, vaccines only work for a single strain of a disease. Denmark is home to 5.8M people and 17M mink. It turns out that the Corona Virus has made the leap from humans to mink. Now in order to make the jump from humans to mink, the virus needs to mutate. The Danish government has confirmed that the new mutation of the disease has made the jump from mink to people and there are 12 confirmed cases. The Danish government has imposed strict lockdowns on those people, including contact tracing. The impact of a new large scale outbreak of this mutation has not received wide news coverage. The potential for this mutation to render a vaccine useless cannot be overstated. The Danish government are taking steps to cull all of the mink on 207 farms out of 1,000 farms where the disease has been detected. We are talking about killing millions of animals. There has been debate on whether to cull all 17M mink on all of the farms in Denmark. In this day and age, I have no idea why there is a need for mink to be raised in such large quantities on farms. The fact that they’re considering this step tells me that the Danish government recognize the seriousness of the situation. All I can tell you is that this is a rapidly evolving situation. I know that I’m continuing to take regular doses of vitamin D, and continue to take precautions to limit social contact. The research shows statistically much better outcomes for those with high levels of Vitamin D. Hopefully that’s enough to protect my family. But we also need to be concerned with the global picture from a virus that knows no borders. So what does this mean for you as a real estate investor, or a business owner? It means that the uncertainty we’ve experienced in 2020 is likely to continue for a while longer. You might have been planning for a period of increasing economic recovery starting now. I’m here to tell you that may not happen. It’s entirely possible we will see more severe lockdowns and outbreaks of the disease in the coming weeks and months. We have already established that Covid-19 was not just a blizzard that would melt away in a matter of days. It has already proven to be an entire winter. You should be preparing your business for the possibility of a long economic winter.

On today’s show we’re talking about the dilemma of choosing suppliers and choosing specific products. There is a world of choice and prices vary widely. It comes down to making a value determination whenever you’re choosing a particular product. The importance of that choice depends on who you are and what you’re going to do with it. If I’m going to play a game of basketball, I’m going to make a difference choice on which ball to buy compared with Lebron James. To me a basketball is worth an hour of recreation. To Lebron, the basketball is worth millions. On today’s show we’re going to be looking at dishes. You might be wondering why we’re looking at dishes. Well, our team is in the planning phases on a hospitality project. This will require investment in many different aspects. Everything from kitchen equipment to seating and tables for the dining room, to glasses, dishes, cutlery and napkins. There are hundreds of details to be planned in this project. Even though we’re going to be talking about dishes, as you’re listening to this, I don’t want you to focus on dishes per se. What I want to emphasize is the process that will be used in the final product selection for the dining room. We believe that everything in the dining room needs to form part of the experience. The design of the menu, the training of the staff, the décor, the room temperature, the comfort of the seating, the manner and speed with which the diner receives their bill. All these details matter. So too does the choice of dinner ware. The dining room will have a certain theme that is a combination of casual and upscale. So we don’t want a classic white dish. We don’t want an overly formal plate. We found a supplier in Vermont that had the look we were after. The reviews of the product were excellent, and the quality looks top notch. But prices were high. A single dinner plate varied in price between $25 to $29 dollars. A serving platter was priced at $82. We would need to spend over $15,000 just in dishes alone. Research showed that we could order products from China online where prices were $1-$2 per plate. But the minimum order quantity was 1,000. Even if we ordered a quantity of 1,000 and only used 200, we’re still talking about a price of $10 per plate compared with $25. We found a supplier in China that had a product we liked. The look seemed in keeping with the brand and theme of the dining room. If we host a large event and need more dishes, we would have them on hand and would not need to rent any dishes. But of course you don’t want to make the decision based on price alone. We have to consider the weight of the dishes. If the dishes are too heavy, that could be a workplace safety issue for our serving staff. If the dishes are too heavy they might need to be heated before serving the meal, otherwise the meal will get cold quickly. If the dishes are too light, then they will appear cheap and give the diner the impression that they’re getting less value for their dining experience. The dishes have to be dishwasher safe and not leach any toxic chemicals. They need to be able to withstand the repeated temperature changes that come from the dishwasher. Those thermal cycles are the #1 thing that shorten the lifespan of a dish. They will eventually get small cracks in the glaze and break. The glaze needs to be robust enough that the plates won’t chip with regular everyday handling clearing the table. The color of the plate needs to complement the food so that when you have a meal on plate, the plate frames the meal and complements the colors of the meal without stealing attention away from the meal. All of these details are about designing an end user experience. You see, design doesn’t have to cost extra. It just requires you to pay attention to the details and think through the experience from the perspective of the end user. It’s not complicated, it’s just rarely done.

On today’s show we’re talking about the morning after. We have a nation where nearly half the population is elated, and nearly half the nation is disappointed and maybe downright angry. If you’re a real estate investor, or a real estate developer, you’re probably wondering what the future holds. You might be wondering if Joe Biden will make good on his election promise to increase taxes on business, and whether he will make good on his promise to eliminate the capital gains tax deferral that has been available in the US under section 1031 of the tax code. You might be wondering if the push to improve the energy efficiency of housing will bring new incentives to build new housing to replace some of the nation’s oldest and least efficient buildings. If you’re happy or if you’re saddened by the outcome of the election, both those reactions are linked to your hopes and expectations. I said your hopes and expectations. Those hopes and expectations have only one origin. They were the product of your own mind. Neither candidate can influence the election at this stage. It’s simply a matter of counting. The election outcome is reality. If you’re feeling any stress around the election, it’s because there may be a gap between your expectation and reality. Stress cannot exist without that gap. When that gap exists most people feel pressure to close that gap. Since there are only two variables, expectation and reality, there are only a few possible choices on how to close the gap. 1) You can change the reality. This is possible in some instances, but it’s rare. It usually involves breaking the laws of physics. 2) You can lie to yourself and others that the reality has indeed changed. 3) You can alter your expectation. Your expectation is rooted in your belief about the way things should be. Maybe you believe that our political leaders should behave themselves a certain way. Maybe you believe that the laws should be written a certain way so as to make them more fair. Maybe you believe that there is an injustice that needs to be corrected. Some people are so wrapped up in their belief about the way things should be that when they don’t match, something’s wrong. We’re here in the middle of November, the weather was sunny this past weekend and the temperatures were in the 70’s Fahrenheit, above 20 degrees centigrade. Earlier in the week it snowed. I heard some people in the neighborhood say how it was too hot this past weekend, or that it was too cold earlier in the week. Do you realize how silly that statement is? Does mother nature care what you think about the weather? Are you going to tell mother nature that you’re right and she got it wrong? There is no good weather or bad weather. There is only weather. The term good weather is rooted in your expectation and has nothing to do with the weather. Sometimes you can wait a bit and the weather might change. It’s raining today, so I’ll wait for a sunny day before going to the beach. That strategy is called wait and see. But sometimes you could be waiting for a long time. If you’re waiting to go to the beach, you might be waiting another 7 or 8 months. My good friend Robert Helms has a great quote. He says ,”Think and Act is better than wait and see”. If you apply that thinking to going to the beach, then you might board a flight to a Caribbean Island and get to the beach right away . Given the current reality, what is the best move that I can make for my business, for myself, for my family and for my stakeholders? Your current circumstances don’t define your destination. They merely define your starting point. The obstacles don’t define your destination either. They’re simply something to be overcome. You decide your direction, and if you’re truly committed to it nothing will ultimately stand in your way.

All the way from Kansas City, Bob Fraser has taken the entrepreneurial journey through several industries. Over the past 8 years he has specialized in real estate Notes as a business. On today's show we're talking about the strategies that are working in today's market.  You can connect with Bob at aspenfunds.us.

Gray Robinson is a recovering lawyer (or perhaps a relapsing lawyer). On today's show we're talking about burnout and how to manage the stress of a demanding role. This is a must-listen episode for any professional, entrepreneur, or business owner. Gray can be reached at lawyerlifeline.net.

Yesterday Zillow announced their Q3 financial results. This is a company that has been one of the few that benefited from the market conditions in 2020. The company has grown to 5,000+ employees. They had a record quarter in Q3. On their earnings call the company shared a perspective on the overall balance of supply / demand that many investors don’t often pay attention to. The pandemic has turned the market on its head and it’s difficult to make sense of what we’re seeing in the market. The abrupt changes are the result of many contradictory forces, both headwinds and tailwinds as we’ve talked about on recent shows. The folks at Zillow pointed out on their investor call that there are 5 million more people in their prime home buying age in the market than there were in 2010. Demographics suggests that the low number of home buyers over the past decade in the wake of the financial crisis has created a wave of pent up demand which is only now starting to get satisfied. Zillow offers is a service the gives a seller cash offer without having to open their house to showings. Zillow closing services is providing closing services for 98% of their transactions of their zillow offers business. Sellers to Zillow make up 0.2% of their total transaction volume. On today's show we're talking about what can happen when you compete with your customers. This is a business lesson that many companies learn the hard way. Last month Zillow announced that they were getting into the brokerage business. Back in 2014, Greg Schwartz, Zillow's then-chief revenue officer, stated Zillow was "a media company that helps people find homes." How does Zillow make its money? They don't collect real estate commissions. They sell the leads collected on their website to licensed realtors who pay a fee to Zillow for those leads. It’s up to the real estate agents on the ground to do the heavy lifting, to drive the buyers to showings of the properties. But the marketing fee for the leads is small compared with the real estate commission earned by the real estate agents who actually transact the deals. In a buyer’s market, the majority of the work is performed by the buyer agent. For now Zillow is only using in-house agents on the properties is buys directly. Zillow is only interested in buying specific types of homes. They look for homes that are relatively new, in good condition, and that are within what they consider to be “high opportunity” markets where the chance of a quick re-sale is possible. Dominance in a segment doesn’t mean absolute power. Remember, platforms rely on all their stakeholders in order to be successful. The company has three main lines of business. Entering into the brokerage business means that Zillow is now competing with their customers. Real Estate Agents who have benefited from getting leads from Zillow in the past have recognized that zillow has become too powerful in the market and will eventually replace their partner agents with salaried in-house employees who carry a real estate license. So the question is will the agents allow their newest and largest competitor continue to be their partner? Some will rationalize that Zillow doesn’t really compete directly with agents. But as they learn, grow and mature as a brokerage, they can shift their focus quickly. History has shown competing with your customers to be an unstable practice.