The Real Estate Espresso Podcast

Video conference fatigue has definitely set in. I found myself NOT participating in three conferences this past week that I really wanted to attend.  I regularly attend the New Orleans Investment Conference each year in New Orleans. It’s the longest running investment conference in the US. The conference organizer Brien Lundin is a friend. Spending time with the attendees is one the highlights of the year. Conferences always have two components: The speakers and the attendees. I love spending time with the attendees. I find that conferences compress timeframes when it comes to relationship building. I love spending time with Chris Martenson and Adam Taggart of Peak Prosperity. They had their conference this past weekend. The Podcast Movement conference is underway and there are some amazing speakers. The content looks fantastic. Instead I attended two masterminds this past week. One is with Kyle Wilson. Kyle used to be business partners with Jim Rohn before he died. Kyle has attracted some of the most amazing people into the mastermind. Kyle has been a past guest on the show on Nov 4 of 2018.  I find the time we spend together to be uplifting, grounding, nourishing of the mind and spirit. There were so many profound things said during the mastermind. It got me thinking about folks who regularly post quotes on social media. Quotes are fun and thought provoking. But they rarely have lasting impact by themselves. I found that quotes DO have lasting impact when you know the author of the quote, but most importantly the context in which the statement was made. This week, during the two day mastermind there were so many quotable moments. I’m going to share three quotes with you from this past weekend. But all of them have a context. So here we go. The quote first is by Robert Helms. We were talking about the uncertainty that is present in everyday projects. This could be a project delay introduced by the city. It could be the result of a regulation change, a hurricane, or perhaps a pandemic. The reason doesn’t actually matter. These surprises are like a bend in the road. Robert said “A bend in the road is not the end of the road, unless you fail to make the turn.” So here we are in 2020, with a bend in the road. So the question for you is, “Are you prepared to make the turn?” Later in the session we were talking with Dr. Tom Burns. Tom Burns was a guest on the show about a week ago and he has a new book “Why Doctors Don’t Get Rich” launching on October 27. We were talking about how Tom always seems so calm and never in a hurry. Tom is a real estate developer and also an orthopaedic surgeon. I asked Tom how he doesn’t allow the pressure of deadlines to affect his day to day life. He said very simply. “My Time is not defined by other people’s priorities.” He went on to explain that he rarely feels time conflicts. When his children were young, he would reschedule patient surgeries if it was his day to read stories to the first grade class. He would forego income, and inconvenience his patients because he was clear on what his priorities were. The third quote is from Mitzi Perdue. Mitzi was married to Frank Perdue from the Perdue Chicken fame. When her husband was in his early 80’s Mitzi and her husband Frank worked together on preparing an ethical will. Now an ethical will is all about legacy. Frank was a wealthy man and no doubt he left a sizeable inheritance to his children.  But there’s a difference between inheritance and legacy. Inheritance is what you leave your children, whereas legacy is what you leave within your children. So the ethical will was all about legacy. I’m going to share one of the items from his ethical will. If you want to be happy, think about what you can do for others. If you want to be miserable, think about what is owed to you.

Our guest today is a repeat guest. George Ross is 92 years of age and has seen more in his business life than virtually anyone I know. On today's show we're talking about how to communicate any semblance of certainty to investors.

Ted Thomas is a nationwide expert on tax lien certificates and tax deeds. To connect with Ted or to learn more you can find him at tedthomas.com

On today’s show we’re trying to make sense of some of the latest statistics that are being reported in terms of national home sales. A new report yesterday in the Wall Street Journal reported that home sales rose to a new 14-year high in September, bolstered by robust demand and a shortage of homes for sale that is making the housing market one of the brightest spots for the U.S. economy. Existing-home sales are up 9.4% in September from August to a seasonally adjusted annual rate of 6.54 million, the highest rate since May 2006, according to the National Association of Realtors. The September sales represent a 20.9% increase from a year earlier. The numbers of August sales were similarly glowing. The August existing home sales were up 9.1% compared with 2019. All of this points to a booming housing market, one of the brightest spots in the economy. But here’s the problem. Depending on how you slice and dice the data you can construct a different narrative, a different explanation of what it happening. We all know that we went through an artificial downturn in housing sales in the Spring. This was the result of widespread shutdowns of the economy and the shelter in place orders that were in effect for close to 90 days across major parts of the nation. If you compare sales in the first 9 months of 2019, to the first 9 months of 2020, we have not yet matched the sales volume of 2020. In fact, in the year to date we have only sold 97.9% as many houses compared with 2019, a reduction of 2.1% compared with this time last year. Are we having a booming market? Are we just catching up from the shutdown in the spring? The number of home sales in 2018 were higher, 2017 were higher, 2016 were higher. You would have to go back to 2015 to find a rate of home sales that are on par with the year to date numbers for 2020. Yes, we’ve had a strong recovery in home sales. But comparing the September 2020 statistics to the same period last year makes no sense. It’s not a reasonable comparison. It’s a little bit like putting a dam in a river that flows continuously. You then open the dam and say “Wow look at how much water there is.” No kidding Sherlock. It may be amazing how much water is flowing, but not surprising. The pundits that are used to reporting statistics a certain way, are continuing to do so. Why? Because that’s how they’ve always done it. There’s nothing normal about 2020 in any way. So if you’re going to quote statistics, you need to look at the big picture. I’m tired of seeing the weekly unemployment numbers being reported by the bureau of labor and statistics. Fewer people filed for unemployment this week, so they conclude the economy is on the mend. These types of reports are ridiculous to be quite frank. It’s not just the National Association of Realtors who do this. Virtually every real estate board is quoting statistics the same way. Why? Because that’s how they’ve always done it. Even in my home city of Ottawa Canada, the same thing is happening. Last week, the September numbers were published for my home town. The numbers are amazing. Sales volumes are up 35.1% compared with the same month in 2019. Hurray. But if you zoom out and look at the big picture, sales volume is down 4.9% compared with the comparable first 9 months of 2019. Look folks, I have no problem with taking a look at statistics. They can be very helpful in determining what is happening in the market. But when statistics are published, I urge you to apply your own thinking and analysis to what the numbers mean. Don’t get me wrong, I don’t think anyone is out to mislead you about what is happening in the market. Don’t just accept a journalists interpretation as the truth because it may not be the entire picture.

On today’s show we’re talking about the role social media may be playing in our world becoming increasingly polarized. The extreme viewpoints that are making headlines in the US have been shocking to say the least. I never thought we would see the day when armed citizens were lined up outside polling stations. This is the United States of America, not some third world banana republic. Some think that extreme views are strictly a US phenomenon. But I can tell you that the same trends are happening in Canada and the UK. These TV shows are being carved up into segments anywhere from 2 minutes in length to about 15 minutes in length. That’s about the attention span of the person scrolling through social media feeds. So now let’s talk about what you and I get to see on social media. The social media algorithms are designed to maximize your time on the platform. Their goal is to hang on to your eyeballs for as long as possible. The longer you are staring at the screen, the more ads can be presented to you, and the more ad revenue the social media platform will get. When you’re looking at social media, the content being presented to you is not the product. This is a backwards economic model. It’s modeled after the free TV model. You see when you go to the department store and buy a toaster for $30, the toaster is the product. You are the customer and there is an exchange of value, money for product. That’s how commerce works. But when you attend a free seminar, or watch a TV show with advertising, or spend time on social media with advertising, YOU are the product. That’s right, you are the product. The customer is the advertiser, and your attention span is the product that is for sale. So the algorithms are designed to maximize your attention span. If your interest is in model trains, the algorithms will show you more model trains. If your interest is in gardening, you will eventually see more gardening posts. That feeds what is called confirmation bias. If you believe the earth is flat, then you’re going to see more posts that confirm the earth is flat. You won’t tend to see those posts that confirm the earth is round. In your world, the earth is flat. Social media algorithms have tried to become socially responsible in the presentation of news content in particular. So lately, you’ve been presented with some of the opposing viewpoints, in an effort to try and balance things out. But there’s a problem. Rather than opening your mind to the opposing point of view, many of these differing viewpoints are some of the most extreme. When you see the extreme viewpoint, it generally isn’t convincing. It has the effect of being repulsive. When the opposing opinion is repulsive, it has the effect of hardening the original viewpoint even further. Finally, we are seeing a lot of controversy surrounding both Facebook and Twitter for having censored content. Many of these decisions are being made by people, and not a software algorithm. The question of political bias cannot be swept under the rug. This further erodes trust in what is being published, which creates the pretext for rejecting what is being served up on social media as fake news. That only serves to harden positions even more. I don’t have the answers here. I come from the tech world and I can imagine being in the software design meetings where algorithms are discussed. Social media is not to blame per se. I feel like we’re witnessing a train wreck on a social level in slow motion. Perhaps the only antidote is for each of us to seek out the opposing view point, but the moderate centrist viewpoint, not the extremes.

The hospitality industry has been decimated by the Covid-19 pandemic perhaps more than any other industry. This spans everything from the major hotel brands to the individually owned short term vacation rentals. There is no doubt that we are entering a second wave of infection across many countries. We’re all tired of this and want it to be over and for life to return to normal. On today’s show we’re talking about a major change at AirBnB. They have introduced a new cleaning protocol that all hosts must agree to implement and certify in order to retain their listing as an active host. All hosts are required to agree to these COVID-19 safety practices by November 20, 2020. Hosts who don’t complete this requirement before the deadline may be unable to accept new reservations. The AirBnB cleaning process is a 5 step process. Airbnb developed their cleaning protocol based on CDC guidance and in consultation with experts in the fields of sanitization and medicine, such as Ecolab and Dr. Vivek Murthy, former US Surgeon General. They have two handbooks, one for regular AirBnB listings. This one is 36 pages in length and a second one for hotels that is 41 pages in length. The difference between the two handbooks has mostly to do with the common areas and the hotel check-in process. Where possible, hotels should implement contactless checkin, using electronic lock codes with a smartphone, checkin using an app, and tap for payments. Make sure that guests know which services are available such as room service, the gym or the pool which might be closed for protection of guests. There are helpful videos, and detailed checklists for hosts to use every step of the way. I read through both handbooks and I have to tell you, I was pretty impressed by the thoroughness of the protocols they have recommended. I particularly like the checklists. One of the biggest mistakes that people make is sanitizing before cleaning. That does nothing to stop the spread of viruses and bacteria. A surface needs to be clean first before it can be sanitized. This is a basic principle. I know this from my days when I used to brew beer and make wine. If the bottles were not sanitized, you would end up with a bad bottle of beer or a bad bottle of wine. But before the bottle could be sanitized, it needed to be 100% clean. There could be no mold residue in the bottle, no bits of food or organic matter. Using a sanitizer like a chlorine or a sulphate solution would not do its job unless the bottle was 100% clean first. These early lab experiments gave me an appreciation for what clean really means. If I cut corners, I would have a bad bottle. The microbes didn’t care if I was in a rush. You see there are just some processes that are pretty unforgiving when it comes to contamination. If you’ve ever had a bad bottle of wine, it’s because something wasn’t clean before the wine got into the bottle, or the cork didn’t seal the bottle and something got into the bottle. They don’t care what brand of wine, if it’s a $10 bottle or a $1,000 bottle. They don’t care if it’s a French wine or a California wine. Here we are in the middle of a pandemic and those microbes don’t care either. We are in a war on clean, at least for the foreseeable future. The choice of November 20 as the cutoff date for AirBnB hosts to comply with the new protocol is not an accident in my opinion. November is traditionally a slow month in short term rentals, especially in the vacation short term rentals. But we’re coming up on the busy US Thanksgiving weekend when people travel to visit family. Poorly cleaned short term rentals could turn Thanksgiving into the super spreader holiday of the year.

Hi Victor- Your podcast is fantastic - a perfect balance of brevity, and information without any noise or fluff. My question is: I have a multifamily renovation in progress which I want to refinance upon completion with 10 year fixed rate debt. As you mentioned, interest rates will likely increase post-election. Since my future rate will be based on the 10 year treasury, what investment could I make today that would earn money if rates when up, to off-set my future increased interest costs? Almost like interest rate insurance... Thanks again for everything you do for the RE community. Tom, This is a great question. To be clear, my goal in answering the question is not to offer advice. That’s the job of a licensed commercial mortgage broker professional in your local market. I’m merely offering my experience and observations on what I’ve found to be effective in the past. I don’t know the specifics of your project, but I’ve secured financing for new construction on numerous occasions. Whether we are financing for value added projects or new construction projects, they can be treated very similarly.  For example, let’s imagine you bought a building for $1M and you brought $300k in cash and borrowed $700k. Your debt would be at a 70% loan to value ratio. You might spend a further $400,000 in improvements. But after improvements, your building might be worth, say $2M in this example. You might be looking to refinance the project at the same 70% loan to value which would give you loan proceeds of $1.4M. At that point, you can repay the initial loan of $700k, and the equity of $700k and replace all of that with a new loan of $1.4M maintaining a 30% equity ratio with no cash tied up. That would be your classic infinite return that most investors are after. The bank is also likely to offer a loan with two thresholds. It might be the lower of 80% loan to cost or 70% loan to value. If we go back to our example of the $1M property with $400k of improvements. In this instance if the total cost is $1.4M, they would only lend $1.12M or 80% of the total investment. The loan would be approved based on today’s interest rates but would be divided into two phases. There would be a construction phase that might be 12-18 months, followed by a permanent financing phase. Here is the trick that I’ve had some success with. Rather than refinance the loan, you can keep the first position loan in place. The loan would be approved based on today’s interest rates but would be divided into two phases. There would be a construction phase of 12-18 months, followed by permanent financing. On hitting your leasing threshold, the loan will convert to the permanent financing and your payment will be the principal and interest payment over the full amortization period. So far so good. But you’ve got a problem. You have a good loan at a good interest rate and for a decent term. If you refinance early, you're facing a large pre-payment penalty. Instead, go back to the same bank after one year of stabilized performance and ask them to increase the loan amount to match the 70% loan to value. But rather than a refinance, the bank is going to record a second mortgage behind their first mortgage. It’s the same lender, so the lender is not really in a subordinate position and therefore no less secure than the senior loan. If all goes well, the property will value at the $2M that you think it will, and the bank will write the loan on the difference between $1.4M and the original loan of $1.12M. That new loan of $280k when added to the first loan will get you to a full cash out refinance without having to refinance. You lock in your interest rate on the first $1.12M, and you accept the risk that you might pay a slightly higher interest rate on the $280k second. But the overall ratio is still only 70% loan to value, so it should still be an aggressive interest rate.

On today’s show we’re taking a look at what’s happened in secondary and post-secondary education. Late last week The National Student Clearinghouse Research Center published data on the enrolment levels at universities and community colleges across United States. In most economic downturns there is a loss of employment and out of work people use the opportunity to retrain. In past downturns, university enrolments have been seen as recession resistant. Enrolments have gone up as out of work mature students decide to focus their efforts on an area of the economy that has higher demand than their previous job. This year has been different. Undergraduate university enrolment is down 4% compared with the same time last year. First time enrolments are down 16.1%. This number is significant because it will trickle through the system for the next four years. Graduate student enrolments grew by 2.7% this year. So perhaps students who might have entered the work force elected to take their education one step further. Graduate students usually make up about 15% of the total university and so the positive contribution of these new graduate students to the overall student population is estimated at 0.4%. Enrolment of international students is down by 7.5%. This makes sense with the global travel restrictions that come with the pandemic. But the percentages mask the economic impact. Tuition levels for international students are traditionally higher than those for local students. So the economic impact is disproportionately high. The profit margin at most universities has historically been estimated to be in the 10% range. In the wake of the 2008 financial crisis, these grew to about 15%. At the end of 2019, profit margins across the industry were at an alarming 3.5%. Today average profits margins are averaging below 4.5%. So if enrolment is down in these bricks and mortar universities that have high fixed costs, many of them will be falling below profitable levels. Universities are real estate anchors in most communities. Neighborhoods and commercial main streets are built around them. The schools at greatest risk are the public schools and the private non-profit schools. But virtually no school is immune. The story of James Madison University, in Virginia is one of many possible case studies. They made the decision to extend spring break and graduation. By the middle of March, they had transitioned all of their classes online. They might be considered one of the most agile schools during this pandemic. They issued refunds for housing, food and parking and no refunds for tuition. The school lost $30M dollars in just 9 weeks. According to credit rating agency Moody’s, 30% of colleges were running deficits before coronavirus. Not only that, 15% of public universities had less than 90 days of cash on hand! This is despite the fact that college tuitions for a four year degree have multiplied by 1600% over the past 40 years. Universities used to rely upon the notion of scarcity. You could only have so many students in a class. For example, the law school at Yale has about 200 students. The classroom was only so big. That scarcity meant that they had to limit enrolment. But now, with the global reach of the internet, there is no real limitation on the number of students that can be reached. The incremental cost of adding a student in a virtual environment is small. There is a prediction that as the internet democratizes knowledge, about 25-30% of universities will close permanently in the next few years. As you are evaluating communities to invest it, you’re probably still assuming that the university is an anchor tenant in the community and more importantly that it will endure past the pandemic. I want you to examine the financial viability of the local college or university as part of your due diligence in any local community in which you invest.

Dr. Tom Burns is founder and partner in Presario Ventures, an Austin Texas based apartment development company specializing in Class-A new construction projects. In the mornings, he is a practicing orthopaedic surgeon. Tom just wrote a book "Why Doctors Don't Get Rich" which illuminates the path for other doctors, dentists, lawyers to replace and displace their professional income so that they can practice their profession for the love of it, and not for the money. This is such an inspirational story. You will hear Tom's humility in this interview.  The book launches on October 27 and you can be one of the first to get a copy at richdoctor.com. 

John Cooke specializes in disaster restoration and hazardous materials situations. His team of over 400 staff get involved in all aspects of property maintenance from commercial cleaning to assisting families during the depth of insurance claims. On today's show John and I are discussing how to clean in a Covid-19 environment. What are some of the right solutions and how to apply them. This was a very insightful conversation and I learned far more than I was expecting to.  You can reach out to John at inquiry@smottawa.com or directly by phone at 613-244-1997 where he can connect you with trained specialists in virtually any market in North America.