The Real Estate Espresso Podcast

While I don’t pay close attention to the stock market, there are a few rare exceptions that are worth noting. One of them is Warren Buffet’s Berkshire Hathaway. Buffet and his partner Charlie Munger don’t invest in the stock market. They buy companies, and happen to trade the shares through the stock market if they’re publicly traded companies. Berkshire Hathaway filed their 13F form with the SEC for the past quarter ended June 30. In that form, they disclose their holdings. From that form you can compare their current holdings with the previous period. It’s an exercise in addition and subtraction to figure out what they did during the quarter. There are a few items that are noteworthy from that report. BH unloaded more than a quarter of its stake in Wells Fargo. They also sold about 61% of its position in JPMorgan Chase, and dumped its entire stakes in Goldman Sachs. They also sold their stake in PNC Financial. Finally, they also exited their holdings in the airline industry including American Airlines, Delta Air Lines  United Airlines and Southwest Airlines. It marks a rare moment when BH has lost money on an investment. So that’s what BH is getting out of. What’s interesting is what BH has been buying over the past 90 days. They spent $563 million on a position in Barrick Gold. While the position is only about a 5% stake in the company, there are a few things significant about this. When you are buying a gold mining company, you’re really buying gold at a discount. The process of mining gold only makes sense if the cost of getting the gold out of the ground is substantially less than the cost of buying gold on the open market. The recent run up in gold prices makes this an even better buy. The disclosure is only reporting the purchases up to June 30. Another 6 weeks have passed and it’s likely that they have increased their ownership position since then. Barrick is a well managed company. They don’t take a ton of risk when it comes to exploration. They take a disciplined approach to mining. So Buffet has decided that the airlines are going to take far too long to bounce back to invest in them. The banks and financial services represent a sizeable downside risk as we go through this economic cycle. Gold is a good buy. When you buy anything, the idea is to know what it’s worth when you buy it. For example, I can value an apartment building based on rents, expenses, and market cap rates. The analysis is never perfect, but I can project future cash flows and market-based asset prices, and derive an appropriate value for what an asset is worth. But gold does not intrinsically generate cash flow like a business or rental property, so that analysis doesn’t work. People often try to predict the price of gold by examining certain financial benchmarks. For instance, in theory there are some loose relationships between the gold price and the money supply. But these relationships are far from perfect. There’s another theory that gold prices increase because the dollar is weak. But this relationship is also far from perfect. Finally, there’s a theory that the gold price is correlated with ‘real interest rates’, i.e. the rate of interest after adjusting for inflation. This relationship is also far from perfect; The bottom line is that there’s no magic formula to tell us what the gold price should be. Dollar weakness, real rates, and money supply are all useful indicators. But they’re not predictors. For the most part, the price rises when people lose confidence in the financial system, in their government, in their central bankers, or in each other. And that’s what we’re seeing now. Ignore Warren Buffet at your peril.

On today’s show we are talking about how the narrative in your mind is selecting the data from which to make decisions. To properly frame today’s discussion, we need to look at two things: The data itself The way you process the data Let’s start with the data. There is no question that the data showing up in the market is contradictory in so many ways. We have the stock market in record territory and at the same time we have economic contraction and unemployment in record territory. We have record low inventory and rising prices in many real estate markets at the same time as we have millions of properties in financial distress. But almost none of those properties are appearing on the market as distressed properties. We have rising real estate debt and falling consumer debt. We have signs of economic recovery and looming signs on the horizon of a second wave of infection coming in the pandemic. Although it’s too soon to say whether that is indeed what is happening. We have some school boards reopening and others not. How many people will be home schooling their children this year and what will be the impact on the employment workforce of those millions of individual decisions? People are for the most part paying their rent. What will happen when the emergency financial aid comes to an end? It’s truly difficult to make sense out of all of these conflicting data points that under normal conditions would be useful in determining the current state of the market. Ok so the data is confusing to say the least. The question is how are you processing the data and deriving conclusions based on that data? To answer that question we’re going to look at how people listen. Whether you’re listening, or reading, or watching, you’re processing what is coming at you in one of eight different ways. What I’m going to share with you now is something that I developed a decade ago called the 8 forms of listening. I’m going to mix a metaphor here. When I’m talking about listening, I’m also talking about reading or viewing. So here we go with the 8 forms of listening. 1. Ignoring listening 2. Partial listening 3. Selective listening 4. Active listening 5. Empathic or sympathetic listening 6. Know it all listening 7. Pretend listening 8. Focused listening

Today's guest went to Stanford Business School in 2011 and started an online used car company after graduating in 2013. Nicholas raised a total of $10M, went through the startup accelerator Y-Combinator and sold his business to Carvana in 2017. After the sale of his company, Nicholas started investing into real estate projects in Phoenix. The founder realized that real estate is a fantastic assed class for entrepreneurs. After leaving Carvana, Nicholas and his former co-founder Chris joined forces again to build a digital platform to refinance auto loans, called WithClutch.com.

Gary Pinkerton's career trajectory into real estate was definitely not typical. He spent 26 years serving as a Submarine Officer in the U.S. Navy, including commanding the nuclear attack submarine USS TUCSON from 2009-2011 and retiring as a Captain. On today's show we are talking about making career transitions in mid-life and how to navigate the uncertainty of that transition. You can learn more about Gary at www.garypinkerton.com or connect with him through his website. Gary is also the host of the Heroic Investing Show with co-host Jason Hartman. You're going to love this heart centered conversation with Gary Pinkerton. 

On today’s show we’re going to ask a fundamental question about business structure. I’m not going to answer the question. But give you something to think about. The potential problem arises when you have a mismatch between a short term revenue commitment from your customers and a long term expense commitment in your business. These situations arise all over the industry. Starbucks signs a multi-year commercial lease for a location. But the customers are not making a long term commitment to buy coffee. A customer commitment to a coffee is a 15 minute commitment. Somehow, the folks at Starbucks are comfortable and confident with the notion that someone who bought a coffee today is likely on average to buy a coffee tomorrow even though there is no long term commitment to do so. In the co-working space, companies like WeWork and others in the same segment are experiencing a dramatic drop in revenue because customers in many cases had a 30 day commitment to the space. Whereas the co-working landlord had made long term financial commitments. Critics of the business model point to the 30 day commitment as the Achilles heel of these companies. I too have been a critic of WeWork for that reason. But the exact same theoretical problem exists all over the place. The entire Self Storage industry is based on the notion of customers renting a storage locker in 30 day incremental commitments, and the storage company has a long term commitment to the business. The entire hotel industry is based on clients making a one night commitment. You can cancel free of charge up to 6PM on the night of arrival. Yet the hotel owner builds a multi-million dollar, building complete with swimming pools, conference facilities, a restaurant and a big fancy lobby. All of this for a one night commitment of revenue. Most of the time these mismatches between a short term asset and a long term liability work out just fine. Then again, in the rare case it results in complete business failure. The entire rental car industry is suffering terribly because of this fact. Hertz Rent A Car is in bankruptcy because they have long term commitments to their bond holders to the tune of $19B dollars. Here too, customers commit to rent cars one day at a time. The airlines purchase an entire fleet of aircraft where each aircraft costs a couple of hundred million dollars. Many of these purchases are financed. In some cases, the planes are leased and there is a long term lease. The customer on the other hand is committing to fly to London and back over the next couple of weeks. Maybe you’ve purchased a property and put it into the short term rental market with AirBnB or VRBO. You have mortgaged the property to get some bank financing for the next 25 years. Again, the customers are committing to a couple of nights stay at your beautifully furnished vacation rental by the lake. You’re starting to get the idea. It’s easy to look at WeWork or Hertz and have sage wisdom on the folly of their business model. It’s easy to be an armchair quarterback and say how you would do it better. But the reality is so much of the business world and the lending world has accepted the notion that a mismatch between the lifespan of an asset and that of a liability can be different. But that mismatch has some risk inherent in it. The greater the mismatch in time, or the greater the volatility of the revenue, the greater the risk. The risk is of a pandemic, or a terrorist flying a jet into a building, or armed conflict, or social unrest. Any of these things can result in business disruption that can expose the risk to the revenue stability. Again, I don’t have all the answers. But it’s something to think about how you mitigate that risk, incredibly small as that risk may seem on the day you sign on the loan agreement.

On today’s show we’re talking about how to interpret price volatility. Property prices tend not to be that volatile from one day to the next. If your goal over the long term is to acquire property, you’re happy that prices rise when you’re selling, you’re happy that prices rise when you look at your statement of net worth. But if you’re looking to acquire more, you are happy when prices fall so you get some bargains. We’ve seen the price of gold fall from a high of 2084 on Aug 6 to below $1,900 in less than a week. That’s a 10% drop in a week. I bought more gold this week. It was more expensive than the gold I bought in March and less expensive than gold a week ago. For the speculator, these price swings are headline news. Price swings cause anxiety and they drive emotional decisions. But for the professional investor who truly understands the fundamentals of the market, these moments are like finding your favourite food on sale at the grocery store. The reaction is, Wow, I just got a bargain. It’s not life changing. You just got something that you were going to buy anyway on sale. I just placed an offer on some land. Prices are rising in the market and the level of competition for quality properties has risen dramatically. When a bargain comes along, you execute. One builder I spoke with this past weekend had 200 offers in the first hour for 8 building lots that were released on Saturday at 11AM. A professional investor is looking past the next few hours, or the next week, or the next month. They’re focused on portfolio building. The professional investor knows that real assets are a hedge against inflation. We also know that there will be a flight from the world’s weakest currencies to the world’s strongest currencies. Much as the US dollar is a hot mess right now, it’s hard to identify a currency that better. While the US dollar is being devalued by excess printing, the demand for US dollars outside the US seems to be growing as fast as the Fed can print them. Printing money is a strategy that works for a period of time, until it doesn’t. Printing of money has the effect of making the currency less valuable. An original oil painting is worth the most. A limited edition print copy of the painting is worth less than the original, but will still have some value. An unlimited number of photocopies renders the copies virtually worthless. So it is with currency. When we sell assets, we don’t aim to sit on the cash for very long. We aim to sit in dollars for a short period of time and then exchange for another hard asset fairly quickly. Now is the time to accumulate dry powder and to be ready to execute on opportunities when they present themselves.

The thought experiment goes something like this: “Which came first, the chicken or the egg?” Some people decide to go around that circle a few times and then give up. Others will go to Charles Darwin’s “Origin of Species” and argue that the Chicken evolved from a prehistoric bird dating back to the time of the dinosaurs. Others will tell you that the Chicken, like all living things are creatures of God and it was God that gave life to the Chicken. But if we put that philosophical argument aside for the moment, we can safely say that if we have an egg, there’s a good chance that once it hatches, we will have a full grown chicken in a few months. It’s also pretty clear that if you go to your local farmer and buy an egg, you’re going to pay less for the egg than you would pay for a full grown chicken. Yes, I know, the egg will become a chicken, but it’s not a chicken now. The discount for an egg compared with a chicken is much more than simply the time value of money over a few months. This is such an important idea that I’m going to say it again. The discount for an egg compared with a chicken is much more than simply the time value of money over a few months. When we’re talking about an egg and a chicken, it’s pretty clear that an egg is not a chicken, a chicken is not an egg, and they’re priced differently for a very good reason. They’re not the same thing, even though the egg might become a chicken in the near future. Once the egg hatches, it becomes a chick. You might pay a little more for a chick than an egg, and you would pay an even higher price for a full grown chicken. So why are we talking about chickens on a real estate podcast? Because when we find undeveloped land for sale that has not been approved for development, you are finding the land equivalent of an egg. Yes, you can go through the zoning approval process. You can have the site plan drawings completed. You can hold the community meetings and collect the feedback from the community. You can develop the storm water management plan so that your newly developed property won’t cause flooding on your neighbour’s property. Once the property has been approved for development, and the site plan has been approved, and the building permit has been issued, the land is clearly worth more because it’s a large step closer to being a full grown chicken. I was recently offered a property that was zoned DR. DR stands for development reserve. That means that it is land that the city has designated for development. But it’s not approved for development yet. You would have to go through the process to get the land rezoned. The city will eventually approve that land for development, when city council decides that its ready. Maybe that means when there is capacity in the local schools. Maybe they’re waiting for an upgrade to a water main, or a larger sewer pipe. There can be all kinds of reasons why a city might delay the approval of a particular land use. This particular seller was valuing the land as if it had already been fully developed, and all the services were in place. But the truth is, this land was not a full grown chicken. It was still very much an egg. I’m not going to pay the same price for an egg that I would pay for a full grown chicken. Needless to say, I didn’t buy that property from her. She said that she was expecting another offer that very same day. I wished her the best of luck. I’ve had so many conversations with land owners in the past week where the land owner is trying to sell a chicken, when in fact, all they have is an egg. I don’t care whether you buy a chicken or an egg. Both are perfectly valid purchases. Just don’t pay the price for a chicken, when all you’re buying is an egg.

Today is another AMA episode, Ask Me Anything Joseph asks. A friend of mine has contacted a person who is both a coach and a source of turn-key properties. My friend likes the idea of a one-stop-shop to get their start in real estate education and investing. The arrangement involves paying a coaching fee and then partnering 50/50 with the coach / trainer on each turnkey property. I did what searching I could do (some of this on bigger pockets and just random google searching); the reviews seem to be all over the place. The BBB doesn’t  list him as a bad business person. I’m concerned for my friend though who worked hard to save up the cash to do this. What do you think of this arrangement? Joseph, this is a great question. First of all, the coaching fee you quoted seemed fairly low. It’s certainly a lot less than I charge, but then I don’t work with rookie investors. It sounds like your friends are trying to accomplish a few things at once. Learn about real estate investing. Buy some investment property. Minimize the time they invest in the management of the properties. There is a lot of confusion in people’s minds about what an investment really is versus an active business. The confusion arises because “Real estate can be a good investment.” The fact is, a rental property, whether it is turnkey or not is an active business. Sometimes an operator aims to make it appear like a passive investment by calling it a turnkey property. Working with an experienced professional property manager who is acting in the best interests of the property owner is the key. Here’s the problem that I see with the proposed structure. There is an inherent conflict of interest. The person providing the education is teaching the student to buy the coach’s product. I don’t like the structures where there is a knowledge imbalance and the student is assuming a disproportionate amount of risk. The coach needs to be in a pure coaching If the coach is putting up 0% of the money and remaining in the deal for a 50% stake, then the risk is high. If the coach is putting up 50% of the money for their share, then the interests of the partners are aligned and the coach has significant skin in the game. In order to be successful in your real estate investing business you need three things. These are the same three things you need to be successful with anything in life. You need the knowledge. This you can get from courses, from books, from your local REI Club, from podcasts. And yes, you can get knowledge from a coach as well. But sadly that’s not enough for you to be successful. You need the emotional fortitude to be successful. That’s a matter of getting your emotions under control so that they’re not driving your business decisions. You need to become immersed in the environment where you’re hanging out with other real estate investors on a regular basis and masterminding around what’s going on in your business. Joining a real estate mastermind can be a really effective way of accomplishing this. Simply hiring a coach may not give you all three of these things I’m a believer in hiring a coach. I have a handful of clients who having approached me have hired me as a coach.  I don’t advertise that service at all. The coaching fee that your friend was quoted is very reasonable. But it’s hard for me to assess what they’re getting for that price. To recap, I don't like structures that have an inherent conflict of interest. 

On today’s show we’re talking about the health of a high turnover businesses. One business in particular that has been very hard hit during the pandemic is senior housing. Under normal circumstances, those entering assisted living are there on average for about three years. Some facilities offer respite care, but most residents are there until they move into a skilled nursing facility, or if they decline quickly, they go into hospice. Senior housing relies in a continual flow of new residents coming into the homes to maintain their occupancy. Generally speaking, there has been a lot of construction of new senior housing in anticipation of the baby boomers aging out of their homes. It’s expected that the size of the senior housing industry is going to double over the next decade. So much of this excess supply will eventually get absorbed. So here we are in 2020, in the middle of a pandemic that has impacted many senior care homes. The stories of homes that have been devastated by outbreaks of Covid-19 have made headlines. There have been a handful of really badly managed situations, acute staff shortages, resident neglect and high death toll. On the other hand, the vast majority of facilities have continued to be well run, and have not experienced any Covid-19 outbreaks. But the headlines have stigmatized the entire industry. We are now 7 months into the pandemic and a number of residents have left the assisted living community where they resided. This may have been due to a deterioration of the pre-existing condition, it may have been as a result of Covid-19, and it may have been as a result of family pulling Mom or Dad back home. Senior facilities continue to operate under strict lockdown protocols. That means that someone new coming into a facility must quarantine for 14 days. After that, they may have contact with other residents in the facility. But family is still barred from visiting indefinitely. The lack of human contact for the elderly can be emotionally devastating. Families are simply not electing to put a family member into assisted living under these circumstances. While facilities have been open to accepting new residents for some time, the number of new residents has been a trickle compared with normal conditions. That means that senior housing as an industry is going to experience declining occupancy until well after the pandemic is over. Some newer facilities were in the middle of their lease-up when the pandemic hit. According to a report in Senior Housing News, 53% of communities are continuing to report declining occupancy. Ventas is a large national operator. They’ve seen occupancy drop from 85% in some of their facilities to about 80% since April. WellTower, another large player with 612 senior housing operations in their portfolio reported a 79.4% average spot occupancy rate for its portfolio in July, a significant decrease from the 85.8% occupancy rate it reported in February before the pandemic hit. We believe that the big box operators are going to get aggressive in their marketing in the coming months as they try to fight for market share under these challenging conditions. We also believe the economic model is going to change. The number one cost in assisted living is staff. Labour costs are on the rise in the industry as caregivers and personal support workers demand higher wages to compensate for the added costs and risks associated with working in the pandemic environment. These higher costs are ultimately going to be passed on to customers, except in those cases where there is a government or insurance contribution. Labour rates are rising faster than the cost of living allowance that both government and insurance have built into their rates. The result will be a profit squeeze for operators. Some who are already suffering due to lower occupancy will get hit again as their profit margins get eroded.

This weekend we're talking about using video for marketing yourself and your business. Greg is based in the San Francisco Bay Area. He is a specialist in using video to market for real estate. He can be reached at Greg McDaniel on Facebook, GregMcDanielREU on Instagram, or by text at 925-915-1978.