The Real Estate Espresso Podcast

On today’s show we’re talking about how shopping has changed. But not just shopping in general. We’re talking about how my shopping has changed forever. Last week, my wife and I were on vacation. We chartered a boat on an inland waterway in central Ontario. We were going through the locks and my wife lost grip of the boat hook and it fell in the water. Normally, a boat hook is a specialized item that you can only find at a marine chandlery. They can be expensive, usually starting at about $75.00. She was pretty upset and was worried that the charter company would charge us a large amount of money to replace the lost boat hook. So I went on Amazon and found a basic telescoping boat hook of similar quality to the one that now is sitting at the bottom of a lock. We ordered a replacement for $31.00 and with free shipping it arrived at the charter company before the end of our trip. I solved three problems with that online order. 1) I replaced the lost boat hook 2) I eliminated the fear and uncertainty that my wife was experiencing around the lost boat hook. 3) I saved at least 50% compared with buying from a retail marine chandlery The owner of the charter company was hugely appreciative that we ordered the replacement. It solved a problem for them and frankly they were surprised to receive an anonymous boat hook in the mail without warning. This is the new world of retail. If you own a retail store or a chain of stores that offers a variety of products at high margins that are easy to ship without being needed immediately in expensive retail locations, then you're in big trouble.  There were items that I religiously said I would never buy online. Top of that list was clothing and shoes. I find it difficult to buy shoes that fit. I often will try on a dozen pair of shoes before I even find one that fits.  The idea of sending shoes that don’t fit back in the mail seems offensive to me and I won’t do it. This year, I had a pair of running shoes that had worn out. There is one manufacturer that I can count on to fit my foot. Rather than go to the store and try on running shoes, I decided to try buying online. I ordered the same size from the same manufacturer that I already had. It was a new model, but I reasoned that the sizing should be consistent within the same manufacturer over time. The purchase price online was less than the retail store, and I spent a total of 4 minutes on the transaction. Two days later, the running shoes arrived and I spent less time than it would have taken to drive to the store. So the emotional obstacle to buying clothing online has largely been overcome, at least in my case. Will I buy a new dress suit online? Probably not. But I would buy a dress shirt online from a brand that I know. I would buy somethings, but not all things. I maybe would buy half of my clothing online in the future. If you’re a clothing retailer and you lose 50% of your sales to people like me who now buy things online, you’re going to suffer. In fact, you’re probably not going to survive financially. Is retail dead? No. But how many retailers can survive a 50% drop in sales volume? Those that remain will thrive, but only once the industry has shrunk enough to allow those remaining to survive. As real estate investors we need to pay attention to the changing landscape of our communities. If the smaller family run retail businesses die off as they seem to be doing, who will occupy all those retail store fronts? The change in retail will change the flow of traffic in the community. It will change how people choose to live in a particular location. They want amenities nearby that they care about. They definitely don’t want vacant abandoned storefronts

John Fortes has been syndicating apartment projects for a small number of years. He's a relative newcomer to the world of syndication. Listen to how he rapidly made the transition from investing in single family to multi-family properties. John can be reached at JohnFortes.com. He's also the host of the Passive Investor Show. You'll want to check out that show as well. 

Steffany Boldrini is a former technology entrepreneur and host of the Commercial Real Estate Investing From A-Z podcast. She is based in San Francisco and on today's show we are talking about what's happening in several asset classes in the San Francisco market including the residential rental market, and the commercial rental market.  

The much feared W shaped recovery is upon us. Attempts to open up the economy and to restart the floundering food and beverage industry have hit a snag. This past week saw a record number of new infections across multiple states in the US. There is understandably a degree of Covid-19 fatigue in the population. Summer is in full swing and people want to enjoy the outdoors. The question is how to do it safely? The US recorded a stunning 130,000 new cases of Covid-19 over a two day period this week alone. Hotspots include the populous and economically important states of California, Florida, Arizona, Texas and Louisiana. Texas, California and Florida are all reporting record numbers of deaths so far in the pandemic. In a world where scientific data seems to be politicized, it’s hard to get reliable data. In a world where economic data seems to be politicized, it’s hard to make sense of anything. In a world where getting reliable data is increasingly difficult, several software as a service  companies can offer a window into what is happing in the economy. It seems that data often is presented with an agenda, or a narrative. On this show we aim to share data, mixed and confusing as it may be and allow you to draw your own conclusions. OpenTable is used to reserve a table your favourite restaurant. I use it frequently when I travel. Data from OpenTable showed that people were venturing back out to restaurants at the end of May and early June as the economy reopened. But in the last few weeks, reservation bookings on the platform have slipped, especially in states that have rolled back reopening plans, such as Texas, Florida, and Georgia. Homebase, a time scheduling and tracking software used mostly by small businesses, saw the number of hours worked plateau in the last week of June, which is likely to continue, according to data from the company. The pace of improvement of businesses reopening and workers coming back in June slowed from a month earlier, according to Homebase's monthly report. In May, the number of employees working improved 37%, while in June, gains were only 6%. In addition, Homebase is seeing declines in growth in states with higher COVID-19 cases, such Arizona, Florida, and Texas. It’s unlikely that we will see a national shutdown like we saw in March. The appetite doesn’t seem to be there in the White House. It’s likely that we will see numerous state level and local shutdowns in hot spots as outbreaks flare up. The slowdown in infections that was predicted during the warmer summer weather hasn’t materialized. In fact, we’re seeing quite the opposite. Many school districts across North America are making plans for the upcoming school year. Some are opening two days a week. Some are going 100% online for the start of the school year. Others are opening fully with attempts to increase social distancing in the classrooms. The number of families where both parents work is going to be further impacted by the decisions made by school boards. Some families don’t have the luxury of finding child care. So what does this all mean for real estate investors? This is starting to feel like 2008 all over again. I’m seeing distressed properties coming on the market, below construction cost. In earlier months, properties like this would have been snapped up in hours. Now, they’re staying on the market for days before being snapped up. If a deal meets our criteria we'll place an offer. Otherwise, we'll pass. There will be plenty of opportunity over the next couple of years. 

We are living through one of the most perplexing periods I’ve ever seen. On today’s show we are talking about how in the middle of an economic downturn, some indicators suggest a red hot market. Restaurants, Construction Companies, and DIYers Drive Demand Lumber and plywood prices are hitting record highs as various sectors of the economy respond to the pandemic. Restaurants and bars are buying wood to build makeshift outdoor seating options. In many parts of the country, including in New York City, outdoor dining service is permitted, but indoor operations are not. Additionally, home builders are purchasing large amounts of wood as they respond to rising demand for new homes. Low mortgage rates and a desire to be able to social distance in a single family home has led to an increase in construction. Additionally, people stuck at home this summer are working on home improvement projects and flocking to stores like The Home Depot (HD), Lowe’s (LOW) Lumber futures have risen over 85% since April 1. July futures hit $499 per thousand board feet last week, and September futures reached $481.90. Mill companies like Georgia Pacific have seen their shares rise due to booming demand for lumber since June. In March, as shutdowns hit the US, wood prices tumbled and share prices of companies like Georgia Pacific fell nearly 40%. Home sales slowed, as did construction. In response, many mills scaled back production. Now, these trends have been reversed, and mills are doing their best to keep up as construction companies, restaurants, and individuals flock to buy lumber. GP shares are up 50% in the past month. All of this points to strong demand. These statistics mirror my own first hand experience. Last month, I purchased a small quantity of cedar lumber to build some planter boxes for my wife. All of the major suppliers of cedar lumber were out of stock with no forecast for new inventory. I was eventually able to buy what I needed, but it took several attempts to source the building materials. I’m also seeing significant shortages in construction labour. If the project is small, consisting of half a day of work, finding labor is relatively easy. The weekend warriors who have full time work will often moonlight on small jobs. But if you have a significant job, be prepared to schedule the job several months out from now. Other factors that can drive a spike in lumber prices include summer storms. In past years we have seen a significant jump in prices following a major hurricane. We are just starting hurricane season and have yet to experience any major storms making landfall in North America. It could be that we have a lighter than average hurricane season, but it’s too early to tell. It’s conceivable that we have some weather events at the same time as we are dealing with the COVID-19 pandemic. The demand for detached housing seems to be stronger than ever in many parts of the country. We have seen a big drop in demand for high end rental apartments in the most expensive cities like New York, San Francisco, Miami, and Seattle. If you looked only at the construction metrics in the economy, you would think we are in the middle of an economic boom. There are no signs of 11% unemployment, or of distressed properties hitting the market. There are 4.5 million properties in default on their mortgages in the US. There are a likely similar number of rental units with tenants in default on their leases. Because there is a freeze on evictions, we won’t know the real statistics for many more months. It’s hard to make sense out of this economy. If you are sitting on a construction quote that is more than 30 days old, chances are high that you will need to get a new bid for your job.

Dominic asks, Dear Victor, Thank you for the ongoing excellent content. While awaiting projects to invest in that make sense to me, I’ve been looking at various places to hold capital. Do you have any thoughts regarding the “infinite banking” concept using whole life insurance policies as a collateralized asset? The pitch seems to be that these policies provide tool to park unused funds with some dividends.  When a suitable investment comes along, the insured borrows from the insurance company with the cash value acting as collateral. The pitch being “your money is working in two places”, earning dividends within the policy while also being deployed in a higher return investment.  Other advantages being potential tax advantages on accrued values, some asset protection as insurance policies may be exempt from some collection actions, and generational wealth transfer. In concept, this seems to me to be similar to leveraging collateral of other assets, such as real property, precious metals, etc. I would be very interested to hear if you have any thoughts on the utility of this. Dominic, this is a great question. Let me preface my comments by saying that your question really gets to the heart of personal philosophy around money and around how to best invest. It’s a little like asking whether the image on the magazine cover is beautiful. I personally am not a fan of life insurance policies in general. But that’s just me. Remember, life insurance companies make a profit. There is no free lunch. When you borrow against your life insurance policy, it’s my understanding that the value of the policy is reduced by the amount you have borrower. You are correct, borrowing from your life insurance policy can be a quick and easy way to get cash in hand when you need it. You can only borrow against a permanent or whole life insurance policy. Policy loans are borrowed against the death benefit, and the insurance company uses the policy as collateral for the loan. But you need to read the fine print. Some policies penalize you more than just the money borrowed. Those who advocate life insurance as an investment usually justify it on the basis that the cash balance of the policy grows inside the policy tax free. The argument is that if you don’t touch the cash for a long time (20 years), you get growth of the cash. If you don’t collect on the policy, then you can often negotiate flipping the policy into an annuity with the life insurance company. Earlier this year we did an analysis of annuities from life insurance companies and we found the quoted rates of return to be approximately 1%. The yield was better in US Treasury bills. The only reason to put the money with an insurance company is if you have zero financial discipline and can’t leave the cash in your own bank account. As an investment vehicle, life insurance policies have very high fees. These fees are much higher than a mutual fund on Wall Street. If you're horrible at money management but can swing your premiums for the long haul, then a whole life policy could serve as a means of forced savings, since you'll eventually have the option to tap your policy's cash value. My personal preference is to buy term life insurance and then make investments separately. True real estate investors have the ability to generate much higher returns than an insurance policy. The amount of money required to make a solid real estate investment is far beyond the cash value of most life insurance policies. There’s a mismatch between the amount of capital in a life insurance policy and the cash required for real estate investing. Savings as the path to building wealth in real estate is the slow train. You won’t be able to realistically save fast enough. If you develop the skill to raise capital, then you can multiply your returns much faster than is possible with savings alone.

On today’s show we are talking about how to look at a property through the lens of a developer. So often when I talk to the seller of a property, they will tell me about the zoning of the property and how the property has so much potential. Sometimes they will tell me what is possible with a zoning change. Some have even gone so far as to tell me what another property sold for that was approved for a 20 story apartment building. Somehow that is supposed to justify their asking price. The value of a development property is based on what you can actually build on it, not what you might dream of building, or what you might want to build, or what the city might approve in a decade from now. My first question is where will the parking be located and how many spaces are possible? That will ultimately determine the density and the number of dwelling units that are possible. Some areas will allow for one parking spot per unit, whereas others want more. If the property has a mixed use component, you need to factor in the parking for the commercial elements. Some downtown projects that are close to public transportation will sometimes allow for less than one parking space per unit. I always want to supply at least one space per unit. Zoning is all well and good, but the market wants parking. In a market downturn, I want to eliminate the fundamental objections that a prospective resident might have. Let the vacancy go to the properties that lack parking, or to the ones that lack modern amenities. The second thing I look at is access. Where will cars and pedestrians access the property and does the flow actually work? Is there an existing curb cut in the sidewalk, or will we need to apply for one? The third thing I look at is the overall dimensions of the property including the setback requirements and the height restrictions. The other restriction is the floor area ratio. Simply put, if your floor area ratio is, for example 3, and the building is going to cover 100% of the land, then you will only be able to build 3 stories. If the building covers 50% of the property, then you might get 6 stories, subject to any other restrictions. Sometimes a larger property doesn’t translate into a larger building. You see an apartment has certain natural dimensions. It would be rare to design an apartment that is longer than about 35 or 40 feet in one direction. If you want two apartments separated by a hallway, the ideal dimension for the width of the building is around 75 or 80 feet. If the property is too wide or deep in that dimension, you won’t be able to make a larger building. At the other end of the spectrum, there are properties that are too small to make into an apartment building. Some properties are restricted by the size of shadow they cast on neighbouring properties. In that case a shadow study might be required to prove you won’t be adversely affecting the neighbours. When you look at a property that has development potential, understanding the true scope of its potential is an exercise in understanding the constraints. Are all the utilities available at the property line? Is there an overhead electrical transmission line that you will have to work around? The key is to work with an urban planner, or an architect who specializes in the type of building that you have in mind. When you are talking to the right person, you will know it instantly. They will be looking at the project through the lens of a developer to understand the constraints and clearly know the limits on the development potential. If you are going to do the work to get the entitlements on the property, then you as the buyer are creating that value. The seller gets no part of the value increase because they didn’t do the work to create the value.

On today’s show we are talking about how to deal with inertia when you hit an obstacle. There are two types of inertia. The first one is obeying Newtonian physics. But we’re not going to focus on that one. Hitting an obstacle when you’re in motion usually results in a crash. But we’re not talking about physics. We’re talking about when your project encounters an obstacle. We’re talking about finding that perfect balance of persistence and knowing when to pivot. As syndicators we have to keep our fiduciary responsibility to our investors at the forefront of our decision making process. That consists of a combination of preservation of capital and maximizing investor returns. We also have a responsibility to the employees of the organization and the residents of our properties. So along comes a pandemic and financial performance suffers. Agreements that were in place prior to the pandemic evaporate. The choices are simple. Keep pushing on the current path. Slow down and wait for the obstacle to clear Give up Change course I have several projects that have been impacted by the pandemic. In one case, there is a dramatic decrease in construction capital available for that project. So we decided to pivot and deliver a different product in that location. Our original idea was to build a 4 star hotel. But at a time when hotel occupancy is at historic lows, it’s very difficult to engage people in investing in a new construction hotel. So much of the hotel capital is waiting for the deluge of distressed properties that are expected to hit the market in the coming months. So if a hotel doesn’t work this year in that location, what should we build? We feel that a high rise building in the core of the city is best suited to provide one of three products. Hotel Apartments Condominiums All three were analyzed at the start of the project. So a pivot to one of the alternate options was straightforward. We knew that all three products were viable in that location, When a lender on another project surprised us with a much higher interest rate and higher fees, we had to change gears again. The reason for higher rate was the uncertainty introduced by the pandemic. The appraiser gave a low valuation compared with the historic data. His rational was the uncertainty introduced by the pandemic. The appraiser reduced the rents in his model compared with the actual rents in the market. He also changed the cap rate compared with the market in order to account for the uncertainty associated with the pandemic. The net result was a financing that was simply unworkable. Again, you have here choices, Keep pushing on the current path. Slow down and wait for the obstacle to clear Give up Change course Trying to convince a lender to fundamentally change their terms rarely works. A bad quote from one lender is hardly a reason to give up. Changing course is the only sensible option. We have another project where the negotiations on the land have been underway for an extended period of time. In the end, the land owner put the land under contract with conditions with another buyer. The seller put the chances of the buyer closing at 50%. But somehow he had convinced himself that he had made the best choice. Obstacles appear in every project, often without warning. Sometimes it’s a regulation change affecting construction. At other times it’s an increase in interest rates. This year it’s a pandemic. The question of when to push, when to wait, when to quit, and when to pivot presents itself with every obstacle.

Yonah Weiss is an incredibly well connected member of the real estate community, not just in his home town of NYC, but nationally as well. He specializes in cost segregation in addition to his role as a real estate investor. On today's show we're talking about cost segregation and how it can be a powerful tool for improving the tax efficiency of a real estate investment.  You can reach Yonah at yonahweiss.com.

Today's show is an excerpt of a conversation with Keith Elias held earlier this week at the Ottawa Real Estate Investors Organization. Keith heads up the Player Engagement Department at the National Football League. He's a former real estate syndicator, and a former running back with the Giants and the Colts. Our conversation sets a powerful context for living. Rare to have such an intimate conversation about meaningful topics so publicly. Thank you Keith for sharing.