The Real Estate Espresso Podcast

Brian from Ottawa Canada asks. I'm wondering if there has been any discussion about the lack of government support for residential landlords? In this environment, it seems like we're one of the forgotten ones. Deferring mortgages seems to be a decent temporary measure but replacing rental income is far more important. Brian, this is a great question. Tenants and Residential landlords are both feeling the pinch from the current economic conditions. The economy is facing millions of claims for unemployment benefits. This is the time when you need to be in contact with your tenants on a regular basis to make sure they are clear on the terms of any reduction in rent payment. Governments all over the world have implemented a moratorium on evictions for non-payment of rent. That is not the same as saying that the tenant doesn’t need to pay rent. All it has done is remove one of the remedies that landlords have to enforce the payment of rent. If a tenants says that they can’t pay rent, then you need to ask them to produce documentation that supports why they need some rent relief. This includes, paperwork from the government on their new unemployment cheque. They need to demonstrate what their income was before they lost their job, and now what their income is now while they are collecting an unemployment cheque. In many cases, the current income numbers are very close to the previous numbers. If their income has gone down, then you need to ask the tenant to show you their budget. They can’t just stop paying rent because they feel like it. In a handful of cases, we have negotiated with our tenants a reduction of their rent for a period of time. The change has been written into a rent forgiveness letter, and the tenant must continue to pay the revised number.  You see, right now the government is stepping in and helping people who are out of work and replacing their income. If their income truly goes to zero and they don’t have the money to feed their family, then that’s a different story. A moratorium on evictions does not mean tenants no longer are required to pay rent. If a property owner is experiencing a shortfall in revenue, there are a number of different types of discussions that can be had. In many markets, we are seeing that the city has offered a 6 month deferral of property taxes. This ultimately won’t help with a shortfall of money. The city eventually wants its money. But if you have a short term cash flow problem, a deferral of 6 months in property tax is better than going out and borrowing money. You want to have a conversation with your lender. If you are experiencing a cash flow problem, you may be able to negotiate a small loan modification that consists of a deferral of the principal portion of your loan. Under that scenario, you would still pay the interest. The loan would be considered current, meaning there would be no default on the loan. The principal would not reduce according to the amortization schedule, and the effect of the principal deferral is that you would essentially be adding, say, 3 months to the length of the loan. Just like there is a moratorium on evictions, there is a moratorium on foreclosures in a number of jurisdictions. That doesn’t mean that property owners don’t need to pay their mortgage all of a sudden. The same logic holds here as well. While you are correct in saying that there are no programs specifically aimed at residential landlords, this actually makes sense. You see, the money is needed by the people who lost their jobs at the outermost extremities of the economy. I’m talking about the people who produce through their labour, who have earned income. Landlords are further up the food chain so to speak. As a landlord, I would not want to see a situation where the government pays the rent to me, but pays nothing to my tenants.

Steve Olson runs the Fourplex Investment Group (website fig.us). He has developed a strategy that is adding value to the market by building new product in areas where the land cost supports a rental rate to reliably recoup the investment, even in today's environment. I love this strategy. 

In this final segment of a four part series, Russ and I talk about how to value assets and in particular real estate. Today's final mind blowing segment will bring home the ideas that underpin how to think about investment.  You can hear more from Russ on The Real Estate Guys Radio show at realestateguysradio.com.

On today’s show we’re looking at how investors are investing today. There’s no question that we are living in uncertain times. The stock market is pushing valuations that can’t be supported by the current level of profitability in the economy. So what’s driving it? I feel like we need to go back to basics and talk about how investments are made, or at least how they should be made in my view. Money comes to you through one of three mechanisms Earned Income Residual income Capital Gains If we’re talking about investing, then it comes through one of #2 or #3 either residual income or capital gains. Residual income, by definition means that a business is generating cash positive cash flow. Capital gains happens either because you bought something at a deep discount to its true value, or the value increased from the time you bought it. In order to make a good investment, you need to be able to assess which of those is at play. Is there positive cash flow, payable to investors, and if so, how much? If there is a capital gains play, or a value play, are you buying the business at a discount or are they on a trajectory to create enough value from today’s purchase price that you are making a good buy? If you can’t give an affirmative quantifiable answer to one of those questions, I’m starting to lose track of what you’re doing. That drifts out of the realm of investing into the sphere of speculating. How on earth are you going to evaluate the value of a company that can’t provide any forward guidance on revenue or earnings? Many publicly traded companies in their most recent investor communications have declined to offer forward guidance. Don’t get me wrong, the executives are doing the right thing. They really have zero ability to provide meaningful guidance. If they gave a number, they’d be making it up out of thin air. So why have people been piling back into the stock market in recent weeks? It makes no sense to me. Quite simply, the investments are being made based on a belief that the Federal Reserve, and the Treasury will print as much money as it takes to save key sectors of the economy. If you believe that the airlines will be saved by the government, then Delta Airlines and British Airways must be a good investment, right? Or if you believe that the cruise lines will be saved, then Carnival Cruise line must be a good investment right? The only thing that makes the investment a little better than another is the notion that the Fed is going to save the company, no matter what it takes. But folks, that’s not the same thing as investing in a company based on fundamentals. In a few short weeks, the stock market has gone from one where investors invested in companies, to one where investors are front running the Fed expecting that if the Fed is going to pump money into it, it’s a good investment at any price. The Fed doesn’t have the power to grant money. They only have the power to lend money. The money actually will be coming from the government and the terms of those cash infusions haven’t been fully disclosed. What I’m seeing in the market right now is that people are making investment decisions based on who is getting a government handout. The government handout that is being helicopter dropped from the sky, falling upon some and leaving others behind. Don’t get me wrong, survival is a good thing. If you’ve decided that you want to hold onto a liquid investment, like shares of your favourite public company, then you definitely want to understand the story. But that’s not the same thing as making a new investment, expecting that you will get residual income, or perhaps you’re secure in the knowledge that you are buying a bargain at today’s price. I’m parking funds on the sidelines in physical metal, or in real assets where I feel confident in the earnings from those businesses.

On yesterday’s show I spoke about using the energy of the market to aid you in your quest. Use the energy of the market to your advantage as you evolve your investment strategy. On today’s show we’re going to look at a few asset types that we believe are eventually going to do well once through this period and once this pandemic recedes and we are into a recovery phase. My analysis of various segments of the market show that some sectors are feeling tremendous pressure, and others are just ticking along like nothing has happened. The ones that are doing poorly are will probably come as no surprise. But even in these segments, there are some bright lights. The worst performing asset class right now is hospitality. Hotel occupancies across North America are averaging below 10%. According to a report from Colliers, most hotels have laid off much of their staff and are either closed completely, or are operating on a skeleton staff. Short term rentals are a segment that overall have been hard hit. We’ve seen some announcements from AirBnB in recent days of large workforce reductions and cost cutting measures in response to the fall in bookings. But some short term rentals have done surprisingly well. In those locations, they’ve filled a particular need. Our own portfolio of short vacation rentals had very low occupancy in April, which in a normal year would also have very low occupancy. April is between seasons in the mountains. It’s after ski season has shut down and before the summer vacation season. As of last weekend, we’ve seen a flurry of bookings as lockdown orders have been relaxed.  Retail store front real estate is also struggling. The social distancing requirements have closed down most non-essential businesses. This includes clothing stores, restaurants, bars, many primary health care locations including dental clinics, massage therapists, and hair stylists. We’ve seen a 50% drop in our commercial rent collections. Commercial office space is also struggling. This is particularly true in the co-working office model. These businesses operate on very thin margins because their operating costs are high, higher than regular office space because they carry more staff. Many companies are re-examining their office space as they’ve continued to operate with large parts of their workforce remote. Residential multi-family continues to do well. But the huge impact to the economy means that many having lost their primary source of income will eventually lose the means to pay rent. Unemployment benefits are closing the gap. But the moratorium on evictions could have the effect of encouraging non-payment of rent. Multi-family remains a good asset class, but the degree of leverage will determine how well these assets perform under these challenging market conditions. There are three asset classes that are actually performing as if nothing has happened. Warehouse and distribution centres that serve essential businesses continue to do well. These include grocers, online retailers that have been less impacted by the shutdown. Online retail sales are up 10% year over year in March as residents leverage deliveries to purchase essentials to set up home offices. The operators I’ve spoken with in the Self Storage segment have seen no measurable drop in rent collection. That doesn’t mean this segment is fully insulated. If people are looking to cut costs, this might eventually become an area of cost cutting. But for the moment, it has not been the first to be cut. Boat and RV Storage also continues to operate with no measurable change. This might change if and when people look to sell their boats or RVs in order to raise cash. But even if they sell, the boats and RV’s still exist and will simply change hands. There are other asset classes that we have not analyzed yet. But for the moment, these are an initial analysis of the landscape.

When I was a young boy, I studied martial arts. But not any martial art. The fashionable ones at the time were Karate and Kung Fu. They were full of very flashy strikes and kicks. No I studied Judo, the Japanese art form. One of the things we learned in Judo is that if someone is coming at you, you could expend a lot of energy trying to stop them. Instead, in Judo, you use the energy of your opponent to their own detriment. In the simplest example, you might have someone coming at you at very high speed. If you stick out your foot and trip them, they are probably going to fall flat on their face. Or you could rotate them over your shoulders and flip them onto their back on the ground when you can easily pin them down. They’re too big and heavy to pick up slowly, rotate in the air above your head and then place them down on the ground on their back. But if they’re coming at you, it doesn’t take that much energy at all. Many people I speak with are trying to push against the system. We’re starting to major defaults across many industries. We’re seeing J Crew, JC Penny, Hertz Rental Car, Neiman Marcus, all filing for bankruptcy protection, or on the verge of filing for such protection. There are a lot of people out there fighting against the tide. They’re resisting the tidal wave of energy that is coming at them. My advice is don’t fight it. That doesn’t mean you shouldn’t fight to save your business. Absolutely you should. When I say don’t fight it, what I mean is don’t enter a state of denial. If the energy in the system is in the direction of an economic downturn, then lean into the downturn. When I say don’t fight it, what I really mean is to align yourself to take advantage of the energy in the system, to use that otherwise destructive energy to your advantage. You literally want to perform a judo flip on your investments.

Ryan from Arlington Texas asks Hi Victor, You always seem to be ahead of the curve, and you do a wonderful job informing your listeners about the trends you see in real estate and current events. Where do you like to get your news? What are some of your bookmarked websites (or other mediums) that you refer to most often? Love the show. Thanks for all the great content. Ryan, This is a great question. I produce several different types of segments on the Real Estate Espresso Podcast. Evergreen content Trending Stories Journaling - These are stories from direct observation of my own projects Interviews Book of the month AMA episodes Your question relates most strongly to those topics that are trending in the industry. These shows require the most research. They are those that somehow tie into something that is happening in the broader economy. For that, I have numerous sources. I tend to stay away from the headline sources like the NY Times, and the Washington Post. I almost never look at USA Today or CNN or Fox News. I find that when it comes to commercial real estate, the Wall Street Journal does a dreadful job. So I rarely look to the Wall Street Journal for real estate, but they are a source of good economic, and geopolitical information. I have many go-to sources. They include the World Economic Forum, Business Insider, and the newsletters of various economists. I go to the research departments of the major brokerage houses like Colliers, CBRE, JLL, and Marcus and Millichap. I use the economic research from the big 4 accounting firms. There are a number of people I follow regularly, many of whom I know personally. I’m thinking of folks like Peter Schiff, Simon Black, Dr. Doug Duncan, John Mauldin, Ray Dalio, and Harry Dent. While I may not quote them directly, the information I receive from them gives me a thread to follow. So for example, if the story is something on, say, demographics and the story references an updated data set in the census data. I’ll go find that census data, download it onto my computer, bring it into Excel and calculate a new slice of the data that would be relevant to our listeners. In your question, you talked about my reporting being ahead of the curve. It’s true that I’ve made numerous predictions this year that have appeared in the podcast days or weeks before they’ve appeared in the news. Whenever that happens, it’s the result of some analysis. I rarely just report the news without adding any value. Thought leadership involves using my own intellect to add value. That’s an exercise in connecting the dots. For example, on January 29, I predicted that we were going to experience a deep recession as a result of Covid-19. At the end of January, this was hardly headline news anywhere. Connecting the dots frankly was easy. If you go back to the impact of travel reductions in 2003 due to SARS, the GDP in the US fell 1.5%, solely from the impact to travel and hospitality. The scope of travel reductions and supply chain disruptions by the end of January were already looking to be larger in impact than 2003. Predicting a recession was as plain as day. I’m going to go out on a limb and make one more prediction. I’m going to predict that once social distancing requirements are eased, people who have been stuck at home for nearly two months will be looking for a get-away. But it won’t be the charter flight to an all-inclusive resort. It’s going to be a while before people have the confidence to jump on crowded flights. The vacation of choice will be a cabin on a lake, a chalet in the mountains, far from the crowd, or perhaps an RV vacation. If you own a short term rental within driving distance of a major center, you are well positioned to fulfill the demand that will return with a vengeance. 

On today’s show we’re going to do an analysis that show how you can use numbers from the same data set to construct virtually any story that you want. We are continually exposed to data in the news and the news source will provide an in-depth analysis with lots of supporting data. Let’s say that you wanted to create a narrative on which country is experiencing the worst outbreak of Covid-19. For the purpose of today’s show, we’re going to rely on data that is available on worldometer.com. This website collects all kinds of global data like population data, global oil reserves, coal reserves, the number of bicycles manufactured each year, and yes, statistics related to the Covid-19 outbreak. Of course the conclusions you draw from the data are only as good as the data collection that supports the numbers. But on today’s show, we are going to also examine which measures provide meaningful insights, and those which are completely useless. So back to our question, “Which country has experienced the worst outbreak of Covid-19?” If we go to world-o-meter, you would see that as of today, May 4, 2020, the United State has more reported cases than any other country. The data shows that of the approximately 3.5M globally reported cases, approximately 1.2M are in the United States. But we know that testing and reporting has not been uniform across the globe. There is a clear correlation between testing and reported cases. If you’re not testing, then the reported numbers would be low. So let’s take a deeper look at the testing numbers and see if that can give us a clue. The USA reports having performed more than 7.1M Covid-19 tests, more than any other country. Russia is a close second with 4.1M tests. So perhaps the numbers are accurate, the US has the worst outbreak in the world. Let’s take a closer look and see how the testing compares against other countries. So far, the US has performed 21,400 tests per million of population. That would place the US in 42nd position out of all countries in the world for extensive testing. So maybe that’s not the best metric. Perhaps we need to look at the number of serious cases and compare that with the ability of the health care system to handle the outbreak. Next down the list is Brazil with 8,300 serious cases. They have far fewer critical care beds and have experienced significant outbreaks in areas with very poor health care infrastructure. Perhaps Brazil is the hardest hit country? What about deaths? Which country has experienced the most deaths? Maybe that’s a better measure. So perhaps let’s look at the number of deaths due to Covid-19. Here too, the US leads the world with the largest number of reported deaths due to Covid-19 with 68,200 deaths. Clearly, the US is the hardest hit country. But wait a minute, perhaps that’s not a meaningful measure. The US has a large population and a huge land mass. Perhaps the number of deaths per million population would be a better measure. If you look at deaths per million, then San Marino leads the world with the most cases per million population at 1,208 deaths per million. But of course San Marino has a tiny population so even their small cluster outbreak which killed 41 people could provide a skewed statistic. Let’s see who’s next. Next on the list is Belgium with 7,844 deaths and a whopping 677 deaths per million population. The US which has more deaths at 68,000 deaths has 207 deaths per million, less than a third of Belgium. The next major countries after Belgium include Spain, Italy, the UK and France having the most deaths per million population. So the top 5 hardest hit countries are Belgium, Spain, Italy, the UK and France.

Dana Samuelson is owner of American Gold Exchange, a national dealer of gold and other precious metals based in Austin Texas. On today's show we break down the way pricing is done in the physical metals market. His  analysis brings a tremendous clarity to pricing that may be otherwise difficult to understand. You can connect with Dana directly at info@amergold.com or through his website at www.amergold.com.

Russell Gray is co-host of the Real Estate Guys Radio Show. He's a financial strategist and one of the smartest dudes I know.  On today's show we talk about the impact of counter party risk and where precious metals fit into the picture of real asset investing. It's an epic conversation as always.