The Real Estate Espresso Podcast

On today’s show we’re talking about where your future tenants are going to come from. Last week the US Census Bureau published new data on migration across the US. It shows some new trends that are quite frankly a reversal of some long term historic trends. If you think back to the time of your grandparents or great grandparents, they probably grew up in the family homestead community and they married and started their own family in the same community, probably the same neighborhood. My father’s family lived in the same community on an island for nearly 400 years. They were displaced by the Second World War. Were it not for that, my father probably would have ended up taking over his father’s Pharmacy and continued the family business. As modern transportation increased and mobility became easier, so too did migration of people. Migration, that is the percentage of people who move their primary residence has been increasing generally with each passing decade. That is, until now. In the latest census report, we’re seeing a reversal of migration trends in the past decade since the start of the Great Recession. But I don’t think you can blame this on the Recession itself. Because even as the economic recovery has taken hold, migration has continued to decline steadily across the US. If you have a brand new vacant apartment ready for someone to rent, or a recently renovated property for sale, people have to be willing to move in order for you to rent your apartment, or buy your house. If the mobility in the population is declining, it stands to reason that there will be fewer people looking to move into your property. So let’s look at the data. The Census Bureau looked at a data set of 263M people over 15 years of age. Of those, 238M didn’t move in the past year and about 25M people did move. That’s about 10.5% of the population. That sounds like a lot. But it’s a significant decline compared with the previous decade when In 1985, nearly 20 percent of Americans had changed their residence within the preceding 12 months, but by 2018, fewer than ten percent had. That’s the lowest level since 1948, when the Census Bureau first started tracking mobility. The largest group of movers by age are in the range of 15 to 24 years of age where 17% of people in that age range moved in the past year. This makes sense. College choice is a big driver of that need to move. The older you get, the less people move. Only 4% of those over 65 years of age moved in the past year. 11% of those between 25 and 64 years of age moved. Your inclination to move also depends on where you live. The lowest mobility part of the US is the NE where less than 8% moved in the past year. 10.73% moved in the midwest and 11.2% moved in the South and the West. Income also seems to be a factor. Those with no income had one of the highest inclinations to move with 11.55% of those people moving. The lowest percentage of movers were those having incomes above $100,000 with only 8.5% of those people moving. Only 3.7% of the people who moved in 2018 came from outside the country. Of those coming from abroad, men were more likely to move than women, with men making up 3.9% of those who moved compared with 3.4% who were women. 81% of people who moved stayed within the same state and 15.5% of those who moved went to another state. So if you’re looking for new tenants and you can target your product offer or your marketing message, it pays to take a closer look at the demographic information in the census data.

Debbie Bloyd is based in Dallas Texas where she specializes in reverse mortgages for those seeking to utilize the equity in their homes to fund their retirement. She demystifies the process of reverse mortgages and how they can be a useful tool for those later in life.

Gary Boomershine is CEO of RealEstateInvestor.com. He is also host of the Real Estate Investor Huddle podcast. He lives in Danville California.  

The question of the legal treatment of short term rentals has been contested in multiple communities around North America. Earlier this week, a legal challenge that had been underway for the past two years has finally come to a conclusion. The City of Toronto enacted new rules in December of 2017. Almost immediately, these rules faced a legal challenge from a consortium of hosts and short term rental platforms. The government's Local Planning Appeal Tribunal (LPAT) announced this week that it had ruled in favour of the City of Toronto, effectively allowing the city to crack down on short term rental landlords for the first time since approving new bylaws in December of 2017. It's a major blow to people who have invested in properties for the sole purpose of putting them in the short term rental market. It is estimated that as many as 5,000 units could return to the long-term rental housing market thanks to the city's new rules. Whether that happens remains to be seen. The definition of a short term rental is any rental of 28 consecutive days or less. The new short term rental regulations, which include capping the number of days anyone can rent out a single property for, were originally supposed to have come into effect over the summer of 2018. A person needs to live in an Airbnb property, either as owner or tenant, under Toronto's new regulations, and is also now required to register with the city for an annual fee of $50. The rules also restrict the number of days any resident could rent out their space on a short term basis to 180 nights per year. So what is going to happen? There are 4 possible outcomes for any given property. 1) Property prices in Toronto have risen dramatically in recent years. Some owners will simply choose to sell their properties on the open market, and take advantage of a capital gain, rather than experience the negative cash flow from renting at lower prices in the long term rental market. For those properties, it will return some inventory to the long term housing supply. 2) Some will convert their properties from short term rental to long term rentals. They will experience lower income and the city will achieve it’s objective of returning more housing to the long term housing supply. 3) Some may choose to continue to operate, but outside the rules and hope that they don’t get caught. We’ve seen this kind of activity taking place in New York and other cities where short term rentals have been regulated. It’s hard to say how much of that will go on. 4) I think there is a market nuance that many have completely overlooked. There are a number of clients of the so-called short term rental platforms that actually rent on the medium term basis. We’re talking stays of 1 month, 3 months, 6 months. There are all kinds of reasons for these rentals. Sometimes it’s dealing with a repair situation where some people need to vacate their home because of an emergency like fire or water damage. Some people have purchase a new home and their builder is running late and they need a place for a few months. Many are corporate contracts. In fact, the net income for a medium term rental is not that much different compared with a short term rental in my opinion. While the nightly rate is lower, the management costs and maintenance costs for a medium term rental is also much lower. For these clients, a 12 month unfurnished lease is of no use. If I was an owner of a short term rental, I’d certainly be looking hard at the corporate medium term rental market as a viable alternative to the short term rental market. I spoke with a representative from AirBnB last week and she told me that approximately 20% of their traffic are for stays of more than 28 days. That’s already a substantial proportion of their existing business, a proportion that I predict will grow substantially.

Vishal from Ottawa asks, “I listened to your interview with Aaron Chapman on the weekend. You were both talking about how inflation can benefit investors, and I didn’t quite follow how that works. Can you explain it in a little more detail, maybe with an example?” First of all, let’s start with a definition of inflation. Inflation means the growth of something. Often we think of inflation of prices as being the issue. In fact, increasing prices are not the actual inflation. They’re a symptom of inflation. The true underlying inflation is the inflation of the money supply. Prices rise for one of two reasons. Sometimes they rise against our will, but more often than not, they rise because people are willing to pay more. The only reason they’re willing to pay more is because they have more disposable cash available. I’ll give you a simple example. A cup of Starbucks coffee costs about 25 cents if you buy the big bag of Starbucks coffee at Costco. That same cup of coffee costs $2.45 if you buy it read made at Starbucks. People are willing to pay almost 10 times the price of a cup of coffee, not because Starbucks is forcing them to pay more, but because they’re willing to pay more. It’s the availability of that extra cash that enables Starbucks to charge 10x the price of a cup of coffee. So let’s extend that concept to real estate. I think we would all agree that most people have not saved up enough money to buy a house. That’s why they go to the bank and borrow heavily, some as high as 97% of the purchase price. It’s the availability of that extra cash at low interest rates that enables people to offer higher and higher purchase prices in the market. It’s not that prices are being driven by the sellers asking too much. When sellers ask too much, houses don’t sell. If they sell quickly or homes sell over asking price in multiple offers it’s because the buyers have access to more cash. So where did all that extra money come from? It was loaned into existence. We think of central banks calling down to the printing presses in the basement and asking them to start printing some more sheets of $100 bills. That’s not really how governments print money these days. It’s simply the addition of a line item on a general ledger on the central bank’s balance sheet. So now let us look at how an investor can use inflation to their advantage. In our example, you’re going to buy the home with conventional financing. You’re going to put $200,000 in equity and borrow $800,000. In our example, let’s say that inflation is 10% per year. At the end of year 1, your property that you purchased for $1M is now priced at $1.1M. The principal owing on the bank loan is still very close to $800,000. For the sake of simplicity we’ll say you still owe about $800,000. But now you have a property worth $1.1M and your equity in the property has increased by $100,000. It’s not truly $100,000 because the increase in price is only an illusion. What’s happened is the value of the currency has fallen by 10%. So that $300,000 gain is really 10% less because the currency is worth 10% less. You gain is really $270,000 in last years dollars. If you then fast forward one more year your property would be worth $1.21M at the end of year 2 and your equity would have increased from $200,000 to $410,000. Again that $410,000 measured in dollars from 2 years ago is more like $332,000. At the end of 10 years of 10% inflation each year, your property would be priced at about $2.6M in the market. If you didn’t make a single principal pay down on your loan in 10 years, you would still owe $800,000. But your equity would have grown from $200,000 to nearly $1.8M in just 10 years. If you had never borrowed the money, and without inflation, you could never have made that rate of return.

On today’s show we’re running what seems like an almost annual episode. The pain in retail real estate continues with little signs of slowing down. According to a new report in Business Insider this week, Retailers closed a record 102 million square feet of store space in 2017, then smashed that record in 2018 by closing another 155 million square feet, according to estimates from the folks at CoStar. We can expect similar numbers in 2019, with more than 9,000 stores expected to close this year. Some of these announcements are from earlier this year, but several are as recent as this past week. Back in February, Payless shoes abruptly announced it was closing all 2,500 of its stores in what may be the largest inventory liquidation in retail history. Gymboree filed for bankruptcy protection for the second time. The first time was back in 2017 when they closed about 400 stores. This time, they’re closing all 805 outlets, never to return. The company’s remaining 140 stores under the Janie and Jack brand. Dress Barn is closing 650 stores after 50 years of operation. Discount Chain Freds announced that it was also closing 520 stores. Dollar Tree plans to convert 200 Family Dollar stores into Dollar Tree stores and close another 390 Family Dollar stores. The Gap announced the closure of 230 stores and announced intention to sell its Old Navy stores. Womens clothing retailer Avenue is closing all 222 of its stores. Walgreens continues to rationalize after its acquisition of Rite Aid. Following the acquisition, they announced the closure of about 600 pharmacies. This year they announced the closure of 200 Walgreens locations. Forever 21 is closing 350 stores globally and about 178 locations are in the US. Sears department stores have been the walking dead for years now. They announced the closure of another 175 stores in a series of announcements that have trickled out over the past three months. Lifeway is closing 170 stores. Kmart is closing 160 stores. Performance Bicycle filed for bankruptcy protection this month and is closing all 102 stores. Bike shops around North America have been struggling. Cyclists would go to a local performance bike shop, try out a bike, get a feel for exactly what they want and then find the same product, or the brand name components to assemble a performance bike online for less and order it online. This story is playing out over and over and over again. Olympia Sports was purchased earlier this year by Jack Rabbit. Following the acquisition, they announced the closure of 76 stores. CVS Health is closing 68 stores. Bed Bath and Beyond is closing 60 stores. Pier 1 Imports is closing 57 stores. Party City is closing 55 stores. Agaci is closing all of its 54 stores. Victoria’s Secret is closing 53 stores. JC Penney is closing 27 Stores. Womens retailer Christopher & Banks is closing 40 stores over the next two years. Lowes is closing 20 stores and even retail giant Walmart is closing 17 stores. Macy’s is closing 9 stores. There are more retail closures that I could tell you about. I don’t know about you, but after listening to that partial list, I’m pretty numb already. I firmly believe that the strategy for dying shopping malls is the redevelopment of mixed use planned communities that have a combination of residential, parks, amenities, and a modest amount of neighborhood retail including groceries, and food and beverage. These distressed assets will increasingly appear on the market in the coming year and years to come.

Brendan from Pennsylvania asks: I bought my first commercial rental a few months back using seller finance and it was a breeze since the property was off market and I could talk to the seller directly. The seller and I haggled it all out based on their retirement needs and since it was still a good deal the interest didn’t matter much to me since it was an excellent cash on cash return. I am currently searching for my next deal and have found one that interests me on the MLS but the price doesn't make sense as-is. The realtor is telling me the seller will entertain owner finance offers. Without being able to directly contact the Seller without realtor involvement I’m stuck as to how to build my offer. Brendan, This is a great question. Congratulations on your first successful deal. There’s no question that seller financing can be a great financial tool. The thing to remember is that seller financing is still financing and you are still the owner of the property after the transaction closes. The property should still be a property you want to own, not just because of the financing structure. That means that the property is in the right area from a management point of view. You want to know that you are invested in an area where you will see an ongoing stream of investment. You want to make sure that the investment meets your criteria in terms of supply and demand. For example, you may choose to invest within a radius of a major hospital and target health care workers as your ideal tenant. Or you may choose to be within a radius of a major university and target students as your ideal client. You want to be in an area where there is inflow of population, and inflow of jobs. I will never invest in properties in a shrinking market. At the end of the day, properties are simply part of the inventory of your business. You really want to find out from the broker why the seller is selling the property. You are correct in saying that the negotiation will need to be direct with the seller. Some realtors are uncomfortable with a direct discussion with the seller. Offer for the realtor to be present in that discussion. Your strategy of offering a lower purchase price and a larger overall deal value makes sense. But in reality you could actually be offering more than the asking price, but then choosing the payment terms. Let me give you a simple example. Let’s say that the seller is asking $100,000 for the property. You want to purchase the property for $50,000 up front and then $10,000 per year for the next 8 years. You could tell the seller that you’re offering them $50,000 up front which they may find alarming. Another way you can write the offer is to set the purchase price at $120,000 payable as $50,000 on closing, followed by annual payments of $10,000 for the next 8 years. Such an offer will certainly get the seller’s attention. Note that a realtor is legally obligated to send any offer to the seller. The realtor can’t hold onto the offer, even if they don’t like it. Once you are in the dialog with the seller, you can have the discussion about what is more advantageous from a structural point of view. The seller may desire to have the payments secured on title using a collateral mortgage until the property is paid in full.

On today’s show we’re talking about environmentally sustainable buildings. These are part of a growing trend of buildings globally and in North America as well. A new report published by CBRE details what’s happening in the multi-family asset class. The buildings that have traditionally been energy hogs have been in the office and industrial asset classes. Most of the work in environmental sustainability started in that asset class. In fact, much of this work dates back to the 1940’s and 1950’s. My mother was an architect in NYC and she used to design mechanical systems in those buildings that would use the air conditioning to manufacture ice during the night-time hours when the outside air was cooler. During the day, the air conditioning systems would melt the ice and heat the water in huge tanks. These systems used much less energy than the traditional air conditioners that we know and love today. Some of these systems are coming back into fashion. I recently visited the JC Penny headquarters building in Plano Texas. This 500,000 SF building is LEED certified and uses the same technology that my mom was working with in the 1950’s. The only difference is that they think it’s new technology. Historically, energy efficiency hasn’t been a big factor in multi-family construction. Increasingly though, while the number of green apartments remains small as a percentage of the total inventory, it is a growing proportion of new construction. To help the commercial real estate market measure and understand the adoption and prevalence of green buildings across markets, CBRE and a consortium of Maastricht University and the University of Guelph developed the Green Building Adoption Index (GBAI) in 2014. The index tracks the adoption of green building certifications across the largest U.S. office markets since 2005 and this year has been extended to the 30 largest U.S. multifamily markets (measured by number of units) in collaboration with Yardi and supported by the National Multifamily Housing Council. Three of the main certification programs for multifamily buildings in the U.S. are the EPA’s ENERGY STAR rating, the National Green Building Standard and the U.S. Green Building Council’s LEED certification. The 2019 Multifamily Green Building Adoption Index shows that green building certification is on the rise in the multifamily market. A total of 251,763 units, representing 3.3% of the 7.7 million multifamily units across 39,071 investment-grade properties (i.e., those with 50 units or more) within the top 30 markets, have already been certified as “green.” The top 5 markets for green certification are Denver, where 7% of multifamily units are green certified, followed by Washington DC / Suburban Maryland (6.9%) and Seattle (6.5%), Northern Virginia with 6.5% and Chicago at 5.9%. Green building adoption rates vary widely among the 30 largest markets, which could be related to the differing green building mandates and incentives for each of these markets. For example, some cities now require green building certification for all new construction. Just in case you’re thinking these efforts are in the traditional tree hugger communities, even cities like Austin and Dallas that have a reputation for high energy consumption made the top 10 list for new Green buildings.

All the way from Mesa Arizona, Aaron Chapman specializes in helping investors finance properties. He won't finance a residential condo for an owner occupant. On today's show there are some powerful nuggets that could really impact the way you look at business. 

Mark Owens has been a fixture in real estate investing in the Baltimore area. He knows the local market and has figured out a niche that is solid and repeatable. He's not after home run deals, but lots of consistent growth using simple proven strategies.