The Real Estate Espresso Podcast

On today’s show we’re going to be doing some math. That’s right. The real purpose of today’s show is talk about the importance of financial education. Some people, notably lawyers, mathematicians, accountants, engineers and statisticians will find this math fairly simple. But for the general population, the inability to perform basic financial math is one of the reasons that wall street and the major insurance companies are able to exploit their customers and quite frankly give them a bad deal on their money. On today’s show we’re going to look at what some life insurance companies are quoting for income annuities. These financial instruments are often used by people later in life to guarantee an income stream in their later years. Some of you might be wondering what an income annuity is? Quite simply an annuity involves paying a fixed lump some of money into an insurance company. The insurance company in turn guarantees you a regular monthly income for the term of the annuity. There are a couple of different types of annuities. Some are somewhat like a life insurance policy in the sense that the insurance company takes the risk on how long you’re going to live. You might purchase an annuity that has a 10 year minimum on it. But if you live, say, 20 years, the insurance company will take the risk and pay the monthly amount for life. The second type of annuity is simply a guaranteed income annuity for a fixed number of years without taking life expectancy into account. So if you call up your friendly insurance company and ask them for a quote, how do you know if you’re getting a good deal? This is where the ability to perform basic financial math is vitally important. What we’re talking about is the ability to move seamlessly between the present value of a lump sum of money and the future value of an income stream. The most important variable in this instance is what is called the discount rate. That’s essentially equivalent to the interest rate that is being charged for that money into the future. Now let’s be clear, the calculations to perform this math are extensive if you’re doing it in long hand on a piece of paper. Fortunately,  programs like Excel have a function embedded in them that makes this math quick and easy. But before you can use the function, you need to understand the concept. What I’ve discovered is that a lot of people don’t even understand the concept. For an investment of 100,000, the insurance company will guarantee you $893 a month for 10 years. If you multiply $893 a month times 120 months, the total comes to 107,160. So in 10 years, they’re giving only an extra 7,160 for the benefit of holding your money for that length of time. If you kept the money in your bank account and earned zero interest, simply withdrawing the same $893 a month, the money would run out after 9.3 years instead of 10. If plug these numbers into Excel, you will find that the insurance company is essentially offering you 1.4% growth of your money on an annual basis. Is 1.4% a good number? I guess it depends. Is it good compared to what? Compared to the 10 year US treasury yield of 1.549%, it’s a little better, but not by much. The same money invested in 10 year treasuries would give you $900 a month instead of $893 a month from the insurance company. Generally speaking, US Treasuries are considered the safest form of investment. If you were to invest the money at 6% instead of handing it over to an insurance company, you’d earn a monthly income of $1,110. This is clearly a lot better. But here’s the sad thing, there are lots of people out there handing their money over to an insurance company to guarantee them an income for life. They don’t have much money to begin with, and the lack of education on how to perform the math is ultimately going to cost them even more money.

Alexandra asks: “I’m considering investing in the Toronto market that has an extremely low rental vacancy rate. Since the demand is so high and Toronto is a growing city, do you think this is a good idea?” Alexandra, this is a great question. It is true that vacancy in Toronto is extremely low. The city continues to add about 125,000 population each year, and there are about 35,000 units of new construction added to the market each year. Clearly there is a gap between demand and supply for housing overall. If you break down the vacancy by type of property, you can see even more granularity. For example, Bachelor apartments have the highest vacancy at 1.6%. This data comes from the Canada Mortgage Housing Corporation. This is Canada’s quasi government back mortgage insurer. One bedroom apartments have a 1.3% vacancy rate, two bedrooms have a 1.1% vacancy rate, and 3 bedrooms are 0.9% vacancy rate. Rental rates increased an average of 4.9% from 2017 to 2018. The shortage of housing in Toronto isn’t new. That’s been happening for years. So the real question is “Why is the vacancy rate so low?” If the opportunity is so amazing, why do we not have more people flocking into the market to invest in rental properties? It doesn’t make sense that the vacancy rate remain so low for such a long time. In my opinion, there are four factors that contribute to making rentals in the Toronto market a mediocre investment. Properties are very expensive to purchase. We’ve seen sale price increases over the past several years in the double digits. When the purchase price increases much faster than the rent, it’s hard to make the numbers work. You won’t see the market support an 18% increase in rents, whereas in 2016, market prices increased an average of 18 across the entire Toronto market. That’s a huge shift. You end up tying up too much equity in a property for the rent that you can collect. Toronto has instituted rent controls which limit the amount of annual rent increase that a landlord can demand from tenants. Constructing new dwellings in Toronto attracts very high development fees to the city to pay for the increased load on infrastructure, whether we’re talking about water, sewer, electric, roads, public transit and so on. When you have to write a cheque to the city for $84,000 to build a new single family home, and you have a choice to sell that home in the open market where you have no cap on the sale price, versus putting it into the rental market where your rent increases are capped, it’s an easy choice. The landlord tenant laws in Ontario are heavily skewed in favour of the tenant. Toronto is a wonderful city. It’s clean, safe by World or American standards, multi-cultural, and there is an abundance of commercial and employment opportunities. But it’s increasingly one of the most traffic congested cities in North America. They haven’t been able to build enough road infrastructure to keep up with the population growth. Some investors have bought into the market, accepted the fact that there is very small cash flow, and in many cases negative cash flow. They’ve justified the investment by saying that they make it up in appreciation. For investors, it has worked out. But you don’t control what the market will do in the future. For that reason, it’s a risky strategy and one that I don’t recommend. I personally favour markets where the rent to purchase ratio is much better.

George Ross is my guest again today and we're talking about the opportunity that may exist in the aftermath of the disaster at WeWork. 

Adam Taggart is one of the founders and principals at Peak Prosperity, an organization dedicated to helping people build a sustainable life. The headwinds and dislocations facing us as a society are numerous. On today's show, Adam gives a first hand account of what it was like to evacuate from the fires in Sonoma County in Northern California earlier this week.  To learn more, reach to Adam at www.peakprosperity.com They also have an actionable plan which can be found at www.peakprosperity.com/wsid (What Should I Do?)

The book this month is Getting Things Done: The Art of Stress Free Productivity by David Allen. This is not a new book. It was first published in 2001, with numerous revisions. The most recent edition is 2015. Since technology and tools are moving so quickly, the most recent edition removes a lot of the tech tools that have a short shelf life and what remains is a timeless edition the focuses on the techniques needed to This book is about how to manage the overwhelm that represents the reality of modern life. The author David Allen has been called one of the world’s most influential thinkers on productivity. As I was reading the introduction of the book, it’s like the author was inside my head. He was articulating many of the struggles that I faced on a weekly, if not hourly basis. I experienced the stress of having too many things to remember, too many things to do, and too many priorities to ever feel like I’m keeping ahead. While the title of the book seems to imply that it’s all about accomplishing more, it’s really a book about how to engage appropriately with your world. In some cases, it’s about doing less, about focusing, and about eliminating the overwhelm and distraction that is associated with what you are not doing. When I’m sitting at my desk working on a focused task, I’m often distracted by the nagging knowledge of something that is overdue, that someone is expecting me to do and isn’t complete. The mental juggling of tasks is overwhelming and causes distraction and loss of focus. Even writing down the tasks into a to-do list doesn’t solve the problem. Some people simply write down their focused task list of the 8-10 items they plan for that day. But the problem with this approach is that it neglects the dozens of other items that are not on the list. Those items are still stuck in your head and occupying mental storage. Writing them all down seems overwhelming and not the way to go either. Unless you have a method for decision making, you will quickly get overwhelmed. The method presented by David Allen is based on three decades of experimentation and refinement. It’s based on three fundamental practices: 1) Capturing all the things that might need to get done or have usefulness to you in the future 2) Directing yourself to make front end decisions so that you a workable inventory of “next actions” 3) Curating and coordinating all of that content utilizing the recognition of the multiple levels of commitment with yourself and others at play. A paradox has emerged in our lives. We are bombarded with choices that far exceed our capacity. We have an enhanced quality of life, and at the same time we have been adding to our stress levels by taking on more than we have the resources to handle. The fact is the edges of work have blurred. In the old days, you could tell when the work was done. The field was plowed, the room was painted. These days, there is no real boundary. Writing another blog article, ten more social media posts, updating the images on the website, reviewing the google Adwords campaign, checking that the lawyer has completed the title work, reading the financial statements and ensuring that expenses were properly categorized as part of the construction inventory and not operating expenses. The list goes on and on. David Allen’s book was all the rage in Silicon Valley for a number of years after it was published and several of my colleagues used its method religiously. I’ve been adopting it into my work flow. While the system required a large commitment in time to implement, the benefits are self evident.

On today’s show we’re talking about interest rates again. Yesterday, the Federal Reserve announced another 0.25% drop in the benchmark lending rate. A number of listeners are wondering what the Fed rate has to do with every day lending rates. Some consumer credit card rates have increased in recent months at a time when the Fed rate was falling. So on today’s show we’re going to read directly from the Federal Reserve’s prepared statement, and then give our interpretation of what it means. In his prepared remarks, Federal Reserve Chairman Jerome Powell refers to the committee that governs the Federal Reserve. The Federal Open Market Committee (FOMC) consists of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. So these 12 people have more influence on the financial world than perhaps any other non-elected officials on the planet. So what does this all mean? In my view, we can expect interest rates to remain low for some time to come. While there has been stimulus in the economy since the summer, it’s not uniform. We are seeing increased demand in real estate, which is very sensitive to interest rates. Real estate refinance activity in July and August was up 75% compared with June. Manufacturing numbers are down. Some are blaming it on the trade negotiations. But in truth, I believe the inventory numbers are the real reason. We’re seeing troubles in the automotive sector. When I drive past car dealerships, whether it’s in rural upstate New York, or in the core of a major city, dealership lots are literally bursting at the seams with inventory. I haven’t seen dealer lots this jammed with inventory in a long time. I’m seeing manufacturers offering very aggressive deals in order to move inventory off the lots. So back to real estate. As a real estate investor, your borrowing cost is usually tied to one of two indexes. Most short term loans, like home equity lines of credit and other revolving credit lines in real estate are tied to Libor. That is the London Interbank Overnight Rate. This is the lending rate that banks use to pay for money that is stuck between accounts on an overnight basis. Long terms lending rates for permanent financing tend to be indexed to the 10 year treasury bill rate. So if you’re looking for long term permanent financing, whether it’s conventional, or an insured non-recourse loan When the Fed sets rates, they’re really setting the rate at which the US government borrows money. Ultimately that trickles through to the T-Bill rate, both short and long term US government bonds. As a real estate investor, you’re in a great position to lock into some great terms on long term financing, and even some strong terms on short term financing.

On today’s show we are answering a question that I receive frequently. The question is how I spend my time. What is an average day? So today I’m going to do a deep dive on what I did yesterday. My day started at 6:15. First thing, my wife and I spend about 20 minutes together. We have a meditation practice that we do. We have a couple of different ones that we use. We sometimes use an app called Calm. Today we used another App called Oak. It’s a very simple app to use and the guided meditation is very simple and easy to connect with. We start our day with the meditation practice lying in bed and holding hands. We both had a quick shower and got dressed for work. In our family we made the decision this year to go from two cars in our family down to one. Some days my wife takes the car to the office and other days I will drive her. In fact many days she will walk because the office is walking distance from our home. But today she had a little too much to carry for that distance. It gave us a few extra minutes together during the drive. On the way to her office we stopped at the fresh vegetable market to buy something for her lunch. I was back home in time to start organizing my day. I usually reserve my morning with a minimum of meetings. That is when I get my focus work done. On Monday morning I have two short meetings. At 9:30 I have a call with my partner John in Dallas for a quick update on status. Then at 10 I have a quick daily call with Patrick in my team where we reviewed the negotiations on a project. From there I started drafting the podcast for the next day. Some episodes are recorded well in advance and others are only one or two days ahead. Every Monday morning at 11:00 I have a brief phone call with a lender to update the status on one of our projects. My son reported that he had tooth pain and might have cracked a tooth. He would need to get to the dentist and find out what was going on. Recording the next podcast episode completed my morning. My afternoon was focused on another condo development project in my local market. We had a meeting scheduled at the law offices of the land owner to review a number of details on the file including a number of complex structural problems with the investment. On the drive to the meeting I made a quick stop to grab a salad from the salad bar at the local market. I made good use of the drive time to have a call with an investor. The owners of the property are a lovely family who are very close knit. We spent nearly two hours at the lawyer’s office discussing various aspects of the project, solutions to the existing problems and estimating the costs associated with the next phase of the project. After that our team found a Starbucks and we strategized how we would structure the deal. By this time it was deep into rush hour and it was going to take me an hour to get back to the west end of the city. During the drive, I figured out how to register as a delegate for an upcoming city council committee meeting. I also called a friend who had been struggling in the past year to see how they were doing. I arrived at my wife’s office just in time to pick her up. We only had about 20 minutes to have dinner, so we grabbed a sandwich on the go and went together to a community meeting organized by our local city council representative to discuss the proposed development of a golf course that is not far from our home. Several other developers were in attendance and the Mayor came to speak as well at the meeting. There were about 500 people in attendance and the meeting ran late into the evening. I finally wrapped up my day by reading part of a sailing magazine that I had picked up about 3 weeks ago and had yet to crack the cover open.

James from British Columbia asks: I have been scouring a lot of Canadian town and cities and have not come across any properties that rent at 1% of houses value let alone 2%. What do you recommend for Canadian’s and am I focusing my search in the wrong areas? I live on the west coast, so I have been primarily looking in the interior of British Columbia and Vancouver Island. James, that’s a great question. There is sometimes a paradox when it comes to making the numbers work for rental properties. The one percent rule, or the 2% rule are a proxy for not paying too much for your income stream. It’s not exact math by any means. Properties that tend to adhere to the 1% rule fall into one of two categories. 1) Working class, C Class housing in areas where there is steady employment and houses are quite inexpensive to purchase. This happens usually in mature markets. I’m thinking of pretty industrial towns like Sudbury Ontario where there are large Nickel Mines and Smelting operations. But Sudbury isn’t growing like a major Metro like Toronto or Vancouver or Nashville. You need growth to drive up the price. Areas that are more rural like Vancouver Island and the Interior of British Columbia have very high infrastructure costs. The cost of building roads and bringing electricity is high. A good US example where you can often meet the 1% rule is in Indianapolis, Indiana. Boise Idaho would be another. 2) The second area where we often meet the 1% rule is by building new apartments in markets where there is strong demand. This is what my company does. We don’t set out to adhere to a 1% rule. We use more sophisticated measures, but when we look in the rear view mirror, we often discover that we indeed did meet the 1% rule. When we purchase vacant land in the core of the city, next to a great area, we often purchase the land at a deep discount to the market. This is our buy on the line strategy that if you’ve been listening to the show for a while you would have heard me talk about. We consistently build new apartments in Philadelphia that meet the 1% rule, even though we’re not actively setting out to meet that metric. It’s absolutely true that properties in many markets in British Columbia are expensive. There has been a tremendous amount of immigration and homes that were once very affordable are now out of reach for many average people with real working class incomes such as you would have in those communities. The growth in the cities has had a spill over effect and now even outside the major cities, prices have increased considerably. Sale prices have increased much faster than rents. I find that the opportunities in many expensive Canadian markets is to focus on very specific under-serviced needs. For example, there may be a shortage of student housing next to a growing community college. There might be a need for luxury rental apartments for senior citizens who are downsizing and don’t want to tie up a lot of equity in their home.

On today’s show we are talking about cyber security. October is the annual cyber security awareness month. As more and more of our lives seem to have an online connection, there is a tug of war between convenience and security. Our mobile devices are always listening. My phone using location information tells my thermostat when nobody’s home so that we save energy on heating or air conditioning. We may think that our phone is only listening when we issue a voice command. But that is not the case. My latest car has a smart phone app that allows me to read the current status of the vehicle. It tells me if the windows are open. It tells me if the doors are locked. It tells me where the car is located. It even tells me what my mileage was on my last trip. But if my phone were to become stolen and compromised, someone with my phone can unlock the doors, and even start the engine from the app. Practicing online safety takes on so many new angles that didn’t exist even a few years ago. These days it means so much more than making sure your password isn’t something simple. If your password use simple words that are in the dictionary you’re vulnerable to a computer program guessing your password by brute force techniques. The intruder simply makes enough guesses over a long enough period of time that it eventually will guess the password. The shorter the password the quicker the computer will guess your password. Let’s imagine that your password is the word “sand”. At only 4 characters, it will take no more than a few minutes to guess the password. If you extend the password to an entire sentence, something like “Sandisonthebeach” the password has a lot more characters. It’s going to take a lot longer for a program to crack that password. Now if you start including special characters. Let’s say that you replace the S in the word sand with a $, and you replace the letter B with the number 8 which looks a little like a capital B, you’re making it much harder for a computer program to guess the password. When we talk about cybersecurity, people tend to think first and foremost about password security. That is certainly important. Another technique called two factor authentication brings an added layer. For example, if in addition to having the correct password, you also had to type in a time sensitive code that is only valid for a short period of time, you make the chances of a password breech incredibly small. But there’s another few areas that can create vulnerability. The first is to never click on a link that’s been sent to you via email. If the link isn’t going to the place you think it is, the act of clicking on a link can initiate the download and installation of software on your computer that might exploit a security vulnerability in your computer’s operating system. Once the hackers have installed software on your computer or your phone, that software can monitor your keystrokes and memorize your passwords. At that point, no amount of passwords security will help because they’re literally eavesdropping on all of your keystrokes. If you’re in business, your website is a point of vulnerability. It’s not often talked about, but commercial websites are under assault virtually all of the time. For example, every day of the week, I receive notifications from my website and from the website for my wife’s business every time it receives a barrage of attempts to attack the websites security. I can tell you that I’m seeing hundreds of attempts to crack website security each and every day. We also make edits to the website on a staging site that is not publicly visible. So if the production website was ever to be compromised, we can replace the production website with the staging website with the push of a button and in about 3 minutes, the entire production website has been replaced with a fresh website that could not have been compromised.

Tamera comes all the way from Stockton California where she has mastered the art of remote lifestyle investing.