The Real Estate Espresso Podcast

On today's show I'm talking with Ottawa investor Rich Danby about some of the painful real-life lessons earned from working with contractors. This is an important show that every investor needs to hear.  

On today’s show we’re continuing our series on digital marketing. A few of my consulting clients have asked about SEO. So on today’s show we’re going to cover some of what’s new in search. It’s no secret that the majority of the business goes to the businesses that appear on the first page of Google’s search results. By some accounts, 50% of the business goes to the first organic search result. By the time you’re on page 2, your market share will be in the single digits. So ranking highly for your specific keyword search results is important if you rely on digital marketing for your business. Search engine optimization is all about appearing on page 1 of Google’s search results. Search engine optimization is not one thing. It’s a menu of like 50 optimizations that each by themselves can improve your ranking. These optimizations break down into two major categories. Eliminating the errors that are penalizing your ranking with Google. Making sure you have the elements that will have you rank well against your competition. Before you spend any time competing for ranking, you need to fix the errors that are pushing you underwater. First of all, Google’s algorithms have improved dramatically over the past few years. If the address for your business isn’t verified, then Google will deem that you’re not serious about being in business. If the address for your business is at a UPS Store or a residential address, Google will deem that you’re not serious about being in business and will push you down in the search rankings. If your website has pages that have an un-natural use of certain keywords, then they will assess that you’re not actually speaking to your customers. They will assess that you’re using language for the sole purpose of fooling the search engine. That’s called keyword stuffing and they will penalize you accordingly. In the past, one of the measures that featured heavily into a website’s ranking was how popular the site is. One of the principal measures of that popularity was how often the site appeared elsewhere on the internet. The more links to your site, the more popular it was deemed to be and therefore you would appear higher in the search rankings. That gave rise to an entire industry of people offering to create links to your website. Link-building was one of the great artificial manipulations that web designers used to try and fool Google. Today, Google is a lot smarter.  In the good old days, search was very literal. For example, if your search included the word color, and you spell the word color the American way, COLOR, that would be a different search than if it was spelled with British way COLOUR. Google did not distinguish between those two. This often created some very awkward wording on your website. You would often see the same word spelled different ways on the same page so that Google’s search algorithm would see both spellings. The fact is, most real estate investors don’t know about this. You can’t be an expert at everything. Many of the low cost SEO companies that are based offshore will make large promises for a low price. For $500 a month, they will get you on the first page of Google. All too often, these companies are not current with the latest Google algorithms, and they advocate tricks to try and fool Google. These tricks are increasingly caught by Google and will only hurt your search ranking. It’s important to find the right digital marketing agency who can first, help you establish the right goals for your website, and then execute on those goals. The key to finding the right partner is, like many things to get referrals, and to conduct a detailed interview.

We are continuing our deep dive on digital marketing. If you’re in business, you need to make sure your clients know what you have to offer. The most valuable pile of gold bars hidden in the middle of the Sahara desert is worthless if nobody knows about it. As real estate investors, too often the importance of marketing is overlooked or outright ignored. Let’s start with a few definitions. I’m going to make a distinction between advertising, marketing, and publicity. They sound similar, but they have vastly different meanings in my world. The purpose of marketing is to generate interest, to tap into curiosity. It’s not to manipulate or convince, or even sell. In my world, the most preferred form of marketing today is educational marketing. People are willing to be educated. Very few people want to be subjected to a sales pitch. Advertising is similar to marketing, but the main distinction is that it’s paid for. With advertising you pay a platform owner for the right to present your stuff to their audience. The platform might be something like Facebook, or it might be the conference organizer giving you the right to include your material in the conference registration kit. Publicity is the by-product of getting visibility in the media. That could be radio, TV, a podcast, or a magazine article. Generally speaking, publicity is free. If you’re paying for publicity, I call that advertising and it’s very distinct from publicity. So with those definitions, This podcast is a form of marketing. When I appear as a guest on someone else’s show, then it’s considered publicity. The purpose of the podcast is to generate interest, to trigger curiosity, to start a conversation. For a subset of you, that conversation may somewhere in the distant future translate into doing business together in some fashion. I truly have no idea what that will ultimately look like. Google remains at the top of the heap as the most visited website. Its position as the search king is well established. Number two is Youtube, and Facebook is number three. 73% of Americans use Youtube on a monthly basis, 68% use Facebook, and 35% use Instagram. However, it’s important to know that less than 50% of millennials actively use Facebook and the vast majority are on instagram. LinkedIn, Twitter, Snapchat, and Pinterest are all hovering between 25%-30% penetration of the US population. Each of these platforms serves a different purpose and has a different target audience. Too often we tend to use the tools that are interesting to us. But that may not be where your customers are hanging out. For example, if I’m looking to advertise student housing, then Google and Instagram are the platforms of choice. I would not waste any time with Facebook. Conversely, Facebook once gave me the option of including Instagram users in an advertisement for one of our RV Parks. When I said yes, I didn’t expect 96% of the ad revenue to be spent on Instagram and only 4% on Facebook. That week’s worth of ad spending was completely wasted. Fortunately, I ran it as a small experiment. If your content has a “how to” element, then Youtube can be the preferred search engine. If your customer is searching for how to market student rentals, then a video that speaks directly to that topic might be the perfect piece of content. Successful businesses invest somewhere between 12%-20% of their resources, that’s both time and money on marketing.

The year was 1888 and Almon Strowger was the local undertaker. The phone systems of the day were answered by human operators who would make the physical connection for you using a giant patch panel. In his home town of La Porte Indiana, one of the telephone operators was the wife of another undertaker and his competitor. He felt that phone calls requesting to be connected to the undertaker were going to his competitor, the operator’s husband. So in 1891, Strowger introduced the first mechanical automated telephone exchange. It was installed in 1892 in his home town with 75 subscribers and a capacity for 99. The rotary dial phone was triggering a series of connections that informed the network of relays and switched how to route the call. It was adopted in the UK in 1912, and over the years, the Strowger Step by Step exchange became the global standard for the phone system for over the next 70 years. It levelled the playing field and took away the potential bias that an operator could exert over your phone connections. This week we’re going to do a deep dive mini-series on digital marketing. If you’re in business, even as a real estate investor, knowledge and expertise in digital marketing is an essential element to your success. Today, in 2019, we’ve gone backwards where the owner of the communications platforms are increasingly competing with their customers. We’re back to the days when a call to the undertaker was not being handled in a fair manner. I believe, you need to be the gate-keeper to the information that enters your brain. But increasingly in the world of social media, many have abdicated that responsibility to the gatekeepers of various social media platforms. Today, 43 percent of Facebook of Americans get their new from Facebook. That’s a scary number. Moreover, 57 percent of Americans who get their news on social media say they believe that news is largely inaccurate. Even among the people who prefer to get their news on social media, 42 percent say that news is, again, largely inaccurate. With that great power comes great responsibility. I might becoming cynical in my middle age, but there is increasing evidence that these decisions are self serving for the platform owners and not for the benefit of the end consumers. A case in point, Facebook clearly wants people to spend time on their platform. The more time spent on platform, the more ads they can present to you, and the more they can charge for ads. This maximizes their ad revenue. When Facebook launched their own video platform, they prioritized video content on their own platform ahead of youtube. I’ve run a very simple experiment. I uploaded the same video content onto Facebook and onto Youtube. I created two identical posts in Facebook, one had the embedded video, the other was a link to Youtube. The native Facebook video received 10x more views than the exact same content hosted by youtube. So if you’re using social media to promote your business, this is something you should take note of. Facebook wants to keep you on their platform and they don’t want to link to content outside their platform. The latest change in the Facebook algorithm is to actually ban any link to an Apple hosted Podcast. That’s right, I can no longer post an update with a link to an episode of the podcast. That is considered a link to banned content. The same is true on Instagram, which is owned by Facebook. So far, if the show is distributed through another platform link, like say, Castbox, the link to my show displays with no problem. About 80% of US podcast traffic is going through the Apple platform, even though Apple only represents 39% of the overall phone market in the US and 22% of the phone market globally. This is Facebook asserting control over how you access information. They are clearly targeting Apple as the enemy. But not only that, they’re targeting all the users of the Apple products as the enemy.

On today’s show we are talking about one of the factors that can be at play in a tight market. We have just gone through a period of more buyers than sellers, of rapidly rising prices and of multiple offers. That’s not all markets or sub markets. But many major markets including New York, Toronto, San Francisco, Seattle. My home town right now has less than two months of inventory in the market and frankly when you conduct searches in individual neighborhoods it’s pretty common to find only two or three homes for sale in the area. People looking for a larger home in the same area or those looking to downsize who want to remain in the same area have very little choice. So why are there so few homes on the market? People clearly want to move. The most common response is that they won’t sell their house because there is nothing to buy to replace it. It’s like that puzzle game with the squares whereby moving one square at a time you can rearrange the squares to match up and form an image. But that puzzle only works if there is an empty square. Otherwise there is no mobility possible for the squares. If there isn’t inventory for sale in the market, there is no mobility. If you take my home city of Ottawa Canada, the inventory in the rental market is less than 1%. So even saying that you can rent temporarily until you find a new home doesn’t work. Most landlords are demanding a 12 month lease  So if you find the perfect home in month 4 you can still be on the hook for a 12 month lease which means double the home ownership cost for an extended period of time. In that situation the seller faces a dilemma. Do they sell now when they know they can get top dollar? Do they wait for better inventory conditions in the future? When will that be? Will prices fall at that point? What will be the interest rate at that time? Will prices continue to go up? Will you get priced out of the market? When the market conditions change, will there be some warning? What will the warning signs be and will you even notice before the change has fully arrived? What we see from looking at other markets across North America is that when changes occur, they occur quickly. But the market is actually several markets that don’t change in unison. For example when you segment the market by price, you discover that you might have 2 weeks of inventory at the entry level of the market and six months of inventory at the top end of the market. Some homes are sitting on the market for 18 months.  Let’s look at the San Francisco Bay Area and Silicon Valley in particular. That market boasts some of the best paying jobs in the technology sector. It’s no secret that homes are expensive in Silicon Valley. That’s been the battle cry for 30 years. But about 9 months ago, the market dynamic in Silicon Valley changed in a matter of weeks. The market was expensive before the shift. Taxes were high. Interest rates increased a quarter point. Hardly enough to fundamentally change affordability of a property. Today, prices have moved down 4.3% since the high last fall. It’s very tempting to believe that hot market conditions will continue. If the demand was being driven by foreign investment, and all of a sudden that source of capital coming into the market dries up for whatever reason, the market can turn very quickly. One such market is Miami where a high percentage of buyers come from outside the US, and South America in particular. Argentina just instituted capital controls after 4 years of eliminating capital controls. So it’s probably a safe bet that the number of Argentinian buyers in the Miami market is going to drop significantly. A few years ago there were a number of buyers from Venezuela trying to escape the economic malaise. Today, that wave has passed and Miami developers who assumed the demand would continue were caught off guard with excess supply.

Patrick from Austin Texas writes. Hello Victor. Congrats on all of your success. I have followed you for years now. Do you suggest any good masterminds. I currently own 110 single family homes for rentals. I have them professionally managed so I only spend 15 minutes a month on my real estate and I’m looking to expand. Patrick, thank you for the kind words and that is a great question. Masterminds are an amazing way of elevating your life to another level. While the concept of a mastermind has been around for a long time, the greatest modern day articulation was in the book Think and grow rich by napoleon hill. In that book Napoleon Hill describes the masterminds of Henry Ford and Andrew Carnegie. I’ve participated in many different types of masterminds over the years. I actively participate in them even today. For example, I have a call every Sunday morning at 9AM. That conference call is an integrity mastermind. About 4-5 of us get on the phone each week and share what we have discovered in the past week about integrity. Now when I talk about integrity, I’m not talking about the honesty definition of the word. I’m talking about workability. For example, if you have a bicycle wheel with broken spokes, then that wheel is lacking in integrity. The wheel isn’t bad. The wheel isn’t dishonest. It’s just lacking integrity and more importantly, it’s possible to restore integrity. So we look at where things are breaking down in our lives and brainstorm structures that can be put in place to permanently restore integrity in that area. There are larger masterminds that are run as a business. For example, I used to participate in a mastermind which had about 30 members. The price of admission was $25,000 a year. The host would bring in various speakers to share their wisdom. We had an Entrepreneur who built and sold a business for $800M. We had the CEO of Krispy Kreme donuts. We had a senator. All kinds of incredible people who we probably would not have been exposed to were it not for the mastermind. My friend Kyle Wilson was Jim Rohn’s business partner for 18 years. Jim Rohn is considered the father of the modern day seminar industry. He mentored Tony Robbins, Zig Ziglar, and countless others who today have established themselves as thought leaders. Kyle has several mastermind groups that he leads across the country. There’s one in Dallas, Los Angeles and Philadelphia. These meetings are monthly and usually take place over two full days. The thing to remember is that there is no one way to do this. I host a monthly mastermind conference call with George Ross. George is 92 years old. He has over 60 years of business experience and he just recently retired at age 89. We record the calls and even if a member of the mastermind can’t make the live call, they can listen to the replay and still get huge value from the conversation with the participants on the call. Here are a few best practices that in my experience make for a successful mastermind. The members have to commit to absolute confidentiality. If you don’t trust that you have a completely open non-judgemental environment, it’s going to be very difficult to have open honest conversations. You need to be very mindful of who is participating in the mastermind. Don’t admit new members without the unanimous consent of all the members. Keep the mastermind small, usually under 10 people. There are some examples of successful masterminds that are larger, but they’re harder to manage. Unless they’re a “for profit model” and professionally managed, keep them under 10 people (I find that 4-6 is ideal). Start each session with a round-table sharing of wins since the last session. When people commit to be part of the mastermind, they commit to protect that time slot and be a regular participant.

The book of the month this month is “Never Eat Alone” by Keith Ferrazzi. This book is all about relationship building and the business and life success that comes from building relationships. When I wrote the book Magnetic Capital, I realized that there were 5 principles that are essential to raising money. Briefly, the 5 are: Relationship Trust Results Compelling Opportunity Alignment between the goals for the money and the goals for your project. I chose this book for the book of the month because raising money and real estate investing is a relationship business. It’s one of the 5 principles and if you don’t master this one, you’re going to struggle as an investor, as a developer, as a syndicator. Never Eat Alone is not a new book. It was first published in 2005 and I think I read it around 2010. But it’s one of those books that continues, even 15 years later to be selling well, and to have impact. I know this because I recommend to all my consulting clients and they tell me how much of an impact the book has had on their approach to relationship building. The author comes from humble beginnings. His father was an iron worker and an immigrant. All his father knew was hard work and low wages. But his father also knew there was another system at play that he wasn’t part of. He asked one day to speak with the CEO of the steel company, a pretty audacious move. But the CEO was so intrigued with the request that Keith’s father was granted the meeting. The result of that meeting was an opening that forever changed the course of the author’s life. Keith went to the most prestigious private elementary  school in the area and then ultimately to Yale University and eventually Harvard Business School. The success that becomes available from a school like Harvard has more to it than the quality of the information. The real differentiator is the relationships that come from being in that environment. The author has developed global relationships that include the corridors of power in Washington, Hollywood’s A-list, and eventually led him to being elected as a global leader for tomorrow at the World Economic Forum in Davos. Keith Ferrazzi distinguishes genuine relationship building from the crude desperate business card dealing networking we so often encounter at conferences. The core of the book is a shift in mindset. Some people immediately are looking for something. True relationship building means never keeping score. It’s never simply about getting what you want. It’s about making sure that people who are important to you get what they want too. It’s about maintaining presence in people’s minds. It’s about connecting with people in your circle of contacts all the time, not just when you need something from them. In today’s world of social media connectedness, this is both easier than ever, and in some ways more difficult than ever. It’s easier because the effort to reach out has never been easier. The environment has become so much noisier than ever before. So your interactions have to add more value to stand apart from the rest of the pack. The author addresses the difference between a cold call and a warm interaction. People are bombarded by so much content these days, that most of it gets ignored. Interruption marketing worked 20 years ago, not any more. People are tired of being interrupted. If you’re going to get someone’s attention, then you need to be interesting. That sounds obvious, but people rarely examine what comes out of their own mouth and ask the question “Is this interesting?” That means it needs to sound fresh and different. If you’ve struggled to build the quality of relationships with the kind of people who could make a meaningful difference to your business, the book Never Eat Alone is for you.

On today's show I'm talking with George about his background, our monthly mastermind, and his take on the US China trade negotiations.

How often to marketers create artificial scarcity and tap try to manipulate their prey through fear of missing out or the acronym FOMO for short. This kind of manipulation is repulsive, see-through and yet we’re subjected to it time and time again. It’s like the store that has a one day sale in the window. Today and today only. But the sign has been in the window so long, it’s been bleached by the sun. You’re not off to a good start when the very first interaction is based on a lie. If they’re willing to lie to you to get to you to come into their store, what else are they willing to lie about? Last year, my wife and I spent a couple of weeks at a resort in the sun. It was one of those resorts that gives you a bracelet so that the staff can easily see if someone if on the property who should not be. I was walking through a crowded market and a man walked up to me and started chatting me up. He said that he was my waiter last night at the resort. So I asked him. Oh really? Where was I seated and what did I have for dinner? Of course he couldn’t answer correctly. So I asked him if he thought lying to me would somehow induce me to buy his stuff. It’s uncomfortable to confront someone who lies to you. Now most manipulations are not as crude as the one I just described. But we’re still subjected to them on a daily basis. One of the fundamental principles underlying investing in real estate is the psychological contract of trust. Trust is not just whether you dealing with an honest person. That’s an absolute must. Even that can’t be taken for granted. But it runs much deeper. It’s a layered nuanced complex relationship. It involves asking a number of questions. Can I trust you to put together a solid plan? Can I trust you to execute the plan Can I trust you to hire the right team? Can I trust you to communicate in an open and transparent way? Can I trust you to communicate when there is a problem? Can I trust you to keep small commitments? Can I trust you with my money? Can I trust you to be resourceful enough to solve virtually any problem that might come your way? Can I trust you to manage risk in a prudent manner? And on and on. If any one of these items is missing, it starts to chip away at the trust. The final element of trust is your track record. What have been your results? Have you lost money for investors? If so, what was the reason and what did you do about it? Now I know what you might be thinking. You might be new to raising capital and wondering how can I raise any money if I don’t have a track record. How can I get. Track record if I can’t raise any money. I’m stuck in a circular argument. But here’s another way to think about it. So when a deal sponsor says, boy do I have a deal for you. That’s the last thing you should be considering. Consider first, who are you doing business with. I have no idea what the street vendor in the market was trying to sell me. I paid no attention to that. I needed to know first if this is someone I could do business with.

On today’s show we are talking about the impending recession. Yes, that’s right, the impending recession. I believe that both Europe and the US are facing recession later this year if they are not already in an economic downturn. What is the reason? Bloated inventories. Recessions happen when companies end up with bloated inventories. Most of the time, those inventories are the result of growing production in anticipation of continued demand growth. That’s the classic cause of inventory growth. Sometimes companies experience delays in delivery of parts because the supply chain is running at capacity. Inventory of materials or components can cushion and protect against those delays. But when the delays disappear, the excess inventory will be drawn down to normal levels before ordering more. That sharp halt in orders when it happens across a wide swath of the market is what we call an economic contraction. So let’s take a look at inventories and see if there are situations where inventories are being built ahead of demand. If we see enough of them, and we don’t see a corresponding increase in demand to absorb those inventories, we can easily conclude that a recession is not far away. I’m going to build the case for recession in three parts. For exhibit A I give you Brexit The UK has a deadline of the end of October to leave the European Union. But the terms of the departure haven’t been worked out and the risk is high of a no deal exodus. If there is no deal, there is a great deal of uncertainty about what that could mean for the flow of goods and commerce. Will goods be delayed at the border? Will customs inspections increase and materials be held up? Will there be new tariffs? British companies have responded to these uncertainties by building inventories to make sure their supply chains are not disrupted. For exhibit B, I give you the European counterpart of Brexit. Companies on the continent that do business with the UK are also stockpiling in order to handle any possible supply chain disruptions. For exhibit C, I give you the US China trade negotiations. Many companies in the US have ordered extra material in order to avoid the impact of tariffs on goods coming from China. So here we have three significant places in the economy whereby there is an artificial increase in inventory ahead of demand. We know that when that happens a stop in orders to draw down that inventory is not far away. When companies slam on the brakes and stop ordering it sends a negative shock wave through the economy. Customers who were placing steady orders week after week, suddenly stop ordering. Revenue from that customer drops to zero while the excess inventory is consumed. The supplier has no idea when orders will resume. So they respond the only way they can to protect the business. They send people on forced unpaid leave, or institute layoffs altogether to reduce expenses and protect the survival of the company. When recessions happen, businesses fail, banks suffer losses in their commercial loan portfolio. Commercial real estate suffers as commercial vacancies increase. Some of these companies will not survive. That puts further pressure on lending institutions. Banks today are better capitalized than they were in 2007, but still, they need to pay attention to their balance sheets. In recession times banks become more risk averse and have little choice, but to tighten their lending practices and only a fraction of the loans get approved that only months earlier would have been easily approved. So pay close attention to your portfolio and use the current window of opportunity where loan interest rates are lower than they’ve been in a while, coupled with the favourable lending environment to lock into as long a fixed rate term as possible.