The Real Estate Espresso Podcast

Today we're coming to you live from the Village of Montefollonico in Tuscany. This medieval village dates back to the year 1202. The richness of history here is incredible. If you haven't visited, I highly recommend it.

Our guest today is from Team Malizia (team-malizia.com), one of the IMOCA 60 racing boats scheduled to compete in the Vendee Globe single handed round the world sailing race in 2020. 

My guest today is the skipper of Initiatives Coeur. You can find out more at https://www.initiatives-coeur.fr

On today’s show we are coming to you live on location in Italy. We are about an hour outside Rome at a seaside town called Santa Marinella. I come to Italy regularly and in the past decade, not much has changed. In this idyllic seaside town there are numerous properties for sale, many of which have been on the market for two years or more. In fact, they’re still talking about the financial crisis as the reason why things are so bad economically. When I was here in 2009 and 2010, I totally get why they were talking about the global impact of the financial crisis. But a decade later, I don’t think you get to use that excuse anymore. A decade later it’s called the new normal and there needs to be an acceptance of the situation and the that it will take bolder steps to create more economic activity.  Many of the properties we looked at were either waterfront properties or across the street from the sea. These are either single family homes or multi-family buildings facing the water. Many of them are distressed properties with visible signs of deferred maintenance. Sellers seem to be reluctant to reduce prices and the emphasis seems to be on the asset price and not the cash flow generated by the asset. This stands in stark contrast to the more fluid notion of valuation that we have in North America that values an asset as a business and that valuation is based on multiples of net income, or what we call the cap rate.  This week, the local news in Italy is talking about the widely anticipated interest rate cut in Europe. This would be the first interest rate cut since 2016 and outgoing ECB chairman Mario Draghi’s final move before he steps down in October.  But it also raises practical questions about how much more the ECB can accomplish with its current toolbox. The bank’s key interest rate is already below zero and its balance sheet has swollen to around 40% of eurozone economic output, double that of the Federal Reserve. I believe that with interest rates already so low, the economic stimulus that would result from a lowering of rates is unlikely to have any measurable impact. Accompanying the rate reduction it is widely anticipated that the central bank will also participate in another round of bond buying. That’s code for printing more money and then buying the bonds. Printing money could have a stimulating effect, but here too it’s like a drug addict who becomes addicted to the drug and eventually develops a tolerance to the drug and needs more and more each time in order for the drug to have an impact.  So what does this mean for us as real estate investors? If Europe lowers interest rates, that could put pressure on other central banks around the world to do the same. The US news media have been reporting that the Federal Reserve is predicted to drop rates somewhere between a quarter point and perhaps as much as half a point at the July meeting coming up in a few days.   For us, as real estate investors, lower interest rates are a good thing. They make the cost of doing business lower, and we can ultimately translate that into higher profits.

On today’s show we’re talking about several bids that were out of whack. You’ve sent the drawings over to three subcontractors and the numbers comes back with a wide variation. One of the bids is quite low and seems attractive. The other two are from subcontractors that you know better, but the numbers are much higher. What do you do? Do you take the low bid? You go back to your tried and true subcontractors and ask them if they can do better. The answer is no, that’s the best they can do. You’re left scratching your head, wondering why such a large variation. Contractors have a lot of experience with negotiations and they experience being played against each other on a daily basis. As a result, they tend to become less transparent in their bidding process in order to maintain their negotiating leverage. But that lack of transparency actually hurts the negotiation because you can’t tell why they bid what they did. You can’t tell whether they misunderstood the scope of work, whether they’re greedy and uncompetitive, or whether there is a structural problem that is causing the bid to be out of whack. We had a situation with an electrical contract and all the bids came in much higher than we had ever expected. The numbers were truly out of whack. The numbers were truly double what we had expected. But they were consistently high. All three bids were high.  Only when we brought in another subcontractor who knew and understood our architect’s drawings did we get a bid that made sense.  So in that instance, the scope of work was not well understood. The contractors had misunderstood that the allowance for fixtures was not to be added on top of the specific fixtures that had been specified in the design. There was an absolute double count on the cost of the materials. But unless the contractors are willing to be transparent, you have no way of knowing why they bid what they did.  It would be too easy to point the finger at the contractors and say these guys are way too expensive.  In another instance, the engineer had specified items that was not what we had asked for. They specified surface mounted transformers which would require multiple levels of conduit buried in the ground at our expense. Instead, we requested that they change the design to incorporate pole mounted transformers from the electric utility and the final service from the transformers to the buildings would be buried in the ground resulting in a much shorter cable length and much less conduit in the ground. The bids from the contractor were high, but its because the specifications from the engineer were forcing much higher costs than were necessary in the project.  So how do you manage to get competitive bids that you can have confidence in? You focus on developing relationships of trust with a small number of subcontractors who you commit to give regular business. You will treat them fairly if they commit to treat you fairly. Once that relationship of trust exists, you can create the transparency that is necessary to uncover problems in a bid. It starts with a conversation with the contractor whereby you let them know that transparency is required in the bidding process. You promise not to use the transparency against them. Hiring a contractor isn’t just a matter of getting the lowest price. It’s a matter of getting the job done reliably and with quality at an acceptable price. 

Apple is in the product business. But before they can manufacture a product, they need to design it. There was a time when Apple Computer used to rely upon components supplied by outside companies to incorporate into their products. The Mac first used a microprocessor based on the Power Architecture developed by Motorola and IBM. Then in 2005, Apple announced the decision to switch from the Power Architecture to processors from Intel Corporation. Shortly after that, in 2006 they made the change.  At around the same time, they aquired a company called PA-Semi that had a microprocessor development team in silicon valley. That team had been working on a low power consumption microprocessor for the notebook PC market using the Power Architecture that Apple had just abandoned. They clearly didn’t need the product that PA-Semi had been building. They spent $75M to buy a company with 150 talented engineers who knew how to build low power chips. Now in the US, it’s against the law to buy people. You can only buy a company and hope that enough of the team decide to stay together at the new company. Apple bought the company in order to buy the team. In order to build the next generation of products, they needed a crack microprocessor development team. But for what?  Then two years later, Apple announced the iPhone, a product that would transform the company and propel it from just a desktop and laptop computer company to one that would blur the lines between a phone and a computer and a camera, forever changing the landscape of mobile computing in the industry. When I was in the microprocessor development business, I had hired a design team in Austin Texas of about 75 people at a small company called Intrinsity. They had developed a method for building high performance low power circuits and were among one of the better processor development teams in the world. They were used to augment my own processor development team that had staff in San Diego, Austin, Silicon Valley and France. Then in 2010, Apple announced that they were going to acquire Intrinsity. Today, most of the guys who used to work for me are now at Apple. Their first project was a power reduction for the graphics subsystem in the iPad. Getting higher performance graphics on the iPad with a 10 hour battery life was one of the goals for the iPad and this team delivered on that promise. They’ve gone on to work on other elements of the processor for both the iPhone and the iPad.  Most recently, it was disclosed that Apple is in discussion with Intel to acquire their mobile handset modem chip business. Here too, Apple might be buying a business where they have little interest in the actual products that company was making. They would be buying the business for the team. The acquisition has not been completed as of yet and will probably take a few months to complete. There’s a pattern here. Before Apple can bring a new product to market, they need to have the right people on board. Not just any people, the right people, the best people.

On today show we're talking about the incremental changes that if taken slowly enough can lull a docile population into submission. Opposition happens slowly at first and then all of a sudden. The current crisis in Hong Kong is a case in point.  The handover of Hong Kong, occurred at midnight on 1 July 1997, when the United Kingdom ended administration for the colony of Hong Kong and passed control of the territory to China. Hong Kong became a special administrative region and continues to maintain governing and economic systems separate from those of mainland China. The protests have been large and vocal with anywhere from 200,000 people participating to 2M people depending on who is counting. Police estimates put the largest protest march at about 338,000 people. Let’s be clear, these are large protest marches.  Protests in more recent days have turned to vandalism and the Chinese government is signalling that they need to restore order and the rule of law. So now the concern is that Hong Kong experiences an escalation of violence involving the police or perhaps the military.  This could result in an ideological flashpoint between China and the West where the assertion of China’s muscle over Hong Kong creates a values based confrontation between China and the US.  The global economic impact of a confrontation over Hong Kong could be far greater than the current negotiation over trade practices. Global supply chains could be disrupted and we could experience significant price increases. This is something to pay attention to and ensure that alternate supply sources can service your business in the event of disruption.

On today’s show we are talking about the importance of digital marketing. Regardless what business you believe you’re in, today’s market requires an expertise in digital marketing. As real estate investors we are marketing products digitally as well. Whether it’s a vacant apartment, an empty pad in the mobile home park, lockers and eight self storage facility, or even listing a multi family apartment building for sale. Every single one of these, in someway shape or form are vying for attention from the target audience. But here’s the problem, all of us are overwhelmed by the number and quantity of people, advertisers and opportunities that are vying for our attention. we have tune the vast majority of it out as a matter of simple survival.  So if we want our opportunity to be noticed, we need to go where people are looking. When we think of search, the name Google usually is the very first to come to mind. The problem is the Google searches the entire universe. It is too big. We’ve all experienced the case where we conduct a search and Google reports that there are 3 million instances of our keyword search results. But the fact is, most people rarely search beyond page 2. In fact, 50% of the search traffic goes to the first one or two listings on page 1 of the search results from Google. Google is great at indexing keywords. But they are not great at determining search criteria that are not purely keyword-based. For example, if you are looking for apartment complexes for sale of more than 100 units, and a cap rate of 6% or higher, google will not give you any useful search results. There are more specialized market places , and search engines that are specific to those market places. For example YouTube is another powerful search engine. If I am looking for instructions on how to do something like maybe repairing a fitting in my dishwasher I will use YouTube as search engine to find an instructional video. If I’m looking to buy or sell something locally, maybe a piece of furniture or some sporting equipment, then I would use craigslist or perhaps the Facebook marketplace as the search engine for something like that. If I am looking to hire a keynote speaker for an event, I would look to the national speakers Association as my search engine for finding a great keynote speaker. If I am looking to purchase a specialty item or a gift, I might choose Amazon as the search engine. If I am looking for a place to stay in the city on visiting I would choose Priceline.com, or Airbnb as my search engine. Every single one of these search engine’s use a different method, a different algorithm, for presenting their search results. If I’m looking to hire a virtual assistant, I would use up work as the search engine. So when we think of search, there is much more than just Google we need to focus on.  Each one is different. To be successful, we need to find someone who is a specialist in that specific search engine so that we get the best possible results from our initiative. How do you stand out and get noticed on each of those platforms? You might have the best offer in the world, but it’s irrelevant if people don’t know about it.  One of the common mistakes is for someone to copy what is common on a given platform and make their listing looks like all the others. We often get trained at school to act like the other students, just like the other children in the classroom, and conform to the norms that society sets for us. We need to fit in. We need to act and look like we belong. That when you do that you get stuck in the sea of sameness. It’s virtually impossible to get noticed when your offer is unremarkable. 

We're talking about market cycles this weekend. Love what Marco has to say, To connect with Marco, go to NoradaRealEstate.com or listen to the Passive Real Estate Investing Podcast. 

Today's show is coming to you live on location from the French Island of Groix. If you've ever wanted to know about what owning a piece a paradise off the Atlantic coast of France, this show is for you.