The Real Estate Espresso Podcast

Today's show is a real life personal story about fire fighting and what it means. What areas of your life are you fire fighting?

On today’s show we are talking about reading between the lines. This is the ability to fill in the blanks when the seller of a property provides incomplete information. Any professional real estate investor has the full information about their own property. If the seller truly lacks the information, then that’s a sign that they have been grossly mismanaging the property. But then you may already know that by now.  When the seller only provides a partial picture, we are left wondering what it means. The fact is, it could mean one of several things.  Some sellers use the shortage of information as a way of signaling to the buyer that they have the upper hand in the negotiation. This is one of those misguided knowledge is power plays.  I will ask the seller if they are interested in selling the property. That usually brings a response like: “Yes, but only at the right price.” To which my response is, “Great. We are on the same page. In order for me to buy the property, I need to complete my due diligence to justify your price. I will send you the list of minimum information I need to make an offer, and a second list of what I will need to complete due diligence.” Sometimes, the seller is using incomplete information information as a way of hiding something about the property. By hiding the truth, they believe that they are not lying.  At the end of the day, I rarely rely upon the seller’s information in due diligence. I construct a new financial model that is based on how the property would operate in my hands. After all, I’m going to be using my systems to operate the property, not the seller’s. They are the one selling the property, which means they have a problem. It’s not the buyer who has a problem.  The due diligence falls into a few categories. The physical asset.  Anything recorded on title  The tenants.  The operating history.  Land use restrictions 

On today's show I'm coming to you live from the WW-II submarine base in Lorient. 

Today I take you on a short walk in the ancient walled city of Valletta, a UNESCO World Heritage Site. Enjoy...

I’m coming to you on location from the island of Malta. This small island country joined the European Union back in 2004.  Since then it has seen tremendous population growth as the open borders of Europe has allowed the free movement of people.  Malta has always been a natural hub for relocation. Ever since the 1994 Malta Permanent Residence Scheme and more recently the renewed schemes, Global Residence Programme and the Malta Residence Regulations 2014, the country has seen a steady interest in purchasing real estate in Malta as one of the criteria to obtain the residency status. By 2014, the number of properties in the country exceeded the local population by 65,000 units. In the past few years that excess has been absorbed, and the entire island is undergoing an unprecedented construction boom. There are construction cranes everywhere.  One of the drivers for immigration has been the rules in Malta which permits businesses which operate in the online gambling arena. These gaming companies are everywhere and real estate agents report that 30% of tenants looking for rental accommodations are employees in the gaming industry.  Rental rates have increased about 40% over the past 5 years. Some rental apartments that opened with starting rents of 600 Euros a month only a few years ago are now charging 1000 Euros a month. Some tenants have seen increases of 200 Euros a month in a single year.  The country’s lower cost structure has attracted retirees from all over Europe, including the ultra wealthy.  Malta offers an advantageous tax structure for those who have large capital gains and the island offers greater anonymity than, say Monaco.  Depending on the investment one takes, cap rates range between 4%-7% and according to the folks at Remax and historical capital appreciation has been between 2% and 6%. Home ownership rate in the country is 81.9% which is high by global standards.  The current construction industry accounts for 7% of the economic activity in the country. In historical terms, that’s a very high percentage for any market.  In my estimation, the market will reach a point in the near future where the market will appear overbuilt. In the high summer season, short term rentals are numerous and the nightly rates rival hotel rates. But in the low season, vacancies can be extremely high and number in the tens of thousands.  Malta recorded a government budget surplus of 76.5m Euros in May of 2019. The government debt to GDP ratio was at 50% a couple of years ago. Today the debt to GDP ratio is at 46%. This compares with over 100% of GDP in the US.   Tourism is one of the main drivers of the economy and makes up 16% of the country’s GDP.  Tourist Arrivals in Malta increased to 250,000 in April, 2019. Considering that Malta’s permanent population is 433,000, a monthly tourism arrival rate of 244,000 is significant. If you consider that the island is a top destination for cruise ships in the Mediterranean, about 35,000 of the visitors come by ship and stay less than one day. The remainder stay longer with more than half staying a week or longer. 

Today’s episode is a companion to yesterday’s show. If you haven’t already listened to yesterday’s podcast, I suggest you listen to that one first. Today’s show will make so much more sense if you do.  On yesterday’s show we talked about the promise of 5G wireless technology and the fact that having good internet access is a component that affects property value. But in order to achieve the advertised performance you need to be much closer to the cell tower than in previous generations.  The number of cell towers is expected to more than double from the 323,000 in 2017 to over 750,000. Not only that, a 5G base station uses so much bandwidth that the network infrastructure to power it must be upgraded to optical fibre.  So the real cost of deployment for 5G is far greater than for any previous wireless generation.  If you are adding nearly 400,000 cell sites across the nation, and you need to get optical fibre to the cell site, then multiple utilities will need to negotiate easements to bury conduit and optical fibre on potentially millions of properties.  So let’s dig into the implications of an easement. An easement gives the right to the holder of the easement to access the property within the boundaries of the easement for the purpose of maintaining or upgrading their services.  These rights are often located along the edge of a property where they do no harm. For example, most zoning codes do not permit building structures right up to the property line. Easements are usually located in the setback where you can’t build anything anyway.  But easements can also cloud title and negatively affect the value of a property.  If a cell site is needed every 800-1000 feet in order to achieve the benchmark 5G performance, there is hardly a property in the country that won’t be affected in some way.  Now let’s be clear, many properties today carry utility easements. This isn’t a new concept by any means.  The cellular towers themselves are actually easements where the cellular carrier pays a monthly rent to land owner for the right to use the easement.  There is no doubt that the economic model for 5G cell towers will have to change compared with previous generations. Cell carriers cannot afford to pay as much as they have in the past for a cell tower.  Cellular towers are income properties that essentially trade in the cell tower market. Once a tower has been installed, it’s common to have several carriers share the same tower infrastructure. They would each pay rent to the property owner independently.  Cellular towers generally are valued at a 7% cap rate.  You can sell that easement on the open market and truly collect a check. That’s the upside. But there is a downside too. An easement on your property could ultimately negatively affect the marketability of your property. Before accepting an easement on your property, get a legal opinion from a competent land attorney. 

Today’s question comes from Natalia in Toronto.  Could 5G wireless impact the value of my property, and if so how? That’s a great question. This is a large topic with several elements to it. In fact, so much so that we’re going to answer it over two days.  On today’s show we are talking about the wireless technology itself and how it works. On tomorrow’s show we will address the specific impacts that the infrastructure related to the wireless technology can have on your land.  There is no question that having internet service available at your property definitely affects your property value. It’s right up there with water and electricity. Very few people would buy a property without electricity. The cost to add it is high and very few people want to install and maintain their own diesel generator. High speed internet service ranks high on buyers list of requirements.  Traditionally, high speed internet service has relied upon wired service to your home and more recently, optical fibre. Fiberoptics can deliver extremely high bandwidth and experiences very low signal degradation. It’s not subject to interference and you can easily have a fibre cable of 60 miles or 100km without needing a repeater.  Today mobile devices have become extremely powerful. I’m able to do most things from a mobile device that used to require a desktop computer. 5G wireless technology offers the promise of wireless performance that is similar to today’s wired solutions. Wouldn’t it be great if you didn’t have to worry about that and you could roam freely and get great service everywhere you go. How can one radio technology be faster than another? The secret lies in the encoding and in eliminating noise.  The first idea that I’d like to introduce is the coding scheme. Most people know that computers use binary math to make decisions. The individual transistors inside a microprocessor are only capable of counting from zero to one, and back to zero.  But in the world of wireless where we have limited spectrum available, the key is to pack more info into the same airspace. We as humans rely mostly on more complex coding schemes. Each character on a written page represents one of 10 numbers or one of 26 letters, plus all the different punctuation symbols and a space to separate words from each other. But not only that, we have upper case and lower case characters which are distinct. Add all that together and we have about 100 times more information in a single character than a computer does.  Each new generation of wireless technology has introduced a more complex coding scheme in order to pack more information into the same airspace.   But the airspace is a noisy environment. The ability to have so many simultaneous conversations is a function of the signal to noise ratio. This is the difference between two people having a conversation in a quiet room and a crowded cocktail party. In order to have a meaningful conversation at a cocktail party, people need to stand close together and speak very loudly. You can’t hold an effective conversation across the room. There is too much interference from the other conversations for you to be understood. In technical terms, we call that the signal to noise ratio.  In order to achieve the benchmark performance, these cellular towers in 5G will need to be spaced much closer together than today’s 3G and 4G towers. The number of cell towers will need to approximately double compared with today. In fact you will need a cell tower every 800 to 1000 feet.  Areas which have lower population density will not be worth the investment by the carrier.  In the world of 5G, you can expect much more sporadic coverage than we have today with 4G

Today's show is a specific case study of a building permit refusal and how we ultimately prevailed. It's a powerful lesson in how a well crafted argument can sometimes win the day. We have the utmost respect for the government officials who work tirelessly to be good stewards of public safety. Our appeal process was respectful, and utilized the tools made available by government to influence a different interpretation of the rules.

  On today show we are featuring the book of the month. In order to be considered for book of the month, a book has to meet a very simple criteria. Work must be impactful enough to change your life or your perspective on the world. Whether it does or not of course is up to you. You might consume the content, remark on how good it is, and continue your life as before. But if you do you’re missing the point. Our book this month is by two brothers who are both university professors on opposite sides of the country. Chip and Dan Heath are professors at Duke and Stanford University. They have written several books together and the book I’d like to showcase is called “Made to Stick: Why Some Ideas Survive and Others Die”. It examines why some ideas are highly memorable and others are completely forgettable.  If you want your words to be remembered, and if there exists a formula for why some things are memorable, would you want to know that?  For example, the sentence “ A bird in the hand, is worth two in the tree.”   That sentence is nearly 1000 years old. Why is it that sentence has been repeated time and time again and has lasted nearly 1000 years? Of all the other sentences that have been uttered in the last thousand years this one has been repeated billions of times. Not only that, the same sentence also exists in multiple languages almost Word for Word. I’ll give you a simple example from modern day politics. I have no political affiliation in the US. I live in Canada. There’s lots going on in US politics on both sides of the aisle that I disagree with. If you go back to the last presidential election, Donald Trump’s slogan was “Make America Great Again “. Even democrats remember that slogan.  But if you were to ask any American what Hilary Clinton’s slogan was, the vast majority have no idea. Even most democrats can’t remember Hillary Clinton’s slogan. Speaking in a way that is memorable is vitally important.  Robert Kiyosaki is another person who has mastered the art of memorable communication. Rich Dad, Poor Dad. Savers are losers. Your house is not an asset. The central ideas of a book published 20 years ago are easy to remember and repeat.  Oh, I almost forgot to tell you. Hillary Clinton’s slogan was “I’m with her”. That’s right, “I’m with her”.  The book's outline follows the acronym "SUCCES" (with the last s omitted). Each letter refers to a characteristic that can help make an idea "sticky": Simple – find the core of any idea Unexpected – grab people's attention by surprising them Concrete – make sure an idea can be grasped and remembered later Credible – give an idea believability Emotional – help people see the importance of an idea Stories – empower people to use an idea through narrative As scriptwriters have learned, curiosity is the intellectual need to answer questions and close patterns. Story tellers oppose this universal desire by doing the opposite, posing questions and opening situations. So, they key is to open gaps first in presenting your ideas, then work to close them; the tendency is to give facts first. The local news uses this technique very well: They might use a hook like  Coming up after the break, Real estate expert Victor Menasce will be here to show you that if you can’t afford a house, you should buy two.  That’s an example of a hook that has a surprise twist to it. The idea is simple. If you buy a duplex, you can use the income from renting the other half to subsidize your home ownership.  If speaking in a memorable way matters to you, "Made to Stick" could change your life.

Paul Moore is the principal at Wellings Capital. He can be reached at WellingsCapital.com. Join me for this wide ranging conversation on market sentiment and investment strategy.