The Real Estate Espresso Podcast

There’s no question that beautiful homes are just that, beautiful. As always, fashion and tastes are always changing. Like clothing, homes make a fashion statement. They have a life span. The gold door knobs of the 1980’s and 1990’s are replaced with the cleaner look of brushed stainless steel.  Colors like hunter green are out, and white subway tiles are in. Colonial style mouldings and trim are out, and clean lines are in. Thick pile carpeting is out and hardwood is in. Warm tile colours are out and cool colours like grey are in. But fashion goes far beyond finishings. The large mansions of the 2000’s were in hot demand. Today, there simply are not as many buyers for those homes. It’s partly demographics. But it’s also tastes that have changed. The 5,000 square foot home on acreage is not selling as well as the more modern, smaller home in a walkable community with access to the local coffee shop, the art gallery, and the neighborhood gourmet establishment.  One of my clients is building two residential subdivisions in Asheville North Carolina. This area in North Carolina’s Buncombe County, draws retirees with its mild climate and Blue Ridge Mountain scenery.  Homes under $800,000 have been selling quickly. So much so, that there is a shortage at that price point. Many are electing to custom build. Mountain gated communities like Ventana are doing really well. Homes below $500,000 are flying off the shelf. Homes over $2M are sitting on the market. Last year, there were 32 homes in Asheville over $2M on the market, and only 16 of them actually sold. Asheville is a wonderful community. It’s very artsy with great restaurants. The town has earned a reputation as a food lovers haven. There are lots of craft breweries and converted industrial buildings. This is a story that is playing out all over the country.   A lot has been written about the growth in senior housing as baby boomers are aging. But the thing to remember is that all those people going into senior housing are coming from somewhere. What properties are they leaving behind? Boomers currently own 32 million homes and account for two out of five homeowners in the USA. The picture is pretty similar in Canada and other western nations.  The problem is expected to worsen in the next decade, as more baby boomers advance into their 70s and 80s, the age group where people typically exit homeownership due to poor health or death.   The problem is particularly acute at the high end of the market. About a year ago, Fannie Made published a report which takes a deep look at the problem from a demographics perspective. But you don’t need to be an economist to see the problem.  That brings us back to talking about fashion. Even assuming that there were enough buyers, which there aren’t. Even assuming that younger home owners could afford these larger home, and many of them can’t. Even if you update the home and get rid of the dated finishes and colours to match modern tastes, these homes are not in the most desirable locations for younger home buyers. Most younger home owners are not looking for such a large home. They want to be closer into the city. They want to spend their money on experiences, not accumulating possessions. The 1980’s and 1990’s were all about material possessions. Social values are changing and younger people would rather create memories than buy more stuff. 

It is said that real estate investing is a mental game. But what does that really mean? It means having the discipline of investing and managing projects overcome your emotions. It’s been said that most decisions are made emotionally, and the logic to support the decision is then brought to the forefront to bring justify the emotional decision. On today’s show we are talking about deal momentum. Let’s say that you have your eye on a property that you think has potential. The initial analysis looks favourable. You manage to get it under contract with all the usual due diligence conditions.  You have a term sheet from the lender and you have several investors who like the deal.  You have completed your due diligence and everything seems ready to go. But late in the game a week before closing an issue arises on title.  In addition, just one week before closing you’re starting to see signs regarding your property manager that are alarming. You don’t live in the same city, and you don’t have time in the next week to fly and recruit a new property manager to replace the one you’ve got. The title issue will not affect your use of the property but might affect the salability of the property in the future. You have spent two months working on the project. You have spent money on appraisals, phase 1 environmental, legal fees reviewing documents, and countless hours putting the whole deal together. In one week time you will get all of those fees reimbursed and you’ll earn The acquisition fee that you put in the offering memorandum with your investors. Most purchase contracts include a clause that is an open condition requiring the transfer of marketable title. That condition does not expire right up until the time of closing. Even though you have waived conditions, the title condition remains in full force and effect. If you had known the issues with title and the issues within your team at the start of the project, you probably would have chosen not to proceed with the deal. But here you are, a week before closing and all systems are go. This is clearly a case of deal momentum. I remember watching the launch of a NASA rocket. The countdown was well underway and 10 seconds before launch mission control scrubbed the launch. Every single project requires a continuous risk assessment. In the case of a space launch the consequences are clear. Like a rocket once fully launched, a project becomes like a one way street. There is no backing up. You can only go forward.  But when you have a deal that runs into problems, the correct solution is to stop, inform all the stake holders of the issue and then negotiate accordingly with the seller. They’re the one with the problem. By taking the more conservative stance, you are letting your stakeholders know that you take their money seriously, that you won’t skip steps and take risks with their capital.  They will respect you for it. It builds trust.  That doesn’t mean the deal is dead. It means that there are some problems that must be resolved before you can move forward. If there is an issue with title, perhaps it can be cleared up prior to closing. If it’s a problem for you, then it could be a problem for virtually any buyer. The problem is not a buyer problem. The seller owns the problem and they have significant incentive to resolve it prior to closing. After closing, your negotiating leverage has evaporated.  Now I’ve outlined an fictitious example here. Deal momentum comes in many shapes and sizes.  As a deal sponsor, you have the same responsibility as the launch director for a rocket. That doesn’t mean the entire mission is scrubbed. It means not today. It means we need to make the deal safer.    If real estate is a mental game,  be mindful of deal momentum. 

Warning. Today’s show contains a real life story that some listeners may find disturbing.  On today’s show we are talking about how to maximize your profit. Profit, simply calculated is revenue minus expenses. You can increase profit by increasing revenues or by reducing expenses. Often it is tempting to reduce expenses. When something needs to be done on a project you can hire an expert, which can be costly, or if the work is simple, do it yourself.  I’m here to tell you that doing it yourself is the path to ruin.  On today’s show we have a cautionary tale about Tony, a pilot with 21,000 hours of flight experience. Tony had a number of trees on his property that needed pruning. But the tree cutting service was going to charge $600 per tree. He did the math and decided to rent a professional cherry picker. These are one of the machines that hoists you high in the air in the safety of a basket with a railing. Most of the controls are at your fingertips. Joystick control makes it quite easy to position the basket exactly where you need it.  At one point, the cherry picker detected the beginning of instability. When that happens, the joystick controls are disabled and the cherry picker stops working. The only problem is that Tony was by himself. The only way to fix it is to use the manual crank on the base of the cherry picker. But Tony was 30 feet up in the air and he was by himself. Rather than call for help, Tony decided to try and jump onto the roof of the house which was nearby. Only he missed the house and fell to the ground. Sadly, Tony did not survive the fall. Now folks, this is a real life story about a man who made a series of bad decisions, about a wife who lost her husband, about children who lost their dad.  There is so much do it yourself mentality in our culture. We are thought to do it yourself at school. We are taught to get a job. On the job we are to do the work.  Even if you didn’t do something involving heights, I’m sure you can relate to Tony’s lapse in judgment. Maybe you decided to do a quick and easy plumbing repair rather than call a professional. Maybe you cut your own grass.  Overwhelmingly, when I think about increasing profits, I don’t think about reducing expenses. I think about increasing revenue. You can hire the skills to do the work. You can increase revenue to pay for the work. You can’t recover the time it took to do the work. 

Billy Keels is based in Barcelona, Spain, but invests in the USA. You can learn more about long distance investing from Billy at billykeels.com or at  keeponcashflow.com. He has a free e-book for our listeners at growyourmoneythesmartway.com.

Justin and Keisha Brooks are based in Kansas City where they own and operate assisted living assets, and multi-family. They are also hosts of the Real Life Real Equity Podcast. They can be reached at realliferealequity.com.

On today’s show we’re talking about professional tenants. These are the ones who present well during the screening process, who fabricate elaborate stories, and who encourage landlords to skip steps in their due diligence. Ultimately, the professional tenant has one goal, to squat in your property rent free for as long as the legal system will protect them. They use every trick in the book to delay proceedings.  On today’s show we hi-light the top 5 tricks that professional tenants use to cheat a landlord.

On today’s show we are talking about the process of finding life balance, while living in several different time zones concurrently.  We have spent the past two weeks living on board a boat in Northern France, all the while working to repair things on board, maintain client meetings by phone, keeping in mind the time zone differences with home.  Everything seems to be a little off balance.  On the west coast of France, we are actually further west than much of the UK. But we are on Central European time and an hour ahead of Britain. As a result, it’s daylight here until well after 10:30 PM. We are eating much later than normal, often having dinner at 9PM.  Our phone calls with North America start at 3PM, which is the start of the business day in eastern and central North America.  The mornings are spent working on the boat and doing paperwork. Fortunately our internet access has been excellent which has made getting work done much easier.  Many of our meetings are held by video conference using either Skype or Zoom.  Structure is vitally important in maintaining a sense of organization and order. Without that structure, life seems chaotic. Our business day has been shortened to only a few hours of time zone overlap. It would be too easy to allow meetings to go on until 11PM at night. That actually happened once this week already. 

On today’s show we’re talking about the lowest and best use of a property. Traditionally, we are trained as real estate investors to seek the highest and best use for a property. This might be a high rise building, or a hotel.  But sometimes, the best use is the one that buys you certainty. That may not necessarily maximize the revenue. Sure you want to build that hi-rise condo tower on the property. But you won’t know for some time if the zoning is going to be approved. In the meantime you need a way to carry the property during that period of uncertainty.  For some properties there might be an existing single family home on the property. But the rent for a single family home probably won’t generate enough income to cover the costs of a property that is valued for development of a major property. You don’t really know how long it will take to get the entitlements. On paper the city might say its a four month process. But by the time the concept is developed, the required traffic studies are completed, public consultations, submission of 15 copies of the drawings 30 days in advance, you could easily be facing a six month process before the zoning board. Chances are, there will be some objections to the minor variances. If you require an appeal or a resubmission, then you could be easily facing another 3 months delay. Once you pass the zoning board, then you might be facing another delay to get the project on the agenda at city council. All of this uncertainty means carrying a property without the knowledge that you are gong to be approved. OK, so now you’ve got zoning approval to build the project. From here you can start the detailed design of your project, the full construction drawings will take several months to complete with all of the engineering aspects including civil, structural, mechanical, electrical, plumbing, acoustic. Once that’s all done, you need to satisfy the long list of deliverables for the actual building permit including the demolition permit, the stormwater runoff permit, the road closure permit, the sign-off from the fire Marshall and so on. That entire process can take several months. Then you’ve got to get firm construction bids from all the subcontractors. That entire process can take a year. So now you might be two years into the process and you haven’t broken ground. What do you do? How do you carry a multi-million dollar piece of land with no income? How do you raise the capital for the entire project before you even know if its going to be approved? You don’t even know what its going to cost to complete the project.  So what is the answer? Parking.  If your property is in a desirable area with a shortage of parking, you can create a surface parking lot. A surface lot is relatively inexpensive to build. I’m not talking about a monthly parking lot. I’m talking hourly parking. You install a payment machine and you have a security company visit the property on a regular schedule to enforce the parking. If your area has a shortage of parking, you should be able to charge $3-4 per hour for parking during peak times. You should be able to average $20 per day for a parking space in a downtown location. Parking spaces consume an average of 320 square feet including the parking spot at 200 square feet, plus the space for the laneway.  The beauty is that most zonings do allocate for parking. Getting a parking lot approved is relatively easy in most cases. A property that is actually an income producing property like a parking lot is easier to finance than vacant land. This can be one of the least expensive ways to land bank during the entitlement process.  

It’s no secret that Italy is running out of cash. Much like in the US, some US states are in better shape than others financially. The US federal government has one extra trick up its sleeve. The feds can go to their friends at the federal Reserve and ask them to print more money. The individual states can’t do that. So they are under much greater pressure to live within their means.  In the European Union, individual countries that had control over their currency could print money at will and inflate their way out of their short term financial troubles.  Italy’s populist leaders are discussing paying public-sector suppliers with IOUs instead of Euros. Some who oppose European controls have proposed this as the starting point for a new currency in case Italy has to leave Europe’s currency union. The heads of the League Party and the 5 Star Movement, which make up the governing coalition in Rome, want to assess the idea of paying off government arrears using IOUs with denominations as small as €50 ($56), dubbed “Mini-BOTs” after Italy’s BOT treasury bills. BOT is an acronym that stands for BOT (Buoni Ordinari del Tesoro, or loosely translated Ordinary Treasury Bonds.  “One can debate the instrument…it’s a proposal. But the urgent need to pay the tens of billions of euros of public-administration arrears to companies and families should be clear to all,” Matteo Salvini, head of the far-right League party, said Sunday. Italy’s finance minister, Giovanni Tria, has tried and failed to stop the discussion, arguing that the IOUs would be either an illegal parallel currency, or they would be extra government debt at a time when Rome is struggling to rein in its deficit. So the question simply is, when is a piece of paper considered currency?  Is a US T-bill as good as cash? What is the difference between a one dollar bill that is essentially a government IOU. It says on the front face of the dollar bill, “Federal Reserve Note”. It then goes on to say “This note is legal tender for all debts public and private “. It used to say “This certifies that there is on deposit in the treasury of the United States of America one dollar in silver payable to the bearer on demand. But that was when our currency was actually money and backed by tangible hard assets. That’s an entirely separate discussion.  So let’s go back to Italy. Italian government bonds currently have a yield of 2.35%. This compares with US treasuries at 2.15%. Considering the additional risk associated with fiscal management in Italy, such a small risk premium seems inappropriate to me.  Claudio Borghi, chairman of the budget committee of Italy’s lower house of parliament, has said such small-denomination IOUs could be a fallback instrument for Italy’s economy in case of a clash with eurozone authorities. Mr. Borghi tweeted on Sunday that the European Central Bank forced Greece into submission in 2015 “in a shameful humiliation of democracy. I would like to avoid this to my country.” European officials last week called for disciplinary proceedings against Italy for flouting fiscal rules. Italy’s national debt stands at 132% of gross domestic product and is projected to rise above 135% next year. Among developed countries, only Greece and Japan have higher government debt ratios. Unlike euro members, Japan borrows in a national currency that it can print. Japan’s debt is currently priced at negative 0.11%. Here too, the pricing seems out of whack.  I’ve been predicting for some time that the next financial crisis will be caused by a sovereign debt crisis that spills into the global financial markets. The signs will appear slowly at first and then quickly when the realization kicks in that the problem has no solution. 

On today’s show we’re talking about a debt bubble. There have been numerous debt bubbles over time. There was the sub-prime debt bubble. There’s clearly a sovereign debt bubble in many countries around the world including the US. There is arguably a debt bubble in automotive loans as the number of auto loan defaults in the US is skyrocketing. But we’re not going to talk about any of those. The debt bubble that is going to have a ripple effect throughout the economy is the student housing debt bubble.  You might say that students are making an investment in themselves. We’re not giving a bunch of 18 years olds $40,000 in debt to go buy large screen TV’s. We’re investing in our youth. They are our future. A university education is essential to succeeding in this increasingly competitive world. I’m extremely grateful for my degree in engineering. It has served me very well.   There are some degrees that lead directly to a career. We’re talking about degrees in medicine, law, engineering, physics, chemistry, psychology. These degrees have commercial value because they are valued in the marketplace. But then there are Students are spending tens of thousands of dollars on degrees that frankly have questionable value in the marketplace.  I believe 100% in making an investment in yourself. Like any investment, there should be a return on that investment. What exactly does a bachelor of commerce prepare you for? What would a degree in European and Russian studies prepare you for in the marketplace? I have not come across any job descriptions that call for a bachelors degree in humanities.  Now I’m not degrading any of those fields of study. I’m just not buying into the idea that students take on thousands of dollars of debt where there is zero ROI. If you grew up in a wealthy family and they can fund your degree in philosophy, then great. But the idea that you borrow tens of thousand for a degree in Linguistics seems questionable to me. So what does this mean for you as a real estate investor?  Universities are anchors in many communities. Housing is built around them. Commercial amenities are built around them. Public transit infrastructure is built around them.  We know from demographics that University enrolment is scheduled to decline starting in 2025. There simply are not as many young people graduating high school over the next several years. Naturally, you can expect that universities will aim to offset the decline with foreign students. But that too will eventually be limited by the number of student visas. Some Universities will do a better job than others in marketing to and attracting foreign students. This means that we will see a number of outright university failures. Some of these schools will be absorbed by nearby schools resulting in a consolidation. Others will simply go into bankruptcy.  A good example of that was Mount Ida College, a private college in Newton Massachusetts. It closed its doors about a year ago. Some of the assets of the school were purchased by the university of Mass. The students were given automatic admission to UMass Dartmouth, even though their academic programs are different. Student’s were also given the chance to join Newbury college which is also closing.  If you are investing in a community that has a university as one of the economic anchors, there is additional due diligence necessary. One of the measures is how many scholarships are the school offering to students? Scholarships sound like something that student’s have earned. But in the business of universities, a scholarship is nothing more than putting the tuition on sale. It’s a discount, designed to induce students to choose this school over then next one.  If you see tuitions rising, and the number of scholarships increasing, that may be a warning