The Real Estate Espresso Podcast

AJ Osborne was paralyzed from head to toe and on life support. He used real estate to carry his family during those difficult times and today manages a portfolio of 14 storage facilities across several states. You can learn more by reaching out to AJ at cashflow2freedom.com.

This week we've been talking about golf courses and how the landscape is changing. Today's guest has owned and operated 36 holes for the past 19 years. Listen to today's conversation about what it means to own a golf course from someone who is deeply immersed in the business. You can also get in touch with Deb directly at Greensmere.com.

On today’s show we’re talking about what happens when a neighborhood goes downhill. As real estate developers we’re always thinking about improving things. But what happens when things go bad in a neighborhood, and quickly? When you hear something like, there goes the neighborhood, many people think that some undesirable people have moved in. That’s not what we’re talking about. People are people, and they all have the right to live on this planet. We are talking about the abrupt destruction of property value with the death of area amenities. There is actually an extremely common case of a neighborhood taking a significant hit.  Throughout the 1970’s, 1980’s and 1990’s, there were many residential communities planned around a golf course.  The residential properties backing onto the golf course were sold at a premium. They had large back yards and the large open spaces behind those homes were a beautiful thing to look at. Golf courses were being built at a feverish pace. We now have an oversupply of courses fueled by the infamous National Golf Foundation’s edict to “Build a course a day to keep up with demand.” Fast forward to today, and that demand isn’t there. Oversupply causes price drops and business failures in any industry. Golf is no exception. As some private clubs have faced declining membership,  many started opening their door to daily play some changing entirely to a semi-private model. This has had the effect of increasing golf course availability 20-30% overnight. Much of that latent over-supply was hidden behind private memberships.  As we’ve talked about on the show previously, some courses are being sold and redeveloped as development land. But in reality, many golf courses go through a period of decline, long before being redeveloped. How many?  About 2,000 golf courses across North America have closed down in the past 12 years to put a number on it. That’s a lot of golf courses. In fact, with that many closures, these courses fall quickly into disrepair. The once beautiful view out your back window is now replaced by a weed infested, swampy mosquito pit.  The impact to your property value is swift and steep. Any buyer for your home will want to know what’s going to happen to the golf course. In the meantime, if there’s uncertainty, the resale value of your property is impacted. If the golf course is sold for redevelopment, then your property is going to be negatively impacted. Some of these courses are very large and span hundreds of acres.  When you’re looking out your back window at the beautiful green fairways, it’s easy to think it would be great to get outdoors and take a nature walk. But the business of golf is not very environmentally friendly. The perfectly green short cut fairways are the result of some pretty harsh and toxic chemistry.  New environmental regulations have also increased costs for some operators. Some chemical treatments have been outright banned, leaving only costlier and sometimes less effect alternatives.  Let’s be clear, I’m in favour of a clean environment. The point of this, is that if you’re in the business of golf, your job just got harder and more expensive at a time when you are experiencing falling revenue.  So what does this mean for you as an investor? It means that buying an operating golf course for its value as a golf business could represent a very low cost land bank. You would be buying development land with a modest income stream to carry the land during the entitlement process.  Once your project is entitled, you can build the infrastructure including roads, and utilities. From there you can sell the parcels of entitled land to home builders who will do the heavy lifting.

Today is June 6, The 75th anniversary of D-Day. We are coming to you live from northern France. D-day was the coordinated assault by Allied forces on the beaches of Normandy. It was the beginning of the liberation of Europe from Nazi occupation. The assault on the beaches of Normandy had several coordinated steps. The first involved a diversion to draw the attention of the German forces away from the intended landings. The second what is the landing of paratroopers behind enemy lines to secure several key bridges that would prevent the Nazi army from bringing in reinforcements. Finally there was the simultaneous landing on several beaches. Those beaches were given codenames like Juno Beach, and Omaha Beach. Those code names have become so important to world history, that in many ways they have replaced the actual names of the beaches that preceded that day.  Immediately behind the beaches were steep cliffs that were heavily fortified with gunners and infantrymen holed up in concrete bunkers.  The casualties suffered by Allied forces on that day were significant. But eventually with the help of artillery from the ships offshore pounding the cliffs, the troops eventually made a successful landfall and managed to secure the beaches.  The very first troops to come ashore came in amphibious landing craft and had to wade through waist deep water with heavy equipment all the while making sure to keep their weapon dry.  Many soldiers perished in those last few feet before reaching the beach. Once the beaches were secured, the allied forces brought floating docks that could facilitate the process of bringing thousands of trucks, jeeps, tanks and artillery ashore. Eventually, the allied forces under the command of General George Patton, were able to secure the liberation of Western Europe. Today is a day much like the recent memorial day holiday in the US to remember those who sacrificed so that we could regain freedom through much of the western world. There are very few families who were untouched by the calamity of the second world war. Both of my parents escaped Europe in 1939. My father boarded a ship from Italy and landed in New York City. His name is among the millions who are listed in the registry at Ellis Island. My mother boarded a ship bound for Argentina. They sought refuge in Buenos Aires for about six months before making the journey where she too came through Ellis Island. Sadly hundreds of members of my extended family grandparents, aunts and uncles, and cousins never made it to freedom. The entire community on the island of Rhodes perished in concentration camps in 1944. I am enormously grateful to be alive today and do you benefit from the freedoms and liberties that we enjoy. I also recognize that my parents would never have met had it not been for the war. My wife and I would never have met had it not been for the war. In the years that followed since 1945, The world has seen countless other conflicts. My wish and prayer is that we see a future world devoid of ego driven conflict. 

Joseph asks: “My wife and I are getting ready to move into rental properties and we are at a sticking point of what a rental should be like inside. I’m okay with things being clean, unbroken, & liveable; she is more of the opinion of caring about the person renting and providing them something new or like new, as she wants to care about them as a person. We are stalled in moving forward as we can not agree.  How say you? What is the right amount of quality and care for a rental vs. your own home. Is there a difference?” Thank you Joseph for a great question. In order to answer the question, I think it would be helpful to reframe the question. I’ll start by saying that you’re both right. But ultimately the finer points of what to upgrade versus what to repair will depend on the answer to the following questions.  A very important question to answer whenever you are looking to market any product is: Who is your target customer ? Who is your ideal client? In virtually every industry there are products positioned at different segments of the market at different price points. For example you would not expect the same amenities at eight Fairmont hotel compared with Motel 6. Everything about those two product offers is different.  The Motel 6 is going to be right off the exit from the freeway. The Fairmont hotel will be an amazing location, will have striking architecture, and will offer luxury services that are simply not of interest to a trucker looking for a place to crash for the night.  They are also priced very differently. The motel 6 might be $60 a night and the Fairmont could be over $300.  While a beautiful plush terry cloth robe is lovely for just about anyone, you won’t get a higher nightly rate at Motel 6 if you put a terry cloth robe in every room. In fact, it would be out of place. But if there wasn’t a terry cloth robe for each guest in the closet at the Fairmont, you would be disappointed. It would be conspicuous by its absence.  It all comes down to knowing your target client and positioning your product to that target client.  So back to your situation with a rental property. Who is going to be your target client? Are you targeting young families, students, senior citizens who are on their own, army veterans with disabilities, young professionals, tenants with rent subsidies, or workers at a nearby hospital or factory? All of these ideal clients will be looking for a different product with different amenities.  Some may want interesting spaces to showcase their collection of trophies. Others will want a space to hang a 60 inch TV. Some may want cloth drapes, versus aluminum blinds. You may want two sinks in the bathroom instead of one. You may want a standing shower versus a tub/ shower combination. All of these decisions start with knowing your target client.  Look in the local market and see where the shortage is. There almost always is a shortage. For example, we noticed that in Philadelphia, there was a shortage of parking. Whenever possible, we build our new apartment buildings with ground level structured parking and we elevate the building on top of the parking. Dedicated parking is so rare in Philadelphia that it would take decades for enough parking to be built to satisfy the demand. We are hugely confident that we will almost never experience vacancy in a building with parking. Even if the market went through a huge downturn, a building with parking would be in high demand.  Figure out what will differentiate your product in the market and more specifically speak directly to your target client. 

On today’s show we’re talking about what happens when businesses shrink. The latest earnings season for retail brought some more bad news. But let’s be clear, retail isn’t dead. It just has too much friction.  There is the perception that the lowest prices can be found on-line. I as an average consumer believe that there are some things that I simply can’t buy online. I haven’t got my mind around buying shoes online. I find that only a small percentage of shoes fit my feet. I need to try them on. Shipping shoes that don’t fit back to the online shoe retailer is more work than going to the shoe store. But if there is a specific pair of shoes that I already own, and I’m looking to buy the exact replacement, then I definitely would consider buying that shoe online. Or if there is an article of clothing like a white dress shirt, here too I would buy that online. If I can save an hour of my time by ordering online, the savings are significant because my time is worth a lot, to me anyway. So what does this have to do with real estate? If bricks and mortar stores are facing declining sales, all retail commercial real estate will suffer, not just the ones that are landlords to Sears or JC Penney. This past week, the shares of Gap, Abercrombie and Fitch, and J. Jill were absolutely hammered. The shares at Gap fell 9% on Friday. Shares at PVH which owns Calvin Klein and Tommy Hilfiger fell 10%. Abercrombie and Fitch was off 26% last Wednesday alone, and J.Jill fell 53% in a single day last week. What do all these retailers have in common? They rely primarily on shopping malls for the majority of their sales.   Last year it looked like retailers were poised to rebound. It turns out that in 2018, many retailers numbers improved due to better inventory management. That change was short lived. So far sales in North America have been slow as cooler than seasonal weather has kept shoppers at home.  Here’s the problem. Businesses either grow or they shrink. If they can’t move their inventory, they resort to selling at a discount to move the inventory. You can’t wait another 15 years until that color comes back in style. The product has a shelf life and it’s about 16 weeks in the case of fashion clothing.   Once a store closes in a mall, I’m not seeing legions of new businesses looking to open up in the mall at $65 per square foot just waiting for a vacancy to open up. Sometimes, you will see a store reduce their footprint in the mall as a larger proportion of their sales shift to online.  When there is excess inventory in the retail market, prices drop. When there is excess inventory in real estate, prices also drop. You don’t need that much vacancy to cause a precipitous drop in rents. Rents will drop to the point where any rent is better than no rent. We’ve seen mall after mall close down. So what will cause people to get up from their sofa, get in their car and drive to a business? 

On today’s show we are talking about what is up or down with interest rates.  Interest rates are traditionally influenced by two main factors, inflation and risk. If inflation goes up, then naturally investors will want their bonds to at least keep pace with inflation.  If the investment is perceived to have higher risk, then investors will want a premium to compensate them for the higher risk. These are the two principles at work in pricing interest rates.  But of course there isn’t a single interest rate. There are short term rates and long term rates. The short term rates will often experience larger swings than the long term rates. Shorter loans tend to be linked to short term interest rates like libor. Longer permanent financings tend to be linked to the yield on the 10 year government treasury bill.   In recent weeks, the yield on the 10 year treasury has fallen to the lowest level in two years.  The US dollar has remained persistently strong as the uncertainty over global trade has sent investors globally looking for safety. The vehicle of choice seems to be US treasury bills. That explains why the yield for 10 year T-bills is falling.  But since long term mortgage rates are tied to the 10 year treasury, mortgage rates have fallen to below 4% on the longer 30-35 year loans.  So what does this all mean for real estate investors?  I believe that the period of low interest rates is here for a while longer. That means that prices for commercial properties will broadly remain stable. Even an modest economic downturn will not have a dramatic negative impact on prices for commercial multi-family properties.  If you’re considering a bit of profit taking, or rebalancing your debt to equity ratios, now might be the perfect time to do that.  You may have one more year remaining on a conventional loan. Locking in for another 5-10 years at today’s rates would make a lot of sense even if you had to pay a 1% pre-payment penalty. Often times, if there is only one year remaining on a loan, the bank may waive the pre-payment penalty if you refinance with the same bank. They would rather keep the business and waiving the pre-payment penalty might be the necessary inducement to stay with your present bank. But even if you elect to pay the penalty, remember that you’re going to amortize that penalty over 5 or seven years, so a 1% penalty has roughly the same cost as a 0.2% increase in the interest rate over 5 years. If you can save more than 0.2% in the interest rate by refinancing, it would be worth paying the pre-payment penalty. Many people refinance in order to increase a loan amount, or reduce it. As long as you can maintain a responsible debt coverage ratio, you might consider increasing your loan amounts and pulling some equity to build up a war chest of cash to prepare for new acquisitions in the coming years. There is still a lot of money sitting on the sidelines and while there aren’t too many bargains in the market today, there will be a time when bargains will re-appear. 

Andrew Keel is an expert in repositioning manufactured home parks. He currently operates 14 parks in 6 states. To find out more, contact Andrew at keelteam.com. 

Today is June the first and on the first day of each month we feature a new book on our book of the month episode. In order to be considered for a book of the month the book has to meet a very simple criteria. It has to be impactful enough that it will change your life or your perspective on the world. Whether it does or not is entirely up to you. You might read the book and comment on what a great book it was. But if you don’t internalize the book and make a part of you, you’re missing the point. The book of the month this month is “The War of Art” by Steven Pressfield. This book describes in mythical terms the different forms of resistance that prevent you and I and most people from achieving their creative potential. In the book he describes the different forms of resistance that systematically seek to undermine creative work. They include: Rationalizing Fear and anxiety Distractions The inner critic These ego driven saboteurs prevent you from getting down to the business of fulfilling your calling.  In the war of art Steven Pressfield shows how to get into a flow by being into the present moment and losing yourself into the doing. You can be doing and thinking about the doing at the same time. If you’re thinking about doing, you’re not doing.  The secret isn’t to ignore the fear. You need to dance with the fear. Steven Pressfield writes.  If you're overwhelmed with dread, that's a good sign. The real artist is always terrified. The fake artist is wildly self-confident. Remember, Resistance always comes second. The dream comes first. The more Resistance you're feeling, the bigger the dream in your heart. The resistance shows up any time you seek to elevate yourself from a lower state to a higher state. The resistance is described like a force of nature whose aim is to maintain the status quo.  The most common areas where resistance shows up include: The launching of any entrepreneurial venture  Any diet or exercise regimen Any program of spiritual advancement Any activity whose aim is tighter abdominals Any course of program designed to overcome an unwholesome habit or addiction.  Education of any kind The undertaking of an enterprise whose aim is to help others Any act that entails commitment of the heart such as a decision to get married or have a child. Steven wrote The War of Art in many ways as his own life story describing the struggles as a writer. In the process, he discovered that the struggle was universal and that’s why the book was the first book that really put him on the map. In the book he writes:  Resistance is a negative force that attempts to prevent us from taking the first step to achieving our dreams. Resistance doesn’t just show up at the beginning. It can show up daily. The battle with resistance is an ongoing one. Even the most successful, talented, acclaimed authors, business leaders, all face resistance. There are some days when I’m producing the podcast where it takes me far longer than part of my mind says it should to come up with the concept for a show.  Overcoming resistance is more important than talent.  A single sheet of paper is enough to outline even the most complex project. The single sheet of paper enables you to cut through the Resistance and concentrate the mind.  It’s one of the most quoted books in recent years. Steven has been interviewed by Oprah, Marie Forleo, Joe Rogan and countless others.  If you have been struggling to get something started, or to get something completed, then the War of Art is for you. 

David from Placencia in Belize asks: "I was wondering your thoughts on opportunity zones. Specifically do you feel this can trigger a mass exit in the market that will drop stock prices for ones wanting to get into Opportunity Zones and trigger a crash or at least a a major correction?" David, that’s a great question. First let’s define the opportunity zone and what it’s used for, and then we’ll talk about the source of funds for opportunity zone investment.  Opportunity Zones are low income census tracts nominated by governors and certified by the U.S. Department of the Treasury into which investors can now put capital to work financing new projects and enterprises in exchange for certain federal capital gains tax advantages. The country now has over 8,700 Opportunity Zones in every state and territory. They make up about 25% of the low income areas in the country.  Opportunity Funds are new private sector investment vehicles where the fund must invest at least 90 percent of their capital in qualifying assets in Opportunity Zones. Opportunity Zone investments offer a number of benefits for the investor.  A temporary tax deferral for capital gains reinvested in an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is sold or December 31, 2026. A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis of the original investment is increased by 10% if the investment in the qualified opportunity zone fund is held by the taxpayer for at least 5 years, and by an additional 5% if held for at least 7 years, excluding up to 15% of the original gain from taxation. A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in a qualified opportunity zone fund, if the investment is held for at least 10 years. (Note: this exclusion applies to the gains accrued from an investment in an Opportunity Fund, not the original gains). So virtually any capital gain would qualify to be reinvested in an OZ fund. You might have made a ton of money in, say, Bitcoin, or a piece of rare art work.  There is a ton of money in the stock market. But remember, less than 10% of the transactions on the stock market are made up of actual bona-fide value investing. About 90% of the volume on the stock market are program trades by the brokerage houses for their own account or for institutional investors. Those vast sums of money are largely seeking arbitrage profits. These short term trades fall under the category of trading, and not investing. The hold period is often too short to be considered eligible for treatment as a capital gain.  There are likely a spectrum of opinions on the topic and there are likely people who disagree with me. I really don’t see the advent of opportunity zone tax sheltering as driving a selloff in the equity markets. There is a mismatch between liquidities in those two types of investments. I really don’t see stock market investors who have the ability to execute a trade on a moments notice then agreeing to tie up their money for the next 10 years. I think those investors are fundamentally different investors. Most of the long term money in the stock market is in the form of mutual funds, and a lot of that money is tied up in retirement accounts.  I expect that the majority of money going into opportunity zone investments is going to come from the sale of businesses where there is a substantial capital gain from a single event, the sale of other real estate assets where the purchase of a suitable replacement asset is proving to be difficult under a section 1031 exchange.