The Real Estate Espresso Podcast

On today’s show we are talking about some low-cost improvements that can build tenant loyalty, and create a lot of goodwill between landlords and tenants. When tenants are late with their rent, it’s often because there is something about their accommodation that isn’t right. Maybe they haven’t told you about it. But somehow they have the feeling that they’re not getting their money’s worth. Of course, if there’s something really wrong, you should fix it. Whenever a tenant feels ripped off, they will find a way to get even. Maintaining tenant loyalty means eliminating the irritants and the problems. It also means creating pleasant surprises. These are the small WOW experiences that people remember.  As the seasons change, properties also need to adapt. Leasing activity picks up significantly in the Spring in most markets. If you’ve had a vacancy through the winter months, now is the time to improve your curb appeal and get rid of the winter residue on the property. The dead grass and leaves should be cleaned up, and any debris that accumulated over the winter.   This is also the perfect time to perform scheduled maintenance on the inside of your property. After the winter heating season, air filters need to be changed.  Screens on windows should be inspected and repaired. Take the time to repair any broken blinds at the same time. If your windows are standard sizes, you can often get some pretty significant savings by having blinds cut to size in larger quantities. If you have a few extra in inventory, you will need them eventually.  The largest energy cost in the summer months is air conditioning. Functioning blinds can reduce cooling costs. Ceiling fans can be another huge energy saver. They can also go along way to making an apartment more comfortable during the hottest months. A little bit of air movement makes the room feel cooler. It also improves the heat transfer to the outside when the windows are open.  If you don’t have ceiling fans, you may want to consider installing them. They are a low-cost upgrade. If you surprise your tenant with that improvement they will be highly appreciative. Part of maintaining low vacancy is creating a feeling with your tenants that you care about their experience living in your property.  Regular maintenance of your property shows your tenants that you are serious about maintaining your property. It also gives the management team the opportunity to inspect the condition inside each apartment. There’s a balance between allowing your tenants the quiet uninterrupted enjoyment of their property, and regular inspections to protect your investment. If a tenant refuses the upgrade and attempts to refuse entry, that could be a red flag. You should insist on requiring entry to the unit to replace the air filters and maintain the HVAC system since this is a health issue and is therefore not negotiable.  As always, make sure that any request to enter property complies with your local landlord tenant regulations. If your property has amenities like a swimming pool or hot tub, start the process of preparing the pool for summer. They haven’t used the pool in months and will be looking forward in anticipation of dipping into the water when the weather heats up.  If you want to build a sense of community, how about hosting a social event for residents during the upcoming long weekend in May. You don’t have to spend a lot on refreshments. You could heat up some BBQ’s and make it a pot-luck event. The sense of community after a long winter creates a stronger emotional connection between your tenants and the place they’re living.  People won’t remember that they got a $20 break on their rent for one month. But they will remember how you made them feel. That’s where it’s your job as a landlord or property manager to create a spontaneous WOW experience.

Frank from Portugal asks: “I’ve had my eye on a 6 plex that has been on the market for 5 years. The original owner who built them went into bankruptcy 8 years ago and only completed 60% of the project. I’ve spoken with the local bank manager that owns the property and I explained my reasoning for a low offer and we agreed on a reasonable figure for the property. The property is listed at 855,000. And 4 different builders have quoted around 600,000 to complete the project giving a total of 1.45m. I've had 3 different local agents value the completed properties and the valuations on the low side are 225,000 per unit. Which is a total sale value of 1.35m. We made several offers our highest being 400,000 but the bank won’t budge.  The opportunity is in short term rentals where you can possibly get 1000€ a week for about 12 weeks as the area is a hot tourism local. Perhaps the property could also be reconfigured into a larger number of smaller units in the same footprint.  It’s important to know that the decision on the sale of the property is being made at the Banks head office 70 miles away. We are not sure what is driving the valuation but it’s out of context with the local property market. How would you proceed in this case or would you just move on?”  Frank that is a great question.  I don’t have an exact answer to your question because there are a number of additional questions that need to be answered before you make a decision.  Whenever you consider a business opportunity you need to examine 3 aspects: The market opportunity  The team who will operate it The specific deal  1) Let’s start with the market opportunity. You identified seasonal short term rentals as the market opportunity. There is no question that the region of Portugal you are located in attracts a lot of visitors from all over the world.   It’s considered one of the top retirement destinations for people in the UK. I believe the demand is strong. But it is seasonal. You need to do a detailed study of the local market where you understand the seasonal aspect and the revenue potential by month. 2) Let’s look at the team. Short term rentals are a service business, not that different from a hotel. The way we operate short term rentals results in 5 star reviews across the board. That doesn’t just happen by accident. We took the time to define the systems and processes that would deliver that result and we hired the team that we could rely upon to consistently deliver that result. If you want to travel, if you want to have a life, you need to hire the team that can deliver. That means that the project needs to be large enough to generate sufficient cash to afford the staff and pay suitable profits to you as the property owner. If not, then you just spent a lot of money to buy yourself a job as a cleaner.  3)  The deal. It sounds like you have worked backwards from the rental income to determine the maximum you can afford to pay for the property.  If the bank has been holding onto the property for that long, And they have a skewed view of its value, then there must be something funny going on behind the scenes. Banks are not usually in the business of owning property. If they are carrying the property on the box at an inflated value maybe they are keeping it intentionally to make their balance sheet appear stronger than it is in reality. I don’t really know. I’m just speculating on the reason why they might be behaving in this way. This isn't a direct answer to your question, but rather it's what I would examine to make a decision on whether to get into that business in that location, with that specific property. 

On today’s show we’re going to talk about how many people in business are confusing their customers with their business cards. In particular, I’m talking about real estate investors.  I was sitting with a client today having an intellectual conversation about what should be on a business card. So I reached into my briefcase and pulled out a stack of business cards that I’ve received over the past couple of weeks at various events.  I laid out the cards in an array on the table and asked my clients to rate the cards in terms of communicating a clear message to the person holding the card. There must have been about 20 cards in total. I asked my clients to rate the cards simply on the basis of whether they would want to initiate a follow-up phone call purely on the strength of the business card. These cards were chosen totally at random. Out of all the cards, only one of them was for a globally recognized brand. The Vice President from Goldman Sachs got a high rating on the clarity of his card, mostly on the strength of the Goldman Sachs brand.  Half of the cards had no clear marking of the geographic location of the person or their business. While the geographic location of a business isn’t as important as it once was, we didn’t even know what country the business was located in. One business card said that the person was the new york regional manager, but listed new orleans, Louisiana as a physical address. That was confusing. From there, we saw numerous inconsistencies other on the cards. In some cases, the company name didn’t match the domain name for the website, and the email address didn’t match the domain name for the company. If your card is using a free email service like hotmail, you’re sending a message to your potential customers that you’re not serious about being in business. You’re saying that you can’t afford the $6 per month to have a properly hosted email service.  Many of the business cards had corporate tag lines that were next to the company name.  I’m going to share some of the tag lines with you, but not the company names. I’m not here to embarrass anyone, but to highlight how confusing some of the tag lines are. It’s been said that a confused mind doesn’t buy. So if you are confusing your customers at the point of introduction with your business card, you’re doing yourself a huge disservice.  Out of all the cards, only one stood out as being really worth calling the next day. The prize goes to a syndication attorney who told the potential customer clearly what they did.  It spoke directly to the target customer. The business card said clearly who the target customer was. It triggered a positive response from the recipient of the card. In some cases the name of the business states clearly what the business does. One of the common naming conventions for a company is to combine a distinctive term with a descriptive term. For example “Al’s Barber Shop” has the distinctive term “Al” and the descriptive term barber shop. You can tell from the name that Al is probably the owner and that’s where you will probably go for a haircut.  One company simply had a 4 letter company name. They were all consonants and no vowels. I’m guessing that the 4 letters had some meaning, but it was really unclear on what it could be.  After that, it got difficult to figure out what the companies did.  The goal is for the holder of the card to say “I need that”. Get me more of what’s on that card. One card was divided in half. On the top half, the person listed their software development business. The bottom half was in a different colour and listed their family owned restaurant. When you confuse people about what you do, they choose neither. 

The front page of the wall street journal this week had a story on Dean Foods. Dean Foods is America’s biggest milk dairy. Milk consumption has been declining for nearly 30 years and the company is starting to feel the pinch. Multiplying the problem, Walmart used to represent 15% of the company’s sales, and Walmart is now building their own captive supply chain for Milk and opening their own milk production plants. For Dean Foods, the revenue from that one customer is about to go to zero. The company has hired bankers to review options including a sale of the company, privatization or divestiture of some assets as milk consumption continues to decline in the U.S. There could be several factors that contribute to declining sales. Part of the decline in consumption could be easily predicted through demographics. There are fewer young people in our population, and as a result, fewer new milk drinkers. Second, the health benefits of cows milk for humans is being questioned by many nutrition experts. That too is partly responsible for the decline.  But Dean Food is suffering a far bigger problem than a shrinking customer base. They are suffering from a failure to assess their strengths and to truly leverage their strengths.  As the largest dairy in America, they have a robust channel to market and they have well established relationships with the nations supermarkets. Milk is a commodity. When the value of a product is not clear, then the customers’ buying decision always degenerates to price. When the wife calls the husband at the office and ask the husband to pick some milk on the way home” She doesn’t say “Honey can you please pick up some Dean Foods Milk on the way home?” She is likely to say, can you pick up some 1% milk on the way home, or can you pick up some lactose free milk on the way home.  The husband is going to stop at the wall of glass doors in the supermarket and pick out a carton of 1% milk. If there’s a difference in price, they will probably choose the lease expensive one. If one brand of milk is 25% off this week, chances are good that they will buy the one on sale.  In the absence of value, the decision always comes down to price. But Dean Foods has a channel to market. There are numerous products that they could put down that same channel to market. In an effort to improve revenues they purchased good karma Foods company which makes dairy free products from flax seeds. But this will not be enough. Flax Seed products do not have enough market share to replace dairy. They would need to have a soy offering and almond milk, and cashew milk. The problem is that they are still thinking of themselves as a milk company.  They could put iced coffee drinks through that same channel. The could do a partnership with other companies that are looking to break into the market with specialty products. There is a hot market trend for fermented iced teas like Kombucha that have health benefits. If those companies could gain access to the national supermarket shelf through the Dean Foods channel, there are numerous win-win opportunities.  Dean Foods could bring specialty products that are specifically geared towards people with specific medical conditions like diabetes. They need to think much more aggressively about growth.  So what does this have to do with real estate? Every business on the planet that defines itself as a commodity is likely to suffer the same fate as Dean Foods. If your real estate product is a 2 bedroom one bath apartment with laminate counters in the kitchen, that’s about as unremarkable as Skim Milk, you will forever be treated as a commodity.

Nicholas asks: "I see you having interviews with lots of celebrities. These are not people I ordinarily run into. If I’m looking to elevate my game and build relationships with successful people, how would you suggest that I go about connecting with those people?" That’s a great question. The first thing I’ll tell you is that it doesn’t happen overnight. I’m not out there networking, I’m relationship building. There’s a huge difference between those two. Networking has a utilitarian feel to it. You should be not out there to use people. I don’t know anybody who likes to be used.  For example, if you meet somebody famous and you immediately ask to take a picture with them, you asking to use their fame and celebrity to somehow elevate your status. They might be gracious enough to say yes to that request, but you’ve immediately started the relationship with them by telling them that you intend to use them. That’s not a good start to the relationship. When I meet someone, regardless of their social or financial position in life, I approach them the same way. I get to know them. I get into conversation with them about real life. I approach them on a human level. I look for ways to add value to them immediately. It doesn’t have to be anything huge. It starts with finding interests in common. One of the simplest and easiest ways to add value is to make introductions that could be helpful for them. Now many of you might be thinking. Wait a minute, how do you even get to meet them? I don’t even know of opportunities to meet celebrities.  This takes a bit of intentional work. I’m going to give you our listeners a bit of homework that is normally reserved for my consulting clients. This is a very powerful exercise that ultimately over an extended period of time will result in new opportunities.  So here’s the exercise.  I want you to brainstorm a list of 50 names of people you would like to develop relationships with. Some of them can be big names. You could put politicians on your list. You could put celebrities on your list. You could put high net worth individuals on your list. But remember, your goal is to develop relationships with them. You’re not there to use them. If you’re just creating a list of people you’re going to get selfies with, then please don’t do the exercise.  What will happen is that the opportunities to connect with people that were present all along will start to come into focus and become visible to you. Your goal is to contribute something to them that would be valuable to them. If you contribute to a relationship in a meaningful way, You can get several things coming back to you that could be valuable. You might gain a friendship You might get advice You might introductions to other amazing people The relationship might elevate your credibility or visibility. You might gain access to opportunities that you might not have otherwise have found.  Now here’s the magic. The more famous the person, the more difficult it will be to develop a relationship with them. But famous people typically have an inner circle of people that they have a deep relationships with. Sometimes, it’s easier to connect with someone in their inner circle. They know all the same people, and they’re more accessible than the person who has a big brand. If you develop a relationship with someone in their inner circle, it might be just as good as developing a relationship with the brand in terms of all the benefits that flow back to you. Once you have a relationship with someone in the inner circle it could ultimately result in a relationship with the big brand. If it doesn’t, that’s perfectly fine. Your goal is to develop quality relationships with quality people. 

On today's show I'm answering questions on capital raising because it's not easy to raise funds if you've never done it. 

Today's talk was recorded live in Lancaster Pennsylvania. We're talking about the laws of supply and demand. 

Today we're talking about the Inflation Deflator.  The rate of inflation in the US, Canada, Europe and much of the industrialized world is reported by each respective central government. These statistics follow a methodology that is publicized, but highly complex and rather difficult to understand. The measure of price inflation is the consumer price index. In the good old days, the statisticians followed a simple process of comparing the price of a basket of goods over time.  Over the years, governments have made small tweaks to the inflation adjustment.  We’re being told today that inflation is very low, in fact worryingly low. Governments in Europe, the US and Canada have set a 2% target for inflation. But I’m not sure that governments are being fully truthful with the numbers they’re reporting. I’ll give you an example. Most educated people would agree that there is a link between the price of energy and the cost of goods. From December 1 until today, the price of oil has gone up 39% in the past 5 months. Shockingly, the US Bureau of Labor and Statistics reported that inflation in Q1 was a stunning 0.9%. This past week, I paid $6 for a bunch of celery. Yes, we are in the middle of spring. This is not the time to be harvesting celery. So it’s being shipped from a long way away. Much of our produce during these months comes from Mexico and South America.  So the price of energy is a significant component of much of what we consume. So how is it that items like celery can cost $6 and yet the inflation index is running at 0.9%. It turns out there are numerous adjustments that the government applies. The first is the so-called seasonal adjustment. If prices are expected to fluctuate with the seasons, then those seasonal fluctuations are removed from the inflation number.  Since many government costs like social security, hourly wages of government workers are tied to the rate of inflation, a lower reported rate of inflation means the government saves a ton of money The measurement of gross domestic product is based on adding up all the economic activity in the economy and comparing it to the previous period. If the number is higher, then the economy is said to have grown. But in the presence of inflation, we would need to subtract the rate of inflation from the measurement of GDP. Otherwise we would have a false GDP measurement. So we take the nominal GDP measurement, subtract inflation, and we get the real GDP measurement. But if the inflation is understated, then the real GDP is overstated. Governments like to report economic growth. It’s one of the measures that they use to show the voting population how great a job they’re doing.   There are several more adjustments applied by the statisticians in addition to the seasonal effects. The second is something called substitution. This is based on the concept that if the price of a Lexus goes up, consumers will switch to a cheaper Toyota. The third is the concept of imputation. This is where there is no actual economic activity. So the Bureau of Labor and Statistics assigns a value to the contribution to the economy, even though no money changed hands. The largest and most questionable of these measures is the concept of imputed rent. If you own your own home and do not rent, the government adds in the value of the rent that you should have paid if you were renting. The fourth sleight of hand is in fact weighting. This is where they determine how much of the CPI should be attributed to each part of the household expenditures. Today, healthcare makes up about 8% of the consumer price index. But healthcare actually makes up closer to 18% of the US economy. The final and most outrageous adjustment is hedonics. These are the arbitrary price adjustments the government make to suit their rationale. 

Today’s episode is another AMA episode. That is ask me anything.   Dominic asks While I am new into real estate investing, I do have prior business experience. I am primarily interested in passive investing, for now, with a main interest being multifamily projects. With that in mind, your podcast “Money without a clue” really struck a chord with me. I have been listening to fundraising conference calls, reviewing the operating agreements, and so forth. I go through my due diligence checklist and my personal investment criteria. If things look promising, I ask questions to clarify any outstanding issues. I am new, so this process takes me a few hours, and ideally I like to sleep on it before I wire $100k. But what do you do when there are so many gamblers at the table who are apparently not doing any due diligence? Much like the lady you mentioned in your podcast. It seems that many deals that I’m seeing are subscribed before the conference call is held. On the basis of a few lines of information and no specifics. At any rate, I thought I would reach out and ask your take on this. Perhaps the same question has occurred to other listeners. Dominic, thank you for an excellent question.  It is true that there is a lot of money sitting on the sidelines these days. That money often gets deployed quickly when a good opportunity comes along. What you will probably discover is that the people who move quickly on opportunities like the one you described are not in fact gamblers, although there could always be a few hiding in their midst. I suspect that what you are seeing are people who have made repeat investments with the same deal sponsors.  I know from my own inner circle of investors that once we have returned capital to investors several times, they get to know us. They understand how we underwrite our projects. They have seen our legal agreements before and have completed due diligence on us as a team.  I know that if I’m looking to raise money quickly, I’m going to call people who have invested with us in the past. I’m going to see if there is a fit between our near term requirements and the funds they have available. It’s pretty common for me to raise funds in a couple of days in that type of situation.  But if I’m working with a new investor, it could take much longer. When I say new, I don’t mean that they’re necessarily a rookie, they’re just new to us. They haven’t invested with us before. In that situation, I will suggest that the investor put in the minimum investment, or in some cases I’ll suggest an amount that is even below the minimum investment, simply to start the relationship building process. I consider an investment of this type to be a get acquainted round of investment. Even with a large investor I often suggest a small initial investment to get acquainted with one another. I as a sponsor will have qualified the investor on the first engagement and the process for making subsequent investments is much faster. Both the investor and the sponsor of the project know what to expect.  If you’re having trouble getting into a deal, my suggestion is that you speak with sponsors who look like they might be a good fit for you. They may not have an open opportunity right at this moment. Ask to see their last representative deal and ask to go through a partial due diligence with them so that you could be ready for an upcoming project when it becomes available. You will have qualified them, and they will have qualified you. You can do all the reference checks you need to in the un-rushed comfort of a no-deal situation. 

The book of the month this month is "The Miracle Morning” by Hal Elrod.  Hal is a human enigma. He’s the cat with 9 lives. When he was 20 years old, he barely survived a car crash that should have left him crippled for life, and with permanent brain damage. After six minutes with no pulse, he was brought back to life, evacuated by helicopter to the hospital. After six days in a coma he awoke to his new reality in hospital. He would be crippled for life. Instead, he made a decision to control his emotional state. From that launch pad, he was able to reprogram his life narrative and physically, mentally, emotionally, and financially put his life back together.  So much of life’s success has nothing to do with what actually happens to us. Our perception of what it means is completely of our own creation. Hal is living proof of that.  We are all born with many things in common. One of them is the innate desire to grow, to improve our lives and ourselves.  Hal figured out while he was lying in the hospital bed staring at the ceiling, that he alone could control his mental state, not his circumstance. He knew that he had a steep setback to overcome. If he was going to truly overcome his predicament, it would take an extraordinary series of steps. One simple change was unlikely to be enough to have a measurable impact. So he made a decision to combine the best practices of several practices into a single intense explosion of activity to start his day.  His doctors thought he was delusional. He was not supposed to be able to walk again. Only weeks after his accident, he started taking the steps that would ultimately regain full physical ability.  Years later after writing the book, Hal suffered another major setback. He recently was diagnosed with a life threatening form of cancer and only given a few weeks to live. Here again, Hal dug deep into his archive of knowledge about how to control his mental state. He combined a healthy lifestyle, the cocktail of drugs the oncology threw at him, and the practices of the Miracle Morning. Hal should not be alive today.  At one point in his career, Hal faced near financial ruin. Strangely, he found that experience more difficult and more isolating than his real near death experiences. There is really something to managing your emotional state.  Hal made the decision not to focus on loss, on the bad things. He decided to focus 100% on making the best of what he had. He could not change the past. He could only move forward, and he dedicated his life to fulfilling his potential. The book is based on the core principles. You are just as worthy, deserving and capable of creating and sustaining health, wealth, happiness, love and success in your life as anybody else on earth In order for you to stop settling for less than you deserve, you must dedicate time each day to becoming the person you need to be, one who is qualified and capable of consistently attracting, creating and sustaining the levels of success you want. How you wake up each day and your morning routine dramatically affects your levels of success in every single area of your life.  Simply by changing the way you wake up in the morning you can transform any area of your life faster than you thought possible.