The Real Estate Espresso Podcast

On today’s show we’re examining the price volatility of a critical building material and the impact that it can have on the cost of both construction and renovation projects.  In March of 2018, the White House imposed tariffs on Canadian softwood lumber. Overnight, prices jumped nearly 25%-30%. The impact on the construction industry was felt immediately.  Softwood lumber makes up about 16% of the cost of new home construction historically. So the overall impact of that price increase was about 4% on the total cost of building a new home. It’s a significant increase in less than 30 days.  After that, regular market forces continued to play a role throughout the year. There is an annual pricing cycle that is tied to demand. Demand for construction materials is lower in the 4th quarter and the 1st quarter of each year. Every year, prices fall in November and December, and they pick up again in the second quarter when construction activity heats up the next spring.  Today, prices for softwood lumber are at their lowest level in more than a year. The assertion that low pricing from Canada was the reason why softwood prices were so low is, in retrospect a bit of a red herring. The real story starts back in the 1980’s, when there were millions of acres of timber land planted in the southeastern US. The managed forests were planted as investments by companies that promoted forestry as a great long term investment. So much forest was planted at once, that many of these trees are now of harvesting age at the same time. The surplus has crushed timber prices in Mississippi, Alabama and several other states in the southeast. At the depths of the 1980s farm crisis, when prices for agricultural commodities plunged, the Reagan administration launched the Conservation Reserve Program. Starting in 1986, it promised farmers annual payments of about $30 to $50 for each acre they planted with trees or grasses. By 1994, more than 2.2 million acres of farmland in the South had been converted to pine forest. Other federal programs added about 2.5 million acres more to the supply. It has been a big loser for some financial investors, among them the country’s largest pension fund. Calpers spent more than $2 billion on Southern timberland, and harvested trees at depressed prices to pay interest on money borrowed to buy. Calpers sold much of its land this summer at a loss. The 2008 crisis worsened the situation. We went through years with little new home construction in many markets. That depressed demand prompted many owners to postpone harvests. Numerous sawmills closed. Even with new demand from the housing recovery, there remains about 25 years worth of supply in the Southeast. Adjusted for inflation, the price of Southern pine is down about 45% since 2007, Saw timber used for making lumber, is at a 50-year low. To put this in perspective, today tree growers are getting about $20 per ton of wood headed for the mill. The finished product you buy at Home Depot in the form of kiln dried 2x4’s is being sold at $2.69 per 8’ board. That comes to a price of $489 per ton. That’s a huge markup. Most land owners are stuck with whatever the nearest mill is paying. Hauling logs cross-country chasing better prices isn’t an option. Waiting for better prices has its own risks, because after a certain age, trees become more susceptible to disease.  The constraint in lumber supply for construction is not the supply of raw material. The saw mills are the bottleneck in the supply chain. Georgia Pacific and Canfor have both announced billions of dollars of new saw mills and plant expansions.  If you’re looking to undertake a new construction project, it definitely pays to shop around. It’s clear that the lumber industry is filled with inefficiencies. It also pays to shop at the right time of year. You can definitely get some good deals right now

Mark Roscioli is the CEO of 17 Mile, LLC. His company specializes in buying and selling assets that have cellular towers as part of their makeup. This is one of the most fascinating ways to invest in real estate. It's highly specialized, but also one of the few truly passive businesses in the world. This brief conversation with expand your mind in ways you're not expecting.

Nick got his start in development with student housing. His very first project generated enough cash flow to enable him to transition from an employment situation to full-time investor in less than one year. Nick's story is not typical, but is a powerful example of what is possible with focus and drive.  You can connect with Nick directly at buildinginvestments.ca.

On today’s show we are talking about how a more expensive product can often be the least expensive solution. There’s so many examples when people try to save money they actually don’t succeed in the end. This is one of those counterintuitive situation.  On today’s show I’m going to challenge some loosely help beliefs. When I challenge loosely held assumptions, you’re probably going to say, “Wow I didn’t know that”. Most people feel energized and enlightened by challenging a loosely held belief. But if I challenge a closely held belief, the reaction is likely to be the opposite. Most will flatly reject a challenge to a closely held belief. It’s too threatening to have some core ideas turned upside down.  Today’s episode starts with a story about the fireplace in my parent’s home. In my parents house when I was growing up, we had a wood burning fireplace I love the smell of the burning spoke. I loved the radiant heat sitting only a few feet from the fireplace and I love opening the steel curtain and pokey at the fire with the steel poker. From 1985 on words, it was almost impossible to find a newly built home that had a wood burning fireplace. They were all natural gas fireplace. It seems strange to me that a more expensive product, that is the gas fireplace would win out over a wood fireplace which in many ways is more desirable.  You would think that any home builder who is building a new home would be looking to save money. If they are going to provide a fireplace as a feature, the least expensive solution that meets that requirement is what I would expect most volume home builders to supply. Why would they use a more expensive gas fireplace. It needs a gas supply, a controller, decorative fake ceramic logs, and of course a fire box. A wood fireplace is just a metal box with a brick liner. It’s gotta be less expensive. All of that is true. But here’s the problem. When you have a wood burning fireplace, you need to build an entire chimney. Whereas the a natural gas fireplace can be direct vented to the exterior. There is no chimney required. When you take into account the additional cost of the chimney, it turns out that the gas fireplace start to look less expensive overall, even though the fireplace insert is much more expensive. Here’s another one. The conventional heat of an apartment is done with a furnace. The cooling is done with a centralized air conditioner.  There is a lot of framing and ducting required to distribute the heat and cool air from the furnace heat exchanger throughout an apartment.  In recent years, we have started to build using the European style mini-split systems. These are both a heat pump and an air-conditioner in one. The downside to these units traditionally has been that they are not traditional. Some don’t like the look of the panel on the wall. These systems are more expensive than the traditional furnace and air conditioner. But when you take into account the fact that you eliminate all the extra framing and duct work, these systems can in fact be less expensive. Not only that, these systems give you individual temperature control in each room. You don’t need to spend money heating or cooling rooms that you’re not using. So while they’re more expensive, in reality they’re much cheaper.  What do all of these examples have in common? The local optimization of cost gives way to a bigger picture optimization. If you elect a more expensive solution locally, but can eliminate another cost element entirely, the result can be a significant savings. But it requires a change in context. Finding the cheapest material is based linear small thinking. Finding the cheapest solution requires bigger thinking.  As you’re thinking about that, where could you realize huge saving by spending a little more?  

Today’s episode is the story of how you may consider collecting rent each new month.  Rental income is much like the income a grocery store receives from its clients. Client goes to the grocery store and buys fruits and vegetables, maybe some bread and butter. It is recurring income. The customer is hungry on Monday when they go shopping. By Tuesday, they’re hungry again, and again on Wednesday. Each time you go to the grocery, the store does what it can to earn your business. They make sure the fruits and vegetables are in good condition, displayed in an attractive manner, kept from spoiling by being chilled to a lower temperature.  If the bananas look terrible and beat up, you probably won’t buy bananas today.  Imagine if the grocery store experience was conducted the way some landlords collect rent on the first of each month.  The grocery store isn’t entitled to the tenants money. The grocery has to deliver value each and every day to earn your business. If they fail to do so, you will shop elsewhere. What if, you asked yourself, what could I do as a landlord that would allow my tenant to clearly remember the value they’re getting each time they the rent? What if each month’s rent was treated as a new sale. No sense of entitlement. What would be different? 

On today’s show we’re talking about the challenges that governments face in creating rules that are appropriate and fair.  One view of the world is that rules should be uniform. One set of rules for everyone. That way, nobody can claim they were unfairly harmed by a rule that’s the same for everyone. Fairness should be at the core of our legal system.  If you look at what most local governments deal with, overwhelmingly it’s real estate. If you read the city council meeting minutes for virtually any city in North America, you’ll find that the overwhelming majority of the business for city council has to do with land use. There’s the occasional item dealing with parking, business licensing, or keeping pets on leashes. But overwhelmingly, cities deal with real estate. Here’s where it gets tricky. You often get rules created at different levels of government that can be in direct conflict with each other. You can also get rules that are NOT fair to everyone because the circumstances locally on the ground are different. If policy changes are brought into place to cool off the economy, or cool off a real estate market, that could be very appropriate for a city like Vancouver or Toronto.  At the same time when Toronto experienced an 11.5% increase in prices, Calgary’s prices were essentially flat. Applying the same medicine to both markets might not be appropriate. Housing affordability issues in Toronto and Calgary are not the same. A set of rules that limit development in a dense urban situation might not be appropriate in an area of declining population. You may want the opposite to stimulate the growth of jobs and population.  OK. So we get that rules should not be uniform.  You can consider rules to be a set of constraints that are being placed upon you, attempting to limit what you can and cannot do.  Another way to look at government rules, is as a set of incentives. Government in essence is showing you the path to make investments.

We typically think of rent controls being imposed for residential leases. Housing affordability is a real issue. Access to housing is considered by many to be a basic human right. Landlord tenant laws all over North America have been enacted to protect both the rights of landlords and tenants.  The latest twist being pushed in City Council in NYC is a proposal for commercial rent control. This would give small business tenants the right to demand a 10 year lease. Commercial rent control ended in NYC in1963 when a state law mandating it expired. Councilman Ydanis Rodriguez, who is sponsoring the new version of the Small Business Jobs Survival Act, claimed his bill is “not commercial rent control,” adding it “is about immigrant rights … and improving the small business climate in New York City.” The Mayor is opposed to the bill. But Mayor de Blasio suggested a few months ago that the city is considering a “storefront registry” and a “vacancy tax” that would penalize landlords who leave stores empty for lengthy periods.

Customer perceptions about a rental property are formed in the first few seconds of viewing a property. Increasingly, today’s customer looks online before committing to drive to a location and view a model suite. Everyone has walked into an apartment with an old looking front door, entry flooring that testifies to the thousands of footsteps that have worn a path into the finish. The old white appliances, are just yuck. The savvy property owner will make investments that show the potential tenant they are maintaining their property, and keeping the property up to date. That means making surgical investments in keeping a property up to date. That doesn’t have to mean spending a ton of money. Some of the most visible items are not expensive to replace and update.  Curb appeal can be improved by simple things that draw the attention. I like shiny stainless steel mailboxes. They’re a bit more expensive than the plastic composite mailboxes. But wow, they really stand out. They last for decades and they look amazing.  Kitchen counters can be replaced every few years for a few hundred dollars. If you use natural stone, granite has come down dramatically in price in recent years. You can routinely buy granite for $25 per square foot, about 1/3 of what it cost less than a decade ago. These small investments go a long way toward creating a desirable product. 

Today show is about a magical market that doesn't exist in reality. It’s the real estate market in the Town of Springfield. Springfield much like in the TV show The Simpsons is virtually any town, but nowhere at the same time. This imaginary town of Springfield is an amazing town. It is one of the hottest real estate markets in the world. Investors flocked to Springfield from all over the world. There are so many buyers and sellers. The rules in Springfield make it very quick and easy to buy and sell real estate. There is full transparency in the land title system in Springfield. So title insurance isn’t needed. Trades happen in seconds.

On today's show I'm talking with two investors who live in a suburb of Chicago, but on the Indiana side of the border. They're built incredibly strong systems to manage thousands of transactions. These folks have a strong set of core values that enable them to make great decisions.