The Real Estate Espresso Podcast

My wife is amazing. Apart from that, she's a therapist, a marriage counsellor, a frequent guest on radio and TV on all things personal. Today's show is about managing holiday stress and establishing the mindset to have a great holiday.  Have a blessed day.

Today’s episode is focused on four items in the investment world that have been either naughty or nice. The naughty or nice list is pretty long this year, and even a small fraction would not fit in your morning espresso cup. So we’re only going to talk about 4 today. Top of the nice list.  The increases in real estate prices have been nice indeed. I’m not that keen to buy at those prices, but hey, selling at high prices is very acceptable. We had several asset sales that helped strengthen the cash line on the balance sheet. Selling assets is always a hard decision. You put in all the work and the future appreciation is cut short in exchange for taking the money now. The market has peaked in many areas, and despite this, there is still tons of money on the sidelines in search of opportunities.  I’m going to declare anything real as nice and anything that’s abstracted from real as naughty. That’s a timeless fundamental, that frankly was forgotten by many in 2018. In the second half of the year, more and more people became face to face with this fundamental either by choice, or whether if was forced upon them by the marketplace. There were a few particularly bad offenders, most of them fuelled by hype rather than substance.  2018 was the Year of the crypto fraud. There were 1,227 Initial coin offerings in 2018, having raised over $7.5B dollars. Last year Initial coin offerings raised $5B largely using crowdfunding. In 2018 more than 1,000 coins failed outright. The irrational exuberance of the stock market was definitely naughty this year. It caught some institutional investors in its cross-hairs. The Swiss central bank was one of the king pins. Rounding out the list, the strong economy has been pretty nice. It's meant stronger than expected rents, a high occupancies acros the portfolio.

Jeff Schechter runs a large scale turnkey investment business in Indianapolis. He defies some of the conventional "wisdom" regarding the benefits of multi-family over single family investing. In the dynamics of his market, his approach is the most successful and the lowest risk. There is no one way to invest in real estate. Have a listen to this conversation. You'll probably learn something. I did.

Keith Baker is the host of the Private Lending Podcast. He's based in Houston Texas where he invests, lends, and works with multiple borrowers to redevelop properties. Private lending is a semi-passive business that relies upon strong systems for loan origination, and loan servicing. If done well, private lending can leverage money to generate healthy returns while keeping the active aspect of the business down to a manageable level.

On today’s show we’re talking about a new report that was issued in the past week by Spectrum Location Solutions that examined the departure of more than 13,000 companies from California over the past decade. Many real estate investors look at data from U-haul to see where people are moving. But that only talks about population migration. People who use U-Haul are not the captains of industry. Of far greater importance is the migration of capital, and head offices. After all, where the head office is located ultimately determines which jurisdiction will get the bulk of the tax revenue. During the study period, $76.7 billion in capital funds were diverted out of California along with 275,000 jobs – and companies acquired at least 133 million sq. ft. elsewhere – all of which are greatly understated because such information often went unreported.

Today we're talking about the latest interest rate increase announced by the US federal reserve. Fed chairman Jerome Powell announced a quarter point increase in the benchmark rate. This is despite the fact that the economic data could just have easily supported no rate increase. The forward looking guidance is about as murky as ever. They are pointing toward 2 rate increases in 2019 versus a previous forecast of 3 increases in 2019. It is widely assumed that this interest rate increase means that all interest rates are going up. But that is not necessarily the case. As real estate investors, the cost of capital is perhaps our single largest expense. Some loans are indexed to the Fed short term rate. Others are indexed to the six month LIBOR rate. Most importantly, long term loans are indexed to the 10 year US treasury bill. The rate for the 10 year treasury bill has actually fallen since September.

On today’s show we are talking about the use of the 911 database. When a new property is developed, a municipal address is registered with the city or the county. Usually, that address is generated when the building permit is issued. Somehow, through a magical process this information trickles through layers of government bureaucracy and eventually makes its way into the 911 database. The 911 database serves a critical function for public safety. It is used by emergency first responders to locate people in distress when they dial 911 from any terrestrial phone connection. Today, the legacy phone network is a relic that maintained a geographic relationship between a phone number and a physical location. Much of the phone network’s traffic is now being carried over the Internet which has no such physical constraints. You can relocate an Internet address to almost anywhere in the world. In North America this year 80% of calls to 911 were made on cellular phones. Determining physical location with cell phones is done using radio triangulation from multiple radio towers and GPS time stamps. Nevertheless, the legacy carriers use the 911 database as part of the foundation of their physical network planning. We have a project nearing completion where the physical address has been in existence for over a year. Somehow, the entry in the 911 database has not been propagated to where it needs to be. The carrier is not willing to provision an optical fiber data connection without it. Even though it’s impossible to use an optical fiber to make a 911 call, the carrier requires it to provision the service. It has taken us months of conversations with the carrier to try and resolve the issue. We have pushed from all sides. We have talked to the city, to the office that issued the building permit, to the carrier. Nobody can seem to take ownership of solving the problem.

We can all agree that not everything in life is predictable. Life is full of surprises, some of the pleasant, and some of them not. It’s been said that a confused mind doesn’t buy. That’s particularly true in the world of investing. Investors seek clarity. Things that are too complicated, have too many variables, or have large unknowns are off the table. Investors are a special breed. Professional investors are relying upon their money working for them. Professional investors truly attempt to quantify what their money will do. Investors hate uncertainty. Anywhere you see uncertainty, you see falling prices. What will happen in the UK with Brexit is uncertain. Businesses don’t know if they will fall under UK rules, or European Union rules. They don’t know whether they will need to relocate in order to do business in Europe. They don’t know whether the movement of goods between Ireland and Northern Ireland will require customs and excise control. The movement of people and goods in Ireland was free, and now it could become a divided island once more. This is reflected in the falling price of the Pound sterling. It’s reflected in the falling price of real estate in London. There are so many examples. How can you bring certainty, or at least a boundary to the uncertainty?

Another offshoot from David’s question on crowdfunding is whether the relationship based approach is going to be replaced with the faceless characteristics of the public equity markets? Are we shifting from a country club style investing where relationship is a key factor to something closer to the stock market? How should investors and fundraisers adapt in this rapidly changing technology landscapes? It’s a great question. There’s nothing intrinsic about real estate that requires a deeper relationship in order to invest. What we’re really talking about is the difference between private placement investing versus investing in the public markets. There is a fundamental difference between a public and a private offering. In a public offering, you have analysts at the major brokerage houses who perform due diligence on the financial analysis. But most investors don’t even read the analysis. They look at the consensus of a group of analysts who say things like “Buy” or "Sell", or "Hold". Sometimes they say "Overweight", or "Underweight". What on earth does that mean? There is a subtle but important difference between public offerings and private offerings. Public offerings are primarily targeted at unsophisticated investors. The additional accounting oversight, and audited financials simply tell you that the accounting is accurate. The emphasis is on the sponsors of the venture. Are they keeping the books accurately, and are they managing the funds in a manner that complies with the law. That covers one of the elements of due diligence. But what gets left behind are two of the most important aspects of due diligence. 1) Is the plan a good plan? Does it meet your criteria? What is the structure of the investment and are the assets leveraged safely with the right terms? 2) Will the market actually deliver the results that are predicted in the financial forecast? We used the restaurant analogy last week. What we’re talking about is the difference between eating at McDonalds versus the exclusive restaurant with 10 tables and a 3 month waiting list for reservations. You can’t organically scale the exclusive restaurant into a business like McDonalds. They’re fundamentally different businesses.

Eddie Lorin has been investing in workforce housing for most of his career and has developed close to 40,000 units so far. One of the newest innovations in the tax code, creates significant incentive for investing in areas that have been neglected. Eddie gives a really high quality education on opportunity zones and the different classifications of affordable housing. I'm going to listen to this interview more than once.