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Real Estate Espresso

Author: Victor Menasce

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Your morning shot of what's new in the world of real estate investing. Daily real estate investment outlook from investor, syndicator, developer and author Victor Menasce. Weekday shows are 5 minutes of high energy, high impact awesomeness. The weekend edition consists of interview with notable guests including Robert Kiyosaki, Robert Helms, Chris Martenson, George Ross, Ed Griffin, Dr. Doug Duncan, and many more.
401 Episodes
Negotiating With Your Contractor
On today’s show we’re talking about how to negotiate with your general contractor. Often times, when a project is designed by an architect there are design tradeoffs that seem perfectly reasonable at the time. The design process consists of a complex puzzle of conflicting constraints of function, aesthetic, zoning constraints, building code, and cost. At the end of that process you get a few hundred pages of detailed drawings and specifications.The General Contractor will take the drawings send them out for bid to multiple subcontractors and get multiple bids for each sub trade. When the results come back, how should you as the project owner respond to the General Contractor?Most of the time the General Contractor will provide you with summary data for each of the major divisions of work. You will get a number for site work, another one for framing. You will have a bid for electrical, for plumbing and so on. This will probably consist of about 25 line items. So the question is, how do you decide if any of the numbers are acceptable? Even if the summary numbers match your budget, you may still have a problem. If the numbers are too high relative to your budget, you definitely have a problem.So how do you resolve it? You could try and negotiate with the General Contractor. But in my estimation, that kind of arm twisting is a pretty blunt instrument. You may get a little bit of savings but not much. In my experience the problems in most construction budgets are the result of mismatches in assumptions. In some cases, design decisions have unintended consequences that if they were fully understood at design time, would never have been made.We were recently reviewing a construction budget for a project and were shocked to see $225,000 in expenses for outdoor electrical work on the site. Only by digging deeper, we were able to determine that the electrician had specified 25,000 linear feet of 1” conduit on a site that measures 300 feet by 800 feet. Where on earth could you even begin to bury that much conduit on such a small site?By digging into the details we were able to determine that by using building mounted lighting, we could eliminate the lamp posts, and by using optical fibre that is specified for outdoor underground placement, we could eliminate the need for the 1” conduit almost entirely. This whole process is called value engineering. By systematically digging into the details of the specifications with the General Contractor, and the architecture team you can create major savings in a project. I’ll give you another example. We had completed the site plan and everything was working. But when we looked at the routing of the utilities, we had far more pipe circulating around the property than necessary. This was because the spacing between the buildings was too narrow to allow the utilities to be routed between buildings. They had to be routed around the buildings at much higher cost. By making a minor change to the site plan, we were able to move the buildings apart and save a bunch of money on the underground utilities. We also noted that when the buildings were close together, we had to use fire rated windows on the walls that were close to the neighbouring buildings. Fire rated windows cost about double the price of regular windows. The end user can’t tell the difference. The windows look the same. By moving the buildings apart we were also able to save 50% of the cost of the windows. Each one of these savings are not huge by themselves. In every case, we were able to save cost without sacrificing quality or the value of the end product. The changes would be completely invisible to the end user of the property. After you’ve completed that exercise, and saved as much as you can save on the scope of work, then it's time to negotiate with the contractor and save a few pennies more.
Two Minus One Equals Three
On today’s show we are talking about the most insane statements to come from economists in recent memory. I’m acutely aware as I’m sure many of our listeners are, of the unsustainable levels of government debt in the US, Canada, the UK, France, Switzerland, Italy. I could go on. The justification for the debt is that as long as the interest rates are lower than the level of real economic growth, that is growth of real GDP, the debt is sustainable. But folks here is where the argument falls apart. We know that our population is aging. That’s not a secret. We also know that as people age, their spending patterns change. They spend less. They also borrow less. So the argument that economic growth will continue at the same 2.1% rate in the coming years in the western economies makes no sense. We saw in Japan that economic activity stagnated as soon as the working population peaked as a result of the aging process. Japan’s lost decade happened as soon as the domestic spending shrank. In other countries in the west We have a population that as it retires switches from actively contributing to economic output to one that is strictly consuming from society. They spend less. They pay less in taxes. They demand more from the society in terms of social security and health care. The deficit spending at the federal level gets the most attention. But the federal government has the tool to print money at will and inflate its way out of the problem by effectively devaluing the currency. That’s a way of taxing the population without them really noticing.  The government racked up a new debt of $2750 for every man, woman and child in America this year. That comes to $7,100 per household. That’s in addition to the already existing debt of 22T dollars. That debt comes to $67,000 for every man woman and child in the country, or a total of $173,000 per household. Nobody seems to be talking about this. This is a train wreck in the making. Here’s what my friend Peter Schiff had to say about the 22T in debt. He says,  "This is just a funded portion of the debt. This is where the US government sells a bond and somebody owns that bond. It doesn't include the 70T in unfunded liabilities like what the government owes for Social Security, or guaranteed bank deposits, or mortgages, or student loans, or all that nonsense. That's not there. Those are contingent liabilities. They're just as real. They're not even part of the national debt calculation."I may not be an economist, but I can perform pretty basic arithmetic. The economy will not grow faster than interest rates. A country will never grow its way out of a deficit. Remember, interest rates reflect a connection to the rate of inflation and also carry a risk premium. When countries carry irresponsible levels of debt, the risk of default clearly goes up. It’s not the Federal reserve who will establish the risk premium, it’s the open market. When China decides it no longer wants to hold 25% of the global float of US treasury bills, who will step in to buy them? When Saudi Arabia decides it no longer wants to hold dollars so much, who will step in to buy them? We see countries in South America with much higher interest rates than the US. Why? Because they’re at higher risk of default. When investor sentiment shifts and global investors don’t want to hold US dollars any more, then the US dollar will carry a risk premium, the same as Argentina.

Two Minus One Equals Three


AMA - Should I Be Hosting Free Events?
My friend Michael from Pennsylvania has started a Real Estate Meetup, and in a short time has attracted a sizeable high quality audience. His question is “What is the benefit of hosting a free event versus a paid event?”Michael, this is a great question. There are two main ideas that I want to get across in answering this question. We are familiar with the concept that you go to the marketplace and buy something, you are the customer, and the thing that you bought is the product. If you buy a cake, the cake is the product. If you buy Spanish lessons, the Spanish lessons are the product. We are also familiar with things that are offered for free in the marketplace. If you’ve ever used Facebook, or watched a YouTube video, you’re comfortable with the notion that you are getting something for free. In exchange for that, you’re allowing the owner of that platform to present a bunch of different advertisements. In that instance, while you are the consumer of the content, you are no longer the customer. You are the product. You are being used. The question is when does it cross a line and you start to become abused. In some circles this is called an “ethical bribe”. The advertiser offers you a free white paper in exchange for your email address. You know that you are going to receive more emails in the future with offers for some kind of product sales. You might want the free white paper and judge that the value you will get from the free report is worth the hassle of getting an occasional email. You are being used, and hopefully not going to be abused.  The second idea I want to leave you with is that of culture. When you create a culture of education, of community, of abundance and you stick to that, then you weed out the takers. You know who those people are. They’re only in it for themselves. They are the ones who come in to your house and steal the bar of soap, who take an extra can of soda for the road from the buffet at the end of the meeting. They’re the ones who walk around and put their business card on every chair without asking the host of the event if its OK to do that. Sometimes the taker is the host of the event itself. We’ve all been to those events. They’re the ones who will lavish compliments upon you while they’re trying to sell you something, and then not pay any attention to you after they’ve made the sale. They’re off hunting for their next victim. With a paid event, you tend to weed out the takers from the audience. Those who are willing to make an investment of cash, are willing to pay for value. They’re not just in it for something free.
World Economic Forum Global Risk Report
On today’s show we’re talking about one of the key take-aways from the World Economic Forum in Davos Switzerland only a few weeks ago. A few weeks ago the Forum published their annual Global Risks Report. This 114 page document was developed in partnership by the Zurich Insurance Group and Marsh and McLennan Companies.Insurance companies make it their business to understand risk. But before we can dive into the content of the report, it’s important to actually define what risk means. Risk, by definition is something that is not in your plan. If you’ve planned for 4 weeks of weather delay in your project, and you only experience 3 weeks of weather delay, then weather delays are not a risk because they’ve been already accounted for in your plan. Risks are anything outside your plan. When we talk about risk, we divide the risk into two components, likelihood and impact. The likelihood is the likelihood of the risk coming true. The impact is the actual impact of the risk if it comes true. The purpose of talking about risks is to ensure you have contingency plans for the risks that represent a threat to your business.The top 3 risks in terms of likelihood are all environmental. This encompasses extreme weather events, earthquakes and the like. It’s amazing to me how in this day and age in 2019 the number of commercial property owners that are still under-insured in high risk areas. Taking the time to read and understand your insurance policies to understand their limitations. Insurance policies can be incredibly complex to understand. There can be language in one section that is in conflict and superseded by opposing language in another addendum. When a claim is made under a policy, the claims department will send the policy off to the legal department for review. That process makes the insurance company your legal adversary at that point in time. Their job is to pay as little as possible under the policy. The two highest likelihood man made risks are theft, data theft, and cyber attacks. Here too, this is an area where there are simple procedural safeguards that you can employ which will protect your business. This past week I was speaking with the owner of a jewelry business who has experienced employee theft on multiple occassions. We’re talking theft in the hundreds of thousands of dollars. Cybertheft is a major issue that continues to make headlines. Data breaches have exposed personal data of billions of people. The largest was in India, where the government ID database, Aadhaar, reportedly suffered multiple breaches that potentially compromised the records of all 1.1 billion registered citizens. It was reported in January that criminals were selling access to the database at a rate of 500 rupees for 10 minutes, while in March a leak at a state-owned utility company allowed anyone to download names and ID numbers.It amazes me that in that environment, people still send wire transfer instructions via email without an old fashioned safety protocol to doublecheck the details by phone. If your investor sends a wire transfer and the email is hacked and the money ends up in the wrong account, you may be liable for hundreds of thousands of irrecoverable stolen funds.  
Bonus Episode - Amazon Quits NYC Expansion
This is a special bonus episode about the recent Amazon announcement that they were pulling out of the NY second headquarters. I predicted that Amazon might take this step despite the public announcement back in November. The major political objection was the tax incentives that were negotiated with Amazon as part of the overall decision to locate in the NY area. On the surface, you could spin the story to say that the government was caving to the interests of big business and handing the richest man in the world a check for $2.5B dollars. But there is another narrative that is equally valid. Before the Amazon announcement, there were no 25,000 jobs and none of those people were paying federal and NY state income tax and NYC property tax. After the investment of $2.5B by Amazon, getting a $2.5B tax break, the 25,000 employees would pay an estimated $875M a year in taxes each year, every year. When the 2.5B in initial tax breaks are exhausted, then Amazon corporate becomes an even larger contributor to the tax base. It’s pretty simple math. Before Amazon there was no tax income to the government. After Amazon arrives in NY there would have been $875,000 a year in new tax income, and going up from there. The handful of very vocal politicians who opposed Amazon coming to town are not business people. How do I know this? Because they cannot do the most basic of grade school arithmetic. Before Amazon no $875 million in tax. After, $875 million in tax. It’s pretty simple math. The most vocal opponent has been senator Mike Gianaris. In this case he decided that jobs coming to his area was a bad idea. He didn’t want more investment coming into the area. He opposed gentrification. It’s kind of like the person who is in a fight with someone else. But you drink the poison hoping the other person gets sick. The other nuance to this story is the boom and bust cycle in the area resulting from the boom that never happened. Over $500M of Real estate changed hands since the November announcement. Some of that may have been under contract prior to the Amazon announcement. The biggest loser is the owner of the Citigroup tower who now needs to find a tenant for close to 1M square feet of space that Citicorp is vacating in 2020. The big winners will likely be Virginia, Nashville, Austin and Dallas. 
Leasing Power From The Sun?
On today’s show we’re examining a potential source of revenue for your income property that has the benefit of a little extra cash flow, plus being environmentally green. The economics of solar power have been somewhat marginal over the past several decades. That’s why governments have stepped in and offered generous incentives to subsidize the cost of a solar installation. That subsidy usually came in the form of higher purchase prices for electricity contributed to the electrical grid from a solar farm. These projects would not have been economically viable without the subsidy. But in recent years, the cost of electrical panels have come down to nearly $1.00 per watt of produced capacity. The total installed cost is about double that amount. Most of the subsidies have disappeared. The payback on a solar project is anywhere from 10 years to 20 years depending on the local cost of electricity and the number of effective daylight producing hours. The high capital cost of these projects have made them unattractive due to the long payback. Two alternatives are the solar lease or the power purchase agreement. Solar Leases have been around for years now, but in recent years they mostly come with performance guarantees, which can make the difference between them and power purchase agreements pretty small. On today’s show I will explain the differences, but in practice, none of this should matter and whether it’s a lease or PPA probably won’t have a huge impact on your decision making. You might be thinking, “Wait, you mean you can lease a solar system?”The answer is yes.

Leasing Power From The Sun?


What is love?
Welcome to the Valentines Day edition of The Real Estate Espresso Podcast. I’m celebrating Valentines Day with my wife on the beach in Mexico. We take time each year to recharge. Sometimes taking holidays is easier than others. We have both been working really hard over the past several months and even into our holiday, there hasn’t been a day of true disconnect or relaxation for both of us. Project timelines spanning several months or years can mean that a holiday in the middle of a critical time of a project can be problematic. Whether it’s making sure the podcast is loaded and ready for the next day, sending a document to a lender, or dealing with an issue at the office, it seems there is always something requiring attention.Through the process, I’ve learned that life is a journey. The global independence that the internet affords makes it possible for me to produce shows from my home office, from a hotel room anywhere in the world, or sitting by the beach in the South of France. You might have heard the birds chirping in the background over the past week.  So on this Valentines day, I’m asking the simple question “what is love?” Is it a thing?The dictionary isn’t quite sure what it is. It’s defined both as a noun and a verb. As a noun, it’s described as an intense feeling of affection. It is also defined as a verb, as in the sentence “Do you love me?” Or “I’d love a cup of Espresso.” But even when you describe love as a feeling, the feeling doesn’t just magically happen on its own. It requires some kind of action for the feeling to result. So in that context, I believe love is really a verb. By describing love as a verb, it’s clear that its an action word. Love of any kind requires action.  Love doesn’t just happen. It’s the result of a choice, a choice to love. All persistent choices require commitment, conviction, tenacity, and integrity. Long term decisions require long term commitments. All too often people make decisions based on transient emotional states. I would not describe myself as someone who is hungry. But I was hungry last Tuesday around 5PM. That was a temporary state. I made a short term decision to eat something to deal with the temporary state. I didn’t make any life altering decisions because I was hungry at that moment in time. Loving successfully requires commitment to loving. It requires energy. The feeling of Love, now we’re talking about the noun is one of those basic human needs like Oxygen, water and food. Without food you can starve. Without oxygen you can suffocate. Without love, you will die. The short term replacements for love like lust are just not the same. They’re hollow and empty. Love can’t persist without commitment.

What is love?


Who Will Choose To Live Here?
On today’s episode we are asking a very simple but important question. It’s a question that I believe rarely gets asked when considering a property. The question is, “Who would choose to live in this property and are they someone who I want to have as a client?” If I improve the property, will that change change enough about the property to attract my ideal client?If the property is a single family home on a nice street with mature trees and all the surrounding properties are well kept with new cars in the driveway, who will choose to live here?If the property is a 1960’s 4-Plex and the paint on the trim is peeling and there are two broken cars in the driveway that clearly haven’t moved in a long time, who will choose to live here? Is that client my ideal target client? If the property is a 2 BR condo in a luxury building with amazing amenities and gorgeous views of the Rocky Mountains and is a short walking distance to Main Street shops and restaurants, who will be my target client?You don’t need to choose a property where only you would choose to live. That might rule out too many good opportunities. But you do need to identify the client who will choose to live here and insert yourself into the narrative of their life, even for a few minutes. When you do that, it’s time to ask a few important questions. If I choose to live here, is it perfect for my lifestyle?Can I afford it?Can I see myself here for a long time?When I invite my friends and family to visit, would they be proud of me for living here? These are very simple but powerful questions that may give you additional insight into the property that you are about to buy. This is what in marketing is often called the customer avatar. It’s a specific individual who exists in real life. They are your ideal client. You know them well. You know what they like. You know their values. 
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