Real Estate Espresso

I’m currently in Istanbul Turkey for their annual builder expo. This is a massive show with over 10 exhibition halls and they report that more than 52,000 people will attend the expo. I’ll do a separate show later this week specifically on the expo.  On today’s show I’m sharing my observations about Turkey. I have visited several cities in Turkey over the years including Izmir, Istanbul, Anatolia, Kusadasi, and Effesus.    It’s been about 5 years since I was here last and maybe 10 years since I spent any considerable time here. The first time I visited Istanbul I was 12 years old. I’ve seen the city grow up so to speak.  Today, Istanbul is a very modern city. It is also a very populated city with over 15M people.  I’ll have more to report in the coming days about the builder Expo. ------------ Host: Victor Menasce email: podcast@victorjm.com

Today’s show is another example of out of control government spending.   Italy's government said on Tuesday fiscal incentives for home renovations had had a "devastating" impact on public finances over the last four years and were to blame for the expected rise in the country's massive public debt through 2026. The plan offered to pay homeowners 110% of the cost of energy saving renovations. Another project promised to cover 90% of the cost of improving the facade of a building. The government underestimated the scheme's appeal, but also made a number of other errors. With such generous handouts, homeowners had no reason to negotiate with builders over costs. On the contrary, since the rebate exceeded the actual cost, higher costs meant more money was left for the homeowners in their pocket.  This effect was so predictable that you could see it coming from miles away.  Asked why they got their forecasts so wrong, officials involved in the budgetary planning have said they had no precedent to draw on as no one outside Italy had ever offered to refund more than the costs of the renovations. I’m sorry this is just plain stupid.  ------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are talking about how to determine the structure of an investment offering.  We often hear about the so-called 2 & 20 formula that is popular among fund managers. When we say 2 & 20, that refers to a 2% asset management fee measured on the value of the fund, plus a 20% carried interest in the ownership of the fund. For many funds, that 2% fee is an annual fee. Over a 10 year life of a fund, that fee can amount to 20% of the original investment. That means the investors get 80% of the profits in the fund. Naturally, for that formula to work, the fund needs to generate enough returns for the investors to more than make up for the fees being charged by the fund manager. In publicly listed funds that are considered liquid, fund managers sometimes charge a 7% up front fee. Investors can sell at any time after the first year, but clearly they are going to pay a penalty for selling early.  That’s in the world of mutual funds. The fund managers are merely placing money in operating businesses. They perform their due diligence on the investments and they sprinkle their funds across a number of investments. The fund manager doesn’t do any of the heavy lifting associated with running the active businesses.  In the world of real estate investments, sometimes that can be a fund which will invest in several projects.  More often, the investment is in a single asset. It might be an apartment complex or a storage facility or a land development, or an industrial building. This requires active management of the businesses. I sometimes see the same 2 & 20 being applied to single asset investments.  But in truth there is no real industry standard. Whatever structure you can imagine and investors will embrace can work, of course as long as it is compliant with securities regulations. On today’s show we are going to talk through the thought process that goes into determining how to design an investment offering. 

On today’s show we are talking about how to scrutinize a quote for construction. Earlier this week we received a budgetary estimate for a new construction project. Needless to say, the price was high relative to what we were expecting. So now that you have an estimate, how do you dig in and scrutinize where it is off base? This falls into a category called “know your numbers”. That means knowing your numbers at a detailed level for specific line items.  I’m going to take you through a few specific line items, not to get lost in the details of this particular project, but rather to understand the thought process inherent in this kind of work.  ---------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are talking about aluminum wiring in apartment complexes. This was common from the 1960's to the mid 1970's. About 2 million housing units are estimated to still have aluminum wiring. Some insurance companies will decline to insure your building if you have aluminum wiring and those that remain will charge extra. But there are a couple of remedial solutions. ------------- Host: Victor Menasce email: podcast@victorjm.com

Grant Reaves is based in the deep south where he invests in Flex Multi-Tenant Industrial. On today's show we are talking about his strategy for adding value to these types of buildings. To connect with Grant and to learn more, visit Stoic Equity Partners at stoicep.com or email him directly at greaves@stoicep.com

Dan French is based in Austin Texas where he has amassed a portfolio in excess of 17,000 units investing in multi-family apartments throughout the South and Southeast. He divested of the majority in 2019 when it appeared that market was overheated and has been sitting on the sidelines ever since. On today's show we are talking about the market cycle and how being patient has proven to be a virtue. To connect with Dan and to learn more, visit atxacquisitions.com or call him directly at 845-629-1808. --------------- Host: Victor Menasce email: podcast@victorjm.com

Real Estate Investors are gritting their teeth at the moment. The benchmark SOFR remains steady, but the 10 year treasury which is the benchmark for permanent financing has risen sharply in the past week and hit a high of 4.65% yesterday. Many are wondering what is causing the bond yield on the 10 year Treasury to continue to rise. We are also seeing oil prices rising at a time when major parts of the world are experiencing economic slowdown. We also have gold reaching record highs.  The obvious questions are “Why?” And what does this mean?

On today’s show we are taking a look at the Macro economy. The bureau of Labor and Statistics published the latest CPI data which came in a bit hotter than expected. This is implying that the Fed will need to keep interest rates higher for longer to combat inflation. The Fed keeps saying that rates needs to be maintained higher for longer so that aggregate demand is reduced to stamp out inflation.  At least, if you read the mainstream media, that’s what they would have you believe.  The narrative is that the economy is still strong and that the GDP growth is high and unemployment is low.  In order to understand what is real in the economy we have to look closely at what is driving the economy.  When you look at all of the growth that has happened in the economy in the past year, it’s been as a result of increases in government spending. It's artificial growth, an illusion. --------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are talking about the EB5 Investor Visa and whether these sources of investment funds have the potential for being useful for real estate projects.  The goal of the EB-5 program is to enable immigrants to get an accelerated permanent residency permit through an investment in a qualified EB5 investment.  ----------- Host: Victor Menasce email: Victor@victorjm.com

Today’s question comes from Paul who asks.  I’m putting together my plan for conferences for the remainder of this year. I’m curious how you determine how much time to spend out of the office attending conferences? How do you decide which events to attend?  ---------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are taking a look at data sources when it comes to understanding the market.  We know there is a gap between asking rents and contracted rents on average. Sometimes you will see a listing as a tenant and the landlord has listed the rent. Some tenants will treat the rent as a fixed number and either pay the asking rent or look elsewhere.  But then a subset of tenants will make a rental offer which might be different than the asking rent. The result is a negotiation.  The rental price might not change in that negotiation. The savvy landlord wants to preserve the value. They don’t want to change the monthly rent. So if they give a discount, they would prefer to offer a rent concession in virtually any other form.  It could be a month of free rent, as in 13 months for the price of 12. They’re still signing a 12 month lease and maybe offering the second or third month of the lease term as the free month. That way, when they compile their numbers for the end of the year, the monthly numbers look stronger even in the presence of a rent concession.  If you’re looking to make an investment, where do you go for a reliable source of rental comp numbers? The asking rents that are publicly listed are just that, asking rents. That’s not indicative of the actual contracted rent.  We can find all kinds of market data on the internet. But before you look at that data for a particular area you need to ask yourself some important questions. ------------- Host: Victor Menasce email: podcast@victorjm.com

Dennis Cisterna is based in Las Vegas where he invests in institutional quality office and retail on a nationwide basis. On today's show we are talking about the opportunities that are evident when you're willing to go counter-current. To connect with Dennis and to learn more visit sentineloppfund.com. ------------ Host: Victor Menasce email: podcast@victorjm.com

Randy Langenderfer is based in Houston Texas where he invests in multiple markets. Over the past decade he has invested in about 1,600 units. On today's show we are talking about finding the right partners in remote cities. To connect with Randy visit invest-ark.com ---------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are talking about the shortage of construction workers that has been widely reported.   From our vantage point, we are seeing a number of contradictory facts. There is a shortage of workers in many of the trades. At the same time, we know of workers who are sitting at home right now, looking for work. We know this because we are being continually solicited for work by subtrades. We also know of architects and consulting engineers who are being laid off because of a lack of work in some markets. It’s a strange dichotomy. There is no question that the industry has experienced a slowdown of new projects after a few years of elevated investment. However, we believe this situation is temporary. The problem is demographics. People are retiring out of the construction trades, faster than new young people are entering the trades. ------------ Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are looking at a study that was authored by three researchers at Purdue University, The College of William and Mary, and The Chinese University of Hong Kong.  The purpose of the study was to examine the impact of short term rental bans on the long term rental market.  There are many different type of ordinances affecting short term rentals. But the truth is, most municipalities do not enforce these ordinances. The end result most of the rules are ignored by landlords.  This particular study zeroed in on Irvine California which is one of a few communities that actually does enforce its ban on short term rentals in properties that have residential zoning. If you’ve spent any time in southern California, you know that the entire area is essentially one continuous city. The only way you know that you’re now in another city is because there is a sign welcoming you to the new city. Otherwise, there is no obvious boundary. If you work in Irvine, you would happily drive from Costa Mesa, or Newport Beach, or Laguna Beach, or any of a number of communities in the area if you can find a place to rent at a respectable price.  The study found that the actual contracted rental prices reflect the supply demand equilibrium whereas the asking rents are generally higher than the actual contracted rent.  The study found that in the case of Irvine, the number of Airbnb listings declined by 27% within two years of the ban.  The study also examined short term rental activities in the neighbouring cities where there was no short term rental ban in effect.  The study found that within three years of the ban, enough new supply had been brought back into the market that there was an observed decline of contracted rental pricing of 3% or the equivalent of $114 per unit across the entire market.  The academic paper is about 32 pages in length, and no doubt will be cited by numerous advocacy groups around the nation as a quality piece of research.  The authors of the paper were very focused on reduction of short term rentals as  the primary source of supply entering the market. As developers, we know that construction is another source of supply entering the market.  It is possible that maybe Irvine had more rental housing constructed during that time period compared with the surrounding cities which contributed additional supply to the market. We just don’t know because the researcher failed to consider that aspect. We know that rental pricing follows the laws of supply and demand. If you’re going to look at the supply side and assess the impact of the STR ban, then you need to look at all sources of supply entering the market, not just STR to LTR conversions.  Unfortunately, the paper made no reference to new supply. ----------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are talking about the importance of hiring a surveyor for every step of the building process.  The first case study is of a property located in Hawaii on the island of Puna.  A construction company has reportedly built a half-million-dollar house on the wrong property. The second example is a public road that was built 20 feet off center and is encroaching on the neighbor's property. ---------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are looking at what I consider to be a double standard. There is one set of rules for the average person and another set of rules for the government.  We know that using funds from new sources of funding to pay off existing investors is the very textbook definition of a Ponzi scheme. These are highly illegal and the likes of Bernie Madoff should rot in jail for stealing from people. But there is another form of the same thing which involves investors and is sanctioned by the SEC. Have you ever heard of a Naked Short Sale? On today’s show I’m going to be quoting directly from the SEC regulations. ----------- Host: Victor Menasce email: podcast@victorjm.com

Our book this month is “Radically Condensed Instructions for Being Just as You Are” by Jennifer Matthews. ----------- Host: Victor Menasce email: podcast@victorm.com

Ben Spiegel is based in Greenwich, Connecticut where he specializes in design and construction of luxury RV Parks. This is an asset class that is often overlooked. To connect with Ben, visit redwoodcapitaladvisors.com ---------------- Host: Victor Menasce email: podcast@victorjm.com