Infrastructure Bid Breakdown

We are still a couple of months away from being able to start improvements. That gives us the time to be thoughtful as we choose the contractor to do our infrastructure.

The following is representative of our bid. I've slightly changed some categories since I'm still in the process of choosing who will do this job.

One thing to keep in mind with these costs is we opted to do everything high-end. We have curves in our roads with landscape islands throughout. This will be all pavers with underground power. These costs are also much higher since we're building in Guanacaste.

One of the largest things we're trying to finalize before we start is the overall 'vibe' or 'feel' of the development. We want everything picked thoughtfully, from the pavers to the landscaping, so that it ties in well with the homes and surrounding town. We believe that pulling this off correctly will give us pricing power as we sell the homes.

Over the next 10 weeks, I will be doing twitter posts breaking down 10 reasons why I chose to move from developing in Utah to developing in Costa Rica.

The following will be my first post this weekend.

Reason #1 The US Economy

I often get asked

'Why did you move your business from Utah to Costa Rica?'

It's a difficult question to answer. 

I will attempt to explain my reasoning by highlighting the top 10 reasons why I moved my business to Costa Rica. 

I will do this through multiple posts over the a few weeks. 

Before I go into those reasons, I want to explain a little bit about how I make my decisions. 

Carl Jung observed that there are two types of ways to perceive information.

Sensing and Intuition 

My top cognitive function is Intuition. I have always made my life decisions based on things that aren't easily measured. You could say I 'go with my gut.'

You may think what I believe is crazy, but at least I can say I put my money where my mouth is. 

Reason #1 The US Economy

In 2020, we all experienced a wild phenomenon. The government decided to shut down commerce to 'slow the spread.'

Anyone running a business like mine was dealing with catastrophic problems. The largest is 'how we would pay our debts if we couldn't earn money!'

The government had the solution. 

We'll give 'loans' to everyone, except they'll be forgiven, so they're not really loans.

This started a chain reaction that made my life an absolute nightmare. 

I was in the middle of a construction project and I couldn't get any supplies since everyone took 6 months off work. The supplies I could get were essentially fought for in bidding wars with other projects. 

Lumber went to the moon. Windows were unavailable. Concrete was rationed.  

You would think, as a developer, I was screwed! On the contrary, I was getting RICH! I thought my townhomes would be worth 300,000 when I was done. Now, they would be worth 425,000!

I give this example to emphasize that this event set off a chain reaction that continues today. 

It's also important to understand that how our leaders handled covid directly correlates with how we responded to the GFC. We have been heading in a singular direction for over a decade, and covid was not a one-off event; instead, it revealed what was and is already happening in our society.

These consequences directly result from the principles that our governing leaders use when making decisions. 

When I say leaders, I don't necessarily mean the president or the governor. The government, banking, corporate, etc., are working together to make decisions.

The problem is that they choose to hold up broken institutions, particularly unsustainable debt structures. 

At first, this seems positive, as avoiding the immediate pain of these structures collapsing seems good. The problem is that we're simply kicking the can and ultimately hurting certain groups of people who are at the wrong end of these consequences. 

The largest lever our leaders can pull in order to prop us up artificially is low interest rates!

The kings of this world decided post-2008 that artificially suppressing the cost of borrowing would help us by stimulating the economy.

Maybe that's true.

What's also true is that it gave an extremely uneven hand to anyone who had better access to credit. 

There was no longer a way to lend money at a good rate, forcing investors to pile money into assets, lowering the real yield on those assets, while simutanously raising the price of those assets.

This combination rewarded those who borrowed the cheap money and bought assets at any price, incentivizing more debt to be taken out. This ensured that we remained on the shaky foundation of an over-indebted society instead of using productivity to dig ourselves out of an ever-increasing hole. 

Who was the beneficiary of these low-interest rates? The decision-makers who decided to do it in the first place. This simply reinforces their decision-making.

Now you're probably wondering WTF does this have to do with Costa Rica?

I'm trying to lay the groundwork to explain what led me to my decision.

Fast forward to late 2021

I am beginning a new development project and see massive inflation problems everywhere.

I'm trying to get bids, but materials and labor are rapidly rising. 

I spent most of my time getting into our customer’s minds. 

As I considered their situation, I realized that if inflation stayed persistent, people could not afford the homes I was building.

That led me to consider if inflation would be persistent.

I believed then and still believe now that inflation is here to stay.

I believe this for 3 core reasons.

1. Globalism is fracturing 

2. Baby boomers hold all the wealth

3. Debt levels are structurally catastrophic  

1. We have benefitted from outsourced labor for decades, and it's ending as we currently know it.

As tensions continue to rise worldwide, we will not enjoy the same benefits of free and open trade.

Do a little research on our attempts to 'on shore' chip production, and it's obvious we can't compete. 

2. Baby boomers have all the wealth and are ready to spend it.

We don't have the capacity to maintain the baby boomer’s expectations for retirement. They expect a particular lifestyle in retirement, and the workforce will need to be paid more to meet that demand.

3. Our society is on a debt foundation that cannot be sustained with current productivity. 

This eventually requires a default , which I believe will happen through inflation, just like in 2020. With inflation  here to stay, interest rates will also stay higher for longer.

As I realized that inflation is here to stay I was led to believe that Ray Dalio's theory on the long-term debt cycle was true and fully in effect.

I also realized that we were experiencing the moment when interest rates could no longer be lowered to stimulate the economy. 

The reason is the value proposition on bonds is gone, as inflation isn't going away. 

I believe the rates will be consistently higher in the next decade, creating a major problem for my business.

HOMES WILL STAY UNAFFORDABLE

They will stay unaffordable because the economy is out of balance. 

1. Wages will continue to rise 

2. Material costs will continue to rise

3. Interest rates will stay high

There are multiple parties involved when building and selling a home.

To do a development, I need 4 main parties to be happy.

1. Equity Investors

2. Contractors

3. Customer

4. Mortgage Lender

I will break down the last development I had in Utah to paint the picture of each party.

I was building a 13-home subdivision building. 2000 sq ft homes to sale for 550,000

• Land and Infrastructure 1,500,000

• Homes 3,900,000

• Sales 7,150,000

• Agent Fees & Closing Cost 450,000

• Profit before interest 1,300,000

#1 Equity Investor 

I've always considered 20% annual return the bar for an equity investment. If I'm not going to comfortably get 20% and see the possibility of something better, I would prefer to go a different route with my money.

In this situation, I would raise the money for land and infrastructure as equity partners. Assuming my interest costs are reasonable and I complete this project in 3 years, this example would work for equity investors.

#2 Contractors

Are they happy while working this job?

I would ask this question. 

‘Can one of the subcontractors afford this entry-level home they're building?’

If they could save $110,000 (20%), they would pay $3,810 (7.5% rate) monthly, including insurance and property taxes. 

The answer is no, not if I build the home at that price.

#3 The Customer

I talk to people in Utah every day who are trying to get into a home.

Homes are too expensive for them to afford. While some people with dual incomes can afford this home, it does not meet the customer's expectations.

#4 The lender

The lender is currently happy with this situation. Most people lending money on bonds right now feel satisfied with their return. 

The problem is that the lender only feels happy because inflation has begun to slow down. If we raise wages to balance this out so that the customer or contractors are happy, the lender would quickly become unhappy since their return would no longer keep pace with inflation. 

This is what is at the heart of all of this. If you have read this far, I have tried my best to build up to explain a concept I believe is true. 

Most of the wealth that people think they have is not really there. The economy is broken because the balance of money and labor is not functioning correctly. 

This imbalance will impede productivity in the U.S., and political tension will persist until the debt and corresponding wealth are rebalanced.

Next week, I will explain how this situation differs in Costa Rica.