In Jason’s Creating Wealth introduction, he answers a listener question as well as shares an important tip to listeners who are currently experiencing vacancy issues or property manager issues. On the show itself, Jason invites local Chicago market specialist John to the show. John addresses Chicago’s crime rate issue, landlord unfriendliness, and his company’s screening process for tenants, plus a lot more on today’s episode.

Key Takeaways:

2:00 – Jason’s new Longevity and Bio-hacking show is doing great on iTunes.

4:40 – Jason plays a listener question on the show and he answers his questions.

11:10 – You can own a much larger portfolio when you use leverage right versus the free and clear way.

15:20 – Jason shares an important real estate tip for those who are having vacancy issues.

18:30 – Jason introduces John.

25:30 – Crime in Chicago suburbs consists of petty thief and vandalism.

30:50 – John’s company will redevelop a distressed house and bring it up to current construction code.

34:50 – John looks for A residences and address the topic of Chicago state being more tenant friendly.

38:10 – Out of 1,600 homes that John’s company manages, less than 2% of those go through the eviction process.

42:50 – John breaks down some of the specials and offers his company gives to their clients.

Tweetables:

Leverage is a very good thing when used properly.

If you’re thinking about investing your money in something, what better than something that is tangible?

Chicago is not necessarily the most land lord friendly, but we combat that by working in the Chicago suburbs versus Chicago downtown.”

Mentioned In This Episode:

JasonHartman.com

www.bulletproofexec.com

Transcript

Jason Hartman:

Hey, welcome to the Creating Wealth show. This is episode 485 and this is your host Jason Hartman. Thank you so much for joining me today. Really appreciate you listening to the show, subscribing, rating, and review it on what podcast platform you’re using and telling your friends about it, too. So, thank you for that. Gosh, we’re going to cover Chicago today. You know, we really are. I know we didn’t have time for it last time, because your host is long winded, but a couple of things here before and I won’t let these go long enough to interrupt our Chicago market profile today.

I really like the two vendors that we’re dealing with Chicago, our two local market specialists there. They’re doing a great job. You’re going to hear from one of them today. I just want to answer a couple of question first. So, the first one is, just a general question that I’ve had here and there, you know, occasionally on the show I’ll talk about health related issues and as you all you know I’ve got that new show, which by the way is killing it on iTunes, it’s doing great; it’s called the Longevity and Bio-hacking show.

Some of you have asked me, you know, where do I get some of this information. Is there another podcast I can listen to besides yours, Jason, besides the Longevity show and it just so happens that it is and I plan to get this host who has a very, very popular show on the show as well for the Longevity show. It’s called the Bulletproof Executive and the host is Dave Asprey. He’s got a huge following. He gets really deep and really technical in to these health related issues, has some new thinking on that, has a new book out that I just recently finished. It’s kind of interesting. I don’t get into it that deeply, I just want practical stuff that any of us can easily do without it taking it our whole lives and us becoming compulsive about the whole thing.

I joke and one of my ex-girlfriends, I think I may have mentioned this on the show, but here is a new vocabulary word for you, she’s just really into health food and organic everything and all of this kind of stuff and so I said, I said, you know what you are or you know what you have, you have orthorexia. Not to be confused with anorexia, which is bad. Orthorexia is actually good, but it’s sort of a compulsion about this stuff where, you know, you just gotta have the right food and all the right everything all the time and it kind of runs your life. That’s not so good. I tease her about it, I don’t think she really is orthorexic. That’s a new word for ya, new vocabulary word you probably haven’t heard about before.

But yeah, the Bulletproof Executive podcast. I recommend it. It’s really good. Listen to mine for financial stuff, my other shows for other content, but if you want some health information there and you want to get into it, it’s a pretty deep dive, so if you’re into that kind of stuff check it out. Also, I’ve got a listener question here that I wanted to play for you. Sean, thank you so much for using the application on the right hand side of the JasonHartman.com website where you can just send me a voice mail.

This is kind of a two tiered question that he asked. One is a criticism and I try to be really transparent about this stuff when it’s applicable. I mean, if someone just calls and just says something that just doesn’t make sense or it’s dumb or it’s silly, you know, I’m probably going to play it on the air, okay. This is a fair question, a fair criticism, and I want to address so I’m going to play it for you and then in the second part he asked a question about refi till ya die. So here it is, let’s listen in and then I will answer.

Recording:

Hey Jason, I just listened to your latest episode on Friday, flashback Friday, about the NIA, and I can’t believe you put them on there again. I thought, it was my understand that those guys caught up in a big pump and dump scheme, pumping those silver stocks to all their NIA members and it turned out that they were in on it and a lot of people lost a lot of money. So, I know their information on the inflation is pretty much dead on, but when they get into recommending stocks, I think they were a little shady. Not sure if you knew that or not, but I thought I’d bring that to your attention, because I generally associate you with not hanging out with those kinds of people.

Another question I had for you is when in your opinion does it make sense to pay off a property? You know, I get this a lot where, I’m with you, I’m a refi till ya die kind of guy, but a lot of people come to me and they’re like, “You know Sean, if you paid off your properties, how much more cash flow would that give you and you wouldn’t need any more properties and any more tenants.” I’m with you and I would hate to have all that extra equity sitting there and the properties doing nothing, but would I rather have 10 properties or 15 properties with both of them producing a same amount of cash flow having 15 leveraged properties versus 10 free and clear. Just wanted to get your thought on that. Hope you’re doing well. My name is Sean from New Haven, Connecticut. Thank you, bye bye.

Jason:

Well, hey Sean, thank you for the question and the fair criticism. I think that’s a fair one. I appreciate that. So, first of all on the NIA and my flashback Friday show. Just a reminder, every Friday we do flashback Friday, those shows are not current. We had a listener skip the intro and they didn’t hear that it was flashback Friday and they thought, what are you talking? You know, this is the risk I run with doing flashback Friday. I did not listen to that episode and I did, when I remember NIA guys on before, the National Inflation Association, I had them on before, someone did call in or email me or something, it’s vague, this must have been, I don’t know, several years ago.

When I had them on, they said they were caught up in some sort of scandal and I remember looking online to see what it was about. I found some information that I can’t remember what it said very much. Yeah, I don’t know. That’s a fair criticism. I mean, I don’t want to be having bad people on my show obviously. However, I gotta tell ya a couple of things.

First of all, I don’t agree with all the people on my show as I think you’ve probably noticed by now listeners and also I would have some bad people on my show intention if I could get them. For example, Bill Ayers. I got some criticism for having Bill Ayers on my show. I don’t agree with Bill Ayers, I don’t really like Bill Ayers. Some people says he’s a terrorist. I don’t know. I think it’s possible that he is, you know. Some people say that one person died in a bombing that he was involved in.

I don’t know, but from this angle I view myself as kind of a journalist, okay. Well, kind of, really. I am a journalist. Not in the typical sense, in the broader sense. I am a member of the National Press Club and I want to provide good journalistic content. So, if I was about to interview Bernie Madoff, I would love that. I would love to do a jailhouse interview with Bernie Madoff. I would fly to whatever jail he’s in and interview if I could. So, I’m not saying that everybody I have on my show you should follow their advice or anything like that. I mean, that was never a promise. Don’t think that. Don’t assume that. You know, Sean is right. That is a fair criticism.

I mean, I don’t want to be putting bad people on the show. At least not without it being obvious that they do bad things or have done bad things. My listeners hopefully they would never be investing in stocks in the first place. I mean, how many times, it’s literally every episode, where I say, stocks are bad! Don’t do stocks. Wall Street is the modern version of organized crime and if these guys were doing some kind of pump and dump stock promotion, well, then don’t invest in stocks. That was a replay. I didn’t invite them back on to the show. I just wanted to play that old episode over, because I thought it was interesting. So, that’s the risk I take with flashback Friday, okay. So, that’s a fair criticism and a fair question. I’ll probably be a little more careful now that I heard that.

Now, the other question is a really good question. So, what Sean is saying, you know, someone said to him, wouldn’t you rather just have 10 properties free and clear and paid off where you can get all the cash flow except for the taxes and insurance and maybe the association fees and other fees that you might have to pay for management, etc and you can receive all of that rent or would you rather have 15 that are mortgaged? Well, first of all, Sean, your math, c’mon. If you look at it as a five to to one leverage ratio on average, okay, assuming you can put 20% down and finance 80%. It’s not a question a question of are you going to own 10 or 15, it’s are you going to own 10 or 50, because it would take the same amount of cash with a 5 to 1 leverage ratio to buy either one.

Now, that is over simplified, because of course we all know there are complexities to this. There would be some additional closing costs on those other 35 more properties that you bought. You may not be able to get loans, that many loans. You certainly can’t do it through Fannie Mae or Freddie Mac. You can do it through some of the other sources like FirstKey and B2R. We’ve got an episode coming up where we’re going to talk more about that. It’s a big difference. You can own and control a much larger portfolio when you use leverage properly and prudently, but let me give you my mom’s example. Now, my mom retired several years ago.

At the time I think she owned 13 rental properties. She did it the old fashioned way. It was all about owning them, they were all the same area in Southern California. I always criticized her as soon as I figured things out. It took me a long time to figure it out, but about 11 years ago I figured out that you should diversify. You should invest national. You should be in cash flow markets. Not in Southern California where nothing makes any sense at all from a cash flow perspective, but mom over the course of several decades built this portfolio. You know, it’s nothing big in the overall scheme of things, but because in Southern California the prices are so high, the numbers are decent size. You listening to this using the advance techniques that we talk about on the show applying some of this more modern stuff, you can do much better than my mom did, but she didn’t do too bad for herself by any means.

So, here was the deal upon her retirement. She told me that she had about $200,000 in rental income and the value of all those properties I calculated at roundly $7 million. So, $7 million in a real estate portfolio, not diversified, I would always joke with her and say, “Mom, you need to be diversified, you need to invest nation wide.” And she does now, by the way, but at the time, she didn’t, and she says, “Jason, what do you mean? I am diversified. I have properties in four counties. Los Angeles, Orange County, San Bernardino, and Riverside.” Ha, ha, ha. Those are all contiguous counties in Southern California. I said, “Yeah, but mom. The problem is, you’ve got all these properties and they’re all Southern California and Southern California is a big earth quake risk after the fact that it doesn’t cash flow, you don’t have earth quake insurance on any of the properties, and these properties are all sitting on either side of the San Andreas Fault.

So, that’s no good. But in her example, $7 million worth of property produces about $200,000 per year. So, first of all, in a typical metric of rent to value ratio, we’re going to take $200,000, we’re going to divide it by 12 months and we get $16,667 per month. When we do that, let’s look at what we would expect on a $7 million portfolio. We would expect what? About 1%. That’s $70,000 per month, $70,000. So, I know this wasn’t the exact question. The question was about more properties or less properties, leveraged or not, but I just want to point out the cash flow that just simply does not work in Southern California or any high-priced market, but secondly, $350,000 would be 5%. $350,000 per year would be 5% of $7 million.

So, if she was to liquidate that portfolio and put it into the stock market. I mean, she could probably earn 5% annual, I would hope. She may do a lot better, she may lose money, but if you average it over the course of 10 or 20 years, could you earn 5% in say, S&P 500 index fund? Yeah, you probably could. So, there she would $350,000 per year as opposed to $200,000 per year. You can see obviously it is so much better leverage those properties. Leverage is a very good thing when used properly. So, I’m already running long in there just answering two quick questions. So, thank you for the questions, Sean.

I want to just leave you with one more tip before we get to our Chicago interview and it is this: I was talking to one of our clients yesterday and one of their properties in a big portfolio was having a bit of a challenge with vacancy problems and rental problems. The client was asking should I change managers. I said, yeah, that’s certainly something to consider, change property managers if you don’t want to self-manage, that is certainly something to consider, but here’s a little experiment you can do for free and it’s really, really easy. I want to recommend this to all of you. If you ever run into a challenge and you will, almost certainly, if you ever run into a challenge with any of your properties, having vacancy issues or not renting quickly.

Go ahead and this is why it’s important to keep photos and have photos of all your properties, okay, go ahead and just go to Craigslist.com and put your property up for rent. Now, if it’s occupied or even if it’s vacant, you may not want to put the exact address in, because there could be problems with disturbing the tenant, there could be risk of crime or something like that. So, you can do it without putting the exact address in on Craigslist, but definitely you want to have photos and a good description.

Put your own property up for lease on Craigslist and then you can get a very good sense of the market from anywhere in the world, just remotely, by seeing how many responses come in. You can also play with things. You can change the price. You can change the photos and see how the response is, change the description, and what does this allows you to do is get a check on your property manager and you can really get a sense as to what the market is like, you get your own independent view of the rental market in that area and you can forward those leads to your manager as a way to hold them accountable and say, hey, look, I got 15 leads on this house in the last week. What are you doing? If you start just forwarding all these emails to your property manager, it’s going to have the affect of getting them to do their job.

Now, granted, most property managers are pretty good. It’s a mixed bag, embrace the fragmentation. You hear me say all that stuff. This is just one little tool that is in your arsenal and we talk about lost of others in the show, but it’s simply to list your own property for rent on Craigslist and see how the responses go. You gotta have good photos, you gotta have a good description, and it’s got to be reasonably priced, but I think this will give you some nice feedback. It takes all of five minutes to do it. I think it’ll be a really good thing, so try it out if you ever run into a challenge with one of your properties, okay.

So, I had a couple more things I wanted to talk about, but as usually, I go long. So, next episode I’m going to see we can talk about the Venture Alliance, the sharing economy; I’ve got some really interesting stuff on there. Let’s talk now with one of our providers in the windy city that is Chicago. So, here we go.

Hey, it’s my pleasure to welcome one of our local market specialists, John from Chicago the windy city. This is a market that we’ve looked at for several years and we just really never really quite got around to recommending it, really getting interested in it, but I gotta tell you, with all of the objections that an investor might have, there are some tremendous benefits. Let’s kind of explore really balanced look at the Chicago land market area and then specifically we always talk about macro markets and micro markets and bring this down to specific cities and neighborhoods that we’re looking at. Of course, an area with a population this big the areas can vary dramatically and we’re going to talk about that too. John, welcome, how are you doing?

John:

I’m doing excellent today. Thanks Jason for having me.

Jason:

It’s good to have you. So, first of all, I want to kind of take this kinda from a board down to a more specific view if we can today. Just maybe give your thoughts on real estate investing in general and then let’s drill down to the Chicago area. Let’s talk about your properties, let’s talk about some special offers that you have on them, and kind of do it that way.

John:

Sure, sounds good.

Jason:

So, why do you like real estate? How’s that?

John:

You know, it’s an easy question. I love real estate because first and foremost it’s a tangible asset class, right. I mean, if you’re thinking about investing your money, your hard earned money in something, what better than something that is tangible? If you invest it in real estate in the correct way, you’re bound to make money. Our philosophy is pretty simple, right, we try to buy real estate when it’s down and sell it when it’s high and after the bubble that we had in 2007-2008, Chicago in particular is a market where it hasn’t fully recovered, so we always tell people it’s a great investment, because you can buy it when it’s distressed, you can re-develop it like new construction, add value, and then you can cash flow it in the interim until you get to the peak of the market and then you can sell it.

Jason:

Well, we’re kind of a fan of the long term buy and hold strategy and occasionally there comes a time where people want kind of rebalance their portfolio and sell for those reasons. What else about real estate in general and then specifically your area.

John:

So, real estate general, you bring up a good point, when I say sell when it’s high, you know, I hate to get into the specifics of Chicago, but the housing crisis that are here currently are no one near the peak of the market. If you had to build a new construction home, you’re still paying roughly, you know, 60 cents on the dollar for a new construction of a similar like home. So, there’s going to be plenty of time. I am not a have of anything that sounds like you can get rich over night. Real estate is a long term hold. It’s essentially you utilize a resident to pay down your debt service and build your equity. So, remember, the larger picture here is a long term play, but the idea is to buy it right, because that will help with some HPA as oppose to just having some cash flow. You really want to benefit on the both.

Jason:

What’s HPA?

John:

Home Price Appreciation.

Jason:

Oh, okay. Never heard that acronym in all these years, like no one ever said HPA to me.

John:

All really? That’s one we use frequently.

Jason:

Is that a Chicago term? Is that a Midwest thing? I mean, we do a lot of business in the Midwest.

John:

It must be.

Jason:

Do you say soda or do you say pop?

John:

You know, I say soda.

Jason:

Oh, really. I thought you might have said pop.

John:

Yeah, I say soda.

Jason:

Just checking. We gotta get the important stuff out of the way here right? Okay, well, tell us about the area. They call it the Chicago land area, because it really is so big and so diverse. Talk to us about some of the different areas. I know that, you know, kind of my major reaction years ago and some investors major reactions is, you know, you got kind of a leftist leaning government. God forbid Rahm Emanuel, very leftist leaning, but the landlord friendliness and the kind of governmental intervention varies from area to area there. The crime rates vary dramatically. Certainly there are some very crime ridden areas of Chicago like there are of any major city, but kind of address some of those issues and let’s talk about the different geographies of the Chicago land areas.

John:

Jason, you know, I’m glad that you brought that up, because I think we need to focus on a community of 10 million residents. We’re the third largest metropolitan area. We’re the third largest metropolitan city in the United States. So, whenever you have that many people there will be issues at any metropolitan city, but I think what you’re focusing on and what you’re seeing on the news is South Chicago. That’s not a market we work in.

One of the things that is unique to Chicago is that we have so many different neighborhoods. I think close to 80 different neighborhoods throughout Chicago land and like with any investment, there’s going to be different risks associated with it. What we try to do is minimize those risks by allowing you to purchase homes in areas that are well vetted, right, so they are not as risky as other areas in Chicago. So, when you bring up things that are obstacles or maybe of concern, sure, crime is an issue, but it’s not an issue in the areas we work in. We work in the South and Southwest suburbs of Chicago. We don’t work in Chicago land or Chicago proper. We are in the suburbs of Chicago.

Jason:

So, what cities would you like to know about there?

John:

So, some of our most common cities would be Glenwood, South Holland, Country Club Hills. We work as far North as Cicero, Berwyn. We go as far East as Tinley Park, excuse me, as far West as Tinley park and we go as far East as Lansing, which is close to the Indiana border. If you’re thinking South, we go South to Creed or Steger. So, nice wide variety. Probably 26 different neighborhoods we work in.

Jason:

So 26 different neighborhoods and even in those cities that you mentioned, some of the areas within those cities won’t be ideal and some will be ideal, right?

John:

No, you know, one of the things that we vet is we’re looking for A locations, so we’re looking for areas that have appreciating populations thriving commercial corridors and just a sense of community where you’ve got a higher percentage of ownership to rentership, so any of the areas that I just mentioned or that any of the areas that we work in, they will have an ownership rate of 65% or greater. So, when you talk about those 80 or so difference neighborhoods, yes. If you talk about just South of downtown Chicago, that’s going to be where you see all of that violence or gun violence on the news, but as far as crime, there’s going to be crime in every location, but the crime that we have in these areas are going to be, they’re going to be petty thief or vandalism. We’re not talking murders.

Jason:

Okay, good. Well, not good, but better than murder. Okay, talk to us if you would about properties or any, actually sorry, before we move on to properties and kind of move down that funnel, let’s talk about maybe other things that you look for. You talk about the ownership to renter rate, school districts? Other neighborhood amenities? Anything else you wanna say about picking those neighborhoods?

John:

Sure, so things that we focus are we’re trying to maximize the cash flow and the best way to do that is to minimize the expense, so all of our properties are going to be on city, sewer, and water. Nothing is going to be on well and septic. None of our properties are going to have HOAs or any sort of fees associated with them other than taxes. As far as school districts, great question, Jason, we’re the South and Southwest suburbs of Chicago, which for those of you that don’t know, tend to be blue collar neighborhoods with an average maybe of an income of $65,000-$75,000.

So, everything is relevant or relative speaking so when you think about school districts, they are decent, they are good school districts, but they are not the best in Chicago land. If you go to the North Northwest suburbs, you’re going to have an average home price of, let’s call it, $500,000 up to multimillion dollar homes and those taxes are going to be incredibly high, but they’re going to go directly to the school districts that are in those areas. So, our school districts are decent, they are good, they are relative to the nation. They are averaged to above average when you talk about the nation as a whole.

Jason:

Let’s talk about specific properties and what you look for in properties for your investors and then I want to make sure we get into any special offers that you have on them.

John:

Sure, so our philosophy is quite simple. It’s tripe A plus. We’re looking for A locations that I talked about with you in terms of higher of percentage to ownership to renter and then we break it down to A properties. So, when we’re talking about properties we’re looking for a minimum of three bedrooms, a minimum of two full bathrooms, and we’re looking for two living spaces, and we’re also looking for backyards. All of our properties will have side walks or of the house will be in within walking distance. The elementary schools no more than two miles away from the high schools and within 5 miles from any interstate on or off ramp.

So, we’re really strategically are buying homes that are convenient for the average family. What’s important to us..you might think, “Why two living spaces?” That’s because we’re dealing with blue collar America, right, they’re not going to go to downtown Chicago, which is only 25 minutes away and go to a fancy restaurant. They might entertain in their home and so having a home that is sustainable to have guests over is really important to our client base or our resident base.

Jason:

What else about the actual properties in terms of style of home or just any other things. I mean, you’ve got this pretty well defined and I want to make sure I draw that out of you in this talk.

John:

No problem and I think I know where you’re going with this. In Chicago, one of the obstacles we overcome for people who aren’t familiar with Chicago is the aging stock of our home, right. So, the average home that we will redevelope will be anywhere between the 1950s to the 1970s. Again, that’s because it’s Chicago. It’s home to over 40 million visitors, so it’s well established market and so our homes tend to be three or four different styles that is a raised ranch that is a Cape Cod style home where we will go into the home and finish the attic, create more bedrooms/bathrooms, go into the basement, finish the basement. We have Chicago bungalows which typically are ranch style homes where we, again, come into the basement and create more additional living space. So, as far as what we do to these homes, our background is new construction.

We treat these homes as if it’s new construction and we bring them up to new construction code. So, when we get a home that is distressed from the 1950s or 70s, we know that the actual fundamentals of the home are good, right, the structure is good because they were prior to the 2000 boom of building homes. So, the structures are really good. The only thing that really needs help is the interior cosmetics and then the actual mechanicals.

So, when we look at these homes, if we can’t get a certification for seven years on a roof, because that is the maximum a licensed or union roofer in the state of Illinois can give, then we’re going to go and tear off that roof and replace it with a new architectural shingle roof that’s go a life span of 25 to 30 years even with Chicago winters. We then look at windows, we replace all windows that aren’t dual paint, then we go in and take a look at all the plumbing, right. So, we pull out all galvanized plumbing and we replace it with today’s standard of copper and PVC. We then look at electrical, we pull out all fuse boxes, romax, anything that’s not to code and we replace it with electrical conduit throughout the walls. Again, all things that are new construction standards today.

Jason:

But, you’re only doing that if it’s not to code, right, or are you doing that on every property?

John:

No, forget about code, we do it on every property, because again..

Jason:

That is an extensive, folks/listeners, that’s a pretty extensive rehab.

John:

Yeah, our rehabs are very extensive and the reason for that, Jason, is because let’s face it, property management is one of the most difficult things to do and we try to minimize the risk in the property management by providing a product that is sound and stable and the only way to do that is to get into the guts of the home and create a home that isn’t going to have issues. So, forget about all the new maple cabinets and granite counter tops and the new flooring and the paint and the light fixtures that we put in, we really get to the meat and bones of the home.

Jason:

One thing I didn’t ask you about before but I know a lot of people have this question, you know, they say, “Aren’t the taxes really high?” And they are higher. I’d say your area, Texas, New Jersey; New Jersey is unbelievably expensive, wow. I was meeting with someone, well maybe when you were at our mastermind you talk with her too and she lives in New Jersey. I don’t want to mention her name necessarily, but you know her and I know her, she was just telling me about her taxes and I knew that already, but my god, it’s amazing how expensive their taxes are. Address your taxes, property taxes, in your area.

John:

You know, I always refer back to again, third largest metropolitan city, right, so we have CTA, which is Chicago Transit Authority, we have a lot of things that are part of our taxes like parks, we have theaters, we have a lot of things that go towards tax dollars, but more importantly it’s all relative. So, California or New York, the real estate is more expensive than in Chicago and the taxes are less.

In Chicago, the real estate is less expenses and the taxes are more, but you have to look at the whole picture. Too many people get bogged down by high taxes and they don’t look at how a property cash flows are preformed. So, even though our taxes are high and to give you an idea, about a $130,000 home will have about a $4,500 tax bill, which is going to be more than most areas. The difference is on the $130,000 home, we’re collecting a rent check of $1,625 per month.

Jason:

And that’s phenomenal. I mean, your rent to value ratios are really, I mean, I was so pleasantly surprised I gotta say in terms of the rent to value ratios, especially in a market where if you have to put up with some stuff and I kind of think you do, you know, you’re welcome to debunk my opinions, if you want, but maybe we can address this actually and maybe now is a good time, the landlord friendliness area of the discussion. Certainly I’d say Arkansas is the most land lord friendly state in the country. I’d say that Texas is pretty darn good. There are some other areas that are pretty darn good too. Certainly I don’t want to be in California or New York. Illinois is not known as being land lord friendly though. I mean, am I wrong about that, John?

John:

No, listen, I’m glad you actually brought that up, Jason, because you talk about different markets and you talk about what the good or the pros or the cons and there’s no doubt that Illinois is absolutely a more tenant friendly state. That being said, Chicago is really at the high level of that. When you talk about Chicago suburbs, the suburbs that we work in, it’s really not a lot different than most markets. That being said, it all goes down to the type of product you’re offering and the people you’re putting into your home. So, we’ve been doing this 18 years and we know the best thing, again, to my triple A plus philosophy is A residents, right.

So, if you’re putting someone in your home and even though the land lord laws are more in your favor, if you’re putting in a bad tenant, you’re still going to evict them, you’re still going to have a refresh. So, let’s get to the basics first. The basics is put in an A resident from the beginning and you won’t have to evict them and that’s what our philosophy is. We’ve probably screened, oh man, close to 700 people any given month. Out of those 700, 35-40 of those people are approved per month for move-in.

So, we have a really rigorous three-part screening process and that’s what people should focus on. That is the first round of applications is we review everything, skip tracing, background checks, etc. If they pass that on the cover, then we’ll take it to step two. Step two is we’ll do a interview in their current living conditions, because let’s face it, anyone can put anything on paper, but if you go and visit them in their home, you’re going to get a good idea of how they’re living, but we take it one step further, Jason.

Jason:

You really have the staff and the resources to do that? That’s pretty awesome.

John:

We do. We have over a 150 people in our organization and because of that we’re able to do things like this. So, when we do that second part interview, you say, well, anyone can clean up their house. No, Jason, we come in and we check out their current living conditions and we go and say, we gotta use your bathroom and we’re going to go look underneath their cupboard in their sink and see if there’s mold or see how they, did they just shove everything in closets, right?

Jason:

You’re like the Seinfeld episode where Jerry is looking in the medicine cabinet. That’s really wrong!

John:

You know what it comes down to, Jason? Is we want to make this a sound investment for anyone who buys a home in this market and with us. So, we really have to do our due diligence. The same you would do your due diligence on any kind of a market and that’s just part of our interview process. The third part will take place right before they’re going to move in and that’s when we re-run all of their information and make sure nothing has changed. So, again, yes, it’s not necessarily the most land lord friendly, but we combat that by working in the Chicago suburbs versus Chicago downtown or Chicago proper and then we do this really through investigation of who we put into the homes.

Jason:

So that’s great. Screening is huge. We certainly have had property managers that haven’t screened that well over the years and we’ve had some that do an awesome job. So, I’m glad to hear everything you’re saying, but when you do have a problem with a tenant, I want to just ask ya, how bad is it? By the way, I’m being the real skeptic here folks. It’s not that bad. I already know the answer to the question, okay, before I’m asking it, but explain. How do you evict someone? If you just have a disastrous tenant and it happens every once in a while to every land lord. I went years without an eviction, but then I had a couple of them. How long does it take? What’s the process like?

John:

We’ve got over 1,600 homes under management. Out of 1,600, we have to go through the eviction process on less to 2% on those home. If we have to go through the eviction process, which is what you’re getting at, what is the process and the process is quite simple, because we hand collect our rents every single month..

Jason:

What is hand collecting me? Explain that.

John:

Meaning we go out to do 30 point inspection on your home every single month. When we do that, we hand collect the rent at least in the first three months of occupancy, because we want to establish a relationship with our residents. We are a very boots on the ground relationship oriented company and because of that, we try to get ahead of any curve balls that might come our way. So, yes, we will come out to the home and we will hand collect the rent. They’re going to pay in check, they give us a check. After we’ve established relationship, we’ll go through the ACH, you know, quick deposit, whatever you want to call that, but to your point, we will serve a 5 day notice on the 5th of every month.

So, if someone doesn’t pay their rent by the 5th, they automatically get a 5 day notice. By the 15th of the month if they haven’t paid, they get a 15 day notice. By the 30th if they haven’t paid, they automatically get a 30 day notice. Once that 30 day notice is filed, you’re talking about anywhere from 30 to 45 days and what happens is, people don’t really understand the system and if you are on the forefront and you do things the right way, by serving those notices quicker, then you’ve already taken down the time period by 50%.

Jason:

Excellent, good. That’s really, these are good practices. Go on, tell the listeners anything more you want them to know.

John:

Just in general, I really want to capitalize on Chicago. I mean, we really do. We have 10 million residents. The economy is stable, the rental demand is high, the available inventory that is available for cash flow properties is ideally priced. If you think about a home that is being sold for a $130,000, you could build that home from new construction for under $190,000-$195,000. So, when you talk about HPA or Home Price Appreciation, you’re talking about 3-5% increase year after year. So, you can do the math and see there is a lot of time before those price points are going to get there. The difference is inventory. There’s a lot of people coming in and buying the inventory and holding it. So, really that’s what people are up against today is not they’re going to buy it wrong is being able to buy the inventory while it’s still available.

Jason:

Good, good stuff. Okay, how long have you been doing business in the Chicago market?

John:

We’ve been doing this for 18 years and we are a tried and true company. We have tried single family, multifamily, we have tried town homes. Anything you can think of we have tried. We got our foot in commercial. We do everything, but what we really are offering today is the best product we’ve ever offered. We have an incredible staff, we have 75 people that work throughout a 15,000 sq ft office space, we have another 75 people that work out in the field to do all those things I mentioned and the product that we have today is the best that it has ever been.

Jason:

What’s the average purchase price? 130?

John:

The average purchase price is a $130,000.

Jason:

Good stuff. Anything else you want people to know before you go?

John:

Just to touch on that, price points are anywhere from $110,000 to $200,000. Obviously land is more valuable the closer you get to the city, but the majority of what we offer is about $130,000.

Jason:

I think the big opportunity here is really buying a hybrid or..it’s not a linear market, it’s a hybrid or a cyclical market, but you’re really buying it at a linear market prices, because I think this, like, only a few of our other markets, there’s not many of them. We don’t really want to touch into the cyclical market area, but when things get crazy again as they surely will, I think you stand a really good chance of seeing some very good appreciation here and I’m not an appreciation investor. I am a cash flow investor. Any comments on that?

John:

Yeah, Jason, I’m glad that you bring that up, so when you talk about our HPA or Home Price Appreciation, that’s great, but like you said, we’re a hybrid here and our cash flow is top notch as well. We’re looking at cap rates that are anywhere between 8-11%. There’s some things that we do differently. You talked about specials, Jason, let me tell you two things that we do that we stand behind and that’s the product that we offer.

So, one thing that we offer is a full one year maintenance guarantee on the home. You may hear that from other people, but let me tell you what we do differently. We do not spend $350-$400-$500 on a third party warranty. We stand behind the product that we offer and we don’t make you go through a warranty company. We take care of anything and everything that could go wrong, because we understand, Jason, that even though we’ve such an elaborate re-development of them that no one has lived in it. So, when we move a resident in and you close on a home, we want to make sure that anything that comes up in that one year period from closing doesn’t affect your cash flow.

So, we take care of it on our dime. The other thing that we do, Jason, is we offer a one year rental guarantee on all the inventory. So, anything that you has a one year rental guarantee and what we do is we take the lowest rent for that style home in that subdivision and we guarantee that rent for you for one year. So, should something come up and we have to replace a tenant that we put in that was bad, which is unlikely, but it’s real estate and people change and things happen, anything happens in the first year, it is 100% covered by us.

Jason:

Fantastic. That’s good. Well good stuff. Thank you so much for telling us about the Chicago market and folks, we’ve had tons of interest in this market since we launched it. We just, I was talking to one of our other vendors in Chicago today, sorry to mention that, I was just talking to them. One person flew out, put two properties under contract just yesterday. There’s just a ton of interest, so I think there’s a lot of good opportunity here and I think there’s some good ways that you can mitigate some of the objections to this market, but overall I think it’s just a fantastic opportunity and I’m coming out of a 1031 exchange on one of my properties and I may well be buying a couple of properties from you here. So, I’ll let you know and thanks for joining us. I appreciate having you on the show.

John:

Thank you, Jason.

Announcer:

This show is produced by the Hartman Media Company, all rights reserved. For distribution or publication rights and media interviews, please visit www.hartmanmedia.com or email [email protected] Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate or business professional for individualized advice. Opinions of guests are their own and the host is acting on behalf of Platinum Properties Investor Network Inc. exclusively.

Episode: CW 485: Real Estate Investing in Chicago Illinois with Local Market Specialist John and Jason Hartman

Guest: John and Jason Hartman

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