AIPIS 128 – Buying Multiple Properties at Once, Affordable Chicago Living with Jeff Morris

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Welcome to the AIPIS show for accredited income property investment specialists and those who desire to be. This is your host, Jason Hartman where we we talk about increasing your income, your productivity and just generally having a better life while serving your clients better with America's most historically proven asset class income property. We have a great interview for you today and we will be back with that in less than 60 seconds.

Hey, so I've got a caller on the line, one of our clients. It's Jeff Morris and he's purchased in Memphis and Little Rock, I'm not sure anywhere else but Memphis and Little Rock. And he's asking about Chicago. Jeff, how you doing?

I'm doing great. Great, Jason, thank you.

Good. Hey, thanks for agreeing to come on the air so spontaneously. By the way. I asked you because a lot of, I think a lot of listeners have the exact same question you asked me when I asked you if we could go on the air with it. So fire away.

So. So Jason, I'm looking to purchase six properties before year end. I'd like to simplify the process by using one provider and making my purchase in one marketplace. I just visited Chicago shortly after your visit. I like the dynamic economy there. The area just feels like it has a lot of energy and I'm just trying to figure out if Chicago makes sense versus some other market in the country.

Yeah, Jeff, it's a great question. And here is the thing. I think it's, you know, like anything in life, you know, it's a two edged sword. There's pros and cons to everything. But you know, I mean, look, Chicago is, and granted these properties of course aren't in the city proper, they're in outlying suburban areas of Chicago. But you know, the Chicagoland area is, you know, that's a world class area. If you were to go to Europe and you were to talk to someone, a European person about, you know, the cities in America that they should go and visit or the cities they know about, they'd say New York, L.A. chicago, you know, that'd probably be number three. Maybe San Francisco, they'd say is number three. And then, you know, you'd get down to some other cities, they might say Dallas, they might say Houston, they might say Seattle, et cetera. And forgive me for whichever ones I missed in that example, but you get the idea. Okay. And so, I mean, I love that about it. And I think it truly is a hybrid market where you're going to have a lot more potential for appreciation than some of our more linear markets like Little Rock, Memphis, which have great cash flow. But in the things I do not like about Chicago is I don't like the high taxes, I don't like the relatively speaking landlord unfriendliness. And I think in those types of markets you kind of have to know what you're doing a bit, you know, or you have to be working with a very good team there. And one of the things you asked me, Jeff, off air, is about our team and how you're looking to simplify and just use one local market specialist and execute on six more properties before the end of the year. And I think that's an awesome goal. By the way, our Chicago provider is one of those that can really do that like an assembly line and make it very easy for you. They have, when we toured with them, I mean, everybody was just so impressed with their operation and I don't know, did you go to their office, by the way, when you were there?

No, I didn't.

Okay, well, let me tell you, had you gone to their office, you would have been totally impressed. You can see some pictures on our Facebook page, which is inside of Facebook. Just type jason hartman.com. i know that's kind of strange to have a website name inside of Facebook, but, but that is the name of our page and there are some pictures from that tour there. And they've got a pretty impressive operation. They have in house lending, they have in house property management, they have in house tax appeals. So one of the things you've got to be on top of there is, you know, managing the rather high property taxes. They have a whole department that just does that constantly for their own properties and for their clients. And you know, that's a good feature. But you know, it is a city. You know, Chicago is a world class city and so it does have a lot of energy, like you said. I mean there are some of those suburban areas are really charming. You know, they've got nice main streets with, you know, beautiful plantings and high end stores and shops in them. And I got to tell you you know, having been there many times myself, you know, going again this time, I was pretty impressed. So I think you've got some real benefits there. You just got to know the pros and the cons. The cons being high taxes, landlord. Well, I'm not going to say landlord, extreme unfriendliness. It's not California or New York. Probably not as bad as those, especially some of the cities like Santa Monica, San Francisco, within those. But that's. Those are definitely two of the big cons. So when you look at your RV ratio, it's got to be a little better than you might expect in a market with lower taxes to offset that con side of the equation. Does that make sense?

It does make sense. Yeah. What's your. The cash flow figures in the RV ratio seems to be really positive in Chicago. Do you have any reaction to that and any sense of crystal ball into the future, how that marketplace might do versus Texas or.

Well, I think, here's my prediction about it. So that's a, that's another really good question because it's one that people don't often, I think, think of properly the way they might balance what I'm about to say in their head. So I think in Chicago, and we say Chicago, of course, we're talking about Chicagoland. We're not talking about the, we're talking about outlying suburban areas. Okay. But we'll use the word Chicago generically. So in that area you have pretty high rents. Okay. Because of course, you have some high incomes there. But I think that the RV ratios, the rent to value ratios will actually decline there in coming years. Why do I think they all decline? I don't think it's because rents will decline. I think it's because prices will appreciate more so than they do in some of the more linear markets. And rents always lag. Those, they always lag price increases historically by a pretty significant margin. Rents, they, they escalate, but they escalate more slowly than prices in hybrid or cyclical markets. Cyclical markets, they get left way behind. And that's why, you know, some of the really expensive areas, South Florida, California, Northeastern states, they'll just never catch up. Those are, forget it. You're never going to have a good RV ratio in those markets. Even in the depths of the worst economy in seven decades, in outlying Southern California areas like Riverside and San Bernardino, the RV ratios still didn't come into line with massive price declines. So I think the RV ratios will actually get worse in that area. But when you go in now and your Basis is pretty low. You can afford to have that happen and you might actually have some capital gains opportunities where you could sell and in 1031 exchange those properties into more linear markets in the future if you wanted to, or execute more quickly, Jeff, on the refi till you die plan. So by the way, where do you live? I didn't ask you that.

I live in Newport Beach, California, Year old stopping ground.

Oh yeah, you're a California guy. So where in Newport do you live? What area?

Beachfront on the peninsula.

Yeah, okay. Oh, so you live in the party zone. Yeah, good stuff. That's where it's happening. Yeah. Unless you're, unless you're on the point, then it gets a little quieter there. But yeah, good stuff.

Yeah. The other thing I got a sense of just, just got a sense from talking to the provider there, Jason. You know, you're thinking about vacancy rates, that sort of thing. I got a sense from talking to them, it's almost like non existent. There's people lined up and waiting for these properties and they got a real massive, if you want to call it, blue collar, working class population that can afford the rent. Maybe they work for public transportation agency or just good paying jobs that allow them to afford $1,200, $1,500 of rent. So I don't know if you came away with any sense of that as well, but I really like the fact that there's such a large population there waiting for quality properties that are really desirable to live in so that that vacancy doesn't appear to be a big concern in that market.

Well, according to them, their average tenant stays 3.8 years and that is pretty darn amazing when we talk to people about, you know, that want to buy apartments. And of course, you know, I like apartments and I like single family homes, but if you can get a tenant on average to stay in an apartment for a year and a half, you have bragging rights. Okay. But in a single family home in an area like that. Yeah, I agree. That is, that is possible. What it might mean though is that they're not pushing the rents high enough because if your vacancy rate is too low, that often is a sign that you're not charging enough. You know, you don't want to have a super low vacancy rate. Okay. Because there's a, there's a balance. In other words, there. Right.

Well, it's interesting you say that because this particular provider I spoke with, they do one year leases and they typically don't increase the rent because they think about the trade off between potentially having a vacancy and then having to fill it again. And even though they do seem to have people lined up, but they seem to be reluctant to do price increases in general on rent during, for tenants who stay in the property.

I know I heard them say that too. And I don't know, I'm not so sure I agree with that. But, you know, turnover is one of the more expensive things you'll have when you're, you're a property owner, so you definitely want to minimize turnover. But I think, you know, I think the psychology of rent increases, and of course, it depends what's going on in the market at the time. So, for example, if housing affordability is really low, then, you know, those tenants aren't likely to go and buy something. If the rental market is really constricted and there's lines of people trying to get every property available in a market at a given time, then you can be more aggressive on rent increases. As I've said before, Jeff, my ideal is I want to see people try and get a 4% bump every year. But I know you can't always do that. Okay. I can't imagine too many tenants are going to move if they're paying, you know, say they're paying $1,300 a month. I mean, what kind of price property, what kind of rental prices were you looking at?

Some of those properties in Chicago, 1400-1650.

Okay, so let's take a $1500 property as an example. I mean, what if you were just to do a 2% bump and you raise it 30 bucks a month? If it's 4%, it's 60 bucks. I can't imagine anybody actually moving for 30 bucks a month. You know, don't you think they'd be more likely to like, give up HBO on their cable if their budget is really that constricted than actually move? I mean, the cost of moving, the cost of paying movers, you're undoubtedly going to have to buy a bunch of new stuff, have some damage, spend money on cleaning, spend money on, on this and that. I mean, it's just not worth the hassle. You know, that's, that's really what you do, is you try to raise your rents a comfortable amount where it's like, yeah, they might be a little annoyed about it, but it's not worth moving. You know what I mean? I, I think that I, I, I don't agree with them that you shouldn't raise the rent. I, I think a good landlord raises rents. You know, tenants will hate me. Saying that, but sorry, you know, that's just the way it works, you know. And you know what? Some of our clients are starting to do two year leases as a more common thing. And you can build the increase into the two year lease too, or you can just make it a flat two year lease. But why would. You see, I don't understand their psychology of saying they sign a one year lease and they don't raise the rent. Well, why don't you just sign a two year lease if you know you're not going to raise the rent? Just give them two years and lock them in, you know.

Yeah, and that's upset the apple cart. But what's your sense? When.

The management company has a philosophy about how to work with tenants, you push, you know who's calling the shots?

Due, you're calling the shots because you're the owner. But I will tell you, I think the one, one of our local market specialists, the one you're talking about, we have a couple of them in Chicago, but they've got a pretty awesome operation going and they really do seem to know what they're doing. So I guess my answer would be is I would buy my properties and then I would evaluate it as I go. I mean, I cannot imagine a tenant in a fifteen hundred dollar a month property moving for a two or three percent increase in the second year. I just, I mean, who's going to do that really? Now granted, if the rental market's really soft at the time, don't do it.

Okay, so last question, Jason. If.

To try to simplify this process a little bit, I'm looking to do, I'll call it one transaction at one time. So this provider indicated they could bring me six properties at different locations, different price points, just to kind of diversify my purchase. Do you have any thoughts on.

Buying a group of six at one time? Just launching into a market like that all at once. And advantages to any advantages out of, gain out of the process by doing a group of properties at one time.

Well, the advantages are you're gonna get it done. It's gonna be easier to just sort of dedicate like look this month or you know, in the next 45, 60 days or maybe 30, you know, you're gonna get this done, get it under your belt and get out of the way. The disadvantage is if you make a mistake and you discover later that this wasn't your favorite market, you're gonna be all in, so to speak. Right. Rather than dipping your toe in the water. So it just depends, you know, what you do for a living and you know, whether you've got your own business or you know, you've got a corporate job and what else is occupying you in your life? Because believe me, I mean, it feels like every, at least from my perspective, every time in my life when I try to save money, I always end up spending more, at least in my time, you know, and so sometimes just getting things done is just, you know, deploy. If you've got the money and it's not working for you now, you've got that opportunity cost on it, right? Until you're invested, that money is losing you money in the bank. So you know, there, there's the opportunity cost and then there's the cost of your own time in managing the purchases, which, you know, that sucks up some time. You're going to spend some hours on that, no question, especially if you're financing the properties. So the scalability of just getting it all done, there's definitely some benefit to that. But again, you have to weigh that against opportunity cost of what is that money doing now and opportunity cost of taking time away from other parts of your life, whether it be your profession or your personal life. But I mean, I don't think you're going to make a mistake in that market. The only two real downfalls I think are the, you know, the regulatory environment not being that friendly to landlords. You know, Chicago is a mismanaged city, okay? It's a left wing environment. I don't like any of that stuff. I'll be the first to tell you. You know, they've got financial problems like all left lefty areas do. There's no surprise there. But heck, I mean it's, it's hard to dislodge a reputation, you know, that's been developed over the years. I mean, think about it. When you look around the US Chicago is far and away the least expensive world class city. You know, you can't live in New York or San Francisco or LA for the kind of prices. You can live in the Chicagoland area, you know, even in the outskirts of any of those places I just mentioned. It's, it's, you know, it's not even a contest as far as cost of living and price. So Chicago is kind of a Midwestern bargain. I mean, it's got a lot going for it. So tell me about the rest of your portfolio just so I can evaluate the diversification. You said you had Little Rock and Memphis, how many in each of these markets?

So just this year Jason And I purchased two properties in Little Rock. Those are say one I think was around 125,000. One was a little over 100,000. And then I have two in Memphis, Tennessee.

All through one of the providers that we toured there with in that local market.

And is that it? Do you own your house in Newport beach or do you rent that one?

No, I own that home.

Okay. All right, so you own that one that you live in and then you've got four other rental properties. No other rental properties in the portfolio.

No, that's it.

Okay. So you're going to see like the sharpest contrast in the United States probably when you compare little rent Little Rock, which is super landlord friendly to Chicago, which is not as landlord friendly at all. Okay, so, so, so get ready for that one. It's going to be like whenever you face. And you eventually will we all do at some point in your ownership of those properties, if you hopefully keep them for 27.5 years, you're going to face a bad tenant in Little Rock and a bad tenant in Chicago, and it's going to be just like a totally, you know, black and white experience, I bet. Just a totally different experience. Opposite ends of the spectrum, you know, so that'll. That'll be interesting.

Yeah, hopefully that, that's an interesting experience. I have a long time from now.

Yes. Or maybe you never have. It would be ideal. But you know, odds are you will. I'm just warning you in advance. Okay, so, so good. Yeah, yeah, good. So, you know, but I wouldn't do. I definitely wouldn't be doing more than six in Chicago, given your diversification. Okay. Because you're basically in. In four markets, including your Newport beach non investment property. And then when you go back to do more, maybe next year do more in Little Rock or Memphis, or you could pick another market like Atlanta or a Texas market maybe, or something like that.

Okay. Yeah. Yeah. Okay. That's great. I appreciate that.

All right, so does that help you out?

Yes, very much. Thank you, Jason. I really appreciate your feedback. Thank you very much.

Yeah, my pleasure. And thanks for coming on the show, Jeff. And you know, I do want to say that I'm sorry I can't be kind of. I feel like I want to be really more definite about a lot of this stuff. But again, this stuff is a million shades of gray. It's just, it's never a black and white decision. You know, I can't say green light Chicago. It's perfect. It's like human nature. There's lots of little frailties and little idiosyncrasies. To it. And at some point you just got to kind of jump in and, you know, and make it work, even if it's not the exactly right thing, you know.

Well, you know, it just, it's two or three things that I heard about that local market that I found compelling. This market specialist was able to tell me the absolute lowest rent they've ever rented in a particular neighborhood within a certain parameter. And that number was great. It was within $50 of what they were telling me. Even if I got the lowest number, that'd be a great return, terrific result. And then the other thing about having people applying and teed up and lined up to rent your properties right away, just because that marketplace is so huge and so many people, that just gives you a sense of confidence that you're going to have a very good cash flowing property.

Without a great deal of risk that's going to sit vacant for a month or two months and that sort of thing.

Yeah. You know, I just got to tell you one more thing. I know we're kind of extending our conversation, but I think this will be interesting. You've probably heard my mom on the show over the years a couple of times. You know, she's been on maybe four or five times now. Right. And you know this constant debate I have with my mother. Your family members never really listen to you completely. Right. You know, a total, total stranger will invest a million dollars with me, no problem. My mom, if I could pry out, you know, 100,000 to buy one property, I'll feel like I climb Mount Everest, you know, like it's a huge success process. Right. It's just a weird part of human nature again. And so, you know, we all, we all know that. Right. And so, you know, my mom always did the Southern California thing, and in the last several years, she did buy some properties through our network and she bought one in Gulfport, you know, right by her in Gulf Shores, Alabama. Okay. And she just rented her house in Canoga park, which is in the valley area of Los Angeles. And once again, my crazy mother, who loves to get behind the wheel of a car, drove herself. Now she came, visited me in San Diego, then went up to Canoga park. And I don't know, she doesn't mind driving. She likes to drive. She just loves going on a journey and an adventure. It's a long, it's crazy. I mean, she is, I, I say my mom is an extreme do it yourselfer. But you know what, I, I kind of fight it and tease her about it. But in a way, it really keeps her engaged and active and involved in life. And I think that's a good thing ultimately, especially at her age and so forth. And so, you know, she rented that one and then she goes. Because she self manages everything, she does not use a manager or anybody to help her with anything practically. I mean, every time she goes to one of her houses, her trunk of her car is. It's got tools. I mean, it's like amazing. It's crazy, right? So, so then after the Canoga park property, she goes to Gulfport and she's working on renting that she puts her signs out, you know, on the corners, the little bootleg signs for rent, you know, and, and just her phone number on it and takes all the calls herself and, you know, all of that stuff. And I'm not suggesting this extreme self management, but I do suggest another version of it we've talked about on the show. But here's what my mom said to me just the other night that was really interesting. She said, you know, I just don't like renting these houses in these little towns. It's just, I just don't get enough action on them. You know, I don't get enough calls. And she said, I put all these signs out and I've only had, you know, a few inquiries on the property. And I said, mom, hang on a second. The property in Canoga Park, Los Angeles area that you just rented, that one's worth, I think it's worth about 450, 500,000 maybe right now. Okay? And she rented it for somewhere in the ballpark of $2,500, 0.5 RV ratio. And I said, what's your property in Gulfport worth? And she says, I don't know. And I said, well, what do you pay for it? And she says, I think I paid about 140. So I asked the address, I looked it up on Zillow. It looks like it's worth about 125 according to Zillow right now. Okay? So, you know, she bought it at the peak and it's, it's, you know, gone down just a little bit. No big deal, okay? But I said, what are you asking for rent? She goes, 1175. And I said, mom, look at this is the debate we've been having for years. You think you had such a success on your Los Angeles area house at a 0.5 RV ratio, if you rent, if you put the golf port place up at 0.5, that means you'll be asking, what, $650, you'll have a line around the corner. It's all about ratios. It's not about the price. And so you obviously understand that. Try and get your family to understand. Good luck.

Right? Yeah.

Exactly.

But to your point about Chicago, and that's why I mentioned that long explanation to your point about Chicago, in that kind of market you're going to have, you said it yourself at the beginning of this talk, there's a lot of energy. You're going to have a very vibrant mass market of a lot of people, a lot of service providers, a lot of contractors. So oddly, your repair costs will be very competitive because there's more service providers competing for business in a bigger metro area and you'll have a lot more tenants to choose from. So, you know, I think you're going to have a good experience there. I would do it, especially if you want to just knock six out quickly. I'm in favor.

Okay, great. Well, that means a lot to me. Thank you, Jason. I really appreciate your. Your feedback.

Thank you so much, Jeff. Appreciate you coming on the show and I appreciate your business, too. I'll stop the recording and then we can wrap up. Okay.

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