CW 544 - Reflections on an Investment Property Tour of Chicago and Grand Rapids

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Hey, welcome to the Creating Wealth Show. This is your host, Jason Hartman. Thank you so much for joining me today. I am stuck in the Detroit airport. Fernando and I are here. Our flight has been delayed. We're not too happy with US Airways right now, but we thought we'd sit down and record a little bit and talk to you about some impressions from our Chicago and Grand Rapids and our little side trip to Detroit, our little semi private property tour that we've done here the past few days. It's been a really good time. So let's talk about that. And next up on our next episode, we will have a returning guest for the fourth time, the economist and author Harry Dent. So that'll be on our next episode. And hey, let's jump in and talk about the past few days.

So I am sitting here in the airport with Fernando and we just got stuck. We're angry a little bit, I think with US Airways in America Airlines because they suck. So if any of you out there work for them, you probably know this. So don't feel insulted because you probably agree with us. Anyway, we got stuck and it looks like we're going to be delayed. And you know the delay is always a weather delay so they don't have to give you any vouchers or pay for your hotel or make any accommodations for you whatsoever other than making you wait on hold for 35 minutes to try and change your flight and then make you wait in line again at the airport to try and change it there. So anyway, enough of my grumbling and griping because you know what if we keep this all in perspective. Look, our ancestors used to die traveling across the country, okay? They used to get sick traveling across the country. It used to take months to travel across the country by stagecoach and horseback. So life is pretty good. Okay, Jason, be grateful. Yes. So, yes, Fernando, we've got to keep it in perspective, don't we?

Yes, we do. I think we need to set our expectations. It's not as bad as it seems.

We're going to be stuck in Phoenix in a hotel there tonight and then we'll make our way to San Diego tomorrow morning and we will enjoy Sunday in San Diego and then have our mastermind meeting for Monday and Tuesday. So that should be really good. I'm really excited about seeing everybody there. But you know, we've been on our little semi private property tour here and the last couple of days we've just had a great time. Chicago in Grand Rapids and today in Detroit, the poster child for big government disaster. Fernando, what are your thoughts and impressions from this very interesting tour? This is the first time we've ever done an event this way. It's been a totally different type of property tour for us. Any impressions you want to share?

Well, I think it worked out really well. As you said, it was a small semi private gathering tour. We got to talk quite a bit with several investors that came to the tour and we were able to visit properties with two providers. Our big provider in Chicago and also a smaller provider, Mike and his team in Chicago.

You know, in Chicago it was just like a total study and contrast, wasn't it? Because in the morning we met with our big corporate local market specialists and their big team. We met in the boardroom, had breakfast at their office, got a complete tour of their, I think 15,000 square foot facility and met a whole bunch of their staff, the property management team, the development team, the rehab people. They have an in house lending department and all sorts of interesting stuff there. And then in the afternoon we all had lunch together, their team, all of our clients that were there, and then the new team, which is Mike and Jamie there are the small solopreneur type providers. And that's sort of the roll up your sleeves, give great service type of thing. The complete opposite of the big corporate provider. So really a big contrast for the clients, wasn't it?

Yeah, it was a big contrast. And we had a lot of questions during dinner and lunch. The clients were asking our opinion. Jason and I were providing the pros and cons of working with the two providers. And our large provider in Chicago, John was showing us around. The owner of the company was there as well and they're probably the most sophisticated of our providers.

I would totally agree with that. And you know what, let's just share with our listeners because I think this is going to be really valuable, some insight into the vacancy rate question, or not the vacancy rate question directly, but really the tenant turnover question. I think we were all pretty impressed with that. Many people listening are interested in investing in single family homes and many other people are interested in investing in apartments. I've done both. I do both currently. You know, it's just such a difference, Fernando, in the different quality of tenant you get in an apartment. When we heard from the head honcho of our big corporate provider and it was kind of interesting, that conversation he recounted from being at an industry conference. Do you want to share that?

Yeah, I think it was very telling of the difference. And we get these questions, questions from clients quite a bit. Quite a bit. And if you have quite a bit of money, why wouldn't you invest in an apartment complex as opposed to a.

Single family home or a portfolio of single family homes, you mean? Correct.

So the head honcho of the corporate provider that we work with in Chicago gave us this story where he was asked. The question came up during a QA session in front of many of the attendees of this conference about the vacancy rate on.

Apartments in this apartment complex. And the.

Owner or the provider of the apartment complex said very proudly that they only saw, they saw tenants staying for one and a half years on average.

So they were impressed that tenants stayed that long in their apartments and they had a couple thousand apartment units. So they were a pretty big sort of pseudo institutional investor. Right. But in the single family home category, the average tenant stayed much longer, didn't they? Yes.

3.8 years, almost 4 years is the average stay for a tenant in Chicago. That's, that's actual data from, from the provider. And of course, you know, for new investors, you know, just to recap on how important it is to keep tenants in the property, when you lose a tenant, you know, there is a turnover cost. There's the vacancy when you don't have a tenant there, there's, there's just cost for lease up. You know, you, at times you could be losing, you know, two, three months worth of your income because of turnover. So it is very important to look at the contrast and why, you know, in many ways what the provider in Chicago was describing is they have this operation.

It'S fine tuned to a degree where they treat these single family homes as small apartments almost.

I call it virtual apartment investing. So if you're a large investor, and I know we have investors all over the board. We have people who are just buying a couple of single family homes for investment and people that are buying large amounts of single family homes. And for example, I met with one of our clients a couple weeks ago, Derek, I think he said he's got 42 units now and is building up from there and is going to build a big portfolio. You, of course, Fernando, you have 70 units now and you're about to do a refinance, which we're going to talk about on a future episode because you did a great analysis. As we were driving around Detroit today, or on the way to Detroit, you opened up your laptop, we're in the back of the Suburban and you were showing me this analysis. I love that. We'll talk about that on a future show. But where you're going to refinance and pull about three quarters of a million dollars out of your portfolio, what should you do, where should you invest and what kind of difference does it make to your cash flow and your overall return? So that was really interesting. But turnover, reducing tenant turnover is key. And one of the things you do, Fernando, that I really like is you try to get two year leases with all your tenants.

Right, right. Yeah.

So yeah, reducing tenant turnover is obviously key. And in apartments you definitely have a more transient tenant base. Apartments require a lot more attention. I've made a lot of money with my apartments. They've been great. But I've also made a lot of money with my single family homes and they've been great too. So, you know, the single family home at the end of the day though is just such a simple and such a proven investment with better appreciation, by and large, I mean, nothing's always true. You know, there's exceptions to every rule. Better appreciation than apartments and certainly better tenant quality. That's, that's, I'd say always true. So a lot to think about there. But let's talk about some of the other impressions. You know, I was really impressed with Grand Rapids. I mean, I got to tell you, we saw some historic houses today, we saw some suburbs of Grand Rapids and here we really talked a lot about the land contract investing. So in this market, our investors have the option to invest in either the paper to be the banker to hold the land contract, which is basically another type of note or mortgage, but not exactly the same. Different and better characteristics in many ways. Depends on the state though. It varies state by state. But in Michigan it's pretty good. Or you can actually direct buy the properties. But for self directed IRA Investors especially, or investors who cannot get financing. If you're a foreign national, self directed IRA investor, you've got over 10 properties, you know, and your spouse, if you have a spouse, has over 10 properties, you. And you're at your Fannie Mae limit now, you can do other things, of course, we've talked about that many times. But if you can't get financing very easily or very attractive financing, being the bank is a really good option. And especially inside a self directed ira, it's a great, great choice. So that option's available. We've done shows on that in the past. We won't go into that in terrific detail, but I think the Grand Rapids market is particularly appealing there. And you know, the rates of return can be anywhere from, you know, 12, 13, 14% up much higher than that. If they pay you off early by selling or refinancing, your rate of return can go up dramatically. So, you know, we've seen investors get 25, 30% return on those land contract investments. And you don't have the management. So there's some pretty attractive characteristics about it. Any other comments on that? No.

I was impressed with the provider there. I think Justin did a great job showing us the properties. I think the investors got to ask many questions. I think it was very valuable. I was impressed with Grand Rapids in general. As you said, it's half a million people, very pleasant location. We got to see some of the suburbs. That was actually, I was even more impressed with the suburbs.

Me too. Me too, the suburbs. I mean, some of these suburban parts of Grand Rapids were just charming, like charming towns where you just don't have this investor community so there's like no competition in them, you know, it's pretty neat.

And the team that he has in place also was impressive. And we got to have dinner with them. Lunch with them. We talked quite a bit. We saw the different stages of homes. He showed us properties that he's considering buying, properties that is halfway rehab.

And some of those were disgusting.

Some of them, they didn't want to stay there for too long. They were so.

But remember that one house we saw that. I think he had purchased this one, but it had done nothing to it at all. Where it had the disgusting sofa and mattress and just trash all over the hello Kitty backpack on the floor. Like a hoarder lived there. And they didn't take anything with them. It was amazing.

In the comment, one of the investors, David, that was with us on the.

Tour, we had two Davids on this tour actually.

Right. So Dave turned To Ryan and the other investor, another investor, and he says, you know, when you look at this, you have to mentally remove all the trash, all of the cosmetic stuff out of the way so that you look at the fundamentals. And he was absolutely right. The fundamentals of the house were beautiful. You know, it was just a matter of picturing how it would look once it was rehabbed, painted the carpet and so on. So I was really impressed.

Yeah, absolutely. It was very interesting. You know, we had such great clients on this tour and we learned so much from our clients and just a great team all together. So, you know, we had David, Ryan, Adam, Jasmine, the other David, John, Samantha, Stephanie, Mike, Jamie, Justin, and, you know, members of his team as well. It was really neat. But you know what I particularly enjoyed on this tour? And it wasn't really about real estate. You know what I'm going to say? I think, Fernando, it was. We went to dinner one of the nights and we didn't go. When we were at this dinner, we didn't go with any providers. Okay. Now that was. We were in Chicago. That was Homewood. Yeah, we were in Homewood that night. And we went by ourselves, just Fernando and I and the clients, no providers there, so we could talk freely and critique what we saw and stuff. But what evolved after that is, you know, we were sitting at dinner for quite a while. We had a big round table and we were all having a good time, having some drinks. And you decided, let's not get dessert at the restaurant. Let's walk down to Cold Stone, the ice cream place. And we all got something there. We sat down at a table and we formed what I call the Cold Stone Philosopher's Club.

Yes. Conversation got big. Really deep in that Cold Stone Philosopher's Club.

That was awesome. And we just sat there, I don't know, for an hour, hour and a half, talking about every issue under the sun.

We were there so long that they closed the Cold Stone. They turned off the lights to give us just a slight hint that we should get out.

Exactly. That was pretty cool. But then we spent the night there. We did the Grand Rapids thing the next day, and then Detroit today, so. So, wow. I always talk about Detroit being this total disaster. It's just a complete mess. Who knows if and when it will ever come back? But this is a population, this is a city that was really one of the world's flagship cities in the past. And a population has gone from about 1.8 million to about 7 or 800,000. So it's been more than Cut in half and just the devastation and destroyed. And the city really is set to accommodate about 3 million people. So what I always say is that all of my theories about investing in economics, they work pretty darn well. They're proven historically. The one thing you definitely cannot fix is out migration, destruction of the population, people leaving. You've got to have at least stable, if not increasing population to make your investment work. With the population declining, all bets are off. That's something you just really can't fight against very well. What were your thoughts on Detroit today?

It was depressing.

You said depressing.

Depressing, yes. It was.

Incredible to me, actually looking at some footage that we took today as we drove around Detroit. I think 30% of the homes as we approached that was amazing downtown were boarded up. They were in various stages of distraught. We saw people just hanging out in front of the homes. We saw very rough neighborhoods. It gave me this picture of.

Despair. And unfortunately, I didn't see neighborhoods where maybe this is as bad as it gets and it will get worse. I think that there's still more.

Resolution that will come. I didn't get a feeling that this is turning around.

I don't know. I didn't get the feeling it's turning around either. I mean, the devastation, you know, and I think Detroit really suffered. And you asked me today, Fernando, what was it? What really killed this city? And I think it's a combination of a few things.

Corrupt mayors. I mean, we just, you know, you've heard of probably Kwame Kilpatrick and there have been many other corrupt politicians that have run this place into the ground. Japan coming up in the auto industry in the 70s, obviously, and really giving the American auto industry a huge run for its money. The labor unions just pushing too hard and placing demands on these auto companies that were just too difficult. You know, at some point you just say the climate here is just too unfriendly. We're just not going to do this.

You know, so the scale is so massive. We looked at buildings, entire buildings today that were unlivable.

And in big, giant commercial buildings, too. I mean, you know, lots of homes, 30% maybe in total despair, but the big commercial buildings wasn't that amazing.

Yeah, it was just jaw dropping. And as we were driving, the number of Fort Lease signs for sale and everywhere, everywhere. It just. What also I kept thinking is this. This is not something that happens overnight. You know, it must have taken decades of bad thinking and improper governance to get to this point. And it's sad to see that a City of this size can get to this point.

Yeah, it really is. It really is. I mean, hope for Detroit turning around. I don't know. I wouldn't bet on it. You know, I really wouldn't bet on it. You know, let's go back to Chicago for a minute and talk about some of the other things there. One of the concerns that people have are property taxes and they are higher, but the cash flow and the rents make up for it pretty nicely, don't they?

Yes, they do. And the providers there, they optimize their business such that they can extract the most out of the properties. One of the items that I was.

The homestead exemption. Is that what you're going to talk about? And they rent to own.

Rent to own. They have a process for rent to own that alleviates the property taxes. And given, you know.

Well, it doesn't alleviate them. It reduces them.

It reduces them. Right. But by several hundred dollars in many cases, which does help. The other thing that one of the providers do to the homes is they try to reduce the maintenance costs. And what we saw and understood that was done is they remove dishwashers, for example, from the homes. They leave the hookup in case the investor decides to sell the property later.

On or the tenant wants to put one in. Well, they can't in their case because they build cabinets instead. But in some providers do no dishwasher and just leave a place for a tenant to hook one up if they want to.

Right. Because the providers try to do a very good job during rehab. The large provider does. 75% of their homes are gutted to the studs and they redo the wiring, they redo the plumbing.

Looking at the amount of rehab they do really amazed me. And the, the way they've got such an assembly line, such tasteful colors and, and durable carpet and great flooring choices and great countertop choices. I mean, really impressive there, you know, makes it very easy to maintain and, and to scale. I'd say if anybody listening wants to do a big portfolio of single family homes, we've got to pick some certain providers for you that can really help you scale that. The markets I'd say would be Chicago, Memphis, Atlanta, would right at this moment, at the time of the recording, be my choices with our teams there. But that may well change depending on. When you listen to this.

Yeah, certainly the scalability in Chicago exists. We talked quite a bit about the inventory there. We, I think are still.

Many months, maybe a few years away from, from using up that inventory.

Yeah, the shadow inventory of theoretically about 20 to 25,000 homes. But that's in a big market, so don't let that number scare you. It's not that big in comparison to the overall market size, but you know it is because when you have these judicial foreclosure states, things go much slower. And you look at Florida, you know, those markets take a lot longer to correct, which is a good opportunity for investors because the prices haven't really bounced back back up that much yet. Because the foreclosures are still clearing the inventory in the pipeline, the properties will likely get more expensive.

And as we discussed with the provider, they do have members of their team that fight property tax increases. They appeal the assessments that happen.

By the county and by the city of Chicago and trying to keep those in check, they're already pretty high. But as Jason mentioned, it makes up the efficiency.

The.

Management of property taxes through lease option, creative lease options help alleviate the expenses, which means that the overall cash on cash return is very strong in Chicago. It does work. The numbers do work well and you have strong providers there. We should also discuss our small provider.

But before you do that, I want to say something. The other thing of when you have a tenant that stays on average 3.8 years Overall, your investment is really going to perform well. And I want you to think about something, investors. You know, we've been reluctant about going into this market for many years and we've been in the Chicago market for, I'm going to say around a year and a half now. And we were reluctant about it. We thought about it, you know, five years ago, six years ago, okay. You know, just never liked it because it's not the most landlord friendly market by any means, certainly has high taxes, it's a liberal, corrupt kind of government. I don't like any of that stuff. But here's the big. Here's the big. But if you will, ha ha, pardon the pun, okay, think about it. Chicago is a world class city. If you go to Europe and you talk to someone about what are the big cities in America, what are the big world class cities you'd like to visit in America? They're going to say New York, Louisiana, San Francisco, Chicago.

So as I was saying, our small provider, in talking to the investors that were in the tour who were in the tour, the question came up about the difference between working with a small provider versus a large provider. And here's, here's something to keep in mind. A small provider will typically be more flexible in working with the investor. And if the investor wants to have A preference for longer lease terms or adjustable lease terms. And they want a different type of rehab paint or carpet or. Yeah, a preference that doesn't fit the box of the big provider.

It would make sense to work with a small provider.

Hey, since we're in Detroit right now at this airport waiting for our late plane, I'm going to give a Henry Ford quote because I think it's fitting. Henry Ford, he was the assembly line guy. That's the big provider Fernando's talking about. Right. He said you can have your model T in any color you want as long as it's black. Okay.

So Harry, Larry's provider actually was better than Ford because he had three different finishes. So you could have anything you want as long as it was one of those three. But nothing taken away from the big provider. They're doing a great job. I was thoroughly impressed. All the questions that we had were.

Answered in a satisfactory manner. The amount of knowledge they had was great. But there are differences between working with the small and big provider.

And it just depends what you're looking for. And so your investment counselor, whether it be Sarah or Fernando or Terry or Dave or me, we can help you choose the right provider for your situation and your investment goals. Hey, we're going a little long. Let's kind of wrap it up. Just a closing thought on the tour this weekend or just anything else you want to share?

Well, we tried this sort of a small group tour and I think it worked out well. I think that the comments that I received from the clients were very positive. I think that the intimacy was really a big factor in making it successful. And the providers also enjoyed it. They sold properties during the tour as well. So that's a good way to measure how successful the tour was.

It absolutely was. I love it. When we were driving in the car from Chicago over to Grand Rapids, it's about a two and a half hour drive. David and Ryan, one of them was looking at their phones, I think it was David, and he said, hey, I just bought a property from you as we're driving along the freeway. Because he got confirmation back that the deal was accepted. So congratulations on that and all the properties purchased during the tour. And thank you everyone for coming out. We really appreciate it. This was a totally new kind of event. We usually do larger tours where we've got, I don't know, 20, 30, 40 people. This was just a totally different kind of thing. And Fernando, you were the one who suggested it, so. So it was kind of a last minute thing. We didn't have time to do a big tour, but it was a lot of fun and I really enjoyed it. On our next episode we will have Harry Dent talking about how to profit from the demographic cliff. So thanks for joining us and we will talk to you on Wednesday at our next episode.

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