All Forum Posts by: Charles Worth

@Saran Sivashanmugam

A property is worth what someone will pay for it but a loan is based on an appraisal so just keep in mind when you go to sell it the buyer probably won't have a bunch of TK people telling them that all appraisals are low so they will probably want the same thing you do, a lower price.  The only other argument that could be valid is that the properties on the block are in need of repairs and as the block gets bought up the appraised values will rise because properties are better. However, I think MI is not in bad areas normally and this argument is generally more valid in worse areas or blocks with lots of rehabs.

With that being said, appraisals often have very different results depending on who is doing it. If you really want the property and MI tells you its really worth $8K more ask them to pay for another appraisal and put their money where their mouth is.

I also think your numbers are probably high. I think MI typically targets closer to 10% to 15% and that is with their numbers so I think yours probably leave out some things like capex, repairs, vacancy etc etc. 

@Travis Houck

There is no substitute for your own research imo. Some folks responding take fees or work with syndicators and one responded actually recommended his own firm.  Look for long track records, alignment of interest with yours and people you won't mind being in business with for many years because you will be. 

Also, good to keep in mind that we have had a huge increase in prices so most track records should probably be looked at with a little skepticism. Very few of those mentioned have track records going back further than 2008 and very few have large scale operating experience. 

@Jing Chai

I would look at it very very critically. In that size range right now good deals are very hard to come by and I can think of very very few that will take a non-acred because it increases the risk by a lot in terms of compliance etc. unless they really do know you well.

The metrics given really don't mean much I can make any old thing go to 16% IRR, the important thing are the items behind it. Also, careful of classes. I see a lot of stuff "class b" that is really C.

@Rio Peterson

Just thought I would chime in and I assume you know this but if you are looking to leave your job you would not have a securities license. You can only hold a license if you are employed with a regulated BD as far as I know (by license I assume you mean registered person). Something that happened in your past like a bankrupcy or other issues would need to be disclosed if you wanted a license again but with a certain timeframe of not working you will not have a license. 

Also, I would point out that, at least in my opinion, it could just be like cold calling brokers. They always tell you that you will be a millionaire bla bla bla. One in X number actully are and the rest flame out. Its worth it for the guy speaking to you because you are going to make money for them. Its not like he offered you 50/50 split for doing nothing. You are doing the work as I understand it and getting rewards and not even in cash but in deal credit right? In almost all deals the money gets paid back first, so you only get paid if the deal does really well. Yes you can make a ton of money, you can also make 0. Its very risky. Like commission sales poeple its just high risk high reward. Least that is how I look at it. I think the assumption that many have that all RE makes money and lots of it so everyone gets rich is nuts. That is the real issue and why not everyone, in fact very few, would probably jump at the offer as I read it. 

He could also just be a predator hard to know without being there. 

@Kenneth Hartog

What can go wrong? in short everything. Bad rehabs which result in significant work that you need to do, bad tenants who have more protections in a big city like Chicago than anywhere except maybe CA and NY, a backed up court system should you need to evict, an aggressive city that will fine you for your mistakes, violence, neighbor disputes, rodents, water damage, and on and on.

I will say that much of this is not unique to Chicago. I am from NYC and its not too different in terms of the risks, tenant protections and how aggressive the city is in coming after you with fines etc. The system can also be just as tough to navigate in terms of laws and regulations. the difference between say NYC or CA and Chicago is that there is a huge shortage of housing here and the property values already went sky high. So in NYC even if a property I owned burned down I think if the tenants had some type of protection (like stabilization or something) they would still be like forget it I am not moving. I could easily fill a place in a weekend here with no problems and very little fix up. 

Chicago is a bit tougher in my opinion because the crime is worse and it has not gone up as much as say NYC. There is certainly some gentrification but nothing like other large cities.  As such, I have found tenants and keeping tenants to be tougher and overall the management process to be harder mostly cause here they are scared to get kicked out there not so much. You also need to make sure to buy on the right block or crime can be a huge issue. 

With that being said, it is not all bad. Its still one of the few affordable big cities if you are buying on the south side and there is a major difference between south side prices and northside prices. If someone can do for Chicago what has been done in other places like NYC, it would be a big win for owners on the southside. The rents are also high enough, even on section 8 or in bad areas, to have enough rent to cover fixed costs vs. say a Midwest town where you are getting $600 a side on a duplex or $700. As an urban market, Chicago also has a large inventory of small multi (2 to 5 units) that qualify for SFR type financing as well as tenants used to living in these vs. in a single family home. So if I have a 3 unit that only uses one of my financing slots and my gross rent could be say $3,700 or even a little more.

Also while no one likes complying with city regulations, dealing with section 8 (if you have section 8 tenants) or getting fined, I also think it does let me know when things are not being done right. Sometimes it can be bad luck like when I get a trash fine when we were turning a unit but other times it means your property manager fell down on the job and I would rather know sooner rather than later. it does make things a lot more work sometimes though.

In short, there are a lot of pitfalls if you are going to invest in Chicago. You certainly need to be careful and you are best served making sure you have someone or a group of poeple who know what they are doing to aviod any issues and comply with all everything on the city side. 

@Mark Ainley responded to this and he knows the southside issues and how to navigate them as well as anyone. his firm operates in the trenches doing property management for himself and for investors on the Southside. 

@Rustam Uktamov

Yes but this is a probability game. The chances of some random person being Ted Bundy are very small. The chances of someone say being a killer who was normal human before yes it happens but its a small chance. There will always be outliers but imo this is more about whats more probable. 

@Pete Barrow

I think the slumlord thing is a misconception for many properties (not all). At least in urban core areas being a slumlord can be a lot more costly when you factor in city fines, vacancy (by far the biggest cost and risk considering that is when property get stripped), eviction times, possible lawsuits, etc. If on section 8 you also will have trouble passing inspections. You will also have to fix things eventually and its a lot more expensive to do so if you let it go for a long time. 

Thats not to say there are not many situations where its advantageous. In rent control or rent stabilized it makes sense not to fix things because they actually want the tenants out. These are normally the worst offenders you hear about. Its also works for those buying on heavy leverage as you can increase the NOI and refi or sell. In addition, if you are making a bet on the market you can buy more this way and the appreciation will more than makeup for any issues and many buyers will want to fix all the units to higher standards anyway. So any money spent fixing it before was a waste. It also works well in areas where the inventory is so low that moving is not really something most tenants will do like say NYC.

These are probably most situations where one hears about slumlords doing well.  just milking for cash flow though or just having some SFRs I think being a slumlord if not really all this advantageous even leaving out the human factor (i.e. your hurting your tenants). 

@John Defreitas yes better areas can have bad tenants too but its less likely and most people with decent credit and a job don't want to risk it for a few bucks. Most tenants in these areas have very little to lose and very little you can do to them. Not to say there are not good ones, I have had both but even a good tenant probably is one missing paycheck away from missing rent and has to make a decision to pay you or other bills most months. If you don't fix something or they get mad at your what are you going to do to make them pay? If they break something its going to be mighty tough to get the money from them. If they move out without paying what do you go after? 

What about tenant selection? Not too many 800 credit score tenants to choose from so is the person with a 600 score a deadbeat or just didn't have money to pay some bills but will pay you? Is the person with a record a bad person or just got a bum rap? These are decisions you have to make in a low income area you don't have to elsewhere so there is def some skill and luck. Even with all that a lot of mistakes will be made. 

In short, it takes a lot more skill and is a lot more troublesome. Could it be worth it, ya def I think it could but its going to be much harder and much riskier imo. 

That youtube video is crazy. It went from this is your way to financial freedom to well at least we didn't lose 100% of your money. You still have your terrible shell. Wow. 

Their lawyers must be losing their mind. They just can't stop talking. Like they just can't stop even if they wanted to. 

When I was younger I used to always get pitched on MLM and because I was younger I did a number of them.  I was definitely not cut out for MLM but it was very interesting to see how some people just crushed it and others fell flat. I think it boiled down to either having natural talent or working really hard and being able to switch up when something didn't work. 

I think of lower income properties in much the same manner. They have a bad rep and require a lot of work but you will always meet some people who made a killing. 

That inherent ability to do really well with these boils down to two things in my opinion. First, the cash flow (if you can actually capture it) can be great. This is even more true if is section 8, where the rents are inflated normally by being benchmarked to some metric that includes higher rent properties but where the property prices to buy are still depressed because well its not a great area. 

Second, at least if you buy the right bad area it can go up as the area improves. True that might take a long time or never happen but as long as you are not banking on it at least there is real potential there. This is probably a lot more true in urban areas like Chicago, NYC, Oakland etc. etc. where there is a huge huge difference between nice areas and bad so people start moving into bad areas over time.

With that being said, like MLM, most people will probably not do well and a select few will. There a ton of pitfalls that can just crush you. from bad tenants from hell to city regulations that are impossible to figure out to taxes to bad rehab jobs etc. It is just a minefield. Its definitely not something that in my opinion you can just buy and sit back watching the good times roll. 

By far once you buy the property (and buying the right property on the right block with the right rehab is very important) the most important thing is your property manager. These are about as management intensive as you can get. Most of your tenants don't care about their credit score, can't afford to give you a big deposit and will be really hard on the property. So you have very little leverage. Most are also fairly mobile and are one problem away from literally not being able to make rent. This is all assuming you have a generally well-intentioned tenant. If you have a tenant who knows the system and wants to play you, they will. It will happen eventually and if you only have one or two properties it can be a huge problem. 

Further even the best property manager probably won't take care of the property like you can because they are there to follow the rules and do a certain amount of work in exchange for a percentage. it is rare that they can or will be able to do certain things that really matter to the success of the property. 

As an example, I had a tenant that fell way behind on rent. Even once she started paying I had to call her every 30 days and she waited until the last day to pay every single month. My property manager wanted to kick her out and told her she had to pay or leave. Based on my interactions with her, including why she was late and the fact that she paid her last balance the day she got her tax refund I let her stay and talked to her about what I expected for doing so.  She ended up staying until I got rid of the property and even paid me my late rent when she really probably didn't have to because what could I really do to her at that point?

She also thanked me profusely for taking a chance on her. 

Course flip side she also called me every time she had a problem with anything and I sweating every month about my rent money.

In short, I think it can work but it requires skill (or learned skill) and a good amount of work. It also requires you do the work upfront to not buy on a bad block or a bad rehab (like the MI properties @Jay Hinrichs was talking about). Its definitely not easy.