Nov 13

There is talk of national rent control, with maximum rent increases of 3%, as well as only just cause evictions..

If your rents are below market, they could remain so forever. When it comes time to sell and you are getting $600 a month and the neighbor $800, the value of your property will be gravely diminished.

This punishes owners who allow long term tenants to remain below market. Eventually this will punish those tenants as well.

In some markets perhaps owners are evicting to gentrify, but in our market when an owner uses a 28 day no cause notice it generally means there is a behavioral problem. This will result in bad tenants staying and annoying their neighbors longer as well as more contentious relationships between owners and people that are problematic.

https://www.bisnow.com/national/news/multifamily/whats-in-aocs-national-rent-control-proposal-101041

“The economists are right, and the populists are wrong,” the Washington Post wrote in an editorial. “Rent-control laws can be good for some privileged beneficiaries, who are often not the people who really need help. But they are bad for many others.”

Specifically, the Place to Prosper Act calls for a cap of 3% or the annual U.S.. Consumer Price Index increase, whichever is greater, for rents in housing markets nationwide.

Jan 20
Note, this began as a discussion between myself and another well known Milwaukee investor.
 
I have been an investor in Milwaukee real estate since the seventies. I have seen the market roller coaster many times. My belief for the coming months is:
 
In the next 12-18 months, we will get to near 2008 levels of correction both the mid-upper end of the market and the lower end, with the middle being less affected. Trump could make it worse, or Trump could make it better. It is not in Trump’s nature to not be involved an issue of this potential magnitude.
 
Mid-upper, 350k-1.5M range depending on the location, valued home sales will suffer as interest rates rise and the limits on tax and interest deductibility make them less affordable for those who are currently, marginally able to have such a home. In some markets, such as south FL and NYC, we’ve already seen discounting in the upper segment. It will get worse. Not many people, including politicians, feel sorry for the overextended Yuppie with the leased BMW in the drive of his McMansion that is filled with furniture bought on credit while working at a job he got with his degree that came with a significant college loan debt.
 
Low value (sub 100k) homes will take the hit as wages have remained static and interest are rising. We have been returning to “soft” underwriting. This is a segment where homeowners are more likely to quit when it gets hard. Those owners will fail. Unfortunately, no one in power truly cares when a poor family loses their home. The Dems say they care, but many secretly rejoice as each failure allows them to increase their political base by verbalizing outrage and empty promises of help. The Reps loyalty is more to the bankers than the homeowners. Rand Paul cannot change the world by himself.
 
Learning from the 2008 debacle, the government will prevent the full-on implosion of the middle. Too much economic and political damage if the voting class loses their homes again. But I still expect a 10-20% discount when owners must sell.
 
Throughout my career, when owner-occupied housing has suffered, rents and/or occupancy rise. Beginning in 2008 and continuing to this day, we’ve seen the most robust rental market of my career. In 2005-2007 we had our worst vacancy rates as every good tenant was suddenly, and temporarily, a homeowner.
 
When the economy is terrible opportunities abound.
 
In Carter’s 1980, prime rate was 21% at one point. Nobody was buying, well nobody but me and a few of others. I bought a hundred fifty units in the ten years between 79 and 89 when owner-occupied mortgage rates were consistently over 10% and rental mortgages near impossible to obtain.
 
In 79-89 we bought properties that worked at the 10-12% interest we were paying. I structured my buys so that I survived and made enough to support my family. When rates fell, values increased. Interest rate chart.
 
The longer the downturn goes on, the higher number of tired landlords, or their estates, will be seriously motivated to sell. They will create ways to make to make sales happen. Much of my purchases in 79-89 were owner financed because banks were not even enthusiastic about lending to owner-occupants at the time.
 
The combination of Amazon and remote working arrangements killed most commercial property value. My daughter does something important for AT&T corporate. She has worked from her living room for the past five years, and AT&T sold her former office.
 
The Chinese are selling off their US holdings.  WSJ: Chinese Dumped $1 Billion of U.S. Real Estate in Third Quarter, Extending Recent Retreat (Dec. 4, 2018)
 
Millennials don’t buy homes. They live in mom’s basement, or they rent. 
 
My three-year view:
 
I have good feelings about residential rentals across most segments. This will only hold true if:
• You have fixed rate financing; or
• You structured your purchases so that they still cash flow at 12% interest.
 
I think flipping will be a flipping foolish thing to do for the foreseeable future. Even if you are buying well today, you are buying higher on the price curve than you will be selling at three to six months from now.
 
Keep your powder dry for the next six to twelve months, i.e., hoard cash. Opportunities will abound.
 
Warren Buffet: “Be fearful when others are greedy, and be greedy when others are fearful.”
 
Jimmy Buffet: “If life gives you limes, make margaritas.”
 
Further reading: (A lot of WSJ pay-walled articles, but they do some of the best research.)
 
 
 
 
 
 
Jul 11

A worthy read:

Evictions: They Are Not The Terrible Landlord’s Fault

Apr 12

From today’s Milwaukee Journal Schneider: Desmond’s ‘Evicted’ is a flawed masterpiece

The article misses the mark in some aspects.
 
Homes in Milwaukee’s poorest areas often can be bought for as little as $8,000, with rents running upwards of $500 a month. In virtually no time, landlords can own the properties free and clear and the rent they collect is pure profit — as long as they can collect. As succinctly put by one of the landlords featured in the book, an African-American woman named “Sherrena,” (pseudonyms are used throughout the book) “The ‘hood is good.”
 
This furthers the misperception that landlording is a “get rich quick” scheme. Sherrena made statements to Desmond that sent up red flags, at least to us in the industry,  that she was already in the throes of failure at the time of the interviews.  

Attorney Heiner Giese did the research to discover Sherrena’s identity.  She was not becoming wealthy on these properties.  Instead, Sherrena began losing her buildings to foreclosure shortly after the Desmond interviews and was out of business well before the book was published.  Many of her properties have since been razed.

However, Schneider does recognize a fact that is missed by many who look at rental housing and urban issues from the outside

 

Further, despite the book’s grim portrayal of landlords, one can only imagine how far these neighborhoods could fall if landlords weren’t there to keep at least some semblance of order. If housing laws were to squeeze the amount of money property owners could make on their rental units, they may simply abandon these homes altogether, leaving a lawless landscape devoid of structure.

 

Aug 23

We spent much of week two of our three weeks out west in the warehouse district of Los Angeles. I was shocked at how large LA’s homeless population is. I was also a bit shocked as how bad the area smelled – stale urine, extreme heat and no rain to wash it away is not very pleasant.

It is really a sad scene given the overall wealth of our country and of SoCal in particular.

An interesting real estate related concept in LA was the number of what appears to be privately owned SRO (Single Room Occupancy or rooming houses) Nice, modern buildings.

So even in this most economically, and probably socially, challenging housing environments, rental owners are able to find workable solutions by providing housing uniquely suited for a specific population.

The third thing I learned while out west for much of July is the most interesting. It has kept me busy for the past three weeks. … More to come 😉

Mar 13

The Milwaukee Journal Editorial based on Matt Desmond’s new book Evicted builds upon some misperceptions about the rental industry.

A NYT reader’s comment on Desmond’s Evicted more closely follows what typical owners see when trying to run lower income housing.

The Journal editorial echoes Desmond’s advocating for legal representation for tenants in most evictions.  If you frequent eviction court you seldom see a day without Legal Action representing tenants.  ATCP 134 provides enticement for attorneys to represent tenants  tenants tin cases where the owner is doing wrong.

Implying tenants need legal representation simply perpetuates a myth that wrongful evictions are common and owners somehow benefits from an eviction. In fact by the time it is over the owner has lost two to three months rent and often more.  Legal representation for tenants in evictions seldom does more than simply let the tenant get another month of nonpayment before leaving.
 
In an average month eviction judgments in Milwaukee County exceed $847,000 – every month.  But this is but a fraction of the losses suffered by property owners.  Of those evictions, only a third of the cases had money judgments other than the court applied fees.  Was this because the tenant did not owe rent?  No, more likely because the owner did not want to waste more time chasing a judgment they will never collect.  Those in our industry as well as those outside of the rental business will tell you that less than a quarter of uncollected rent ends up in eviction court.
 
This is money removed from housing and increases costs for the rest of the tenant population. While some tenants may use the money for real needs like shoes for kids, some use it for other things that further harm the community.
 
Then there is the comments about constructive (illegal) evictions.  While statements like this flame the fires of hatred against landlords, such acts seldom occur and when they do there is adequate remedies for the tenant.  I own two duplexes that a guy walked away from his 1/3 down and eight years of payments after he spent a weekend in jail because he threw the tenants’ belongings out on the front yard and changed the locks.  Seems the tenant did not pay rent and when he went to find out why, he also found they broke the front picture window.  His first stop after getting out of jail was my office to see if I would buy them for the remaining mortgage.  Small owners take these things too personally…
 
Desmond’s book has brought the issue to the forefront. And this is good.  Its is our industry’s job to make sure this does not turn from what it is, the bringing a real problem to light, into yet another excuse to bash the rental housing industry.
 
The part of the discussion that would be helpful to the overall community is increased housing vouchers.  Universal food stamps for people in need was a good first step many years ago. Housing and utilities vouchers for those who need them the most would be a good next step.
 

Mar 24

In the past few months I have had nearly a dozen of conversations with other rental property owners that have turned to some variation on the question ‘What do you attribute your success to’ My story is simply not that interesting.

It is a story of working hard at generally boring things. Yes, I have lived well off landlording for three decades. Yes, I now have time to walk  thirty-five to fifty miles a week, often barefoot on wet sand. Yes, I have the time to travel around the country to help my wife with her business.  I still work remotely when I am away form the office, just not the insane hours I did as a kid.

But the truth is mine is just not an exciting story.  Seems most people want to know how to be independent and wealthy by July.  They do not want to hear about the multi year, multi decade journey it took me.

I used to say ‘Everyone says they want to be me, but none of them are willing to do what it takes.’ That was too egotistical sounding and I only used it in private conversations with folks who pushed me to tell them “the secret.”

A couple of years ago I read a quote by Hugh MacLoed which I like better.  In fact I liked it so much I bought a numbered MacLoed print for my office wall.  At least it was there before my staff redecorated the offices … I haven’t checked in a while.

“What people say they want and what they’re willing to work their ass off to get are two different things. ” – Hugh MacLeod

I simply focused on one thing most of my life,  pursued boring fundamentals with dogged persistence and took the time to learn the laws that affect my business.  For me this worked well.

Focus. Today the buzzword in business start ups is ‘pivot’ and the mantra is ‘pivot early and pivot often’, meaning a complete change in direction when things get tough.  Tough seems to mean in their terms that you aren’t ready for a one hundred million  dollar IPO and it’s already been six months so it must be time to do something else. I wonder how many of these young entrepreneurs  give up just before success.

As I criticize the pivot I must admit I too had a major pivot in the very early days. When I was in my early twenties I wanted to own a state of the art contract computerized manufacturing (CNC/CAD) company.  My background was in manufacturing and CNC machining. I loved the challenges and logic of making things.  I started buying rentals with the goal of using them to finance the machine shop.  That dream hit a bump in the road.  My potential business partner had some legal problems that I was unaware of until we went for financing.  I stayed with the rentals and grew that business.  So on some level this was a pivot, but not in the sense it is used today.

Instead of the pivot I went for incremental improvement.  For thirty years I did little else for income that did not involve rental housing. Every day I try to do this better than we did yesterday.

It was only in the last few years that I diversified a bit from Milwaukee rentals by helping my wife with her business and began exploring Southeastern Florida real estate as well as some angel funding stuff. You will not create the next PayPal, eBay or Google through incremental improvement, but it is a path to a decent sustainable lifestyle.  I see it as a fault of mine that my dreams were not larger, but I am fairly content where I’m at.

Persistence is still being there when everyone else gets tired and goes home.  Persistence is when you still show up and giving it your all even though you’ve had  three bad months in a row. Persistence is eating Kraft instant macaroni four times a week for months on end to finance a rehab. Persistence is leaving for work at 6 AM and not arriving home until 10 PM every day for weeks on end.  (See my follow up post on ten things I should have done differently) Persistence is staying the course when everyone around you says it is a no win game.

Despite how it is spelled, there is no fun in the fundamentals. Once the adrenaline rush of buying a building wears off so does the enthusiasm of many.  Rental real estate is a tough business.  When my son said he wanted to follow me into the business I told him to find something better to do with his life.  And landlording is a business, not an investment, at least not at the levels we are dealing with.

Bookkeeping, taxes, employees/HR, purchasing, collections, filling vacancies, evictions, customer service and dealing with bureaucrats are all part of the unfun fundamentals.

To succeed at landlording you have to focus on these fundamentals and pay attention to a myriad of laws and rules that affect us. I’m pretty sure that must every business out there is similar in this regard.

I’ve done all of those, others who are successful today have shared similar stories.  Then there are those who seemed to hold such promise at the beginning but suddenly were washed out.  Most of them looked for a shortcut, ignoring the fundamentals and then gave up when it got a wee bit hard.

May 11

Wolf Richter writes:

 

Steps in the Fed, and trillions of dollars get printed and handed to Wall Street, and asset prices become airborne, and Wall Street jumps into the housing market and buys up hundreds of thousands of vacant single-family homes, drives up prices, and armed with free money, shoves aside first-time buyers and others who would actually live in these homes, and turned them instead into rental units. Now in over 1,000 cities, prices are, or soon will be, as high as they were at the peak of the last housing bubble.

The difference? Last time, all that craziness was called a “bubble” with hindsight. This time, it’s called a “housing recovery.”

If you are planning to buy now and catch the rising market you should read this and think 2006…

Dec 21

A member of the LandlordAssociationOrg Yahoo Group asked:

I’m considering investing in residential real estate and becoming a landlord. If I proceed down this path I would be inclined to buy a house rent it, learn, then buy a bit more every year. So I need some advice:

My inline reply

1. Is it a good idea?

I bought a duplex in December 1977 when I was 21, another in November 1978.  A couple in the spring of 1979 and a few more before that year ended. By May 1981 I had 70 units and quit my fairly good job. I have had a paycheck that did not bear my signature since.   Today we employee around 30 people in two states.

2. What do I need to know?

Everything you possibly can learn at someone else’s expense rather than making expensive mistakes yourself. 😉

Start with learning landlord tenant law and small business management.  Not knowing the law will cause you to fail.  Not thinking of this as a business will cause you to under perform and over work.

3. Any books or courses you recommend?

  •  Any books by John T Reed  that interest you.  They are the ones I wish I wrote.
  • The E-Myth by Michael Gruber
  • Landlording by Leigh Roberson
  • An oldie (first edition 1959)  but goody is How I Turned $1,000 Into a Million: In Real Estate in My Spare Time by William Nickerson.  It is not the path I took, but the principal is sound.

4. Any organizations I should join?

Any local landlord group or apartment association.  Try a few and see where you fit in best.  I attribute a lot of my success to being an active board member of the Apartment Association of Southeastern WI.  I have been on the board all but two years from 1989 to today.

Being active in the association you choose is the key as you will learn of  opportunity and risks  before most of the rest of the industry.  It will also speed up your learning of the laws that affect your business.

 

Jul 10

You look at conversions such as the knitting factory being turned into loft apartments on the near Southside and you wonder ‘How could they afford to do this, in this market?’

The answer is Low Income Tax Credit Financing.  A brief overview is you design a project, go to the state (WHEDA) and apply for tax credits.  If all goes well you and you are approved,  receive federal income tax credits.  There is a formula based on the amount you spend, the number of units that are reserved for occupants below the county median income and a bunch of other factors.

These credits will be far in excess of what a normal investor/developer can personally use.  So they “syndicate” the tax credits to an investment group.  The investors get income tax saving in exchange for the money you need to put the project together.

It is a very competitive application process.  It is a very intense process. It is a fairly expensive process.  If you are looking for an easy dollar, you are looking the wrong way.  I speak from the experience of having tried and failed at obtaining tax credit financing to create accessible infill housing on the near north and near south sides of Milwaukee a bit over a decade ago.

But if you can break into this market you can do well, while doing good.

So it was a decade ago and I haven’t tried since, so why bring it up today?  The July Apartment Association meeting features Keith Broadnax of Great Lakes Capital Fund, one of the tax credit financing investment groups.  Years later I still find this was an intriguing opportunity. Maybe someone in attendance will become the next Gorman and Company.  😉

When: Monday, July 15, 2013 at 7:00 p.m.

WhereThe Best Western, 1005 S. Moorland Road, Brookfield 53005

Who:  Keith Broadnax of the Cap Fund

Cost:  Free for current AASEW members, $25 for guests and expired members.

 

 

 

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