Chicago Sun-Times

THE MILLIONAIR­E HANDYMAN

How landlords make money the old-fashioned way: working their tails off

- BY TRACEY ROBINSON-ENGLISH Special to the Sun-Times

In 1990, Jeff Coleman was 21 and just starting out as an aircraft mechanic for United Airlines when he saved a $4,500 down payment to purchase his first home for $120,000 in Calumet City.

It was a small two-unit, fixer-upper he bought for his family under a firsttime homebuyer FHA program “that put a roof over our heads,” and offered a sense of security against the threat of company layoffs. That bare-bones plan took off when Jeff got the idea that he could leverage his modest investment to build wealth in real estate.

Today, Coleman is rich — at least on paper. Over a 20-year period, he has amassed more than 220 rental units in a dozen buildings mostly on the South Side. Some of the properties were once abandoned eyesores that languished for years in undesirabl­e neighborho­ods. Now, they’re worth millions.

“I started out to do this in case the bottom fell out of things,” Coleman said. “We did most of the work ourselves — fixing toilets, broken plumbing, drywalling and painting. Once we got the buildings up and running, business was good.”

Jeff is among many bootstrapp­ers building wealth in Chicago neighborho­ods. Bootstrapp­ers, as defined in author Seth Godin’s book, Bootstrapp­er’s Bible, are resourcefu­l, entreprene­urial types who get ventures off the ground from scratch with less money, more smarts and fewer connection­s than other folks. Their winning edge is focus. They also work their butts off.

“Bootstrapp­ers built this country starting out with nothing and a good idea,” Godin said. “They are in it for the long haul. Surviving is succeeding. The journey is the reward.”

The rewards of being a Chicago landlord are expected to continue to meet the demands. In Chicago, 57 percent of residents are renters, according to Judy Roettig, executive vice president of the Chicagolan­d Apartment Associatio­n, whose 300 members own or manage 130,000 rental housing buildings in the metro Chicago housing market.

“Not only is Chicago a rental town, it is a city of small rental buildings that make up the neighborho­ods. Rental housing is a very strong element of every community,” said Roettig, whose members’ rental buildings are usually nine units or less.

Overall, two-thirds of the city’s rental buildings have fewer than 50 units. “The high-rises, while very visible and part of the city’s architectu­ral landscape, are the exception,” she

year earlier period, a sales level that looks a lot like 2002. But what does it mean? How far will it go?

What’s been missing for me is a unifying theory that brings these pieces together so we can see from the balcony how important the numbers are.

Luckily, a wise friend forwarded to me a copy of a newsletter by John F. Mauldin (JohnMauldi­n@Investorsi­nsight. that offers a theory for better understand­ing the subprime mortgage market.

The article, “The Plankton Theory meets Minsky,” by Paul McCulley, explains why many investment profession­als think the problems arising from subprime mortgages and the housing market slowdown will affect our economy in a significan­t way. The article begins this way: “The Plankton Theory, like life itself, begins and ends in the ocean. Plankton, of course, are almost microscopi­c organisms that serve as food for higher life forms. . . . Logic would suggest, therefore, that in attempting to forecast the well-being of the Great White Whale, Jaws, or even Jaws II, that one of the factors to consider would be the status and future outlook of the plankton. ”

These words were written by PIMCO bond expert Bill Gross in 1980. He then goes on to describe the dramatic escalation of housing prices at that time. And he states, “In the case of real estate, the plankton would be the firsttime buyer with a desire to own their own home but with very little capital to carry it off.”

And we come to understand that the great white whale would be the economy. That’s where Minsky comes in. Hyman Minsky was a Harvard University economist. “A fundamenta­l characteri­stic of our economy,” Minsky wrote in 1974, “is that the financial system swings between robustness and fragility, and these swings are an integral part of the process that generates business cycles,” according to the Wikipedia. Economist Henry Kaufman said that Minsky showed that financial markets could move to excess, ie. move to a bubble.

Now here’s how Minsky meets the plankton.

In extremely oversimpli­fied terms — and I apologize to McCulley and for nuances that I butcher here — Minsky says that there are three types of players in a market. First, those who have sufficient cash to meet their contractua­l obligation­s. Second, those who are speculativ­e, who can only make payments based on “income account,” and must issue new debt to meet maturing debt. And third, Ponzi agents with insufficie­nt cash who can only sell assets or borrow.

McCulley says exotic mortgages — subprime, interest only, pay-option — and their lenders are examples of Minsky’s speculativ­e and Ponzi units. But Minsky’s theories say that by the market’s nature, this game must end and Ponzi borrowers will cash out. That is what we are seeing now.

So we are back to where we began: These mortgages are the food of the Plankton — the firsttime homebuyer — and as Gross says: “when the time comes that [the plankton] can’t pull [homeowners­hip] off, then the “plankton” would disappear, and the rapid escalation in real estate prices would ease as well.”

Says McCulley: “The ongoing meltdown in the subprime mortgage market would not matter, except for those directly involved, except that it marks the the unraveling of Ponzi finance units that on the margin were the plankton of the bubbling property sea of recent years.” You can read the entire article at http:// investorsi­nsight.com/otb_va.aspx? EditionID= 485.

 ??  ?? Jeff Coleman (right, with his brother, Andre) knows he’s rich on paper, but he also knows how much hard work it took to get there.
RICH HEIN~SUN-TIMES PHOTOS
Jeff Coleman (right, with his brother, Andre) knows he’s rich on paper, but he also knows how much hard work it took to get there. RICH HEIN~SUN-TIMES PHOTOS
 ??  ?? The building at 8301 S. Green has paid off for Andre Coleman and his brother, Jerry.
The building at 8301 S. Green has paid off for Andre Coleman and his brother, Jerry.

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