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

Chicago Sun-Times - - REAL ESTATE - 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:// in­vestorsin­­b_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

The build­ing at 8301 S. Green has paid off for An­dre Cole­man and his brother, Jerry.

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