Lee has built his own brokerage in Chicago, focusing solely on multifamily apartment buildings. He’s here today to talk about that journey, as well as talk to us about some unique aspects of investing in real estate in Chicago. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“Understand your risk tolerances” – Lee Kiser
Lee Kiser Real Estate Background:
- Principal and Managing Broker of Kiser Group
- Before starting the Kiser group, Lee was the top producing apartment broker in Chicago at his brokerage
- Has a personal career transaction volume greater than $3 Billion.
- Based in Chicago, IL
- Say hi to him at http://kisergroup.com
- Best Ever Book: The Sharpe Series
How great would It be to buy a piece of institutional-quality, income-producing commercial buildings? Now you can… with BuildingBits. It’s NOT A REIT or a fund. BuildingBITS is a new platform for non-accredited investors, where virtually anyone, regardless of income, can select a building leased to a major corporation and earn money from it!
Start investing with as little as $500 at https://www.buybits.us/
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Lee Kiser. How are you doing, Lee?
Lee Kiser: Good, Joe. Thanks for having me.
Joe Fairless: Well, it’s my pleasure; nice to have you on the show. A little bit about Lee – he is the principal and managing broker of Kiser Group. Before starting Kiser Group, Lee was the top-producing apartment broker in Chicago at his brokerage. He has a personal career transaction volume greater than three billion dollars (with a B). Based on Chicago, Illinois.
With that being said, Lee, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Lee Kiser: Sure. Background was always entrepreneurial ventures. I found my way into commercial real estate brokerage in the late ’90s, decided to focus on multifamily, on apartment buildings. We’ve had that company for eight years, the last five of which my partner joined me; she left a law career, I recruited her – yes, it’s my wife – and in ’05 we started our own niche firm, here in Chicago, a commercial real estate brokerage exclusively focused on multifamily in Greater Chicago Land. We are fortunate that we are the market leader in that niche in Chicago. So – commercial real estate brokerage, exclusive focus on apartment buildings.
Joe Fairless: What type of apartment buildings do you typically work with your clients on?
Lee Kiser: Our current average – and we track it religiously – is 34 units and 3.2 million dollars. That certainly goes up and down each quarter, but that’s typically our strike zone. Our profile, therefore, Joe, is the private investor/landlord/owner; that’s approximately 80% of the stock in Greater Chicago Land – it’s privately owned. That said, that’s our average deal size and our average profile client.
We do six flats, and we do 572-unit complexes. So anything that’s privately, not institutionally owned, as a profile client, we would target.
Joe Fairless: What are some unique aspects of doing deals in Chicago, to the best of your knowledge, compared to other markets?
Lee Kiser: I would say that there are three uniques; I’m not originally from Chicago, I’m from Carolina…
Joe Fairless: Okay.
Lee Kiser: …and I moved here in ’93… But there are three local idiosyncrasies that people looking to invest in Chicago need to know about. Quickly, those are Cook County Property Taxes – there’s an entire legal industry in Chicago for protesting property taxes, entire firms solely dedicated to that practice… And the reason is that there’s no math, there’s no logic to the process. The assessor’s office will arbitrarily assign every three years a new assessed valuation of the property; it’s incumbent upon the property owner to go and contest that. And if you don’t, your tax is going through the roof. So it’s just a normal part of doing business here – you hire a protest attorney, they work on a percentage of the savings that they’re able to negotiate on your behalf.
The second idiosyncrasy is a local concept called Attorney Review. If you’re looking to buy an apartment property in Chicago, 95% of the time local attorneys will default to a form of contract which everyone is familiar in Chicago Land – it’s the Chicago Association of Realtors contract – which has an unusual provision for attorney review and modification of the contract itself, as a contingency built into the deal. It runs simultaneously with other more standard, orthodox contingencies like inspection contingencies and mortgage contingencies, but it was a concept I had difficulty wrapping my brain around in the beginning, because if the attorneys are able to suggest modifications and then they have to agree on it, the local contract is really nothing more than a letter of intent…
Joe Fairless: Right…
Lee Kiser: And for people who are anywhere except Chicago, this is a foreign concept… So to get into the local culture, you kind of need to be prepared for that.
Joe Fairless: Well, just so I’m understanding what you’re saying – if I enter into a contract with you, I’m buying a property from you and we use a typical contract that is used in Chicago, then that will say that if after we sign the contract, if there’s something that your attorney wants to add or remove, then my attorney must agree to that, otherwise the contract is void?
Lee Kiser: Voidable, yes. Now, there are specific things they cannot change, and those are spelled out in the attorney review provision, such as price, dates etc. But all other terms and conditions are open to modification. Now, those who are fully indoctrinated into this process and are credible here within our local culture don’t abuse this, and it’s a normal part of doing business, and the attorneys just have to agree on — our clients are like “Oh, the attorneys don’t handle the legal matters…”, but yeah, for people not accustomed to this, it’s a very confusing and frustrating process.
Again, one of the three things you need to be aware of that are local Chicago idiosyncrasies – the third one is the Chicago Residential Landlord Tenant Ordinance. It is a very tenant-friendly ordinance, and there are a few gotchas in it that can get landlords in a lot of trouble… So I would say if you’re new to Chicago and new to investing, make sure you have a good landlord representation attorney coaching you, or hire a local reputable third-party management firm through whom you can learn the ropes as you’re learning to navigate the CRLTO.
Joe Fairless: What are some things that might surprise listeners who aren’t familiar with the Landlord Tenant Ordinance?
Lee Kiser: Well, we were able to get the major one changed… I’ll give you an example – up until about the last two years before Kiser Group was able to effectuate that change; it was security deposit interest requirements, meaning – of course, security deposits had to be kept in a segregated account, but then there are very specific calculations of interest, payments of which must be made to the tenant quarterly, and the rates change, and the calculations are difficult, and they must be paid on a quarterly basis as per the anniversary of the commitment of their lease…
Joe Fairless: Oh, God…
Lee Kiser: If you’ve got somebody that’s got 3,000 units and staggered starts, you can see the complexities of just tracking this… But the problem with the ordinance was any violation of it was strict liability of three times the rent that the tenant is paying. There’s no argument, there’s no defense, there’s no nothing; it was strict liability. So the attorney saw an opportunity to effectuate class action suits because somebody owns 3,000 units, they know that they’ve made one violation unintentionally, on one tenant… And they’ll send out mailers to all 3,000 tenants and start a class action; the landlord was faced with no alternative other than to figure out how to settle the suit.
We were able to effectuate a change in the CRLTO that gives landlords a limited right to cure the mistake, which is inclusive of a payment directly to that tenant, and then the ability to correct the mistake in the security deposit interest… But prior to making this change, Joe, there were seven-figure settlement awards for less than $5 of a mistake in security interest.
Joe Fairless: How was it less than a $5 mistake if it was just three times? Wouldn’t that be $15?
Lee Kiser: No, the actual infraction – the strict liability was three times the tenant’s rent. So you might be holding a $500 deposit on a $1,500 apartment, and you make a $3 mistake on security deposit interest; you owe the tenant $4,500. Now, multiply that with a class action suit times 3,000 units…
Joe Fairless: It’s disgusting.
Lee Kiser: …and you begin to see the exposure for the landlords.
Joe Fairless: But that’s changed, thankfully…
Lee Kiser: Yes, but there are other issues with the CRLTO. But as long as you’re aware of them, and you have someone coaching you, you’ll adhere to the ordinance and you’ll keep your nose clean of problems. A lot of people though weren’t aware of this ordinance and they bought buildings in Chicago, and they took security deposits, and they learned the hard way.
Joe Fairless: Just real quick, what’s a current issue that is still in play?
Lee Kiser: Most of the issues now have become much more reasonable. I would say there’s nothing in there that could be a major economic impact for a landlord. That said, the security deposit interest is another example of one that’s still there; you just have a limited right to cure. So instead of costing you millions of dollars, it might end up costing you $5,000 for a violation of the security deposit interest regulations… But you need to know that if you’re gonna own buildings in Chicago, that’s why you do not take security deposits. You just don’t even wanna open yourself up to the potential.
Joe Fairless: Let’s talk about your average size, 34 units, 3.2 million dollars. Describe that typical property, will you? How old is it, and what’s the business plan that most of the owners have… That sort of thing.
Lee Kiser: Sure. It’s a 1924 construction courtyard building, which is a 3-story walk-up type property. That property, within Chicago Land, can range anywhere from $25,000/unit to $350,000/unit, depending on the neighborhood, the location and the rent… But that is the stereotypical property that we will be dealing with.
Joe Fairless: 25k/unit to 350k/unit, depending on the area… What are of Chicago would be 25k and what area of Chicago would be 350k?
Joe Fairless: Englewood, Roseland, Auburn Gresham… These are the areas where that’ll be $25,000/unit. These are lower-income areas; all the stories you hear about Chicago with violence, most emanate from these areas. And there’s a high concentration of multifamily properties; we work in all those neighborhoods… But typically, that’s where you’ll see the lower end of that spectrum of price per unit I described.
The other end of the spectrum is primo locations like Lincoln Park, Gold Coast, Old Town… These are places where the same physical property will trade at the higher end of that spectrum per unit. Most typically in Chicago you’ll see that [unintelligible [00:13:07].01] at about the price per unit as I described as our average; something approximately $100,000/unit. Again, that’s an average across all Chicago neighborhoods. Typical working class, solid neighborhoods where you’ve got working class tenants and good transportation, you’ll see that building trading $125,000 to $140,000/door.
Joe Fairless: And then what’s the typical business plan?
Lee Kiser: Typical business plan – it depends. Many times these are bought for value-add plays, and those are a 3 to 5-year hold. What we see more commonly though is the very long term investor. Sometimes generational.
A lot of these properties will stay in the same family for years; they’re working buildings, they’re cashflow buildings. There’s a declining profile that matches that, relative to a lot of the new capital coming into Chicago. Because of Chicago’s more attractive cap rates relative to other major U.S. cities, we’re seeing money come in not only from those areas, but also internationally. We are currently doing [unintelligible [00:14:24].20] we track this, and the number is not in my head, Joe, but I think we’re currently active in 18 different countries with investors buying apartment buildings in Chicago.
Joe Fairless: When you get a call from someone who’s out of the country, what are some questions you ask him or her to qualify them to ensure that it’s a good use of your time if you continue to work with them?
Lee Kiser: What their experience in multifamily is in the U.S., how well capitalized they are, what relationships they have with local – not just U.S., but perhaps Chicago local – lenders and attorneys, and then why they’re interested in Chicago. We want to figure out how much they know about our local market, how much they know about the different areas of Chicago, and all of these are usually answered relatively early in the interaction. Maybe not on the first call, but certainly by the first meeting.
Joe Fairless: And are those similar questions for someone located in the U.S., just tweaking them a little bit?
Lee Kiser: Yeah, very similar… Because Chicago is such a local type atmosphere, and I named the three main idiosyncrasies, but there are certainly others… It’s helpful to spend the time with an investor looking to get into this market, to educate them on some of the local practices, on some of the local cap rates, what that means, and try to match it with their expectations, so that they’re not wasting their time or yours.
Joe Fairless: What are the types of terms that area winning deals, but not completely aggressive right now?
Lee Kiser: Ask me that again, I wanna make sure I understand the question.
Joe Fairless: Yeah, so if you show me a deal, and it’s a 34-unit deal, and you say “Hey, it’ll probably trade around 3.2 million”, and I’ll say “Okay, great”, and I’ll take a look at it… And I know about what the price is, but I don’t know what type of terms I should offer that are typical for your market – refundable or non-refundable, earnest money, closing dates, that sort of thing… What types of terms are you seeing?
Lee Kiser: Got it. To be attractive to the seller of a property if you wanna make an offer, exclusive of price, terms that will be most important are 1) a very quick attorney review. [laughs] If you’re using a standard contract and you’re subject to that contingency, then make it quick; three days.
Joe Fairless: Okay. Calendar days, or business days?
Lee Kiser: Business days. And make sure you have a good local counsel who’s credible, who will be known by the seller’s attorney. That will be very helpful. If you want to be competitive, your offer should not be subject to financing. That’s why having a lending relationship and knowing with a degree of confidence what you’ll be able to procure for a certain acquisition – it’s important to have that, to have the confidence to be able to submit the offer without a financing contingency.
The rest is how comfortable you are with learning and understanding the physical structure and reviewing the books and records. All that’s lumped into what we locally call inspection contingency. The more quickly you’re able to move through that on a 34-unit… An acceptable timeframe would be somewhere between 7 and 10 calendar days.
Joe Fairless: Okay, got it. And then what about earnest money? Hard, day one, or do you not see that in your area?
Lee Kiser: We don’t typically see that here. The only time we usually see any amount of earnest money, non-refundable on day one, is when it’s a very unique property and highly active in terms of number of offers. Most typically, you’ll see initial earnest money posted with the contract, all of which is refundable, and an increase to that earnest money once all contingencies are waved. So in the situation I described earlier, where you don’t have a financing contingency, where there’s a short attorney review and an inspection is done in 7-10 calendar days; at the conclusion of that inspection, the earnest money increase is triggered, and that becomes non-refundable to the buyer, except in the event of a seller default. So on a 3.4 million dollar deal, we’ll probably want to see a minimum of 1% hard; more typically we’d see approximately $100,000 non-refundable on a 3.4 million dollar deal, so approximately 3%.
Joe Fairless: Okay. And once that 7-10 calendar days expires, what amount is typically there for the additional money that’s put up?
Lee Kiser: What I described was the additional money. So on a 3.4 million dollar deal, $100,000 non-refundable at the end of the contingency periods would be very market.
Joe Fairless: Got it, okay. Based on your experience in the real estate industry and as a managing broker and an apartment broker of over 3 billion dollars’ worth of transaction, what is your best advice ever for real estate investors?
Lee Kiser: I guess know your risk tolerances. What I mean by that, especially in Chicago, your cash-on-cash returns are really going to be relative to the amount of risk associated with the property. That really speaks true as a general statement for apartment investing, but in Chicago it’s really important… Very low risk, which means great location, no deferred maintenance in the building – you’re going to be low single-digit cash-on-cash returns; 3%, 4%, 5% cash-on-cash returns. If you’re looking for a high risk, high return area – and these are heavily management-intense, challenged neighborhoods… Some of the ones we discussed in the beginning, when I was talking about the 25k-30k unit range – you can see cash-on-cash returns 20% plus, sometimes up to 50%. But it’s heavy risk. Typically, $100,000 to $140,000 units courtyard that we were talking about, in a good, solid working class neighborhood – that’s gonna be a mid-level risk. You’re gonna be looking at approximately 10% cash-on-cash returns.
I would say that the main advice I would give to someone coming in is understand your risk tolerances. That’ll help define where you should be looking and for what you should be analyzing. Take the time to learn Chicago, learn these neighborhoods, learn this architecture, learn the idiosyncrasies before you actually go out and start looking at buildings. It will narrow your search, it will help you understand the investment better.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Lee Kiser: A lightning round? Sure!
Joe Fairless: Alright, cool. It’ll be fun! First though, a quick word from our Best Ever partners.
Joe Fairless: Okay, best ever book you’ve recently read?
Lee Kiser: Oh, not a single book… The Sharpe Series, by Bernard Cornwell.
Joe Fairless: What’s a best ever deal or transaction you’ve been a part of?
Lee Kiser: The best deal is to me the most challenging and complex, that needed someone with our expertise to pull off. That would have been Sheraton Plaza in Chicago. We did that deal about ten years ago. It was an affordable deal. We had HUD, [unintelligible [00:22:53].09] the buyer and the seller, and each of these had attorneys. I’ll never forget the conference call, where I am not exaggerating, I had 12 attorneys on the conference call, each representing their different client, and we got that deal closed. That was a fun deal.
Joe Fairless: [laughs] It’s interesting that you call that a “fun” deal. 12 attorneys representing 12 clients…
Lee Kiser: There were about five or six different entities represented by those 12 attorneys.
Joe Fairless: Oh, man… No, thank you. What’s a mistake you’ve made on a transaction?
Lee Kiser: As a principle, I don’t invest where I am a broker… But I have invested in other things outside what Kiser Group represents. There was a development deal in North Carolina; I got involved at the very wrong time. It was right before the crash, and there was nothing that we could have done to salvage that… So that was probably the biggest mistake I made in real estate.
As a broker, the biggest mistakes that I have made, frankly, is projecting too much upside in a property, which led me to incorrectly value it… So we put it on the market and we simply weren’t able to get people interested in making offers. That happens rarely, but occasionally, where you — look, underwriting and valuing a property is an art, it’s not a science, and we’re 97%-98% effective in it… But there’s always that one that is just a mistake, and you just have to tell the client, “Hey, here’s why I thought what I thought, and here’s why we made the mistake. We can adjust, or we can just agree to part ways now.”
Joe Fairless: Best ever way you like to give back to the community?
Lee Kiser: To the real estate community I give back through mentoring. I mentor both through DePaul University’s real estate program, as well as the Eisenberg Foundation, and I’m mentoring college students constantly. Personally, my favorite charity is NAMI (National Alliance on Mental Illness). They have a big event, an awareness walk once a year. My hobby is music, my band plays for that event gratis, and it’s a wonderful organization, a wonderful cause.
Joe Fairless: How can the Best Ever listeners learn more about what you’re doing and get in touch with you or your company?
Lee Kiser: More about what we’re doing through our website, KiserGroup.com. Through there you’ll also see all of our blogs, all of our Forbes articles, all of the stuff in the news… You can learn all about Chicago apartments. And we’re of course easily found and accessible through that website.
Joe Fairless: I loved learning about the idiosyncrasies of investing and making offers in Chicago. Three things you mentioned – Cook County Property Taxes, no rhyme or reason for how they come up with their tax increases, so having a legal counsel to help you through that process… The attorney review contingency, as well as the Chicago Landlord Tenant Ordinance – you gave the extreme example, that thankfully has since been updated, but still things to keep in mind prior to investing in that market… As well as the type of terms that are typical for a deal, what’s competitive when you make an offer in Chicago, and then what would set you apart from the rest.
Thank you, Lee, for being on the show. I hope you have a best ever day. I really enjoyed our conversation, and we’ll talk to you again soon.
Lee Kiser: It’s truly been my pleasure. Thank you for having me on