Al Goldstein made a killing on the subprime-debt boom. Now he's parlaying his winnings on the bust.
Mr. Goldstein and his brother Alex started an online payday loan business called CashNet USA in 2004, sold it to Cash America International Inc. in 2006 and built it into what's now the biggest operation of its kind. The Goldsteins and their 25 investors ultimately will get $265 million for the business, Securities and Exchange Commission filings show, with the last installment coming March 31. After paying off investors, Mr. Goldstein will walk away with about $70 million — at the age of 28.
His new plan is to snap up foreclosed or otherwise "distressed" buildings in Marquette Park, Auburn-Gresham, Chicago Lawn and other city neighborhoods and turn them into rental properties. He expects to fund the business with $50 million to $75 million from outside investors and from his own investment, a sum that would make his Pangea Real Estate one of the largest local funds in the business.
"We now have access to a lot of capital, we understand the middle-, low-income — the subprime — consumer really well, and we want to take a market that has not been sophisticated and add a lot of sophistication," Mr. Goldstein says. He'll offer discounts, for instance, to renters who pay electronically, and communicate with tenants on the Internet. "In our view, the tenants are going to perform the way you treat them. If you provide a better product, you get much better tenants."
Born in Uzbekistan, Mr. Goldstein arrived in the U.S. with his family in 1988 at age 8. His engineer father delivered pizzas in Skokie to make ends meet while his mother studied for her board examinations in internal medicine. They moved to Niles, where he played defensive tackle at Niles West High. Later he got straight A's as a finance major at the University of Illinois at Urbana-Champaign. After graduating in 2002, Mr. Goldstein took a job on Wall Street.
"He was one of the best junior bankers I ever worked with," says Eric Rychel, a vice-president at Deutsche Bank in Chicago who mentored Mr. Goldstein after college. But "he had just enough ADD to always be looking for more challenges. Being a banker long term wasn't in his DNA."
Mr. Goldstein had spent a summer during college at the Chicago Board of Trade interning with David Shorr, one of his mother's patients. Mr. Shorr left the trading floor in 2003 because of an injury and was looking for a new venture. He hit on the payday loan business — "You borrow money at one rate and you lend it out at a higher rate," Mr. Shorr says — and e-mailed Mr. Goldstein to get his thoughts. "Al sent me an e-mail back with bullet points, action items, and I realized my first action item had to be to get him," Mr. Shorr says.
He offered Mr. Goldstein a 75% pay cut but also the chance to build a business from scratch. Mr. Goldstein jumped.
At first, Mr. Goldstein says, he didn't even know what a payday loan was. Some of the people close to him were leery of the industry, where lenders advance borrowers a few hundred dollars for a typical period of a few weeks, charging annual interest rates as high as several hundred percent.
"I told him, 'I don't mean to sit here in judgment, but it's not a nice business,' " recalls Kevin Waspi, a finance professor who taught Mr. Goldstein.
Mr. Waspi says Mr. Goldstein "had a very logical — and correct — rebuttal: It's what you do in the business that differentiates you from the shady part of it."
Mr. Goldstein says Chicago-based CashNet was careful to follow the law in every state where it operated; he says interest charges are high because of the cost to manage small loans, but that payday lending fills a need for people with limited access to credit.
After a few months running two storefronts, Mr. Goldstein found that CashNet had as many customers applying for loans online as in person, so he sold the storefronts and built an Internet lending site. Two years later, Texas-based Cash America made an offer.
The payday loan business has since taken a hit, with laws restricting operations passing recently in several states and the economic downturn boosting defaults.
But Mr. Goldstein sees new opportunities in that same downturn. People who just a few years ago would have bought houses now can't get a mortgage, and the ranks of renters are swelling. At the same time, Mr. Goldstein can buy buildings on the cheap, as developers who borrowed too much in flush times face foreclosure.
He already owns 10 buildings in Chicago with 100 apartments. His goal is to have 3,000 apartments in three years.
Craig Huffman, co-founder of private-equity firm Ascendance Partners LLC in Chicago, says, "It's not as easy as it looks." The pitfalls: overpaying — "Something you buy at 80 cents on the dollar looks good until you find out that you could have bought it for 40 cents on the dollar" — and security — "When you buy in tougher neighborhoods, you've got properties that may face break-ins and other challenges."
Deutsche Bank's Mr. Rychel, who invested in Mr. Goldstein's first venture, isn't worried. "He knocked the cover off the ball" in payday loans, Mr. Rychel says. As for Mr. Goldstein's new business, "I'm willing to write a check whenever he's ready."
