487: Financial Freedom One Rental at a Time

SHOW NOTES FOR EPISODE 287: FINANCIAL FREEDOM ON RENTAL AT A TIME

He started with $40,000 and leveraged it into a real estate empire — all while working full-time.  In this information-packed podcast episode, real estate investor, coach and author Michael Zuber shares his story of how he conservatively grew his rental portfolio, one house at a time, to financial independence, all with an understanding of the numbers, a single market focus and tenacity.

What You Will Learn

• Which is better and why: Trading stocks or investing in real estate
• What mistakes Michael made with his first rental
• How he was able to purchase 8 properties from an initial $40,000 investment in CALIFORNIA!
• Why it’s important to find and continue investing in a small segment of a city for all your properties
• What prompted his move from single family homes to multifamily properties and how he used 1031 Exchanges for the transition
• Why it’s important to define and stick to your property criteria
• What is “average yield” for rental properties and why is it important to know for your target market
• Why he is getting ready to buy as many single family homes as he can in 2021

About Our Guest

Michael Zuber

Michael Zuber worked in the Silicon Valley since graduating from Santa Clara University over 20 years ago. After wasting time and money in his 20’s, he found Real Estate Investing and, more specifically, Buy and Hold Rental Properties and has never looked back since. Michael focused on his day job, learned his market and grew his rental property portfolio from a single rental house to financial freedom in 15 years.

Now that he no longer has a day job, he shares his story and helps others via his self-published book (available on Amazon) called One Rental at a Time and his YouTube Channel also called One Rental at a Time which gets Daily Original Content and is growing rapidly.

More About Michael

• Grew up in the Silicon Valley (Sunnyvale, CA)
• As a kid, he remembers cherry orchards all around.  Used to have “cherry wars” with his friends
• He remembers when Siicon Valley wasn’t about tech
• Remembers when a family of 4 could buy a home for $25-30,000.  Of course, it’s nothing like that now
• He was married at 19 years of age
• Had to pay for his own college education
• Went to Junior College at De Anza College first
• Then went to Santa Clara University
• Got his undergrad degree in economics
• Got a masters degree in business
• Became an accountant for a very brief time
• Switched it into software sales, where he stayed for 20 plus years
• He has a daughter, now 30 years old
• He is retired now because of his buy ‘n hold rental properties

Getting Interested in Real Estate

• He started day trading stocks in 1999 and 2000 when he was in his 20s
• He turned $7,000 into almost $200,000
• The market turned and his account dropped down to $40,000
• He realized, at that point that he was gambling, speculating, and didn’t know what he was doing
• He also realized that he didn’t have time
• He traveled the world in his job, missed raising his daughter and felt defeated
• He stubbled into a bookstore one day and found this purple book – Rich Dad Poor Dad
• It didn’t change his mind on a lot of things but it did introduce him to the concept of rental properties
• Growing up, he didn’t know anyone that owned rental properties
• His parents made only enough to live and never invested
• He read of Robert and Kim Kiyosaki  bought a condo in Hawaii and he said, “I can do that!  I am an accountant and I have a masters degree in business.”
• He and his wife had full-time jobs and he still had $40,000 left over from his stock portfolio
• So, he spent a year looking for potential rental properties in the Silicon Valley but found nothing.  It was a waste of time
• They then looked at a California map to see if there were other areas nearby worth investing in and they found Fresno, CA – about 2.5 hours from where he lived

Buying Their First Properties

• In 2002, they found a house in a “B class” neighborhood that sold for $107,000 and rented for $1,100 – that was the beginning of his journey
  • They spent about $4-5,000 painting and getting new carpet (even though, in retrospect, it wasn’t necessary)
• Then, he thought, “if I can acquire just 4 properties, I believe in 50 years, I would be better off financially.”
• He had just lost a lot of money in the stock market and his parents lived paycheck to paycheck.  All he wanted was to be prepared one day for retirement
• They cut personal expenses to have extra capital for expenses, repairs, etc. (they had been spending all of their income on living expenses)
• His $40,000 was enough to fund their first three property purchases over the next 18 months – $20,000 down payment on the first, $10,000 on the second property and $10,000 on the third property
• On the $10,000 down payments, they did 80-10-10 loans, 80% first, 10% 2nd, and 10% equity
• They covered the operational and make-ready costs out of their incomes
• Then, they decided to purchase more.  There next 5 properties they purchased buy doing cash-out re-finances on the first 3
• He was fortunate that during this time also because Fresno had appreciation in upwards of 20% annually
• Check out his first property: 1818 Norris Drive E, Fresno, CA  93703  (He bought it at $107,000.  3 years later, they sold it at $264,000)
• By 2006, they then had 6 houses and a duplex – 8 doors
• But because homes in that area had gone up in value, he had a hard time finding properties in that area that would cash flow (i.e. The home he sold for $264,000 still could only rent for $1,100)

Criteria and Finding and Selecting a Market

• Area was most important: He selected a specific zip code (93703 – the Mayfair District) in the Fresno area to purchase his houses – one square mile area
• He continued investing in that area for the next 4 to 5 years
• His criteria was:
  • 3 bedroom, 2 bath
  • One story
  • Built in the 80s
  • Felt safe there
  • Used the 1% rule (doesn’t use that today)
• He found that the more time he spent there and the more focused he was, sometimes he could find holes in the market, like a 3/2 home that had an extra 300 sq ft because of a larger living room/dining room combo, where he could maybe create a 4th bedroom
• Houses 2 and 3 he was able to convert to 4 bedrooms – add a closet, wall and a door
• They would look for properties online, that were on the MLS, and would use a local Realtor to complete the transactions – talked with listing agents all the time
• They didn’t knock on doors or use mailers
• He used to target an amount per door but he now thinks it’s too risky and can bring you into less desirable areas of town to invest
  • Now he tries to find average return in his market, he calls it yield
    • For example, in Fresno the average yield is 6%
    • So he looks for properties in that area that are higher than that like 7-8%
    • Then he only does deals that are better than average
    • You don’t have to say yes to everything
    • To calculate the average you do the math
      • Purchase price, down payment, closing costs, make ready (That’s the denominator – cash out-of-pocket)
      • Then it’s monthly rent, minus all the expenses (mortgage payment, tax, insurance, property manager, reserves, etc.
      • That gives you monthly cash flow.  Then you multiply that by 12 to get your yearly cash flow
      • You take the yearly cashflow and divide it by the denominator (out-0f-pocket cash)
      • And then you will get a percentage
      • When you’ve done that across dozens of properties, then you can find what average is
      • It can take 60-90 days to figure out what average working 20 minutes per day)

Finding a Property Manager

• Their first property manager was the agent who sold them the property – it turned out to be horrible
• Then they got a bigger, more professional property management company
• Another retired
• Finding a property manager in a city you don’t know is tough
• They fired their first 5 property managers
• He tells new investors, “Don’t do what we did.  Find a good property manager BEFORE you buy your property.”
• While you’re learning your market, identify a good property manager

Making the Move into Multifamily

• They went to a real estate meet-up and there was a speaker talking about small multifamily properties
• He had only thought millionaires could buy apartments
• He bought his duplex by accident it went to buy a house and he found out that there was another house on the lot
• He found a 5-unit property that generated $3,000 in monthly income for only $220,000 – he did a 1031 Exchange of his single family home he sold for $264,000 and rented for $1,100
• They went from 8 doors to 80 doors via 1031 Exchanges in a 2 year period
• The first property was 5-units, then a 10-unit, then a 13-unit, a couple 18-unit apartments and the largest was a 20-unit
• They got out of houses because they were so overpriced
• The apartments were older than their houses – some from the 1960s, 1970s
• Mostly 1 bed/1 ba and 2 bd/1 ba apartments
• The apartments are in C+/B  class areas
• They did their last 1031 Exchange 2 months before the crash and the Great Recession
• The apartments were all located in the same area, give or take 2 miles
• They survived the great recession well
• They also had 2 main property managers
• It wasn’t until 3 years ago that they went to only one for all their properties

The Great Recession

• Their net worth was hit hard
• And the apartments’ value were hit
• But their cash flow went through the roof because people who had to sell their houses and were moving into apartments
• They were able to increase rents
• He also saw a better quality of tenant at that time
• They survived the Great Recession (2007-2010) well because he had apartments

Buy Buy Buy!

• In 2009 and 2010, because he had become so familiar with his little market, watching it  everyday, that he could see what was happening to prices and he all of a sudden got very aggressive and started buying up houses, small multis and apartments again (they bought one 18-unit for zero down)
• 2010 was the best time to buy cash flowing property in the state of California, according to Michael
• They bought more houses in 2010-2011 than they had ever purchased (borrowed millions of dollars)
• They used hard money, private money (mostly friends – they’d put them on the 1st trust deed and pay 10%), borrowed against their 401Ks, put loans on their cars
• They didn’t want to repeat the mistakes other people made in other crashes – other recessions, S&L crash, oil crash
• People always say of those crashes, “I wish I would have bought more!”
• They saw the crash as their one time to strike!
• They got all kinds of great deals:
  •  They bought one 18-unit for zero down
  • Bought directly from a bank
  • The owner of the apartment sold the apartment in 2006 for $1.4 million, carried the note
  • The borrower on the note had trouble keeping up with the mortgage and it was foreclosed
  • The owner was very old and wanted out
  • Michael walked the building with the owner and the building was destroyed
  • Michael told the owner there was $100,000 of work needed
  • Michael said he would put $100,000 in escrow for the repairs but he can’t put anything down.  The owner said OK
• His wife quit her fulltime job in 2014
• Michael quit in 2018

Today

• He has acquired certain set of skills over the the 20 years that have helped him in new purchases
• He added 3 or 4 properties last year
• They are very picky about what they buy – the properties must meet their criteria
• Still looking for owner financed deals, makesoffers off the MLS
• They still like being landlords, even though California is not tenant friendly
• He currently has 183 units

Biggest Mistake(s)

• Their first tenant
  • They did everything right – credit checks, reference checks, background/criminal check, deposits
  • They didn’t realize that the family moving in was going to get a divorce
  • They moved in and within 2 weeks, the wife was gone
  • The husband, still in the rental, decided to quit working, quit paying rent and became a “professional alcoholic”
  • And because it’s California, he was able to continue living in the rental 75 days without paying rent
  • The husband also destroyed their house to the tune of $15,000 in repairs
• The good news is that, after 20 years and lots of tenants, there are only two stories like that
• Michael’s wife said him, “Did we do anything wrong?”  and they knew they didn’t.  Michael though that she would just want to sell and get out of the rental business but she didn’t.  She thought that they should just move forward and not be discouraged
• That house has continued to be a great asset even until today
• He learned from that experience that real estate is a people business, not an Excel spreadsheet business
• And because people are not perfect, bad things can happen
• In year 9 or 10
  • They had 80-100 units at this time
  • They just went to a co-worker’s house warming party who had just moved into a big beautiful house
  • Michael was upset after the party because they were living in a little condo and wanted to quit
  • But, what he didn’t think about, was that this person now had a gigantic mortgage payment and will have to work for the rest of his life to pay off that mortgage
• There were many times he felt like quitting but his wife Olivia always came back with the voice of reason – stick to the plan and don’t get discouraged
• The road to financial freedom is long journey but it’s worth it

Biggest Success

• Once he gets focused on something, he does the work
• Even after 20 years, he still looks at his market everyday
  • He can see…
    • the subtle changes
    • the inventory rising or dropping
    • prices rising or dropping
    • quality difference – the clean stuff sells fast, the old stuff doesn’t sell
    • what’s over-priced and what’s underpriced
    • value
  • The only way you can see those things is by looking at your market
    • It doesn’t take a lot of time – just 10 or 20 minutes a day
    • He has focused on the Mayfair district since day one and it’s not that big, so it’s easy
    • To look at all Fresno is difficult but you can learn a small sub-segment
    • And he only looked at homes that met his criteria – 3 to 4 bedroom/ one or two bath homes

Advice for Old Dawgs Looking at Real Estate Investing to Help Them in Their Retirement Years

• Assuming your timeline is more than 5 years (If you have 5 years or less left, don’t invest in rental property.  Go and enjoy life.)
• Being a buy ‘n hold landlord is a great idea if you have more than 5 years
• You can learn your market
• You can get remarkably low interest rates
• You can easily get 4 properties, put 30-35% down, get a 15-year
• When you reach year 10, the properties are close to paid off and you could sell one and use that money to pay off the rest
• Rentals properties are great because
  • the debt is cheap
  • it has tax advantages
  • it appreciates both in value and in rent
  • it’s an inflation hedge
  • It’s a dollar hedge
• If he was in his 50’s, making 6 figures a year and his kids were out of the house
  • I would find a good B or B+ area
  • Get a 15 year loan
  • Put down a little cash so that it cash flows a little
  • Get the tax advantage until you retire
• (See Criteria… above for where he talks about yield, etc.)

Current Business

• Michael is excited with 2021 because he is going to repeat what he did for the Great Recession
• Multifamily
  • Vacancies are up
  • Rent collection is getting harder
  • Rents are going down in multifamily
  • But given the debt structure, that pain won’t show up for years
• Single Family
  • Urban flight
  • Millennials are becoming buyers
  • New development increasing which will pull up existing home sales
  • You can get interest rates in the 2-3% range for 30 year fixed rate money
• Today, he is going to buy as many single family homes, non-urban core, as he can in the next 12 to 36 months
• Then he with 1031 exchange out of over-priced houses into multifamily
• He’s going to repeat phase one of his book, like he did in 2008-2011
• He doesn’t think there will be much of a decline in prices but he thinks there will be an 8% jump in prices

His Book – One Rental at a Time

• The first part of the book (60%) is a re-cap of their journey – the good and the bad
• The remaining 40% are lessons learned, what they recommend, things they would have done over
• It’s just an honest reflection, self-published
• It’s not a “how to” book with templates and stuff – more of a motivator, encourager
• 406 5-star reviews on Amazon

Rap-It-Up

• Favorite real estate book: The Millionaire Real Estate Investor by Gary Keller
• Favorite business book: Buffett: The Making of an American Capitalist by Roger Lowenstein
• Most valuable web site for success (other than your own): Earlier, he used to use BiggerPockets and now it’s YouTube
• Favorite app: Realtor.com
• Favorite quote: “You only find out who’s swimming naked when the tide goes out.” – Warren Buffet
• If you lost everything – all your assets – and had to start all over, knowing what you already know, and you only had $1,000, what would you do to launch your real estate investing business? I would put the $1,000 in the bank, pick up my phone and start calling people.  Call every agent in my target market.  Use the $1,000 only for a deal.

How You Can Reach Michael

• His YouTube Channel: One Rental at a Time
• Where to get his book: One Rental at a Time

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