JF1568: From Early Retirement To Helping Others Do The Same with Michael Zuber
Michael had early success with real estate, retired at 45, and then grew bored. He was sitting around and had to figure out what to do now. He’s using his time to help other people do the same as him and obtain financial independence so they can live the life they want. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Michael Zuber Real Estate Background:
- Buy and hold investor, spent 15 years buying one rental at a time
- Now focusing on helping other busy professionals earn financial independence
- Based in Mountain View, California
- Say hi to him at mzuberATonerentalatatime.com
- Best Ever Book: Principles by Ray Dalio
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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, Michael Zuber. How are you doing, Michael?
Michael Zuber: Great, Joe. How are you?
Joe Fairless: I’m doing great, and nice to have you on the show. A little bit about Michael – he is a buy and hold investor; he spent 15 years buying one rental at a time, and he’s now focused on helping other busy professionals earn financial independence. Based in Mountain View, California. With that being said, Michael, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Michael Zuber: I sure will, Joe. Like everyone in Mountain View, California, seemingly, I’ve worked in the technology industry for the last 20-25 years or so, and the reason really I’m on this podcast with you, Joe, is because 15 years ago I realized that I wasn’t the next Warren Buffet and the stock market wasn’t gonna be my way to financial freedom… And I just started buying one rental at a time, a little 3-bedroom, 2-bath, 2-car garage house in Fresno, California, and that one step led to a journey of 15 years, ultimately through multiple different cycles of the real estate world, and exited this year, February 1st, with a portfolio of 175 units, and financial independence.
At the time I was 45, and when you’re 45 and you still have a lot of vigor and you need to do something… I had a couple of great days, when you can run around and tell everybody you retired, and then you kind of wake up and go “Well, what are you going to do with the rest of your life?”
I was either gonna go back and get a job, or I was gonna find something to throw myself into, and I’ve decided to just try to help people understand that they can take the one rental at a time journey and move forward… So that’s what I’m doing; I’ve been doing that all year, at least since February 1st, and it’s been fun.
Joe Fairless: Did I hear that right, 175 units?
Michael Zuber: Units, yes. So that’s a mixture of houses, up through several 18-unit apartment buildings.
Joe Fairless: Okay, that’s what I was gonna ask you. So the largest property is an 18-unit.
Michael Zuber: Yes, three of those. Correct.
Joe Fairless: Three of them, okay. Were they purchased in one transaction?
Michael Zuber: No, they were not. Three different times…
Joe Fairless: Just a coincidence that they’re 18, each of the three?
Michael Zuber: Yeah, just a coincidence. I’ve never looked personally at anything over 30 units, because I guess my mindset was wrong, and that was something I took away from your book. If we were actually on video, I’d flash everybody the book that I have of yours; it’s all noted up, and it has dog ears, and the like… I need to think bigger, but we’re talking about my history, so yeah… I never looked at anything bigger than 30, and I’ve only bought 18.
Joe Fairless: How much income does 175 units spit off?
Michael Zuber: We’ve gotta be careful when we talk terms – are we talking gross rental income, or net cashflow, or what are we talking about?
Joe Fairless: We’ll go both.
Michael Zuber: So we produce about $135,000/month in gross rents, depending on whether or not we’ve done refinancing or the like. We cashflow net north of 20k/month every month for quite a while now.
Joe Fairless: And 175 units over 15 years, with the largest being three 18-units… I imagine most are – what, one-units, or single family homes, or what?
Michael Zuber: I would say the majority of our houses are what you would call in our world commercial, so they’re five units and above.
Joe Fairless: Okay.
Michael Zuber: Well over 100 units are made up of that configuration, five units and above, up through 18; and 18 times three is 54 by itself, so that’s a third… Then we’ve got some a couple of thirteens, some tens, some fives, some eights, a seven… We bought most of those via 1031 exchange money, coming out of the sellers’ market of 2003 through 2008, so looking back we look like geniuses… We just couldn’t buy anything, so we sold all these houses at ridiculous prices, and moved into apartment buildings, because it was the only thing that made sense.
Joe Fairless: Who’s “we”?
Michael Zuber: My wife and I, sorry.
Joe Fairless: Okay. And how do you two divvy up responsibilities?
Michael Zuber: In the beginning, the first decade or so, my job was to find deals and secure capital, and she did the books, if you will, as well as took care of the daily communications with property managers. The other thing that should be known for your audience is we’ve had a property manager since day one; it was always part of our calculation, our cost metrics, and things of that nature… Because Fresno for us is 2,5 hours away one way, so we could never do that — or at least we never thought we could… And then again, I traveled 100 days a year, I did 200,000 miles on an airplane, and I just couldn’t have another job… And property manager – it’s a job, and frankly it’s a really hard job to do well.
Joe Fairless: Yes. So I think you said initially that’s what you all did. Has that evolved up to now?
Michael Zuber: Yeah, so now we’re both retired. The portfolio is not nearly as active as it used to be. We’ve now gone through what I call the passive investing, we’ve gone through the acquisition, we’ve gone through the sort of clean-up and seasoning, and juggling the portfolio to make it where it is, and now a lot of it is mailbox money.
We’ve worked with a property management team after going through several for a decade now, and the time commitments from the wife is much less; basically, once a month review of the reports. What I’m doing now is I’m still in the game looking for deals and the like, but it’s certainly a lot less active than I used to be. We’re kind of enjoying things right now.
Joe Fairless: Approximately how many acquisitions have you done?
Michael Zuber: That’s a good question. I would say we have done probably north of 80, less than 100. Probably somewhere in there.
Joe Fairless: Alright. And where is the equity coming from, or where did it come from, in order to acquire 100 transactions and now you’ve got 175 units?
Michael Zuber: That’s a good question. You’ve gotta stretch this out over a 15-year period… Obviously, in the beginning we started like most investors do, with just personal savings. Our personal savings was not impressive, admittedly maybe it was more than some, but less than others; it was a whopping $40,000. That’s what we had to begin with.
What we did — because again, remember, when we started in ’03, as you might remember, that was a huge sellers’ market and prices went up… So we took advantage of several cash-out refi’s. Our first purchase was done with a standard 80% first, and we brought in 20%. That particular property I talk about a bunch, [unintelligible [00:08:02].25] you can look it up on Zillow. We bought it for 107k, we refi-ed it after a couple years and pulled out 30k-35k, bought something else, and then ultimately 1031-ed that when we sold it for 265k, 267k or whatever, and moved that money into a five-unit building.
We did a bunch of cash-out refi’s. We never had a windfall of money. It was never like “My company got bought”, or anything of that nature.” We just started, and kept active, and used lending when appropriate, and in 18 months we did eight 1031 exchanges, and we went from roughly 8 to 80 units with no new capital; we just took the equity as the down payment.
Then during the crash we had been saving for a while, so we had some capital, probably 50k-60k, but we found a way to use private money, because nobody was lending during that time.
Joe Fairless: Who did you go to? I’m not looking for names, but what was your relationship with the private money person and what were the terms?
Michael Zuber: Yeah, so friends and family, as you might suspect; lots of co-workers and the like had seen what I’d been doing. That’s the beauty when you talk to people. At this point, they’d seen what we’d been doing for ten years — they’d seen us grow from 8 to 80, just to keep the story straight… So they knew what we were doing, and they were like “Well, I’ve got hundreds of thousands of dollars in a savings account earning less than 1%. I’d like to do something with you”, because at the time we were buying properties for land value, so it was very easy to give great security.
We actually paid 10% interest-only. We would buy a property – just to use rough math – for $50,000. That was trashed, right? The REOs at that time seemed to be trashed or vacant. We would buy with our money, cut the check for 50k, go through escrow, all of that. We would then go back to a private investor and sort of refill our coffers with that $50,000. They would then get a deed, a note paying them 10% interest. Then we would repair it, lease it and hold that for a long time, until we wanted to refi it years later and lower the interest rate substantially.
Joe Fairless: How much of the appreciation was from the 8 to 80 units, when you did the 1031 exchanges? Was it forced appreciation through a business plan, versus “Congrats, you won the lottery because you’re in the right area in California.”
Michael Zuber: I wish I had a better story. We were in the number one market — if you go back and look at Fresno in (I think it was) 2004-2005, it was the number one appreciating market. We got lucky. It wasn’t a business plan.
The only business plan we had is we were never gonna buy what i call an alligator, or a negative cashflow property; that was intentional. It’s frankly what saved us in ’07 and ’08. We were not doing [unintelligible [00:10:30].08] 2/28 teaser loan, because it just didn’t fit our model. So that saved us… But that was the only business plan – never having a negative cashflow property, and being wise to take the chips off the table via a 1031 exchange when the time was right.
Joe Fairless: When you talk to people about financial independence, how do you talk to them about replicating your model, given what you’ve just said?
Michael Zuber: So really what I see as the most beneficial is you’ve gotta get people a start. So if they wanna talk about the story, I’m happy to share it; it is what it is, right? I have the history to talk about it. But what I spend most of my time doing is trying to get people just to think about getting a floor.
Think about how your life would be better just if you spent the next four years buying one rental at a time, for the next four years. Why four? Because it’s easy to finance four. You can go to Wells Fargo, Bank of America, whoever you want… It’s relatively easy for most individuals to get at least a single rental property.
I think if I can do that, if I can get them just to think about four, I’m gonna help lots of people. And then for the few that wanna get past four, we can talk about getting to ten, because that’s also possible.
Then after that you’re in the game, you’ve got the DNA, you’ve figured out if this is something for you or not. I’m not here trying to sell some vision that you too can go from one house to 175 units. I’m not selling you anything, I’m just telling stories.
Joe Fairless: What type of financing did you put in place on the properties after your first four units?
Michael Zuber: The first one was a Wells Fargo, just standard 80/20 loan – 80% first, and 20% owner’s equity. Then we started just going through Countrywide, and they financed the first eight purchases. They did their 90% loan package, which was an 80% first, 10% second, and we only had to bring in 10%, which allowed us to do a lot of purchases. There were no limits. Getting financing back then was literally easier than fogging a mirror. That’s how we started.
Joe Fairless: And you said you didn’t buy any negative cash-flowing properties… What’s a property that didn’t turn out as pleasantly as you projected?
Michael Zuber: That first one, it had a sour taste a couple of different times…
Joe Fairless: Okay…
Michael Zuber: First, our story begins — we live in Mountain View, and all the real estate books we read talked about buying in your backyard; you’ve read those books too, right? Be 30 minutes from home, and all that stuff.
Joe Fairless: Sure.
Michael Zuber: Well, the Bay Area has never made sense, and it doesn’t make sense now, and it didn’t make sense 15 years ago, so we were kind of stuck. Then the wife sort of gets kudos for saying “Well, why don’t we look elsewhere?” So we spend quite a bit of time and we finally end up in Fresno, we finally find that property for 170k that rents for $1,095, and we’re ecstatic; we buy it, we’re ecstatic. It rents in a week, we’re ecstatic.
Then lo and behold, two weeks after the tenants move in, they separate. The wife takes off, moves out of state, the husband decides to drink non-stop and refuses to pay rent, decides to destroy the property, and take his anger out on our rental. In California it takes a while, unlike some states, to get people out… So we took almost 90 days to remove this individual. And again, keep in mind, this is our first rental, after a year of “We’re gonna be landlords, we’re gonna take over the world”, and this could have really killed us and stopped our momentum… And lo and behold, it’s been six months and we got that first month’s rent plus the deposit, and then we had an eviction, which costs about $1,000, and then we had about a $15,000 remake once that individual was out.
That hurt. I think about that a lot, because that could have stopped us… But we kept going, and it was because Olivia and I were on the same page, and we just wanted to move on to the next one. We just didn’t see a better way. We weren’t going to invent anything, we’re not athletes, we’re not singers… It was the only thing that made sense to us, I guess.
Joe Fairless: When you’re talking to people and you’re telling your stories, what are some typical questions that they ask you?
Michael Zuber: “Give me a deal! Give me a deal that you don’t want.” I get that all the time. It’s like, “No, deals are created, they’re not found.”
Joe Fairless: What’s an example of when you created a deal, and didn’t just find it?
Michael Zuber: I can talk about what I just did this year… There was a fourplex that an owner wanted to sell; they’d actually owned it for (I think it was) 28 years, so basically it’s been fully depreciated, so their cost basis is zero. They are now of an age where they are far more interested in stable income, versus just being a landlord, and travel; it’s what they wanna do.
A friend of mine, again, in the Fresno area, heard this individual talk about maybe wanting to owner-finance their fourplex, not really knowing what that meant.
A couple of phone calls later we actually agreed to meet at the property, and what I found out through that conversation is what they wanted the building to produce. What they asked for $2,000/month, when the building was only rented for $3,200. I politely let them know that that would be an alligator, and I explained what an alligator is – negative cashflow, and all of that.
After some going back and forth, we agreed to a monthly payment of $1,700, and we agreed to an interest rate of 1%, so I’m paying off a bunch of principal… And we amortized it over 30 years, and we have a 15-year balloon. That’s an example of something we’ve done.
And why is it good for the seller? Because they don’t have a big income tax yet, because I did a low down payment of only $1,500; and then they get to balance their income for tax reasons. So we found a way that was good for them and good for us, and once it was all done, we were afraid they were gonna have to cut a $100,000 tax bill, so we got around that.
Joe Fairless: What was your agreed upon purchase price in 15 years?
Michael Zuber: It was 232k.
Joe Fairless: 232k. That seems low for Fresno… And maybe my view is skewed for all California real estate, and I’m just stereotyping it, but a 4-unit for 232k is — was that below market?
Michael Zuber: It was below market, yeah. I could probably sell it today, having done nothing other than raise rents a little, for like 350k. So I could make, after transactions, 80k or whatever. That’s not what I do. We do have a pre-payment penalty on there to discourage me from doing that.
Joe Fairless: What is it?
Michael Zuber: It’s 50k for the first ten years. So if I sell any time within the first 10 years, I owe them a $50,000 pre-payment penalty.
Joe Fairless: When they initially wanted $2,000 you said “alligator”, and you explained it, and you ended up at $1,700… Will you talk about the dialog back and forth between you two, where you eventually agreed on $1,700?
Michael Zuber: Yeah, it was a phone conversation… I remember because I was out celebrating my birthday with the wife, and I just stepped out from dinner… I said, “Okay, great. Thank you for the phone call. I understand you want $2,000/month. I’ve looked at your property, it produces $3,200/month, and unfortunately I’ve been doing this a long time and I know that that building is not gonna cashflow for me.” Their response was “Sure it will.” And I’m like, “Well, help me understand that, because maybe I’m doing my math wrong.” I said “Do you pay property management?” “No, we do that ourselves.” I said, “Well, understand that I live out of town and I’m not gonna be able to do that, so my property manager is gonna charge me (pick a number; I think I said) $200, to keep the numbers round.” They said, “Okay, great.”
“What about water and garbage?” “Oh yeah, of course we pay that.” I said, “Well, I own a lot of property there and water’s not cheap. That’s probably $225 for a property like that.” “Well, ours is more like $180.” I said, “Okay, fine. So it’s $180.” And we just kept rattling off [unintelligible [00:17:20].10] insurance, and the other one was taxes… So you bought the property for 18k in 1979 or whatever it is, and I’m like “Well, I’m gonna buy it for 232k, so my property taxes are gonna go up from $12/month to $180/month.” So we just kept rattling off the costs [unintelligible [00:17:36].10] and I remember Paul, which is the seller’s name, sort of stepping back and going “Okay…”, and saying he needs to go back to his wife and think about it.
Another couple of days go by, we have another phone conversation, I come back with a number I would take it — $1,600; he wanted $1,800 or $1,900, and we finally settled on $1,700, because what I saw after looking at the property was a way that I could raise rents roughly $400 inside the first 4-5 months, likely causing no vacancies, because they’re under market… So I could support $1,700 and hold it long-term, which is my intention with most of my properties – to hold long-term and enjoy that positive cashflow.
Joe Fairless: With the management comment, when you were talking to Paul, did he ever say “Fine, I’ll just find someone who self-manages, that way we won’t have to have this variable.”
Michael Zuber: No, he never said that, but I certainly got the impression that he had talked to other buyers, and what became very clear – again, this is my opinion; I never bothered asking him – was that he was getting frustrated with the kind of off-the-cuff comments being made by other buyers. They weren’t fact-based.
I was speaking from a landlord’s perspective, “You know what, I own property next door, or down the street, so I know about the area. I can tell you the cross-street” and he knew that I was gonna be in it long-term… Because you’ve gotta remember, his goal wasn’t to get the maximum price, obviously. His goal was to get $1,700/month for at least 10 years. That’s what he wanted, and it was via listening for that.
I’m sure he had people offering to pay more, but they weren’t listening to what he wanted. He wanted to avoid that IRS hit, and he was comfortable with what I was doing, and understanding, and willing to work with me.
Joe Fairless: Did he initially come out and say that, or did you have to ask questions to get to that point?
Michael Zuber: Sellers are — I don’t know if you wanna call them liars, but sellers are always hiding some cards, so… It was just conversations, and being open. I think real estate is a people business, and the more you listen and ask questions and just be upfront with people, the more you’ll hear and understand. So it was multiple conversations… I probably spoke with him half a dozen times before we actually met at the property, and we probably spoke a dozen times before we met back at escrow and finally signed something and put it to bed.
Joe Fairless: When you speak to him half a dozen times before you meet at the property, what are you talking about each of those six — I mean, obviously, you’re not gonna remember each of the six conversations, but just why six times?
Michael Zuber: Well, the first couple were more about him selling me, because I’m in a situation where I don’t have to buy anything, so it’s a nice kind of place to be… So it was him selling me the property, “Hey, it’s a 3-bed/1-bath, two stories, we’ve done all these great remodels, and this, that and the other thing… Leases are up to date”, and all of that.
The next couple conversations are about me being more inquisitive, because I’m not even thinking about numbers until I sort of meet some certain threshold… And then it was about getting to know each other. That’s kind of how they broke down – him selling me, me selling him, and then getting to know each other… Because essentially, we’ve signed up for at least a ten-year relationship.
He e-mails me every month on the first to confirm he’s got a check, and I send him — I don’t know if we’ll technically be friends, but we’ll probably send each other Christmas cards, because again, $1,700 times 12, it’s 20k/year, so… We’re gonna know each other quite a while.
Joe Fairless: Was the purchase price initially 232k?
Michael Zuber: No, we actually backed into the purchase price based on payment and interest rate. The purchase price wasn’t the most interesting thing to him, hence we got a lower number. It was “I want $1,700/month for at least ten years, and I wanna have a penalty in place”, that doesn’t prohibit (because life happens), but certainly discourages me from selling it and taking an artificial gain.
Joe Fairless: And how did you back into that purchase price?
Michael Zuber: Well, the purchase price – that’s just a simple equation. If you know what your purchase price is and you know what your interest rate is, you can do the math; it’s just a reverse calculation into what the ultimate purchase price is. I basically told him “I can do a $1,700/month payment, you pick the interest rate. You want 1%, you want 3%, or you want 5%.” Obviously, the higher the interest rate, the lower the price. So we just backed into one, and I think 1.9% is what we ultimately did.
Joe Fairless: What does that balloon payment equal out to in 15 years?
Michael Zuber: I think it’s roughly 40% of the purchase, so it’s probably — I don’t remember, I don’t have it in front of me… It’s probably 115k.
Joe Fairless: Got it.
Michael Zuber: Just a guess, but it’s probably pretty close.
Joe Fairless: Taking a step back, based on your experience as a real estate investor, what’s your best real estate investing advice ever?
Michael Zuber: The best real estate investing advice ever is never buy or create an alligator property. We all have heard or read about negative cashflow, but I cannot tell you how many times I have heard someone – and maybe it’s because I’m from California – “Oh, appreciation is gonna cover me”, and all these other things.
I lived through the crash, I saw people who were worth tens of millions of dollars go bankrupt, and it was all because they had negative cashflow properties in a market that changed suddenly. Never buy, or create – which is the mistake I made; I created an alligator once via a cash-out refi – ever, because it limits your ability to hold it.
I wanna have conservative financing, unlimited hold time… I wanna sell on my clock, not on some forced behavior, and I don’t wanna become a motivated seller. That is my number one thing. It may sound hockey, but it’s absolutely the only way to stay in this business – to have properties that are conservatively financed and will cashflow regardless of what’s going on.
I lost a lot of money in net worth when the market turned, but actually my income statement went up, because rents got more stable, I was more occupied, and a better quality of tenants, so…
Joe Fairless: Amen, I completely agree. You saw my book, with the three immutable rules of real estate investing… Two of them are “Buy cashflow property from day one” and the other one is “Have conservative financing”, and then I have a third, which is “Have adequate cash reserves.”
Michael Zuber: Bingo. If I had [unintelligible [00:23:20].18] I would have said that as well.
Joe Fairless: [laughs] Exactly.
Michael Zuber: You don’t wanna have any life event — because again, real estate is a people business. You don’t want some outside force that you can’t control to force you to become that motivated seller that lets something go into discount, or god forbid, you lose it to foreclosure, or a short sale, or whatever, so… Reserves – I totally agree.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Michael Zuber: I look forward to it.
Joe Fairless: Alright, then let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Alright, Michael, best ever book you’ve read recently?
Michael Zuber: Principles, from Ray Dalio.
Joe Fairless: Best ever deal you’ve done?
Michael Zuber: The first one. Even though it had that horror story, it got me in the game and I never looked back.
Joe Fairless: What’s a mistake you’ve made on a transaction we haven’t talked about?
Michael Zuber: A mistake I’ve made… Oh, I didn’t go to private money soon enough.
Joe Fairless: Best ever way you like to give back?
Michael Zuber: My YouTube channel, One Rental at a Time. I try to do daily videos, just giving everything away.
Joe Fairless: And how can the Best Ever listeners learn more about what you’ve got going on?
Michael Zuber: I would say visit my YouTube channel at One Rental at a Time. Please subscribe – that’s a big deal. If you ever wanna reach out to me personally, it’s just email@example.com.
Joe Fairless: Michael, thank you so much for being on the show, talking about — this last deal was fascinating. I’m glad we got to that one, the fourplex… Owner financing, the negotiating involved, how you got to that point by asking the right questions, listening, and then ultimately structuring it in a way that benefits both of you… As well as your approach for the last 15 or so years, when you first got going, and now where you’re at today.
Very impressive, and I’m grateful that you were on the show, so thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Michael Zuber: Alright, Joe. Thank you very much, and thanks for writing the book.