Rent to Retirement

Darren Nix: Welcome to Invest Smart with Steadily. Today we're talking with Zach, who is the CEO of Rent to Retirement. He's got a super interesting story, including some military service time that we're going to talk about. Zach, it's awesome to have you here. In a nutshell, what does Rent to Retirement do?

Zach Lemaster: Rent to Retirement, Darren, in a nutshell, we're the nation's leading turnkey investment company. And I say that hesitantly because turnkey is one of these buzzwords that a lot of people hear about. I actually think we operate in a very unique space within turnkey, more so in the build-to-rent space, and offer some unique things to investors they likely haven't heard about.

Generally speaking, our company scours the nation to find the best investment markets across the country to make the best deals accessible to everyone, and we take care of everything. We find markets that have population and economic growth, where the cash flow numbers make sense, areas where you can have immediate equity and strong appreciation because there's growth in those areas. Then we stand up our local teams to offer inventory in those areas, where people regardless of their experience level or where they're physically located have the opportunity to participate and invest in the markets that meet their goals.

To understand our business model, we do one of two things. We're a turnkey provider but specifically on the build-to-rent space, and we operate in one of two ways. One, we build. We're builders. But that's about 10% or less of what we do. The vast majority of the new construction we do, we as a community are buying properties wholesale from national builders across the country. These would be like Toll Brothers, Lennar, LGI. There's a very good likelihood that one of those builders might have inventory in those areas.

Where it becomes unique, and really what our value-add is, because as a community we're buying thousands of properties every year across the country, we're able to go in and buy wholesale pricing from these builders and pass those wholesale discounts on to the individual investor. One of the big positions we state for investors, our value-add or benefit of being part of our community, is we make institutional-type buying opportunities like Blackstone or private equity or REITs would come in and buy from the same builders, and we make those accessible to the individual investor. We're the first company in our space to do that.

Let's just use an example of a $300,000 house. We have what we call incentives, builder incentives. Let's say we have a 10% incentive, and incentives range from 6% to 12%. On that $300,000 new construction property in an A-class area where the cash flows well, you can acquire that at either a 10% price reduction, so you have immediate equity buying at $270,000, or you can get that 10% back at closing, so that can cover half of your down payment, which skyrockets your ROI if you're putting 20% down. You can use it to buy down rates, or a combination of whatever. It really allows you to be a unique investor to access inventory and opportunities you couldn't on your own, leveraging our relationship.

We can also match that with unique financing options. We have credit unions that will do 5% down loans for investors. There's no mortgage insurance. These are 30-year loans. If you think about it, if you're getting 10% cash back on that, and you're putting 5% down, you could buy a property with zero money down and actually get money in your pocket. I'm throwing this out there so you fully understand our model and our value-add to investors.

Darren: Let's do some quick top of the list, bottom of the list. If you were to think of these cities, Chicago, Indianapolis, Austin, Denver, are any of those four high or low on your list of markets that you're excited about or that you want to avoid?

Zach: Interesting. Let's first define the playing field of what makes an interesting market for us. Our strategy is really adhering to the fundamentals of real estate. We want to be in areas that have landlord-friendly legislation, that have low taxes, both from an income and real estate perspective. We want to be in areas that have an undersupply of housing, which means there's room for growth. There's a housing need in those areas, which means we're going to have a stable market over time. We want to be in areas, generally speaking, where the home prices are below the $400,000 price point, which is the median house price point in the US, in areas where people can have positive cash flow putting leverage on a property.

Some of the markets you mentioned: I'm in Denver, we live in Denver, we don't invest in Denver, at least not in the residential sector, because the numbers don't make sense here. It's too expensive. Taxes are too high. Rent-to-price ratio is not at a ratio we want to be in. That would be lower on the list. I really like Denver, but it generally doesn't make a lot of sense. There are better markets where you can achieve better returns and still have the same amount of appreciation we've seen here, but also have cash flow numbers.

Indianapolis would be an example of an area we are very active in in the Midwest, and we consistently work in it because you can still get a quality house in the $150,000 to $200,000 price point. That's an upper B-class neighborhood that produces a 12% to 15% cash-on-cash return. That's a place where we have landlord-friendly legislation. We have growth factors. We're very active in it.

Chicago fits some of those categories but not others. Chicago has become highly regulated for rentals, and taxes are astronomically high there and increasing. It becomes challenging to be a landlord to make the numbers work there.

Austin is similar to Denver. It's tough to make the numbers work. Austin is a great market. It's growing. What do they call it? The Portland of the South or something like that. It's a really cool market. We work in a lot of markets in Texas, but Austin would also be a difficult market to adhere to our general standards.

Darren: Amazing. When somebody is interested in working with you, what is the typical onboarding flow, and what does a typical month or six months look like in working with you?

Zach: We really try to build long-term partnerships with our investors. The reason we love working with investors and real estate in general is, in my opinion, it's a lifelong journey.

Coming from a background in healthcare as an optometrist and as an Air Force captain for many years, I didn't start in real estate. But I was able to retire myself and my wife. She's also an optometrist. We were able to replace our income in our 30s, investing in real estate strategically, investing in the markets that offer the best returns, growing our portfolio strategically, maximizing tax benefits, and using unique lending options. That's the same thing we help our investors do. We very much approach this as real estate is a lifelong journey, and not everyone has to have the same goal.

There's a lot of misconception out there about, "Hey, financial independence and replace your job." That's not the right choice for everyone. Real estate can fit a lot of different goals for people depending on their goals and timeline.

When someone first comes into our system, they come from all walks of life, all different experience levels. We work with investors that have never bought a property, or this is their first time investing out of state and they want to set themselves up for success where they have an established team already in place, so management is handled for them and they're not having to self-manage.

The first thing we do is build out a strategy with them: what are your goals? We can best understand what type of investing strategy, what markets, and what properties specifically fit the investor's goal to then help them on determining what legal structure they need in place, what type of financing, what markets, identify property, and then go through the process of strategically acquiring those properties and optimizing their portfolio.

When we think about turnkey and who that's right for, it could be the investor who's never bought a property and wants to set themselves up for success and not have to do it all alone and hit those common pitfalls. It could be someone that lives in an expensive market where the numbers just simply don't make sense based on their goals in that area, and they're almost forced to tap into an out-of-state market where there are established teams. We have a lot of investors that are just busy professionals, healthcare professionals or engineers, whatever the case is. They don't want to self-manage properties and try to buy themselves another job in real estate. We also have full-time real estate investors that are doing great things, flipping houses, wholesaling, whatever the case is, but they're looking for a way to easily diversify and scale their portfolio, especially for tax benefits, where they're not having to add work hours to their daily life. It's all about building the right strategy and plan for the investor.

Darren: There are so many things you mentioned that I want to jump on. Let's do optometrist and Air Force captain first. Which one came first, and as a captain, what was your role?

Zach: As an optometrist for the Air Force, I was actually on scholarship. They paid for part of school, not all of it. I was on the HPSP scholarship program, which basically means I go to school, they pay for part of school, which is great. Then I was commissioned immediately as a captain, as an officer, to practice optometry in the Air Force. I was an optometrist in the Air Force.

That's actually where I started investing in real estate too. Like many people do, about 15 years ago at this point, I read Rich Dad Poor Dad and started thinking about real estate and how to be a good steward of money. Up until my first paycheck, I didn't really have too much money. I was more in debt as a student, as a professional student.

The first house I bought in the Air Force, I used a VA loan, no money down, I house-hacked it. I lived in half, rented out the other half. It was very successful. I lived for free. It solidified the concept of real estate in my mind. From that point, Darren, I always tell people, I never stopped investing. I never looked back. I've bought more and more properties every single year since that first duplex we bought about 15 years ago. It hasn't all been easy. We haven't made money on all deals. Real estate takes work. But I've stayed consistent, and that's been really important for our success over time.

Darren: The co-founder of my last company, his side business was to invest in real estate, and his target demographic was specifically military towns, bases, etc. I'm curious what you think of that strategy.

Zach: I love it. There are a lot of areas where there are established bases that provide a very good tenant demographic. I'm partial because I am former military as a vet, and I've been there and seen it from the inside out. Generally speaking, military bases are really good places to have consistent occupants and tenants for your properties. They're generally very good tenants, because they have to be.

That's a good approach. There have also been a lot of people that have been very successful in short-term or midterm rentals around military bases, particularly around where people come for training and they're consistently there for three or four months, and then they have the next people inbound. It's almost like you're talking to the next group of incoming tenants for a midterm rental. It's a unique niche that you can be really successful in.

Darren: Coming back to the second piece, the turnkey of being able to actually be hands-off realistically for a property investor that has a busy day job and wants to be hands-off. What are the duties that they still need to do? Maybe one way to think about it would be the jobs to be done for the owner. And secondly, hours per year. What is the time commitment to be an owner of a turnkey property with you?

Zach: It depends on the person and honestly how much they want to be involved. This is obviously more on the passive end of the spectrum of investing. Although I'll caveat this with saying that it's not truly passive. I don't think there really is such a thing as truly passive income, because you always need to be a good steward of your money. You'll be managing your property managers. You just need to be conscious. Real estate takes work. It doesn't mean it has to be difficult, but it's not like just putting money in stocks and forgetting about it. I don't think you should do that either, candidly.

For someone, the appeal is that this is a way you can expedite your success and limit your obstacles and challenges in real estate investing, where you're not having to try to self-manage. Certainly dealing with tenants, that's a problem for a lot of people that get into real estate, trying to self-manage. I started self-managing locally when I first started investing, and there's not a problem with that, but it's not really scalable, and it's probably not the best utilization of your time either. Most people that are investing in real estate, they earn more money in their active job. From a time and stress standpoint, it probably makes more sense not to manage your property, to let the professionals do it, oversee your portfolio. The idea behind investing in real estate for most people is to buy your time back.

To answer your question, I think average time frame is probably 3 to 5 hours per month. That could even be more passive if you have good teams around your portfolio.

When you first buy a property, the most time-intensive part is going through and building the plan. Working to ensure you have the right financing options in place. You're really meticulous about what markets and properties fit your goals, putting those properties under contract, going through due diligence. That's very involved. The lending is often a very involved process. That first 90 days is very involved, with 5 to 10 hours per week potentially, where you're building out that plan, and you acquire the property, and then you make sure that you have good communication and systems in place with our management teams in each area so you understand what the expectations are.

If all goes well, it can be pretty passive after that. Once the tenant's in place and they can consistently stay there two or three years and pay rent, there's not a lot to do at that point. The time that should be spent is about how do you optimize your portfolio. Do you want to continue to expand your portfolio? Are you taking full advantage of the tax benefits of real estate? Are you using the best financing options? Those things are probably where time is best spent after the property's kind of on auto-drive.

Darren: You mentioned that you've bought properties every year, some have made money and some haven't. If we focus on the ones that haven't, was that just bad luck in some of those, or were there lessons learned that you've been able to apply to your next purchases?

Zach: One of my mentors always told me, "Zach, in real estate, you either make money or you learn." When he says you learn, it's like losing money. But there's a lesson to be taken out of that.

I've certainly learned something from every deal that I've had, those that have gone really well and those that haven't. If I had to summarize the ones that haven't gone well honestly, this is obviously in the beginning when I was just starting out and I didn't have the best guidance or mentorship. You hit those common pitfalls that everyone does. That's why we try to avoid those, because we've been there and done that, and for our investors we try to teach them on ways not to have to do that. But it's a combination, some of those pitfalls that seem obvious to you now, but at the time you fell into the pit anyway.

I mentioned one of them already, which would be self-management. I was two nights away from being a bad landlord. It is a business relationship, but if you let a tenant be late on rent one month and there's no consequences, then all of a sudden they're late every month. Or you do some rent abatement.

Another thing that really changed my mindset over time is investing in better class locations. This is really important when you think about turnkey, because turnkey is a big buzzword. There are a lot of people that work under the quote-unquote turnkey space, and sometimes the traditional idea of turnkey is a C or D-class asset that's been rehabbed in the Midwest. The numbers on paper look really good, but then come to find out, maybe rehab wasn't done appropriately, or the tenant's not taking care of the property. I certainly had my fair share of those issues investing in the lower-class areas, not being extra particular on my due diligence on properties.

That really transitioned both our own investing philosophy over time to focus on, for example, new construction. About 80% to 85% of what we do today is new construction assets. That's just a much better class. Because with new construction you don't have any maintenance on the property. You have zero capital expenditures for at least the first 10 years. You have builder warranties. You attract better quality tenants. You have better appreciation, both in home prices and rents. Focusing on better quality asset classes in more growth markets, that alone has probably been one of the biggest lessons I've learned personally, and why we've also tailored our business to be more focused on new construction.

Having the right insurance on your property is important as well. There's just a lot of stuff I think.

Darren: So many good insights and nuggets of wisdom in that one. I got into real estate investment in 2018, and that was actually the genesis of starting Steadily years later, was how difficult it was for me to get insurance on those rental properties. Pretty much all the mistakes you mentioned, with the exception of self-managing, I made. I'm dealing with one right now in one of my properties up in Chicago, where it's in view of a busy intersection and folks have realized that the property is vacant. It's cold in Chicago right now, and it's been broken into five times. Now I'm spending hundreds of dollars a day for 24/7 on-site security to just defend the property. In the hour leading up to this call, I got a text from the guard saying, "Hey, they came back and I shooed them away." It's just one of those things that when you're sitting on the sidelines running the numbers in a spreadsheet and looking at the economics of a property, you don't think about some of these unexpecteds that end up cropping up down the road.

Zach: Absolutely.

Darren: It's been super fun talking with you today. Thank you very much for spending time with us. For folks that want to learn more about Rent to Retirement, where should they go?

Zach: Thanks, Darren. We always want to drive people to our website. We have a very robust podcast, a great YouTube channel with hundreds of thousands of followers. We put out content consistently about all things real estate investing, market analysis, investing options. We have a great lender option where you can buy properties with as little as 5% down, multiple properties as an investor loan. We want to drive people to our website, which is renttoretirement.com. That's renttoretirement.com. Or if you're listening on audio, you can text REI to 33777. We'd be happy to connect with you and talk about your goals.