#99 - Turnkey Real Estate: Passive or Problematic? A Deep Dive with Zach Lemaster

[00:00:00] Hey, welcome back to Passive Income Pilots, everyone. Tait Duryea here with Ryan Gibson. What's happened to man? Not much. You know, we're into 2025. Tait, what was your best deal you did in 2024? What's the one that you look back and you say, that was the deal? That was the deal that I did that I think was the best deal. Now, of course, maybe it hasn't sold yet or whatever, but which one are you the most, you know, these deals are like children, right? So like, I know you do a lot of deals, but which one was your favorite?

[00:00:27] Well, let's see. We did six or seven deals last year. This is a great question. I guess we'll know once they go full cycle in a few years. Then it'll be because hindsight's 20-20, right? Right? Yeah. I have two. I think we did a mobile home park deal, which I think is fantastic. Bought very well. It's a portfolio deal. So I like that it's diversified.

[00:00:51] And we also did an industrial deal. And I think that the macroeconomic tailwinds behind industrial right now are very strong because of the reshoring efforts for supply chains and warehouse manufacturing. So those are my two favorites. And of course, we did a storage deal with you guys too, which I got to give props to. That's a killer deal. What about you?

[00:01:13] Yeah, that's a constant. Well, that was like late in 2024. So I'll let you like include that in your votes for next year. Yeah. So I would probably say my favorite deal this year was we saw a three property portfolio in Portland and Vancouver, Washington and Portland, Oregon come to market in the turn of the year that we were able to buy at a very high cap rate. So it's just good, you know, discounted price. And it was a class, a brand new multi-story self storage building.

[00:01:40] That was a killer one over 2,400 units, fully stabilized at like 91%. And it's only gone up to 95, 96% occupancy. It's been cash flowing about 30 K more than we anticipated per month. And just, you know, you get the best of both worlds. You got the depreciation. Now it's got to sell, but you know, when you do the math and what we paid on the cap rate, you can see the appreciation on paper at least.

[00:02:05] And then you also have the cash flow and just being in those markets that are doing exceptionally well. So I love that. And you know, it's, it's interesting. I've just got back from a big self storage summit in big sky. And the things that we talked about were, you know, that there's going to be opportunities that come to the market this year. Definitely. And next year, because people are going to have this $1.5 billion in self storage loan maturities coming up in 2025. And so people are going to have to do something they're going to have to refinance or they're going to have to sell.

[00:02:35] And so I think we're going to start seeing an acceleration of, you know, good things come to the market that may not be distressed, but have some distress in the organization that's owning them. Definitely. That's going to enforce them to kind of come to the, come to the market. So pretty excited about that. You know, and that's not limited to self storage. That's commercial real estate in general. It's so, it's so funny, the dichotomy between what has happened in the commercial real estate market over the last few years and what has happened in the stock market.

[00:02:58] But, you know, looking back, I think if I, if I could go talk to my, you know, past self in 21 and 22, I would have said just like, you know, maybe just put everything in the S&P for the next few years. Because I mean, the stock market has been on rocket ship with all of the, you know, trillions of dollars that we printed. And with interest rates rising, commercial real estate's actually had a tough time over the last few years. And that's, that's why we're seeing such great deals that, you know, Ryan and I are buying these days.

[00:03:26] And I think that we're, we're shaping up. If I had a crystal ball, I think that we'll see some reversal of those trends where commercial real estate's got some really nice tailwinds over the next few years. And it's hard to imagine the stock market's going to go up another 25%, but you know, we could be wrong. Yeah, that's a good point. Cause I mean, you know, one thing that one takeaway I had there too was, you know, commercial real estate's the first to get hit, but it's also the first to recover. Right.

[00:03:50] And so it's one of those things where like, if you went back to 2015 and you said, Hey, you know, maybe, maybe your old self would have said, Hey, you should buy a bunch of real estate. Cause it's going to go up and then sell it all in 21. But we're investors. We're not speculators. So exactly. We're investing in all different types of things at any given time of the cycle. And, uh, you know, we're, you know, we're, we're doing the best that we can with the information we have. So exactly. Yeah. And, and I mean, wealth comes from ownership of assets, right? We're not trying to time the market or, or buy low, sell high. We're trying to own the block. Yeah.

[00:04:19] Well, today's guest, I think is interesting. Speaking of owning the block. Yeah. Speaking of owning the block and buying real assets, we're going to bring somebody on that we've never brought on before. Never been, never spoke about this before, but the concept of actually owning a rental property and it being kind of more or less turnkey. And, uh, we're going to talk about build the rent, uh, which is basically just a fancy way of saying we build a new house and then we rent it out. So BTR is kind of a trend. And then sell it to you. So yeah.

[00:04:47] And then they sell it to us, which is the turnkey part. Yeah. So they build it, they find it. They, you know, they even will help you place your tenant and property management. So just as a disclaimer, you know, we haven't done any business with Zach at this point. You know, we're bringing them on to enlighten our audience. I know we, we want you guys to hear everything that you can do in investing. So we're bringing on these great guests to talk about all these different types of things. And I play a little devil's advocate here. I have some personal experience, uh, with turnkey rentals and they, they admittedly you'll, you'll see in the show how I feel about them.

[00:05:15] But I still think they're a great asset to invest in. And just, I think your expectations have to be aligned with what could go wrong and what goes, you know, because I've actually made good money in turnkey rentals, but my expectations were a little bit off. So I didn't have the best experience. Um, so I hope, I hope that we shed some light on that in the show that, Hey, if you go in expecting a certain, certain things could go wrong or, or what involvement you might have to have, because you hear the word turnkey and you think, Oh, just throw the keys at them and see you later.

[00:05:44] But it might not be that way. And so we want to kind of expose everybody to all the things that could go wrong and all the things that actually can go well as, as well. So, yeah. Yeah. And it definitely, I mean, and I, I bring this up in the show, but it's not right for everyone. Uh, a turnkey is you're, you're losing some of that upside because you're not getting the sweat equity, but for the right person who's putting the, all the, these different pieces of the strategy together.

[00:06:10] And they're like, Hey, I just need this solution and I need it done for me because I don't have the time or the expertise to go and find that asset to go and buy. It could work. So we're just, we're bringing Zach on to have a friendly conversation about what turnkey looks like his company, what they do, how they do it. And hopefully it gives you some more context on the real estate industry. Well, with that, let's get to the show.

[00:06:36] Welcome to passive income pilots where pilots upgrade their money. This is the definitive source for personal finance and investment tactics for aviators. We interview world renowned experts and share these lessons with the flying community. So if you're ready for practical knowledge and insights, let's roll. Zach, thank you so much for joining us. Hey, Ryan is a pleasure to be here. Thank you so much for having me. Yeah.

[00:07:02] We're excited to talk today about done for you real estate investing. Can I say that? I think you can. I mean, I don't think anything's a hundred percent done for you, but I think, uh, you know, the business we operate in is more on the done for you passive side. So, uh, you know, people can scale and diversify easier. Well, we were talking about before the show, your background, if you wouldn't mind, you know, we, we intro to you before this, but yeah. Can you break down your background? You were in the military, you're in the air force optometrist. That's super cool. Yeah. How'd you get here?

[00:07:58] Certainly. I was a full-time optometrist in the air force, making sure, you know, all the pilots have, uh, are meeting the visual needs and demands that they, they have in their daily lives. So, but I started investing in real estate my first year as a captain. So first house I bought used a VA loan, no money down, duplex house act it, lived in half, ran out the other half. This is about 15 years ago. Uh, and really fell in love with real estate. It was a tangible asset. I love the idea of borrowing money from the bank to have a tenant pay off, live for free. You know, just the appreciation tax benefits those bring.

[00:08:27] But, you know, that was really the impetus for us to start. Now there was a pivotal moment where my wife and I started investing in different locations throughout the US. So I was stationed in Grand Forks, North Dakota for your pilot audience. The mission at the time was a RPA. So the unmanned aircraft, and that's kind of a weird thing in like a visual setting because actual visual demand is completely different, but they still hold you guys to the same standards as, you know, uh, manned, manned aircraft. But that's where I fell in love with real estate. And I always tell people I never took a year off. I've been investing in real estate for 15 years now.

[00:08:54] And we've, we've never had a year where we haven't bought more real estate than the previous year. I'm not saying I've made money on all deals, but no, we just never looked back. But there was a pivotal moment where we started to invest out of state where we saw better returns, specifically in areas that had growth markets. And that's where we got that really kind of, uh, hockey stick growth trajectory where we replaced actually after about five or six years of actively investing strategically in markets that were more growth markets. We replaced our active income as optometrists, you know, earning six figures a year.

[00:09:21] And that was the framework for our, our business today at rent retirement is helping people pretty much do the same thing. That's amazing. Can, can we for a second, just talk about real estate? Because on this show, I mean, we talk very broadly about, you know, real estate stock market, uh, and, and Ryan and I are involved on, on the larger, more commercial real estate side of things.

[00:09:44] We haven't done a lot of digging on like the bigger pocket style, scrappy buying houses, house hacking. Like for, for people that maybe haven't seen the light on what real estate can do for you in terms of supplementing your income or even replacing it, maybe spend a couple minutes just running through, you know, the benefits of real estate versus sticking your money in it into the S and P. Oh God, I'm going to take, I'm going to try to do this in a couple of minutes, Tate, but we could, we could spend all day talking about this.

[00:10:13] But like, so our core business is residential real estate. And I think this is your bread and butter real estate that just is sustainable, right? It's huge. You're serving a need, human necessity. Now at this point, we own just personally, a lot of commercial retail. We do some luxury short-term real, but I will always hold a portion of my portfolio in the residential sector, single family housing or small multifamily. Because there is a huge deficit of housing in the U S there's an affordability crisis.

[00:10:38] We have a deficit of 7.5 million houses needed in the U S and, and houses are, it's expensive right now. So first and foremost, I think investing in that asset class is predictable and stable. But when you really look at all the ways that you build wealth in real estate, we call it the ideal investing formula. And this is an acronym for all the ways you build wealth in real estate. And I think this will help conceptualize like how it makes it, why real estate relative to stocks or other things makes way more sense when you really understand using leverage in the tax benefits.

[00:11:07] But the ideal investment, it's an acronym. I is your income, your cashflow. Most newer investors solely focus on cashflow. And they think, you know, at some level, if I achieve some level of cashflow, I'm financially independent. That's great. And that's X amount of houses. Their mind immediately goes to that. But where you really build wealth and we can compound that in real estate is all the other ways you build wealth. So D is depreciation and your, and your tax benefits, which are dramatic.

[00:11:30] We run an eight figure business and we're very successful and we pay zero taxes legally every single year because we're buying enough real estate to offset our, our active income. And that's something we help a lot of our investors do. E is your equity buildup as the tenants paying the loan down over time. A is appreciation as values go up over time. L is leverage and leverage is huge.

[00:11:50] If you're at real estate is such a cool concept because you can take, you can own an asset that you have 100% of the control over, 100% of the income, 100% of the tax benefits that you're putting a small portion of your money down, leveraging money from, you know, someone else, i.e. the bank that the tenant pays off for you. And that compounds every single year.

[00:12:10] And so when you just really understand how real estate works, even at a small scale with a single family house providing income, but also having mass tax benefits that you can offset against your active income, the home goes up in value. Like, and you can roll that forward 1031 exchanges. Again, I'm trying to be somewhat quick here, but just when you understand the math of using leverage and the tax benefits around real estate, nothing else compares hands down. I'm biased, but you know. Yeah, I completely agree.

[00:12:37] I think a lot of people look at the appreciation curve and they're like, oh, it's about the same. It's like you're only looking at one aspect of it. You're not looking at the whole thing. Sorry, Ryan, I know you're dying to jump in here. No, I mean, listen, we could have hours and hours of endless tax benefits, why we love real estate, why we got into it. I mean, obviously, like Tate and I own, you know, tens, if not hundreds of millions of dollars in assets in real estate.

[00:13:04] And like, it's no secret that if you do a little research on myself and Tate, like we're real estate guys, right? That's what we do. But I also love to kind of talk about the downsides, right? Because I, you know, I know, Zach, you're into, you know, single family and built to rent and helping investors like own rental property. And we said at the beginning of the show that it's passive and, you know, I'd like to, I'd like to be a contrarian because I love having these really good conversations.

[00:13:31] So people can listen to this and go, okay, I can make really good money. I can save tons on taxes. This is amazing. Run to the fire and actually do it and be successful at it. But then kind of get surprised in sort of the bumps along the road. You know, I personally, when I was getting started in real estate, you know, it's like the first thing that you go after is a single family home because it's the easiest thing to get your arms around, in my opinion, in real estate, right? It's right. You live in a home, so you know it's a home and you know what a tenant would want because you live in a house, right?

[00:14:00] And you can rent it out and it's, there's enough information you can sort of grab from the internet and you can do the thing. And there's usually somebody that can help you buy a house, like a real estate agent. My, my experience in single family rental properties was pretty poor, you know, frankly. And I, and I want to hear, and it's probably just because of the journey I went on, right? Like usually it starts with like bad people being involved or a bad market or a bad house or just not having good guidance, which is why we're bringing you onto the show, right?

[00:14:29] Because we want to hear from you as to why, you know, your, your roadmap might be a little bit different than mine. Like me, I like found this random guy in Philadelphia, like bought this random house, had this random contractor, got screwed over, you know, ended up with a section eight tenant that like, you know, the property manager wasn't doing a good job on managing the place. The thing like with leaking and blowing up everywhere, I had to like fly out there on my days off and like spend all this time with it. I made no money, right?

[00:14:57] Then I bought another, then I went to another turnkey rental property company and they, I bought this house in Cleveland. And, you know, they were like, Oh, we have 95% occupancy in all of our houses. And then geez, the 5% was, must've been me. And it went vacant for six months in the dead of winter in Cleveland, you know? And I'm just like, man, I'm, I do not want this. Like, this is awful. I cannot wait to get out of this. I thought this was supposed to be passive. It turned out to be very active because they're calling from me about decisions on, do I want this fence or that fence or this broke or that broke or this inspection?

[00:15:27] And what do you want to do with the lease? And I still had to go get my own mortgage and all, and all this. It was very active in my opinion, when you contrast it to the hourly rate that I was probably losing out on by spending all this time managing single family rentals. So with that all out of the way, I know that you do this better, Zach, and I know that you provide people with a better roadmap. Look, can you kind of talk through that or maybe agree with me on some of the things that I said or disagree either way?

[00:15:53] But I just wanted to kind of lighten the conversation because I've talked to so many pilots who are like, yeah, man, I got 12 rentals and it's a pain and I can't wait to get rid of it. Yeah. And like, I just want to sell all these rentals and put it in your syndication and be done with this. Right. Right. You know, what would you kind of say to that? Well, first I'd say, Ryan, and thanks for sharing that. And it's a very common story. Right. I mean, a lot of people jump in just as you did jump into real estate looking at all the upside. And it is there. But let me be clear, real estate investing takes work.

[00:16:23] This is this is and it takes intention. And it's quite different than turning your money over. And what I'm talking about, what you just referenced is like actual property ownership. And there's a handful of different ways you can do it. And a lot of different ways you can be successful or set yourself up for failure. Right. And really what I've been there as well, like our first out of state investments, same story. You know, we run a turnkey company now, but we some of the first properties we bought were also same story. Out of state investments where we didn't know anything about the market.

[00:16:52] We ended up buying Southside Chicago. They call them two flats or duplexes, you know, that are stacked on top of each other. And they were in D-class areas, beautiful rehabs. But the tenants destroyed them and it wasn't consistent. Management was terrible. And it's just such a it's such a common story. I will say, one, that when you're talking about actual property ownership, in my opinion, there's no such thing as passage, like truly passive income. Even when you're lending money to someone, you need to spend time doing your due diligence on them. You need to evaluate the operators, the deals.

[00:17:21] When you're owning a property, like nothing is fully passive. This isn't necessarily for the faint of heart, but you can be immensely successful if you stay consistent. Not every property you buy is going to be a wild success. Not every investment you make, like you will lose money. One of my mentors told me early on, he said, when I was struggling through some of these things, he said, Zach, I've lost a ton of money in real estate, but I've made more than I lost. And then this was someone who had a nine figure business, extremely successful older in his life. And I learned a lot from him.

[00:17:50] But that kind of let me know that, like, you got to stick through it. But you can save yourself a lot of pain and agony. Right. And I think by having an intentional plan, many people start off the path buying a property because they start to get excited about they read Kiyosaki. They learn about how the numbers work and then they somewhat arbitrarily buy real estate. Maybe they try to self-manage it. Now, I started locally and I self-managed my properties. And no, that wasn't terrible, actually, but it wasn't scalable either. To really be successful and build a sustainable portfolio, it's about scalability.

[00:18:19] And no one wants to be running around, you know, trying to self-manage properties or micromanage property managers, especially when you have properties across the country. And like, like your point, that's not what you signed up for. And are you even making progress? Even if you're making financial progress, it's a lot of frigging work. So the things that we've done to tailor our business differently and to combat some of those. One, the simple fact is we've moved to focus more on new construction. That's like 80 to 90 percent of what we do. And that's been a night and day difference.

[00:18:46] Now, that doesn't remove all the aspects of the components, but we're specifically focusing on newly built houses in A-class areas. We don't do the lower income C and D-class areas in markets that, you know, there's just a lot of fluctuation that we want to be in growth markets, areas where the average appreciation is 90 to 10 percent per year because there's a significant undersupply of houses. Where there's an undersupply of houses that causes a, you know, a discrepancy for rents where people are, you know, they need a place for housing.

[00:19:13] In new construction, you have better quality tenants, lower turnover, longer occupancy times, less maintenance. You have builder warranties. But it's also about building a system around the management piece of it, right? And no management will be perfect. That is a tough business to be in a property management, right? Because you're dealing with homeowners and you're dealing and you're dealing with tenants.

[00:19:33] But real estate, I mean, property ownership, if you're, if you really can understand, like we talked about previously of how the math works with it, where you can use a loan to put 80 percent, take 80 percent of the leverage to invest 20 percent or possibly less of your money. And you have good systems of good people in place and good teams to manage them. That does make life much easier and it does make it more scalable for people.

[00:19:58] Now, the other thing I'll mention is that some people come in thinking that, you know, and I'm talking about I have a large portfolio and so are you gentlemen, but that doesn't mean that's the right thing for every single person. It's okay to have real estate play a specific role in your life. Like if your goal is just to earn five to ten thousand dollars a month in passive income with a handful of doors, that's okay, right? You may not need a very large portfolio. We have some investors that want to own hundreds of doors, some that just want five or ten. And that's okay. That fits their needs, right?

[00:20:28] And that's that's where the the the growth factor and trajectory that they get to. But I think it is all too common. I mean, other things you and I were discussing beforehand about some of the common things with with turnkey. Turnkey is a buzzword. And a lot of people, when they think about turnkey investing, it's like, ah, when I'm I'm buying old houses. Yes, they may have been rehab, but they're low class neighborhoods. These are hundred thousand dollar houses in the Midwest. Like, you know, that's to me. And that's not what our business does. We've been there. We've done that. We focus on better class neighborhoods.

[00:20:57] And real quick, can you just break down for people that haven't heard the term before? What is turnkey? Turnkey would be and it's a buzzword meaning that it has multiple different definitions. But generally speaking, people expect that this is you're buying it from a turnkey provider that an older house that's been rehabbed leased and their team's going to manage it for you. And it's very much pitched as being a passive investment, which, as Ryan just shared his experience, more often than not is is not fully, fully passive. Right.

[00:21:26] And it was a turnkey rental provider. It was like a online thing and they had all the houses on there and you can pick the house and it was 80 grand. Right. And for anybody that doesn't have it, like just to really drive this home for the audience, if you haven't seen this, it's like, okay, you got two options. You can either go out and work with a realtor and try and figure out what you want to buy and negotiate it and do the renovation and hire the contractor or whatever.

[00:21:52] Or you can go to a one-stop shop, which is a turnkey provider who goes out, negotiates that property, rehabs it, puts a tenant in it, provides third-party property management services, and then sells it to you as a ready-made cake. Zach, that's a fair assessment, right? And there's some reasons why that's a good thing or a bad thing really comes down to what turnkey operator you're working with and what you're buying from them.

[00:22:20] And I think a lot of the common objections about turnkey, one, just understand, like any business, like any industry, there's not always people operating with full integrity. Like there's been a lot of turnkey providers that come and go over, you know, a few short years where, you know, maybe they're operating in maybe lower-income neighborhoods. They're not doing great. Rehab on the job. Like they're setting you up as an out-of-state investor for the first time, not for success. And I would say, one, be cautious of that because those things still exist.

[00:22:50] And many people, I was like, Ryan, like have those experiences, myself included, early on. But what's different, well, I'll say this too. The other big objection we get, we have a lot of people that look at, you know, how do I scale this quicker? How do I be a more efficient investor? Because there's an assumption that turnkey I'm buying like at or above market value because all the work's already been done. All the forced appreciation has been done. So you're not able to come into a value-add position to be able to scale quicker. I want to really double tap on that, right? Because that is the downside.

[00:23:19] When you look at it from a macro scale, it's like, should I go out and buy it myself or should I use a turnkey provider? It's like, well, there's a huge conversation around that depending on how much education you have, how much experience you have, how much extra time you have, how much you want to dedicate to this. But when you're looking purely at the numbers, you're not going to get as good of a deal going through a turnkey provider because they have put in sweat equity.

[00:23:42] And they're making a lift on what they've bought the property for and what they've put into it because they've spent their time and resources rehabbing this property for you and giving you a finished product. You're buying something that is retail rather than going out and rolling up your sleeves and laying tile or hiring somebody to lay tile and then it goes poorly and you got to redo it. You know, whatever, right?

[00:24:04] So just I think that people have to come eyes wide open in just recognizing that you are buying a retail product where it's done for you. And so there's not going to be a massive appreciation bump for sweat equity that you're putting in, but that's not necessarily a bad thing. And that's what we'll get into for the rest of the conversation, I assume.

[00:24:22] Yeah, and we'll also go through it because I love when people ask us that question because a lot of what we do is in our business model is allow people to come into equity positions immediately out of the gate. So we kind of combat that, oh, you can buy a new construction A-class asset that has good cash flow in a growing market that performs well, a low market value. You truly can have appreciation and equity and cash flow all in one investment in the right market with the right process.

[00:24:48] But to that point, just to further explain to you, I think who is turnkey right for? Like who's a right person? Assuming that you're potentially not going down one of these paths that Ryan and I had early on where nothing goes well. Turnkey, I think, is a good option for people if you're a newer investor, if you want an easy entry point to buy that first property. There's a lot of people that, a lot of our community that run very successful real estate businesses and they bought some of their first properties with us because that was a good easy entry point for them.

[00:25:17] Where it wasn't super time intensive, it gave them the confidence, like they got into the game, right? And there's something to be said for that. There's also people that are extremely busy professionals. I have a healthcare background, as you know, and we have a lot of our colleagues that run their practices and they like real estate. They want to invest in real estate, but they don't have the time involvement. People that live in local markets that are crazy expensive and the barrier entry is just so high or the numbers don't make sense in their local market. Turnkey is an option for people to easily diversify or get started in new markets where there's established teams.

[00:25:47] And really what I've learned over time, being a successful investor does not mean doing everything myself. It's about having the right teams around you, but most importantly, investing in the right locations because you can have properties that skyrocket in appreciation in a growth market and you just bought a property in the right area, right? So it's intentional about where you're investing. And I think that's really important to be successful.

[00:26:07] But just to further explain, and this isn't a sales pitch just on our end, but just to further explain our business and other options to people, when we talk about build to rent, our company, as we were talking before, we do two things. One of two things. One, we build houses. And secondly, we also partner with national builders. These are award-winning builders like Toll Brothers, Lenar, LGI, DR Horton, where anyone off the street could go and buy with them. But we actually buy properties in bulk from them in growth markets because they give us their nationwide inventory.

[00:26:36] We specifically buy properties in bulk where there's ample opportunity. And because of that, we're getting wholesale type of pricing. And we actually pass that forward to the investor. So they can buy, say, a $300,000 new construction house where they do have $40,000 or $50,000 of immediate equity. Or we give that back to the investor as down payment credits where they can cover a good portion of their down payment. They can buy the interest rate down to 3% or 4%.

[00:27:03] That's something very uniquely that we've been able to structure just by economies of scale where someone can buy a new construction asset. And they can come into immediate equity where they can burn or cash out refinance or sell earlier because they're positioned that way. Or, again, we will actually pay that back to them to cover part of their down payment. We can unpack that a little bit if you'd like on how that actually works. But those are some unique things. I just want to double-click into expectation setting as an investor, right?

[00:27:30] So, I mean, at the end of the day, like my Cleveland house, I made money. I doubled my money. I made money, right? But, like, all I did was talk about, you know, the first five minutes of the show, like how I had, like, a terrible experience, right? Investing is setting expectations. And so I think you need to make sure that we talk about expectations of what this is and what it isn't. You mentioned coming into, like, investors can come into equity. But investors can come in upside down as well. Like, they can come in with no equity. They can come in with some equity.

[00:27:59] They could come in with what they bought it for, right? Probably most of the houses that, but most of the properties that I buy, I love it when the appraiser comes back and gives me a thing and it says that, you know, things worth a half a million dollars more than I paid for it. But that doesn't always happen, right? So that can be an upside. But you could also go into a property, buy it in peak 2021, and then six months later, it's worth 20% less than you paid for it. And you've got debt that's completely different than what you expected.

[00:28:26] So I think I would love to just zoom into, like, expectation setting because I think if you're going to do this, you should come in with the right expectations. If somebody would have told me, hey, turnkey, yeah, 95% of our stuff is full. But, like, you know, you could lose that tenant for six months. And it's super frustrating. And then walk through, like, who's doing what during that vacancy. Then I would have been like, okay, cool. I understand it. And, hey, every time we have a problem with the house, we're going to call you. You're going to have to make decisions. And these are the things that we're going to have to do.

[00:28:56] Those expectations that I wish somebody would have walked me through that. So I would love, Zach, if you don't mind kind of walking through. Like, I would rather hear about, like, what are your complaints? Like, you get that doctor. You get that lawyer. You get that person who's, like, brand new to this. Right? And they just, I don't know, maybe they skipped your presentation. They didn't pay any attention. And they're, you know what I mean? Like, they didn't listen to a thing you said. You have a ton of education out there. And they're just like, what the hell, man? I didn't realize that X, Y, Z. Like, what is that?

[00:29:25] I want to get into that because, like, I think everybody knows you can make money in real estate. I love that. But, like, the expectations have got to be right. You know? Like, when I talk to investors, I'm always like, hey, what can happen? You can lose all your money. Like, that's what can happen. You can lose all of your money. Right? Like, you know, when you buy a house, guess what? It's different. You're on the title. You can get sued. Right? Like, you can have weather events. You can have all these things. And as long as you go in with those expectations, you're kind of like, okay, cool. I'm ready to go. Let's go.

[00:29:55] You know? And I think, so can you kind of talk about, like, what are the things that people are just, like, surprised with? I'd love to get into that. And I'm glad you brought that up because expectations are so important. And I will say that real estate's the long game. There's a lot of different ways that you can make money in real estate that are attractive. And there's a lot of active ways. And there's more passive ways. But real estate is real estate. It's investing. Like anything else.

[00:30:21] Now, I'm always biased on real estate, especially, like, as I mentioned in the beginning, residential real estate. Because I do think you do mitigate a lot of your risk because you're providing, you know, housing, human necessity. And you have a physical asset. And so it's, I have not come across anyone that's lost all their money. And I've not, you know, but not everyone's made money either, right? But I think the expectation is really, really important for whatever you do, whatever type of investing you're doing, Ryan. And certainly in real estate, you can have markets that fluctuate.

[00:30:49] You can have interest rates that fluctuate like we have seen over the past, you know, two and a half years. You can have vacancies. But generally speaking, if you can hold the property long enough and, you know, make it through some of the storms, you're going to be okay. And you'll likely have a positive outcome. And to your point, you may have complained. Like I had a buddy of mine that bought a couple properties early on with us. And these were the rehabbed ones. And he would call me, and I regretted this ever since, but he would call me every time a tenant would turn. They missed rent.

[00:31:17] And, you know, I'm like, call your property manager. Like, you have a contact for this. And he ended up making, you know, like 3X-ing his money over 5 just by appreciation and being in the right market. But he still complained the whole time, right? But I think newer investors, turnkey investing in general, we track a lot of newer investors because it's a lower barrier of entry. It's an easier way to get started. And expectations can be all across the board. And I think too many people try to pitch the investment as being fully hands-off, you know, passive investment.

[00:31:46] Now, it has the potential to be if everything goes well. But, yeah, what happens when things don't go well? I mean, we've had plenty of experiences where people, there's been vacancies longer than expected. Or it takes longer to get the tenant on the front end. Or guess what? There's a repair issue that came up. Now, again, with new construction, we see less of that because they're just, you know, you don't have the capital expenditures and things that you would on an older house, even if it was fully rehabbed. But exit strategy is so important to think about.

[00:32:13] I always try to set the expectation with investors, both on the front end and throughout their investing journey, that you're doing this for a reason. You're investing for a reason. This is a long-term investment. And do not expect everything to go perfect according to plan. And I think that's irrational thinking in any type of investment. But if you fully understand the math and you can understand, like, your why and what your plan is, we really work with investors to build a strategy.

[00:32:39] Like, let's not just arbitrarily buy a house in this random market just because you trust us and we have a good reputation. It's let's match the property with the right financing option with the right tax strategy based on your specific scenario. And I do think a lot of newer investors, just in general, they get the shiny object syndrome where they see a new, especially in real estate. There's so many different ways to make money in real estate. But a lot of people jump into trying to flip a house when they don't have the time or the experience. And yes, they have potential upside.

[00:33:08] But then all of a sudden, that rehab job takes twice as long as expected or they have a contract. And like, all of a sudden, they're in a bad position because they're underwater on the property. So I know I went off on some tangents, but setting expectations both on what is your time? What is your capital of commitment? Or what is your risk threshold? What avenue of investing? What are your goals? Why are you trying to accomplish this? And what is the long-term strategy? What is the exit strategy for you? Many people don't even think about that when they first come in.

[00:33:38] And I think that's really vitally important. I'm a big proponent of new construction. Everybody on the show knows that my wife and I bought a short-term rental in Reno in late 2023, did a cost segregation study, saved a bunch of money on taxes. It's been a really fun project for us. But that was a brand new house. New construction. And it's been great because we've never had a maintenance issue on it. You compare that with I own an apartment complex on the East Coast that was built in the 1950s.

[00:34:07] And that thing's a nightmare. And so, yeah, you pay a little bit more for new construction, but boy, it saves you headaches. Can you talk about what you mean by build to rent? This is a whole new asset class that's taking off. And sometimes people call it BTR, build to rent. So explain what that means and why it might be a good thing to participate in. Built to rent is specifically homes that are built for tenants, built to rent. Sometimes these can be communities.

[00:34:36] Sometimes they can just be specific business models where they're doing infill lots in residential areas. That's typically how we try to operate versus doing a whole community. But these are houses that are built to rent. And so I would say a few things to be conscious of if you're thinking about build to rent. And this is really blown up more really over the past five to 10 years, especially with institutions coming in. They're buying institutional buyers, private equity, REITs, you know, things like institutions like Blackstone. They're buying hundreds of houses at a time and like making that part of their portfolio.

[00:35:04] And they take those properties off the market and you'll never see them on the retail market. That's actually, you know, hindering the some of the inventory supply issues we have. But their houses that are specifically built to rent. A few things to be conscious of is usually, well, one, when built to, if there's builders that are specifically, working in built to rent, which we actually don't because of the national builder partners we have are building retail specific houses. And we get a kind of cherry pick which ones we want. But we also have a build division that specifically does build to rent.

[00:35:34] Usually the builder will be or the company will be very intentional on where they're where they're building. So they're not going to build to rent does not work all over the country. There's specific markets where it does make sense, where there's an undersupply of housing, where like the rent numbers relative to the home prices relative to taxes. Like we try to be below the median house price point, which is roughly 400K, give or take. We try to be in that two to three hundred thousand dollar range because that's going to be, you know, where you have the most retail buyers in demographically as well as the tenant demographics that we need.

[00:36:03] We don't do luxury type housing, but that's like it's workforce housing. And that's typically what you're looking at. Also, it may mean in some cases that quality of quality of builds are like below retail standards because they're built specifically for tenants. So that's also something to be conscious of. But that's that's built to rent. Awesome.

[00:36:20] And one of the reasons why someone might consider a physical rental property versus, say, just investing as a limited partner, I think, is that I'm a big advocate for putting some physical real estate in your portfolio. Do not just be a limited partner investor. I am. But the vast majority of my investments today are in limited partner positions in bigger commercial real estate deals. But I still maintain some physical real estate.

[00:36:48] One of the reasons for me is we've talked on this show ad nauseum about rep status, real estate professional status. You need 500 hours a year in material participation. And, you know, go back to Episode 75 with Brandon Hall. Check it out. We dive deep into the real estate professional status, but pretty hard to claim that you're a real estate professional without any physical real estate. And then there's also the STR loophole, which we've talked about as well.

[00:37:13] So these are strategies that you could employ by buying a turnkey build to rent house in some cash flow market. Right. Yeah, absolutely. I think when we kind of look at it and I same thing, I invest I only invest in real estate. So, you know, I'm obviously biased, but I also am very diversified in different markets and different asset classes. And just like you said, I will always hold a large portfolio in physical residential real estate.

[00:37:40] I think what you're doing like a comparison of like why that makes sense in how you can be more strategic versus being like an LP and a syndication deal or something like that. One, if we can do like a comparison and contrasting real quick, one physical real estate, it is going to take more work. There could be I would argue that there's not necessarily more risk. Actually, that's up for debate with what you're investing in in a syndication. Probably like I've invested in syndications where I have lost all my money and the whole project would belly up, you know, and like that can happen. Right.

[00:38:09] But in a physical asset, you know, it's really unlikely. Like if you own that asset, as long as you don't get foreclosed on, you're likely not going to lose that asset. But really where it becomes advantageous, even though it may be more work, again, may not be completely passive or someone else is managing all the project for you and you're fully relying on them. You have a little bit more control over the asset. But really, I think where it becomes strategic is a few things. You pointed out cost seg stuff, which we help a lot of our investors do either via the short term loophole or rep status.

[00:38:38] And we could walk through both of those routes. Really, the other thing beyond the tax benefits is using leverage. Right. So if you can come in and put a small portion down versus giving, you know, 50, 100K on an asset and that's basically your shares in that deal, you can leverage is a significantly powerful tool. We have a lot of just because my health care background, we have a lot of docs that invest with us and they're full time doing their job. Maybe a wife can get professional status. Maybe they're both employed and they can't.

[00:39:07] They go through the short term loophole. But we have a lot of people build together a tax plan where they use unique leverage. As I mentioned, we have investor loans where you don't have to put 20 or 25 percent down. Most people don't think that. They think that you have to go the conventional route and use a 30-year fixed loan with 20, 25 percent down. Well, there's many unique loan structures, portfolio loans specifically with local credit unions and banks where you can put 5 percent down. And, you know, that really allows you to, you know, yes, make sense for you. So if you run the cash flow analysis, all the things.

[00:39:35] But you can be extremely advantageous with, you know, your capital to create this tax scenario. Right. Where if you if you bought a million dollars worth of real estate, you put 5 percent down, that's $50,000. You run a cost segregation study on that million dollars. Our studies, I don't know where yours come in, Tate, but ours usually come in between 30 to 35 percent of the improvement value. And so that could be, you know, not considering removing land or anything. And that could be $300,000 at 100 percent bonus, which I do think we'll be back at. That could be 100 percent.

[00:40:02] That could be $300,000 of tax deduction that you could acquire, which if you're in a state that has income tax, it, you know, puts you up to 40, 45 percent. Like, you know, that's saving you six figures of taxes that you otherwise give it Uncle Sam that now you can reinvest. And guess what? You get to buy that buy more real estate that has additional tax benefits. You get the snowball effect. So, I mean, I think owning real estate, physical assets, yes, there is more work involved. And you may have to hear about tenants, you know, coming and going. That's part of real estate regardless.

[00:40:31] But it just allows you to have a little bit more control. And I think use leverage in the tax advantages strategically to, like, really expedite your goals. That was the case for us. You know, we replaced our active income as optometrists. We were both six figures of income within about six years of investing. And we specifically did that by investing only in physical assets and growing markets that appreciated well. We were using strategic financing. We maximized our tax advantages. And then we sold those in 1031 and reinvested it, right?

[00:41:00] We just kept trading up and trading up and trading up. And I think that's how, like, when you talk about building wealth in real estate, that's probably, like, your quickest path. Love that. I'm here for the expectation setting, right? All good stuff, right? Like I said, we could talk for hours, but, like, we're pilots, right? We want to know the downsides. We want to know the risks. You guys mentioned something that I just, I can't hold back. You said that if you buy physical assets, you're less likely to lose that asset potentially because it's a physical asset. It's never going to go to zero in value.

[00:41:29] But let me just make sure, because right after that, we talked about leverage. If you go put 5% down on a house and you can't cover your rent, you will lose that property and you will lose all the money you put into it. That's no different than a syndicator going out and buying an apartment building and doing the same exact thing and having all of the equity wiped out. The difference, the difference is that loan you signed on is on your record and that loan that that syndicator signed on is on his record. That's the difference.

[00:41:58] So I just want to make sure, like, I love physical real estate. I own physical real estate. It's amazing, but like expectation setting, like this can go to zero. You can put a down payment down on a house and you can lose all of your money. You can get the house foreclosed upon and whatever damages that does to your record as a borrower. Right. So, again, I just I want to make sure we're showing both sides here because if people come into this eyes wide open and go, all right, I have a decision to make.

[00:42:26] I'm going to buy this house, this built to rent, beautiful, brand new, all the bells and whistles house. And I'm going to put 5% down. And what could go wrong? That could go wrong. Right. What could go right? All the things we just talked about as well. You could appreciate. You could cash flow. You could 1031 up. You could build an entire empire that completely replaces your income and gives you all this freedom.

[00:42:48] But I just want to make sure that we're balancing the expectations that there could be a complete capital loss and more when you have your name on the title and on the loan. And so I just want to make sure we're doing the ying and the yang here. Right. We're talking about what could go right, what could go bad. Because, I mean, we just went through this right in 2021, 2022. We saw, you know, we have close proximity to some kind of fallout. But, you know, like I said, there is upsides here. I mean, there's a, like you said earlier in the show, Zach, like there's a ton of shortage in housing.

[00:43:18] Blackstone's buying these things up left and right. People can't even buy their first houses. They need a place to stay. The number of renters in this country is increasing. Right. So, like the demographic trends are at your side or the trends are at your favor. The tailwinds are there. But just know, like when you're doing this, it's not without some type of risk. That's my only point. And yeah, and I would agree with you. There's risk in everything. There's risk in inaction. Right. There's risk in not doing anything and, you know, doing the same thing till, you know, till you're old and decrepit. Right.

[00:43:48] And try to do the whole thing. Not to get too personal, but like, and I want to talk to your point further. But like a big motivation for me is I watch. My parents are both electricians. We didn't come from money. You know, we were poor. We were middle class or whatever. But I watched my dad. He talked about retirement and retirement and retirement his whole, his whole entire life. And they were always telling me like, don't become an electrician. Go to school. Get a better job. You know, and in which I did. But then I also realized like, oh, I'm on the same path. I'm making a little bit more money, but I'm on the same path. Right.

[00:44:17] But I watched my dad go through his entire life talking about retirement and he got sick, you know, and wasn't able to enjoy his retirement. And so he spent his entire life. And so I just want to point that out perspective. You need to understand what your why is. But look, I'm not sitting here pitching for everyone to go out and over leverage. Right. Yes. Those scenarios happen. There's always the what if. We can always go back to 2008 and say, well, the sky could fall to my. Be a responsible investor. Understand your financials and build a plan.

[00:44:45] But what I'm here to do is share some nuggets of knowledge for people to think about things they may have not heard about previously. We don't care. Like we don't care what type of loan you use. But it is important because if a 5% down loan could be extremely strategic for the right person, you still have to go and qualify. You can't just this is not 2007 where you walk in stated income loans. Right. And have 100% financing. You still have to have DTI in check. You still need, you know, significant reserves. You can lose all your money.

[00:45:15] Like you could lose a house. Sure. If you're over leveraging. Don't do that. Create a plan. Right. Create a strategy. Is of that. But for the right people, that can be extremely strategic. But there's risk in everything. Right. Of course, we can temper expectations and we can sit here and say, what if? But you do have to take risk at some level. I'll say that. 100%. Yeah. And we should all. And I love what you said earlier, Zach. We were like, hey, there's always been a year that I bought houses.

[00:45:45] You know, I think too often what we do is we go out. We buy or invest in real estate. And then something goes wrong and then we back down and never do it again and say, oh, well, I, you know, I know a guy who bought one house and, you know, it was a disaster. So I just, we just backed away and never did it again. You know, or I invested in a syndication. It didn't go well. So I just backed away and never did it again. Like imagine if we did that with stock investing. I mean, we're, we're, we're in this for the long haul. Right. And so, you know, just because something doesn't go well.

[00:46:12] And I love that you've invested every year because it's like you are a investor because you were investing in all points of the cycle. Right. Maybe you bought some at the peak. Maybe you bought some at the bottom. Right. But you are in, you're playing the long game there. And, you know, my, my point is not to just sit back and make every excuse why you're not going to go out and buy a property. It's just, it just know what could happen and then you can right size it. So when you say, Hey, I got a million bucks lying around and I want to buy five houses, you know, and this is discretionary to buy houses.

[00:46:41] Like maybe you buy five, 200 K houses, all cash and you don't leverage. Then what's your downside. Right. And Zach is a type of person that's going to help you kind of strategize through these things. Right. That's why we're bringing you on and talking about it. So if I can jump in here and just, you know, offer a piece of advice for people who are, are wanting to digest the amount of risk that they're taking. Leverage is the most amazing thing on earth. I love debt.

[00:47:05] I'm up to my eyeballs of debt because it, it, it allows you to exponentially grow your wealth, but it has to be used responsibly. You know, I talk about how if somebody doesn't know how to fly an airplane, they shouldn't get behind the, the yoke and take a one 72 off with no training. You got to understand how to use it. It's a tool. Uh, you know, a hammer, a chainsaw can be very dangerous if you don't know what you're doing. Right.

[00:47:30] But you know, chopping wood manually or using a handsaw versus a power tool, you can get a lot more done with that tool. You just have to be responsible in how you use it. So if you've got a million bucks laying around and you're going to go buy five houses and you're going to leverage to the teeth and you're not going to leave any cash reserves remaining so that if you, you know, break your leg skiing and you're out for six months and your income goes down, now you can't pay your debts. And Oh, also the market is down. So, you know, you can't sell the house for what you bought it for.

[00:47:58] You've put, you painted yourself into a corner there. Whereas you, you, you know, it's fine to use the leverage, just put cash aside so that you, you have six or 12 months of runway on the debt service payment. That, that is what we do on a big commercial real estate scale. It's also what we do at the local level. And you're just buying an investment property. You want to make sure that you're using the debt responsibly. You're right sizing it and you're putting cash reserves in place so that you make sure

[00:48:24] that you can get through any storm, you know, people that bought houses in 2007, all cash didn't care that the values collapsed by 40, 50%, right? Because they're like, whatever, it'll come back. People that bought with 90% leverage were completely underwater and, you know, in a really bad spot. And today is completely different than 2008. You know, we always say, Oh, this time's different. This time is different. It, we, the fundamentals are completely different.

[00:48:51] There was a glut of housing back then we're in a shortage today. The fundamentals are extremely healthy. People have tons of equity. We don't think that there's a, I was saying this before interest rates rose. I don't think, uh, there's any crash coming, right? But defensively position yourself. Yeah. I love what you, I love what you said. Like recessions, every recession is different. Like it's recessions aren't like, you know, Oh, we're having a recession. Go, go get the recession playbook and let's read exactly what happened in the last eight recessions.

[00:49:17] Like every recession is different and there's different things going on, but exactly. But I think I'll just tag onto this that, you know, we're not here telling everybody they should go buy a turnkey property. What we're doing is giving you an option. You know, when you put together all the strategies that we're laying out on the show, we're not giving you advice. We're just saying, Hey, here's everything that's out there. So now you understand what the short-term rental loophole is. You understand that if you buy a physical property and you put a cost segregation in place, which

[00:49:44] we've talked about with car Sega authority and with Yona Weiss, here's all the strategies, right? And you make your own omelet with it, right? So if, if you want to do an STR loophole this year, but you don't know where to start, go talk to Zach. Maybe you guys can find a great short-term rental. That's a, that's a turnkey that makes sense. It's in a great market that you, you already like, but, but Zach is able to get you a discounted house because it was bought wholesale.

[00:50:13] Anyway, we're laying out all these strategies. So I love this. Tate, uh, just to echo, just, I want to just say one thing, since we're talking about risk, we're talking about expectation. We're talking about downside and you know, where things can go wrong. And the number, the number one thing, and this ties into expectations on Ryan's point and Tate, you, you called this out. The number one piece of advice I can give to people is yes, go out and leverage and use debt as a tool and invest in real estate and take risk.

[00:50:40] But the biggest way you can set yourself up for success when things happen is, uh, is to have reserves. That's the number, that's the number one thing, right? Is having reserves that way. When the properties aren't cash flowing, when you do, when your mortgages, you know, your mortgages do every month, regardless, right? When you have a big expense, you've got to have reserves and you need to have an appropriate amount of reserves as things, as you grow your portfolio, you know, like we took out a HELOC on our house and max that out.

[00:51:10] And that is my reserve account. So if I go, if I need a half a million bucks like this for something, we can go and do that. So I just wanted to call that out. Cause I think that's actually where a lot of people, especially talking about creative financing and leverage and get into troubles, not, not having the reserves. So never, never invest more than you can lose. Yep. Every investor that I talked to, how much should I invest in this deal? Don't invest more than you can't stand to lose. Yep. And then your expectations are right, you know? So, well, Zach, thank you so much for coming onto the show. This has been really helpful.

[00:51:38] And thanks for being a resource, uh, to passive income pilot listeners. How do we get in touch with you? Um, yeah, we have a robust podcast and YouTube channel. We put out a ton of information just about market analysis, about some of these different loan options. If you want to learn about build to rent, whatever the case is, or if you just want us to share some of these resources, drive everyone to our website. That's a rent to retirement.com rent to retirement.com. If you're listening as audio, you can also text REI to 33777. And we'd be happy to connect with you and add value.

[00:52:07] Well, thank you so much, Zach, for coming on. And, uh, as always, everybody, thanks for listening. If you have a question about this stuff, you can always email us at ask at passive income pilots.com. But until then catch you on the next episode.