Seth: Hey there, how's it going? This is Seth Williams. You're listening to the REtipster podcast. This is episode 215. The show notes for today's episode can be found at retipster.com/215.

In this episode, I'm talking with my new friend, Zach Zimmer, who I met through my friend Dustin Heiner. We were all staying together at an Airbnb in Orlando for PodFest, which is a conference just for podcasters that we were all at together. And since everybody in this house was into real estate in one form or another, we said, "Hey, why don't we all just interview each other and make a bunch of interesting conversations and podcast episodes?"

So that's what you're going to hear right here. This is me interviewing Zach. And I got to say, I was fascinated by Zach and his business. He's in the rent-to-own business. He buys and owns a lot of houses and rents them out to people on a rent-to-own basis, which means they have the option but not the obligation to purchase those properties in the future at a predetermined price. We get into all of the ways that he does this and all the specifics of how he has his agreements set up. But in talking with Zach, it kind of blew my mind because the guy makes a really good income doing this and he doesn't do a whole lot of work on a week-to-week basis. I'm sure he did a lot of work building up his portfolio. But as he explains in this conversation, this is not a super time-intensive business, even though it generates a lot of income for him and his family.

And in talking to him, it really helped me see the rental property business in a completely new light. I don't know why I had never really heard it explained the way that Zach does here or why it never really clicked, but talking with Zach, it totally clicked. If you have any interest in rentals or in passive income, you're probably going to love this just like I did. And also, before we jump into this conversation, I'm just going to go ahead and apologize in advance for the lower than usual audio quality in this episode. We ended up recording this in a podcast booth that they had set up at the conference alongside a lot of other podcast booths. It was like this big room where people could talk with each other and record podcast conversations like this. Great idea in theory, but unfortunately, there was a lot of noise in this room because there were a lot of other people talking. But as a result, my editor did his best to try to edit out that background noise. And in doing so, the audio quality between me and Zach just is not what it normally is. So I'm sorry, but you can still understand what we're saying. Still a great conversation, but I just wanted to explain what's going on there and why it sounds a little weird. So with that all out of the way, let's dive into the conversation. I hope you love it just as much as I did. Let's dive in.

Zach: Hey, Seth, thanks for having me. I've known you since I think I saw you at first REWBCON and yeah, it was pretty amazing what you've done. And yeah, looking forward to chatting and letting you know a little bit more about what I've done. I interviewed you on my podcast, so I know more about you. So yeah, you're going to hear more about my granular story of a mix of 10x Grant Cardone with a lot of unfortunate dirty money episodes of the investments I've been in that could easily be a whole season of dirty money on CNBC and how I'm coming back from that to my bread and butter again.

Seth: You have your own podcast that's part of the Master Passive Income Network of Podcasts. Is that right?

Zach: Yep, the Passive Income Life. And that is something I really initially didn't have any desire to do. I was a retired 40-year-old guy and just living my passive life. And I went to a conference and met Dustin Heiner and went to a mastermind where some of my deep challenges I had around not contributing and not doing anything. And he got me to come out of my shell and start to teach and start to talk, telling my story and coaching. And yeah, I'm really enjoying it. It's catching that piece of my life wheel, that contribution and engagement piece that I was suffering in that now is getting better through connecting and growing a network.

Seth: Yeah, Dustin's good at that—getting people to come out of their shell. He does that for me too.

Seth: So, let's start at the very beginning. So, when did you get into real estate? How and why? What was going on? Tell me about your life situation and what made you decide to get into this.

Zach: So, I came up with a traditional plan to get the degrees. My father had a business degree, and my grandfather had a business degree. And in the 90s, I think that was no child left behind, right? Everybody's got to go to school and get degrees. And that was a checklist.

And I went to a pretty prestigious co-op school. Every three months, you would switch and work with school. And it was a meat and potatoes school, engineering and business. And did that, coming out with two and a half years of work experience and a degree in manufacturing management, which is a mix of engineering plus business. And went to work in manufacturing companies. And I remember on my resume or in interviews saying the words like, "I bleed for my company. Where do you want me to go? When do you want me to get on a plane? Where do you want me to go and do?" I wanted to work up that corporate ladder, be the vice president, and be a director of manufacturing.

And so I did all those things. And I lived in Michigan. I really didn't have any friends. I was away from my family. And I went back and forth between Michigan and Mexico, working for Gallimore Chrysler. And then finally, in 2005, I was like, I should buy a house and rent is so expensive. And my family and my friends from high school are back in Ohio. And I came back to Ohio in 2005 and still was on that path of corporate and ran around the office, got in early, went and got an MBA and was working up that ladder and got married and heard about people at the company. I was at the Timken company where we had a bonus program and heard about guys that would get their bonus and go and buy a duplex.

And it interested me as I had been kind of, I mean, the internet was burgeoning. It was still kind of small, right? In 2010, but you could go and some finance things interested me on the internet. So I was always interested in money, right? I paid off my truck so early, like pay down debt. So I was interested in some of those things. And so when I heard people talking about passive income, rental income, it reminded me of Rich Dad, Poor Dad, which I had read in 1998 when it was given to me by a guy trying to recruit me into multi-level marketing. I didn't end up doing that IBO, independent business owner with that company, but I had the book and I moved it around. The book moved with me to Michigan and back to Ohio.

And it was just interesting parables in that book. I didn't really know how to apply it or what to do, but it was interesting. So when I heard about people buying real estate, it reminded me of that. So I was like, why don't I do this? I should go do this. And I didn't have any money. My wife and I made good money, but we were the DINKs, the double income, no kids. So we spent on vacations and redoing our house, patio and cars.

So I remember I found a realtor, I believe, and went, and we found this duplex, Canton City duplex, probably a D, D plus class, each side renting for $450, $475, and $20,000-$12,000. And I put all the numbers together. I remember emailing my dad. So my dad owned a business that was fairly successful. And I put all the numbers together and emailed him and said, "Dad, I need a loan. Just give me a loan and I'm going to pay you back in X number of years." And I'm sure he and my stepmom, who I don't know if anyone was for it or against it, but at some point they just said, "Nope, you're not getting a loan. This isn't what you want to do." And I was like, "Oh, they don't get it, right?" The dad bank turned me down. And had they given me that loan, my first property would have been a D-class duplex in Canton City that I'm sure 90 plus percent chance that would have spoiled my interest in real estate.

They said no. And then, fortunately, through whatever type of reading, research, talking, I pivoted to single families and also found out about this rent-to-own program that people could offer. And that kind of hit me like, yeah, I just want passive income. I don't want to be a landlord. I certainly did not understand that this could be my entire life. I still think I'm a corporate guy. I'm going to be a director, a VP. But to have this nice stuff coming in, that's nice side money.

And so I found a... We were in 2012, found a house turnkey from the bank, foreclosure. They did carpet painting. I think they even might have put in new counters. And that was for $40,000 and worked with Huntington Mortgage Broker, 30-year fixed. And again, we were DINKs and they were like, "Oh yeah, your W-2s are great." Easy to get that loan. And about a couple of days or a week after getting under contract there, a 2006 house, two streets over. So built on a vacant parcel that someone had owned. They sold off that parcel because most of those houses were built in the 40s. So these 2006 vinyl sided windows, stainless appliances, four beds, two baths came on the market. I don't know what it listed for, but I got it under contract for like 50 or 52,000. I went to Huntington like, "Hey, can I do this?" "Oh yeah, you can do two." I was like, "Wow. Okay."

So we're going to buy these two properties, our first closing and my entire bonus; we got about a $20,000 bonus. And that was our biggest step ever as people hear how we've done, what we've done and tons of houses, millions of dollars. "Oh man, what was the biggest thing?" The biggest thing was the first one, that first decision. No, we're not going to upgrade the basement patio. We're not going to do this or that; take awesome vacations. We're going to take this $20,000 and make it disappear, but we're going to get cash flow.

And so what I thought when we've got those first two properties was, okay, those are going to cash flow. Maybe they're going to cash flow about $300 a month each. So there's $500, $600 a month. That's our weekend—her and I going out on the weekends. We're having a child. She was pregnant. And in 18 years, that's a good chunk of college. So I don't have to worry about setting aside another couple hundred dollars a month. Like, Oh, we can still live off our W-2s. Our weekends are covered. And now I don't have to save for college because I got these houses. And in 18 years, those are going to cover a good chunk. That's all I thought it could be. I didn't understand. And there wasn't education and Instagram, right? And people talking about all this stuff. So I was like, "Okay, yeah, I'm going to have these." And that was it. And that was it that year. Bought those two. I didn't understand anything else and kept moving along.

I did leave the company I was at after eight, nine years. I took another job. I got kind of recruited. So I left a 401k there. And that's when somehow, through my reading, I found out, oh, I can self-direct this. I can take this 401k, move it into a self-directed IRA that owns 100% of an LLC, and then I can go write checks out of that LLC bank account to buy houses. Now I know that's not a great way to use that money. But back then, I thought, I could go buy three or four more houses. And so that helped understand that process of, "Oh man, more cash flow."

And so let's fast forward. I still didn't know what I was doing. I was struggling with contractors, struggling with realtors, but in that 2014, 2015 timeframe, the realtors clicked. Two different realtors in two different counties, hustling for deals. I went through bad contractors and lawsuits, but boom, a contractor clicked—an amazing contractor. And then the lender clicked. Oh my goodness, this lender, they have great terms. They will finance the rehab at closing as long as the house will appraise with those improvements. So at some closings, I brought no money to the table and got a check because of the rehab. I know that was trickier to get today, but back in '14, '15, yeah, they were loving that.

And so next thing you know, I find Grant Cardone and his book 10X and then "Be Obsessed or Be Average," right? Cardone is brash, he talks in absolutes, and he can be easy to be a big turnoff. But those two books hit at the right time when I had my team to tell me, "Zach, don't take your foot off the gas. Yes, you have a full-time job. You have two kids now. Okay. You got an eviction. You got an empty property. You have two rehabs under contract. Ooh, but this house just listed and that's a good deal." You might say, "Well, hold on. I got too much going on." But if you've really become a disciple of that 10X mentality, it's like, "No." And that's what I did. I kept the foot down. I bought a house every month for about three years.

And next thing you know, we're up over 50 houses, net cash flow, 30 plus thousand a month versus my W-2. My wife did end up getting laid off and we knew something was going to change with having two kids under two. And so she stayed home and we just lived off the W-2. We didn't touch that 30 some thousand a month coming in, just snowballed. So it just became bigger and bigger and bigger. We lived a good life, right? I was making a hundred thousand. So we still lived an upper middle-class life, but we could have been living like balling out, right? Another 30,000 a month. We could have been blowing instead of letting it reinvest and just become this giant snowball.

And I started to diversify; I started into lending. I did my first syndication in 2019.

Seth: Meaning you were investing in somebody else's syndication?

Zach: Yep. So I've never done my own deal. I've always invested in others. And at that point, syndications, they'd been around, but they were becoming more widely known in that 2018, 2019. And to me, they were sexy. I've got 50 houses in Northeast Ohio. Okay. But ooh, I'm invested in a wedding resort golf course winery. Ooh, I'm invested in Florida A-class apartments. That to me was sexy versus dinky single families. So I did one or two. And again, my plan was to work at least until 40.

And the one thing I did do, though, is leverage the ability to not need to work to get easier jobs. Manufacturing was very cutthroat, very stressful. And I remember thinking, I'm making three times what I'm making here and I'm getting chewed out and I'm dealing with all these problems of 24/7 manufacturing around the country. And I was getting close to calling it quits. And then I got hit through LinkedIn to come into healthcare. Had I not had the real estate, I mean, this could be a death sentence. Like I leave what I know, manufacturing and engineering, I go into healthcare, and if I totally fail there or it doesn't work, I'm going to be struggling to come back.

But because I was like, "I don't need this, but this sounds interesting. I'm going to take a jump." And I remember the person that hired me also came from manufacturing and he told me the story of healthcare is a disaster. They were the last industry to think about continuous improvement and to think about process control. And those that came in as operational professionals and Lean Six Sigma, we just ran circles around these doctors that didn't see the business as processes.

And so I jumped to that. And it was kind of funny. Got there, still wanted to do big things, but clinicians don't want to listen to non-clinicians in the executive space, at least there. And go to meetings; try to do things. And nobody wanted to do anything with these people trying to improve processes. They're put on pedestals of, "Wow, we're doctors and we know what's best."

And in the medical sense, yes. From an operational sense, you're not an operational professional. But because they didn't want to work with us, I was doing a lot of twiddling thumb time in a nice corner office. So what do I do? Work on my real estate business, right? So I spent a lot of that time with my own multifunction device, scanning, buying deals, vetting deals, and growing this business to investing in more syndications, buying more real estate down where I wanted to be.

And then eventually, in 2019, after about two years of being there, they eliminated our division. So private equity, cost reduction—we're not going to cut clinicians or take away profit share. We're going to cut some of these non-clinician roles that are non-silo. They don't need to run a specific function of billing, coding, triage, or any of that. So I remember going home that day. We had just built this great house and new cars. And my wife asked, "What are you doing home at two o'clock?" I said, "This is it." She's like, "What are we going to do?" I was like, "We're going to be okay. We need to get insurance. I need to get a laptop. I need to get a cell phone. There's a couple of things I'm going to do in the next couple of weeks, but we're going to be fine."

Seth: You had 50 houses at this point?

Zach: Yeah. So we had 50 houses. You know, again, we were making like three to four times, at a much, much better tax basis, than what I made as a director of continuous improvement at a healthcare company. And it was funny. I just remember talking to friends and things, and I wouldn't even notice my payroll deposit. I remember looking at my bank account one time there, and I was like, "What is this deposit? Oh, that's my pay."

When you're buying houses, selling houses, rent, the numbers become so much bigger that, okay, you get this little payroll that's taxed, and then 401k, and then all the insurance and all these things. So it comes in like two houses worth of rent payment or something.

Yeah. So that was a change. And up until that point, I had been, even when I wasn't doing much there at the last company, I was still like in this 10x aggressive mode. And yes, my calendar became much easier than when I was in manufacturing with 17 engineers, but I was still hustling. And when that happened, it was this switch of, "I'm done. No more calendar, no more bookings, no more meetings. I've got plenty of single families. I'm just going to partner and be passive and do these syndications that are amazing." Oh, these guys are telling me 26% IRR, 30% IRR. Not at that point, but over the next year and a half, two years, I did 25 or so syndications. I put a lot of money in. I stopped flipping, which I was doing. I was funding a flipping business and I put all that money into these seemingly great investments.

I was sitting there just amazing and looking at like, "Okay, I've got two, two and a half million in syndications. That's going to grow at 20%. Oh my goodness. That's 400 grand a year, not doing anything." And I got the rentals coming in and like, I wish I was doing blood work back then. 'Cause I'm sure everything looked amazing. Like I'm so calm, no stress. Everything was amazing.

And then COVID happens and that supports do nothing, right? A guy who's like, "I don't want to do anything." Well, now I can't do anything. And as COVID wraps up, interest rates start changing. And then that's when everything started to tumble. Some of my lending unrelated to interest rates, but just bad operators. Some of those started having issues. Syndications that were just completely predicated on low interest rate, low cap rate, started having issues.

And next thing I know, I'm looking at a million plus, two million of issues. And there's a dozen, eight, 10 different issues. Oh, we got a legitimate Ponzi scheme that the SEC has locked down that I was invested in. We got another just completely fraudulent business plan and they just lost the money and then they took it and misappropriated it. We've got just bad operators, capital calls, projects that did not get underway that should have been well underway that's still just a parcel of dirt. Just so many things just start crushing this, "Oh my goodness, things were amazing. Oh my goodness, they weren't." I trusted way too easily.

And at that time, what I say is, I think for these operators, it was like Hungry Hungry Hippos. And those little white balls were the cash that was out there that people are more and more finding out about syndications and $9 trillion was just printed. And every GP or every guy who wanted a rocket ship was like, "I just need a business plan. I need a plan that gives me an asset management fee, a financing fee, this, this, and this. And I'm going to pull out a ton of cash as well. But as long as this thing sells at a three and a half cap, I can still give these guys an 18, 20% return. And I can raise a ton of money saying, I'm going to give you an 18, 20% return."

So as all that's happening, I go to a conference and I meet Dustin Heiner. And it kind of hit me like, "Ah, you know, I mean, I want to grow a network. I'm not doing anything and I'm not creating relationships and I'm not helping people. And I want to find people to partner with too. And I want to create these relationships."

And that's where I met with him and he kind of like, "Come in and coach and do a podcast." I'm like, "Oh, I mean, I don't know." He's like, "Well, I got the team. I have the people in place. You have the content, the expertise, the desire like I used to coach a team of 18 engineers." So the desire to lead and empower and direct. That's where we've partnered on different things in the podcast and so that has helped get this feeling of association and network.

The last thing is well, I got to make up for this loss. I just got lazy thinking that all these people were going to give me the returns that I was getting from being active. And so two, two and a half years ago, I said, "That's it." I had sold off about 20 houses to fund more private equity. And those properties all did well, right? Through COVID, Northeast Ohio, real estate, my stuff went up two, three times what I was into it for. So I took all those and funded syndications and sold down to 40 properties.

And so the last two years, while still maintaining my target returns, I've built back up to, I think I'm at 51, 52 now, and done a flip or two here or there. But ideally, I want my chickens. I'm not driven very much to go work for an egg. If I'm going to work, I want to work one time or over the course of a period of weeks or months to then have this chicken that pays me each month. That's what motivates me and gets me energized.

And with those to still stay in the passive life, it's doing the rent-to-own strategy. Some people may be like, "Oh, dude, he's a predator. He's a predator on these people. He's taken 5,000, 10,000 down and he's kicking them out in a year."

And yeah, there are guys like that. Rent-to-own, especially, I think if you go back 10, 15, 20 years ago, I think it was just very shady. Very few people would do rent-to-own because they want long-term passive income. They would do rent-to-own to get a large down payment, give them a short time frame, and then get another down payment.

I have never kicked anybody out because of the end of a contract. There's no such thing with me. We write a contract so you know and have security. And I give them a four-year option. And at the end of that, if they need more time or want more time, I give you another four-year option. And again, at any time, you can give a 60-day notice and leave. Anytime you can mortgage a property and cut your rent by half to a 30-year fixed mortgage.

Now, if they don't pay, they will get evicted just like anybody else. And I tell them all that, but they have the security of not getting that 30-day notice that, "Hey, it's time to leave and sell the house," which in Northeast Ohio happened a ton, right? As our values doubled, tripled, as these out-of-state investors are paying pretty high, pretty crazy prices in my mind, but they can't get those returns out west. So they're buying those at 1% ratios.

My ideal client is just someone who's tired of moving. They don't have to be like, "Yes, I'm working on my credit. I'm with this company. I'm doing this. I'm pre-approved." I don't care about all that. That's great if it is, but my intention isn't that you have to buy this house in a year or two. I'd actually prefer you don't. I'd prefer you rent it for six or eight years and then buy it, but you can buy it whenever you want. You can leave whenever you want.

And there's good and there's bad to me being the direct relationship there, right? They feel more secure talking right with me. But then you get into these where they're almost like friends with probably a lot more kind of payment issues than people certainly who have a property manager because there's really no such thing as a payment issue. On the third, they get their notice and then boom, the eviction's filed and six weeks later, they're gone. I work with folks, which I feel is more lucrative.

Seth: What does that mean to work with them?

Zach: If you went onto my portal right now, I bet I'm owed over $12,000 or $15,000 right now in past due.

Seth: Why is it you let that go? Why not stay on top of them like a normal property manager would?

Zach: Because of turnover. I have one eviction every two years. So let's say right now I have 15 people that are behind. I would bet one or two of those people are eventually going to have to move out. They're eventually going to realize that they can't catch up and they'll eventually go. So as long as they give me a plan, I mean, I'm collecting over $1,000 a month in late fees, probably collecting $15,000 a year in late fees. I'd rather collect that. I'd be paying $15,000 a year in turnover costs.

Seth: You frequently will eventually get the stuff. Like when somebody goes late, it doesn't mean eventually they're just going to default stop, right? Like they all end up paying up somehow?

Zach: Most. So I have 15 people, let's say, that are late right now. And I have one scenario where, yeah, I let them go. I let them go. I actually gave them Christmas presents for their daughter. That's what I'm saying. That's not a good thing when we're that close. If I'm that close that I'm giving you Christmas presents for your daughter, I mean, do you know what that was like when I finally realized they're lying to me? And they were straight to my face lying and gave me a fake HR contact to talk to about pay. And I could tell when I was talking to them, this is not a real HR.

Yeah. So I'm too involved for how I say the passive life, but 80% of the time, yes, people are behind, but tax returns are going to come or a parent. I just had a parent swoop in about four months ago and cut a check for three grand to catch their kids up. Red programs, assistance, charities, but as long as they're communicating a plan, making regular payments. So let's say somebody hasn't paid January. They couldn't tell me today, like, "You know what? It's going to be the end of February." Now, if you can't make some type of payment weekly or biweekly to show that you're committed, then there's a high likelihood you're just trying to stretch this to save some money and jump somewhere else and leave me with this $2,000 balance.

Seth: How much of this do you think is because there's this perception that "I'm going to own this thing eventually" versus like, "This is just some rental property. I don't care." Like, is that why people are willing to work so hard to catch up? Because they're going to lose something if they don't?

Zach: Yeah. I mean, what I tell people that are interested in getting into rent-to-own, I tell them your breakups and your move-outs are going to be much harder than in a rental. Right. In a rental, everybody knew what was going to happen eventually. Eventually, you're going to move out. Right. Eventually, this is going to end. In a rent-to-own, they believe they're going to own it. And I'm not going to do anything to stop them from owning it, short of when you fall behind and when you don't communicate a plan or make small payments, then you are going to get evicted.

But yeah, they believe they were going to own it. They had a mentality, a passion. They probably made it better. They probably did something to improve the house. They painted it. They changed flooring, they hung special pictures or they did things. And then reality starts to set in and they get upset. And so they try and hold on or they lie. I'll get one of those maybe every two years, like what just happened to me. I let them get $3,000 behind. And it didn't start like they didn't just not pay for two or three months. They paid $400 this month. And then all the next month they paid $600, but the balance is going. And, "Oh, we changed jobs and the pay is going to be here." And okay, that sounds legitimate. And they did send some type of payroll information, but then they got fired and they lied about that.

So these are things that people may say, "Zach, why don't you have a property manager?" Well, my turns are going to be more. My move-out costs, my turnover costs—instead of collecting $15,000 in late fees, that's going to go away. I'm going to spend $15,000 because of much larger turnovers.

As soon as people can't pay the rent, boom. And because it's rent-to-own and these people perceive it as their house instead of your house, does that mean they're paying for everything? If something goes wrong, it's on them, right?

So what I tell them is, "Hey, if there is an improvement you want to do or there is a repair that needs to be done, and you are capable, your brother, father, cousin, a buddy, or you know a contractor, great, do that. If you do not know someone, I don't want to see you pick up the yellow pages and call Johnny Contractor. Because I know what happens there, right? Quality, cost, lawsuits, liens. I said, let me know. And I will refer someone. I won't be in the middle. I'm not going to make a dime, but at least I've got a Rolodex, right? My phone of plumbers, electricians, and drywall. I've got people I know that are good value and are not going to screw you."

So I tell them that, but then unfortunately, I just found out that, like two weeks ago, somebody reached out to me and they had just paid Roto-Rooter $700 to snake their drain. And I said, "Oh, why didn't you call?" "I didn't want to bother you."

No. I have a relationship with a plumbing company. It's $125 for a cutter snake to snake that out to the main line. Instead, Roto-Rooter comes in there and somehow must have sniffed that these folks had some money and said, "Oh, we're going to camera it first. We'll camera to see what's there. The camera's $300, but then we'll know what we're dealing with." Nobody cameras first. You snake the drain. And so yeah, they hit them hard.

But I try to remind folks, especially in, like a furnace, I can do a brand new furnace installed for like $1,100, $1,200. They call anybody in the Yellow Pages, they're going to be $2,500.

So it's really, whatever happens, they're still paying for it, right? So you just say this out of concern for them because you know you can get them a better price. Either way, it's not like it's costing you money. Sometimes, especially if, let's say, they're behind and something happens, well, I know they don't have the money. So what I will do is cover it and we can add that to the monthly. We can put it out there for tax returns. I do that.

I mean, maybe a third of the time I need to cover a repair and then yeah, I need to get paid back. So if they need a new roof, it's on them to figure out how to do all that. Yeah, we've had twice where tenants have been there some time, you know, like they're in year five, year six and yeah, starting to have some roof issues. And in one of the cases, I covered half and we increased their monthly like $50 a month to cover it. In another case, yeah, they took care of it.

Seth: I want to get a little more into the specifics of how you set this up because I think it's fascinating how you're able to buy all these houses and then cash flow at $300 plus per month without having any real costs that eat into you. It doesn't sound like it's a super hard property management job.

I think you mentioned having a four-year option. So that basically just means for four years at a time, you establish this is the market value of this property. If you want to pull the trigger and buy it, you can buy it at this price.

And if I remember what you're saying the other day, of the monthly rent that they pay, is it a hundred bucks per month that goes towards that purchase price? So they're kind of building a little bit of equity?

Zach: Yeah.

Seth: Okay. I'm assuming this doesn't happen often when people actually do end up buying it, right? Is that accurate?

Zach: Yeah. I mean, I'd probably say 5%. I mean, I send out an email probably once a year to everybody reminding them about Dave Ramsey's free book, go to the library, right? Get Total Money Makeover. I have an option that they can pay for rent to be reported to the credit bureau.

And then when people are having payment problems and we get on a call, like I talk to them about using Excel or Google Sheets or just getting a piece of paper. And what is your income after taxes, after insurance, all these things? What are your expenses? Have you documented? Are you paying for Netflix and for Prime and all these things that are draining it and trying to coach them to get their arms around it? Because it'll be much more beneficial for me and for them if I can close out some of these deals each year.

How I'm looking at it is if I can have five tenants perform a year, and let's make the assumption these are older tenants, right? Not a house I just bought last year, but a house that I've owned for eight or 10 years. So right now, some of my first houses probably only have 20,000 or 25,000 of principal balance left on the loan. And that house will sell for 115, 120. So I will clear $75,000, $80,000.

So to sell five RTOs a year, and go buy another five, I can do five a year that hit great numbers in good areas where I want to be. But that's the same thing as renting 50 of these just to sell five a year. So now I don't need to own a hundred. I just need to own 50, sell five a year, buy five a year. And I'm doubling my income by selling five properties a year that are eight to 10 years seasoned and paid down.

So my process, which we didn't really touch on and it developed in the beginning, I didn't have cash. But my process after four or five years became buying in cash, rehabbing in cash, and then taking it to a community bank since they're much easier to work with for a cash out. So a 75% LTV on a 20-year amortization, five-year adjustments. And with how selective and good I am at buying, I'm able to hit that $500 a month cash flow.

So these are renting for $1,200 now. My all-in used to be in the 40s. Now it's closer to $60, but the rent used to be $900. Now they're $1,200. Your property taxes are a little bit more, but my average property taxes are probably around $1,300 a year. And my insurance through Berkshire Hathaway in the commercial policy is about $350. So you're about $125, $135 a month in taxes and insurance and debt service is now closer to $400 a month. So yeah, that's where you're hitting that $600 cash flow.

Seth: At the end of this four-year option period, I'm assuming those are the ones that do buy. It's probably usually closer to the end of that because, at the end of that, you enter a new four-year period where you adjust the market value that they can then buy it at. And is that done with an appraisal? Or you look at a Zillow estimate or, like, how do you determine what this new market value is now?

Zach: Yep. So that's exactly it. I will go and I'll pull up like three data points. So I'll go on Zillow. I'll go on Redfin. I'll pull up three or four data points and kind of come up with a median. I will also look and see what's for sale right now and say, "Okay, well, this is a three-bed, one and a half with a garage."

And I'll look within—let's say a mile of that zip or a half mile—and I'll look what's for sale right now. So I'll come up with something and I never had a challenge, which probably isn't good, right? If someone was financially astute, you know, I've never had anybody really push back, and my comps are legit. So they just accept it and their monthly changes, but we carry over the deposit and the credits.

And I did have some folks, yeah, at that end of contract, specifically for folks who contracted in like 2018, 2019, right before COVID. And I'm sure they looked at their contract and said, "Oh, yeah, they probably forgot." You know, they see houses around them selling for 115, 120. And they look at their contract and it says 78,000 or 80,000 buy price. And they're like, "Oh, we got to close this." And yeah, I had two houses sell in that 21, 22, where yeah, they made more money than I did on buying the house, but hey.

Seth: What if we ever did have another 2008 crisis scenario where maybe you had bought a property for $150,000, all of a sudden the value is down $50,000 and then that market price adjusts and then they buy it? You could never lose money on this kind of thing, could you?

Zach: The contract as it specifies does not say "or market appraisal." It just says, "Here's your agreed upon price." I would think if they wanted to involve legal, it's going to say no. Here, I mean, it's a purchase contract essentially. You agreed to 120 and yes, there was a horrible market crash and now it's only worth 100, but you agreed to 120.

So yeah, I think in that scenario I think the purchase would hold up that hey, you're either going to pay 120, which your bank is not going to support, or maybe renegotiate.

Seth: So you just wouldn't let the market value go down that low or something like if the market crashes at the end of a four-year period. Now you have to change the market value down to what it really is.

Zach: Oh, so I was looking at a scenario where somebody wants to buy it, but the market is below their agreed upon price. But yes, so if we hit a period and their contract was up and the market values have dropped, then yeah, you're going to look at these and you're going to say, "Okay," but over a four-year period. I mean, you would have already gotten paid a bunch of money, right? I mean, it seems not likely, but this is how my brain works. I have to get these horrible worst-case scenarios.

Seth: Now, I am curious: these properties that you buy, are you just paying market value for a nice property? Or you seek out certain deals; you have to do rehabs on them before you get them market-ready? Tell me what a typical deal looks like.

Zach: So it used to be everything in between. I was buying turnkeys. I was buying homes where we had to put them on stilts and rip out basement walls. I had a great general contractor that I did probably 70 or 80 rehabs with. And he was amazing.

Now he has slowed down. He's got 25 of his own rentals to live off of. And he just basically wants to do things where he can be a true just GC, right? Roofs, carpet, flooring, paint, right? It's easy for him to buy the materials, drop them off and send the crews in. He does not want to take on big projects. And because I don't have like a full-time workload, yeah, it's tough to have somebody good, reliable, good value that you can't employ full time.

So ideally now I'm looking for more turnkey, light cosmetic. Some of those are coming from wholesalers. Some of them are me hitting up a house on market direct to list agent that I see has a drop. So like the last one I bought on the market, it was two houses down from a house that I own. And I think it started at like 90,000. So two bed, one and a half bath, ranch, no garage. I think it started at 90. And then it dropped to like 72 or something, 75, like a pretty big drop. I was like, "Okay, I'm going to call this person because I probably pay low 60s. We're getting close."

So I called this agent and I love just working right direct to list now. It's where you're going to get your best deal, right? They got a double commission coming their way. There's no, what do they call that game where you say something and it goes around the room, right and who knows what it becomes?

Seth: Yeah, telephone.

Zach: Yeah, so when you have two agents, you know who knows what you really heard. So I called her and I said, "Yeah, you know, I own 789 two houses down from here. I'm interested. You're getting close but we're still a little bit away." She said, "I'm just gonna be honest with you, they're under contract to buy their next house and they got to close in two weeks. They need to sell this." And I said, "Now we're talking."

So I went over there and, yep, got it down as low as I could and thought about it for 60. And yeah, that house, we're painting it. So I mean, I'm going to be all in 63 and probably renting that at 1150.

Seth: Yeah. Sounds like you're trying to get the best that you can, but I don't know. What's the minimum cash flow you would need to see to be like, "Yep, I can do this." Is it like 300 and up? Or I know you mentioned 600, 500.

Zach: So I tend to look in my spreadsheet at the cap rate. So that would be like your cash on cash return. So on that property, I calculated 1150 minus my property taxes and insurance. So let's say 150, probably right around there. So that's 1,000. And so 1,000 a month is 12,000 a year on 60,000, which is right, like 20%. And I want to be in that high teens to 20s.

My portfolio prior to starting back over, I stopped buying when I was doing syndications in 20, 21, 22. So my portfolio cap rate was like 24. So that was like, "Okay, I don't want to buy less returning. I want to be in those low 20s." But losing all that money in private equity has had me say, "Okay, I'm fine getting into the 18s and the 17s." And so pretty much everything I'm buying now is somewhere around that 950 to 1,000 cash flow before debt service. Right while I'm owning it in cash, I'm clearing 900 to 1000.

Seth: Were you able to do this because you had a pretty good income between you and your wife? Like, if somebody is scraping by with a minimum wage, can they not really do this?

Zach: Well, what I'm doing is no different than buying rentals any other way. So we're just talking in general now about how you buy rentals. So we started very first with loans that were turnkey houses. But you need enough for the down payment, right?

Seth: Yes. So if you don't have 20, 30K or more, I guess you couldn't do it unless you got them to seller finance or something like that.

Zach: I mean, again, these were $40,000 and $50,000 houses. So you don't need $20,000, $30,000 on $40,000 and $50,000 houses. It's all relative to your market. But that's where, yes, I had my bonus from Timken, which was $20,000. And we basically sent that whole thing away because of high fees.

When you don't know what you're doing, the title company, oh, you got the Patriot Act fee, you got the closing fee, the wire fee, the overnight courier fee. They just crush you until you know what you're doing to be like, "No, I'm not paying that." But yeah, I spent that whole $20,000 on the first two down payments.

And then from then on, I mean, there are these rehab loans where they will fund your rehab. And so that's going to come to you at closing, depending upon what it's going to appraise for with the rehab.

But yeah, I mean, hard money, like I lend my money. So people are using my hard money to go and close on properties and then either flip them or tune them all up, refi with a bank, and then pay me back off. So if you don't have the funds you're looking for, well, let's call it private money first and then your next step would be the institutional hard money because that gets a little trickier and there's a lot more hoops and fees than just finding local private money.

Seth: Why do you think everybody isn't doing this? This just sounds so much better than the traditional rental model where you keep the houses forever. Because it sounds like you kind of do anyway, just allowing a small handful of these properties to eventually sell, which sounds like it's actually a good thing in the end anyway.

Zach: So my best friend who I've been helping in real estate for a long time, and he always kicks himself because he didn't buy into it for a couple of years. And those are the best years when he could have been buying. So he followed my footsteps in rent-to-own. Now he is also an engineer, right? And a little bit more analytical, deep thinker. You know, let's say he was tighter on his screening. Well, if you're tighter on your screening, you're putting in better people that close on the option faster.

And right now he's trying to quit his job. We met at the same company up in manufacturing. And so when you've got these chickens that are each giving you $500 a month, okay, hey, I need 25 chickens to quit my job. 30 chickens. Ooh, this lost a chicken. All right. I made $20,000, but I can't retire on $20,000. I can retire on a whole bunch of $500 a month.

So after losing two in his first two or three years, he said, "Nope, I'm just going to do rentals." And I'm going to make sure with rentals, there's a lot of things you do—no ceiling fans, no screen doors, no disposals. You do a lot of things to bulletproof them, to limit the maintenance calls. And so yeah, you just tweak how you're going to do it. But now you know, you're not going to lose that chicken that you need to get to FI, to financial independence.

Seth: Yeah. Okay. What kind of screening do you do? It sounds like you don't even want that good of a tenant who's actually going to buy it, right? So what does the screening look like?

Zach: Well, at this point, I do, right? Now that I have 50 plus, I'm buying more. But basically, at a high level, I'm looking for cash flow. Can you pay the rent? I don't care about your credit score.

Seth: Is that part of whether they can pay the rent?

Zach: It's definitely a part of whether they're going to get a mortgage, obviously. All right. You could see, because some people, right, they had a medical issue, right? And they have piled up medical bills, or unfortunately, our society, right? We told kids to go get $100,000 of debt for a liberal arts degree that pays them as a teacher or whatever. I have somebody who has $100,000 in school debt and she's a clerk, secretary, making $30,000 a year. She's never gonna pay off her student loans, right?

So you have a lot of that that has hurt people's credit, but they're not gonna lose their house, right? They know, I mean, they have kids, like they're not gonna go live in a car or move in with mom and dad.

So credit is correlated, not causal to an ability to pay rent. Now, evictions, obviously, so I don't want evictions. That's directly related to your ability to and desire to pay rent. And that's what's tough to say—it's funny, but this time of year, no good people want to move. December, January, early February—all the applications now are at evictions and felonies. And what was the trifecta. The other day, they made half the income that was required in the listing. And we're not going to pass a background check because they both have felonies. It's like, "Oh, do you have five dogs too?" Like, "No, why are we even wasting my time?"

But unfortunately, yeah, like it's the time of the season now. I think you're going to see this anywhere in America. December and January are tough for good tenants, but the light of day is right out there with tax returns, right? Tax returns: people get money, especially for rent-to-own. Hey, we will, because to do a rent-to-own, you got $2,500 down; you have a first month. So $3,500 is a pretty big chunk that tax returns help make possible.

Seth: So it sounds like, I guess I'm just trying to draw a distinction between how much more loose you are or what particular problems are totally fine with you in terms of getting a tenant there.

Zach: Yeah. So the difference between me and my buddy is that if they're making cash, I have a tenant who's just a hustler, right? He scraps cars; he buys cars on Facebook. He flips cars, right? He doesn't have documented W-2, 1099, right? He just makes weird alternative money. He's been with me like six, seven years. And I mean, I taxed him heavy one year in late fees. I mean, I taxed him for a couple thousand dollars in late fees because he was just stringing me around, but I knew he would catch up. And now he helps me with some of my rental stuff because he's been with me for so long.

But if he were to apply to my buddy, I think my buddy would turn him down. And I'm like, "Oh, I mean, you do this and you do this. You have no proof of income, but this guy, he's a good boy and he's going to get caught up. He's not going to lose his house."

So that type of thing. I mean, I just got an inquiry the other day from how she phrased it. I'm pretty sure she's an exotic dancer, right? Cash only. She doesn't deposit it, makes a lot of cash. She said, "If you know what I mean," and I'm like, "Well, yeah, I think I know what you mean." "Yeah. Go to the bank, color that up to hundreds."

But I don't really want to meet somebody every month to take cash. But given this season right now and the vacancies I have of new purchases plus some turnovers, I would probably take a little bit more of a down payment because she would be uncollectible with a garnishment making only cash.

Seth: How much of a down payment do you need at least?

Zach: $2,500.

Seth: So no matter what the cost of the house would be, like it's just $2,500?

Zach: People have poked at me because it's been $2,500 since 2013. I have not raised the deposit amount. And whether it's a $95,000 house or a $150,000 house, it's still just $2,500. I guess my thought is I'd rather have a larger pool of candidates than lessen that pool by the people who only have $3,500. But theoretically, if they have more cash, they should be more stable.

Seth: It sounds like it's working for you. So running this kind of business, if these RTO properties are all you're doing, how many hours per week does it take you to do this interacting with tenants? I don't know, whatever's involved with that. Is it much time or how much work is it?

Zach: So let's say when I don't have anything going on with new properties or turns, so just line of business, right? Line of business activities: collecting rent and tenant communication, let's say two hours a week. I go into my portal. I look at balances. Okay. I've got 15 people that I'm tracking. I can see when their last payment was. I can see if they scheduled a payment. I can go on my phone and see when they said they were going to make a payment. "Oh, you said you're going to make a payment yesterday. I didn't get your payment yesterday."

But right now, unfortunately, the worst time of year, I bought three new properties. I had two turnovers. I got another property coming under contract. So there's quite a few things on my plate around getting utilities turned over and getting somebody in to clean up this house or replace carpet or fix something. So right now, I was in Florida for 10 days with my kids over Christmas break. I'm in Florida this whole week with Dustin and you guys. And so yeah, you can see I'm not on my phone all the time and calling tenants or calling contractors.

So it can be ebb and flow, but most of the ebb, if that would be the work time of it, is put on me by buying. I bought three properties and they're vacant. I need to get them filled. This is the worst time to fill. But just general turnover-type stuff is normally not that much work. Like, okay, turnover, I got to get paint and carpet. I can call two different companies; come and do that. Or if it's not bad, a lot of these, I just turn around. So it's rent-to-own.

And "Hey guys, yep, it needs painted. I'm going to give you a $750 credit. Or, yep, this carpet's pretty stained. You know, it'll give you a thousand dollar credit. You can go do vinyl plank. You can do carpet again, or you can just live with this. If you've got dogs and everything and you don't care about the cleanest carpet, just carpet clean it so that it's sanitary and just the stains you live with."

Seth: So, like in this market right now, what's a typical price range of a house you're looking to buy? Like, are we talking like 100 grand, 200 grand, less, or more?

Zach: So the houses I've bought so far—let's call it in the last 10, 12 months—that ranch, two down for mine at 60.

Seth: That house two down, which is worth probably 130, I'm all in at 55. And how are you getting these deals?

Zach: So that one was from one of my best friends who runs a wholesaling and flipping company. And so he pays $10,000 a month for all the SEO and pay-per-click. So in Northeast Ohio, if you said, "Sell my house fast, foreclosure, inherited house, how do I sell?" He's going to pop up at that top on Google. And he got the lead and they don't want to mess with Akron. They want Canton and South, and he looked at it. He's like, "Okay, this is in an area where one of my best friends Zach buys." Like, "Hey, you know, the lead was already very clunky. It was a very odd lead; tough to talk to this person."

But they kicked it over to me and said, "Hey Zach, see if you can make this work." And it took me five months with this individual. He was the third in the family to inherit this home and just had some communication issues. But yeah, I ended up getting that at a steal. Bought another from a wholesaler.

Seth: So it sounds like these relationships with wholesalers are relationships with friends and wholesalers to be able to get these well under market or going direct to list agent.

Zach: So that you know, my average all-in for these last four or five houses has been that 60 range.

Seth: If you were just dropped off in a totally new market you'd never worked before, how would you start finding these relationships?

Zach: The meetups. Definitely the meetups. There's quite a few in our area. There's maybe two recurring regular monthly. There is another group that has like quarterly meetups.

Seth: How do you find these meetups? Is it like Facebook or something?

Zach: Yeah, Facebook. Definitely Facebook. Probably like word of mouth. I don't think it was Facebook back, you know.

Seth: How far away are these houses from where you live? Or like, if you wanted to start doing this in Illinois or something, is that not an option? Like you have to be able to get to them?

Zach: So mine are all within 20 minutes of my house, 20 minutes north and south. You know, I've talked to some students, some MPI students, ones that are having challenges. They kind of send over to me with more experience; kind of talk to them. And what I'm seeing is, yeah, these challenges in markets where they have no friends, no relationships, no contacts. All they have is a property manager, right? They chased cash flow or apparent cash flow. They've maybe called a couple of property managers and they went with this one. But these property managers have no relationship to you. They're not incentivized appropriately.

Now, how are they incentivized? Turns, right? They're not incentivized by longevity. And so what I've told these folks is, I was talking to one last week, like four or five cities around the country and a couple of them were having problems. "Sell that house." They were having good success in Columbus. They have a great property manager. They're doing medium term and they're having great success.

And they're talking to me about this stud in St. Louis and this other one in Kansas City or something. And I said, "Sell those. Why do you want to struggle? Sell those and buy more in Columbus." Like, "Oh, that's true."

Like that should be the first thing: wherever you have a relationship, where do you have a cousin, where do you have a college buddy? Where do you have a real true boot on the ground that's not incentivized based on turns or a realtor incentivized on selling you a house, but you really want to have an area where you have some type of connection other than just "it looks like good cash flow." So that's where.

Seth: Well, before we wrap this up, I know you'd mentioned earlier on in your story, some of the syndication stuff that just sort of went sideways and didn't go well. And it's not like just various reasons, everything from legit Ponzi schemes to like just poor managers and just this and that. With what you know now, I don't know if you'll ever invest in another syndication again, but if you did, what are the red flags you're looking for? Like, what could you have seen to catch and be like, "Oh, that's a problem. Shouldn't do this one."

Zach: So as of right now, I don't see myself ever investing in a syndication again. Some of the red flags were newer operators. They'd been doing it for two or three years—four years. One of them even more like eight years, nine years and had a ton of real estate. But I think they just really went aggressive with their business plan based on the low cap rate. "Hey, we're going to buy this thing at a four. We're going to do A, B, C, and D in 18 months. And we can sell it again at a four at a completely new multiple because we've raised rents and done these improvements." Well, those rates completely changed. Things are selling at sixes and sevens now.

Seth: Is it a matter of looking at their projections and saying, "Let's change the interest rate to this and see if this still works?" And is that one way to catch this stuff?

Zach: Yeah. I mean, I didn't know. I just believed. So I didn't know to say, "Okay, you plan to exit at four and a half. Okay. But what happens if you have to exit at six and a half?" And a six and a half on $100 million. I mean, it's big. It's $20 million or something.

So if I were ever going to do another one, it would be with someone with a close relationship that I know and have known for more than a year or two. You know, someone I've known for a while that is really vetting the plan understands, you know, whether the operator truly is invested in equity or with the operator. It's got to be something much more valuable and airtight than the things I all invested in before.

Seth: Is it at all important that you have some kind of influence in the deal or you can at least, I don't know, have any control? Or is it just more about the trust and the relationship and really knowing the person and believing more in them rather than just kind of blindly throwing money at people?

Zach: Well, I mean, you're talking about two different things, one being a partner or on the GP side versus an LP who never has any input. You never have any ability to tell them to do anything or ask for anything. So yeah, I mean, I've been in partnerships and we flipped 20 units in Ohio and made half a million dollars in 18 months. I would love to do more of that. Partnering, where I provide capital, insurance relationships, banking relationships, oversight, the data tracking, the dashboards, and the things that I'm good at.

And in that instance, I partnered with contractors. The guys that are boots on the ground, going to collect the rent, going to fix these buildings. And then we thought we were going to hold them. But that crazy investor demand in our area—I mean, it's a "Nope, we'll put this up, make 500 grand in 18 months." So I would love to do more of that of partnering with more of the boots on the ground contractor types that are out there. And these guys sourced the deal and they came to me and I was like, "Yes, let's do it. Sounds great."

Seth: Yeah, it's interesting what you're saying about relationships. Like they really do matter. Even when I was looking at my self-storage facility, I had talked to a few different insurance agents and got quotes on what they were charging. And then one of my minority partners knew another guy and the insurance was way cheaper. It's just one little example of just knowing the right people that can do stuff better, faster, or cheaper. It's worth a lot. It adds up. As opposed to if you're new or you just don't know the space that well and you can easily overpay for stuff because you just don't know any better.

Seth: Well, Zach, thanks so much for your time. It was awesome hearing about your story. If people want to find out more about you, just check out the Passive Life podcast. Is there anything else they should do or anywhere else they should go?

Zach: Yeah, my website is real, R-E-A-L, realzachzimmer.com. The Passive Income Life Seven Figure Investing is on iTunes and Spotify. I'm on LinkedIn. I'm also on Facebook. I'm not an Instagrammer. I think I do have an account on Instagram, but no one's going to see anything there for now. And who knows if I'll start to do another platform.

But yeah, those are the places where they can find me.

Seth: Cool. I'll include all that stuff in the show notes, retipster.com/215.

Zach, thanks again. Great to know you. And we'll talk to you all next time.

Zach: All right. Thanks for having me.