Michael Zuber 0:00
The reason I did that is I wanted a list that was manageable that I could scan every single day. I looked at that same set for three years, and only bought in the Mayfair district for that. Because why? Because I ultimately learned that buy box better than 99% of agents, brokers, anyone. So what happens after another bucket of balls and another bucket of balls, right, another day, another day, you start to go, oh, that one’s different. Oh, that one’s listed, you know, this way. And that way, it’s probably like this. And ultimately, once you know, average, you can do good or great deal. So I believe the trick is to get simple, get tight, get daily with it, and then ultimately find average and once you know average, you can do good or great deals. I think every investor needs to do good or great deals. And if you don’t, don’t if you don’t do the work to learn average, you’re gambling and I don’t like to gamble.
Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant We are here to learn from the experts.
J Darrin Gross 1:12
Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals provide their experience and insight to help you grow your real estate portfolio.
Today, my guest is Michael Zuber. Michael is a former Silicon Valley accounting professional turned full time real estate investor and the author of one rental at a time where he promises if you can get to four doors, it will change your life. Additionally, he he hosts the every day, I want to say the everyday daily YouTube channel, one rental at a time, where he dispenses tons of useful info investor knowledge by discussing current events and their effect have effect on the real estate market. And he also has a panel of real estate experts. He interviews regularly for additional knowledge. And he’s also got an online course. And he’s got a challenge to get to 500 deals of which I have participated in here and grateful member of his audience there and I can’t encourage you enough to check him out. And in just a minute, we’re going to speak with Michael about rentals and rental market.
But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome our guests are, be sure to check out our YouTube channel. You can find us on youtube at commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest, Michael, welcome to CRE PN Radio.
Michael Zuber 3:12
Oh, thanks for the opportunity. And congratulations on being one of the 500 that is awesome.
J Darrin Gross 3:17
I was gonna ask you I hadn’t heard recently and I catch you at various times, where are you your your audience on the account.
Michael Zuber 3:26
So we are about three and a half months in actually exactly three and a half months. And we’re sitting at about 157 so we are we are on a pace to get there. I would clearly like to blow it out because I actually bought 1500 cards hoping that we accelerate into this but right now three and a half months in we’re feeling okay, I think we’re gonna get there.
J Darrin Gross 3:48
And the the end of the goal is is it at the year end? Is it 12/31? Or
Michael Zuber 3:53
No, I had this. I had the crazy idea the last day of May so I didn’t see any reason to to wait. So June 1 of 2021 through May 31 of 2022. So kind of okay, I’m some sort of summer.
J Darrin Gross 4:07
Gotcha, gotcha. Well, I I’m always encouraged when I’m watching and checking out your information there on your platform and and you know love to see that there’s an active investor you know, group listening and participating so it’s got
Michael Zuber 4:26
Its it has been it’s been fun. Yeah. On the daily financial show. I I always start right if people send me like you would have gotten a shout out in the morning, right. Hey, Darren got one. So yeah, this morning, we had two people get a shout out. So two more cards went out today.
J Darrin Gross 4:40
Well sweet. Hey, before we get started here if you could take just a second and share with listeners little bit about your background.
Michael Zuber 4:48
Yeah, so Michael Zuber, as you mentioned, lived in the Silicon Valley my entire life. My real estate journey starts after losing $150,000 in the stock market. It starts right around my 30th birthday. Read Rich Dad, Poor Dad, that purple book that meant so much to many of the Gen Xers out there. And I didn’t know I wasn’t introduced to rentals, nobody my family owned them didn’t know was a thing. But I realized I wasn’t Warren Buffett, I wasn’t going to conquer the stock market. I needed something that I could, I could work off hours, right, I could do it. As you know, today, it’s called a side hustle. It wasn’t called that 20 years ago. But yeah, I built my portfolio. off hours, I worked 70 8090 hours a week, I did a million miles on airplanes. So I had a crazy day life I was raised, you know, was married had raising a daughter. So my life was busy, like a lot of your listeners. And, you know, lo and behold, lose all that money in the stock market have $40,000 to my name. And we ended up buying a property two and a half hours away in Fresno, California, in 2002, and we haven’t looked back. So that’s kind of the start, it ends with financial freedom at 45, you know, four or five years ago, and, you know, kind of a fun ride those 15 years.
J Darrin Gross 6:01
It’s awesome. I love the fact that you’re not only, you know, talking the talk, but you’re walking the walk, kind of thing. And, and I got it, I cannot stress this enough for anybody that has is not familiar with you or your platform, the amount of information you put out, and I’d love to hear about how you do and I’m assuming you read a lot. Because you’re you’re constantly providing daily practical, you know, boots on the ground information that, you know, and how it just kind of your approach. How’s it going to affect an investor? Yeah, kind of thing. I’d love to hear how you go through that.
Michael Zuber 6:42
Yeah. So the beauty of all of this is the only thing I’ve added to my life is I talked to the camera. Because what I’ve been doing for the last 20 or 25 years is I’m a morning person, my wife is evening person. So for the last 20 some odd years, I’m up at six o’clock between 530 and six o’clock, no alarm clock. So what I have done for the last 20 years or so is I read I drink my coffee, I kind of decompress, right, I get ready for the day. But I read for an hour to 90 minutes every day for 20 years, Saturday, Sunday included, it’s just like it’s my habit. Now what I do is I do that I take notes, that’s kind of one different, right? I take notes, and I talk about him. But everything comes from the I have a investor. And more specifically, you know, I have an econ degree from Santa Clara University and MBA as well. So I have that hindsight. And he just said I was an accounting professional, right. So I’m a numbers individual. So I bring that background. I’ve been in the market for 20 some odd years. And I just talked about what’s going on and, and then lo and behold, I’ve have eight multimillionaires that over time have joined me for weekly conversations. Right, Jonathan is on Thursdays on his on Wednesdays, you know, Omar and all these other folks. So the beauty of my channel is it’s just not me talking to a camera. I have eight other multimillionaires that talk to me throughout the week. So really, each of those conversations is three videos. So yeah, I put out five videos a day, a daily financial show, likely three experts. And then I’m still doing this business. Right. I’ll be closing on another duplex this week, or maybe Monday. But yeah, YouTube is just for a way for me to get back. So I don’t get a day job. Right. I when I retired, I almost went back and got a job because I’m still up at 6am I just didn’t have anything to do. I’m like, God, what am I doing? I’m 45 I’m, I’m Taipei, I got to feel like I’m contributing. So I’m convincing myself that this is how I get back by by contributing content every day.
J Darrin Gross 8:33
Well, I count myself as one of your connoisseur, and I appreciate all the info you put out there. So
Michael Zuber 8:41
J Darrin Gross 8:42
And hopefully you keep doing that. So I wanted to, to, you know, start with kind of a conversation about the, what is it? Do you think that most people miss when trying to if their goal is to invest in a property? I know one of the things that that one of the teachings that I’ve heard you comment on you know, and and I subscribe to is identifying a market get to know a market be an expert in a market. And I was kind of curious from from your experience and your you know, talking with others and and just kind of assessing the situation if you could kind of you know, look at and tell me what what do you think that most of the investors or potential investors Miss?
Michael Zuber 9:36
Yeah, I think the biggest one is I believe my opinion is becoming a good or great real estate investor is a skill. And what I mean by that means nobody is born with it. I it means everybody has to go through it. And what do I mean by that? Well, the best analogy I have is a golf swing. You see, I didn’t pick up a golf club until I was almost 20 years old, and I played baseball and you know, naturally athletic. But I gotta tell you the first time I put a golf club in my hand, it was the most unnatural thing I’ve ever done. It just feels weird. Like I pulled muscles I didn’t know I had, it was just I bounced the club on the ground, it was just a horrible experience. But what happens with a golf swing as you go on the driving range, and you get a bucket of balls, and then another bucket of balls and another bucket of balls, your swing just naturally gets better, right the body figures about. And then as you’re doing that, and then if you go get coaching, it takes that raw, you know, feeling even makes it better. So now let’s equate this to real estate investing. I believe all real estate investors need to simplify in the beginning. So what I preach what I talked about is, I get it, you’re excited. I get it. You’re a shooting star, you’ve got you baby, you’ve got capital, and it’s just burning a hole in your pocket, stop. Go look at a market get a buy box. And what do I mean by a buy box? I mean, you need to get super specific, and I’ll use the buy box that I had in 2002. Right. So for example, I live in the Silicon Valley, which is ridiculously expensive. I wasted a year trying to find cash flow here. It didn’t work even in 2002. So ultimately we find Fresno, California, Fresno is a market I’ve never lived in. I drove through it once when I was 13 On the way to Yosemite know nothing about it. It’s a million people roughly now it’s probably 600 to 700,000 then too big for me to figure out. Okay, fine. So I do some basic research I find an area that’s middle of the road. It’s 93703 it’s a it’s a part of town they call the Mayfair district, the main register, Ruffin toughs. 100,000 homes still too big. Right? I go Okay, great. So ultimately, what I have to do is I have to go Mayfair district 93703 single family homes, so not duplexes, not quads, not apartments, not condos, between 12 115 100 square feet. The reason I did that is I wanted to list that was manageable, that I could scan every single day, I looked at that same set for three years, and only bought in the Mayfair district for that. Because why? Because I ultimately learned that buy box better than 99% of agents, brokers at anyone. So what happens after another bucket of balls and another bucket of balls, right, another day, another day, you start to go, oh, that one’s different. Oh, that one’s listed, you know, this way. And that way, it’s probably like this. And ultimately, once you know, average, you can do good or great deal. So I believe the trick is to get simple, get tight, get daily with it, and then ultimately find average. And once you know average, you can do good or great deals, I think every investor needs to do good or great deals. And if you don’t don’t if you don’t do the work to learn average, you’re gambling and I don’t like to gamble.
J Darrin Gross 12:45
That’s, that’s pretty clear. And you know, actionable. You know, I love the the analogy or not the analogy, but you just what you did with kind of just narrowing it down to where you could really, you know, study and become an expert in one thing. single family homes from you know, 12 to 1500 square feet or whatever that that was that area. Yeah, I mean that. That was that was that’s pretty, pretty smart on your your part, as opposed to Oh, wow, look in Denver, you can buy Oh, wow. Over here.
Michael Zuber 13:16
Yeah, don’t do that. Don’t Don’t try to compare Denver with Austin with Miami with Cleveland, you’ll go nowhere.
J Darrin Gross 13:22
Yeah, exactly. And it’s. And I think that, for anybody that’s, that’s excited about real estate, and wanting to get in real estate, it’s really easy to get in a kind of that all over and you’ll you’ll talk to somebody, they go, you know, don’t buy there, you can’t cash flow there. And they’ll send you over to here and they’ll and they’ll give you their reasons, you know, and, and then, but it just it really is just kind of like just, you know, get rid of the noise, pick your spot, and then become that expert in it.
Michael Zuber 13:52
Yeah. Because this is what happens, right? Because once you again, trying to relate it to the golf swing, right? So when you’re on the driving range, and you finally figure it out after 90 days of going every day, ie looking on market every day. Once you do that, you’re like, I know what an average deal in the Mayfair districts for 12 to 1500 square feet. Once you’ve proven that, now you can take that skill and go to any market you ever wanted to go to. It’s just like a golf swing. Once you’re done with the driving range, you can take that golf swing to a pitch and putt to Pebble Beach, to you know all these other fancy courses. It doesn’t matter the course doesn’t matter, just like the other city was it wasn’t matter. You don’t pick a market first. You got to build your skill set first, in my opinion.
J Darrin Gross 14:34
Oh, that’s awesome. Let me ask you about investors, expectations versus reality with respects to like cash flow. You know, I think one of the the upsides you would have with being familiar with a market like Fresno is you would know again when it deals a good deal ripe and it’s gonna cashflow well, versus it’s not. Do you have any kind of a sense of, of or do you? You know, I guess what are your thoughts on that? Because cash flow in some of your larger markets, like you mentioned, in your backyard was not attainable. Yeah. Versus like an appreciation, play where there’s no cash flow. But there’s, you know, if you sell then you’ve got, you’ve got some equity.
Michael Zuber 15:26
Yeah, for me, I learned very early on. And again, this is probably because I suffered that $150,000 stock market loss, I was never going to play the appreciation game, the house that I live in, still in the Bay Area is appreciated wonderfully. And someday, it’ll cash out and be a great day. But I never wanted to bet for that I wanted to produce income that I could easily pay my bills with. That was that’s why we sacrificed your 15 years, is I wanted to enjoy the rest of my life knowing that my monthly bills are paid for. And you can’t do that with appreciation. I’ve lived through the last crash, I knew people that were worth 10 million bucks that went bankrupt inside of 18 months. That’s what happens when you bet on appreciation. The market can go against you. If you’re betting on cash flow in the market goes against you, who cares, right? You don’t usually spend your net worth. And oh, by the way, the last crash rents went up, not down. So I just simply I’d never count on calculate looked at appreciation ever, ever, ever. The only time I do it is when I have to fill out a financial statement for a loan. I don’t even look at net worth, you asked me my net worth i would i wouldn’t even answer. It’s like it’s an irrelevant number. It’smade up.
J Darrin Gross 16:31
Right. Not unless you saw everything today, right?
Michael Zuber 16:34
Yeah. Not doing that.
J Darrin Gross 16:37
Right. No, I I appreciate that. And I’ve learned myself kind of the the slow way. I think I when I first started investing, you know, I thought well, I just, you know, just bleeds a little bit each month, you know, and, and was always happy to be at the front of the line, get my taxes done, because it was enough right off the bat kind of thing. But having had a property that the cash flowed as I Wow, this thing really works. There’s actually money coming in, and then
Michael Zuber 17:11
J Darrin Gross 17:12
Well, and just the ability to have a second stream of income, that an unexpected stream of income, where you can actually, you know, create a savings and actually then go invest more. I mean, it’s it, you know, it’s just such a different mindset, as opposed to, you know, living payment to payment or kind of just kind of spending everything you’ve got, which I think is I don’t think it’s unique to a particular demographic or an income earner. I think that more people are in the more they spend. You know, I agree. Yeah, yeah, great boat payments, car payments, vacation, home payments, you know, vacation payments, you know what, whatever it is if you have more than you spend more, spend more than you earn in your, you know, and you’re upside down there, but but couldn’t agree more with the the cash flow thing there.
I wanted to get a little bit of your input on what your thoughts are. And just perspective. You and I we talked one time before here about a year, almost a year and a half ago, right after when when COVID started, I had you on and just kind of some COVID perspective. But I think, you know, where we were talking then was more of like a front end of unexpected. What, you know, what, what can happen. My question to you today is more of now with all of the measures that have been put in place, the the eviction moratoriums, the cash that’s been flooded that flooded the system. The the forgiveness of the the rent, right action says forgiveness, there’s supposed to be money in there that’s supposed to make its way from the government to the agency to the to the landlord. But all of that just the the COVID cash and the COVID mindset based on renters and buyers, if you could kind of summarize what you think that will, how that will play out. Yeah. And then next year to three years in the real estate market.
Michael Zuber 19:20
Yeah. So let’s kind of do two things because I remember that conversation from about, you know, 14, 15 months ago, I think there’s two things that I will admit were unexpected surprises. The first one is rent collection, even acts. Ultimately the government making up you know, the 45 billion that they’ve approved in two different trenches. rent collection proved to be far better than expected. Right when we got the notice that it was shutting down and evictions were put in place. I remember having a Sunday conversation with my property managers going How bad can this be? And we were actually penciling in 50%, right? If 50% happened and we got a lot of stuff Where are we? Right? And how long would our reserves last? Not that. So long story short, we never collected less than 97 and a half it was, I think the average was 98% 98.1. It’s about a half a percent worse than normal. So not fun, but not catastrophic, right. And then ultimately, when the government finally makes up for what has been short will probably be even so read collection First off, proved to be better than expected. Second, man, home appreciation. Was that a shocker? Man, people a didn’t list their homes, which I called expected, right? It’s this thing that was talked about was like, don’t come in my house, you got cooties. So that part I got right. But man, this whole millennials, leaving condos and vertical living leaving the cities of New York and San Francisco, people going to the suburbs, that there are a lot of niche markets that got a got 510 years of people moving to there in a year. And building doesn’t work that way. Demand moves faster than supply in some of these market. I mean, Boise, Idaho is the extreme example. Right? It just the demand, there was a is probably like 15 or 20 years of the demand showed up in a summer. And guess what happens to prices? When that happens? It just explodes. And yeah, so those are the first two things that shocked me. Now as we look forward. I think there’s a couple of things that we can count on. First and foremost, inflation is real. And I actually think it’s under reported specifically, when you look at housing costs, which is something I look at all the time, the housing numbers have just came out and CPI yesterday, today’s Wednesday, so yesterday and PPI the following week, they’re really not reporting any rent equivalent increase, it’s like 1.7%, where everything I’m seeing it’s double digits, this is houses and apartment. So at some point that’s going to come home to roost. And I think rents continue to go up because we’ve been, you know, we’re, you know, 5 million units under produced for the last 12 years, right housing development hasn’t been keeping up with housing formation. And as we exit this, I think we’re gonna see housing formation increase again, because there’s a lot of been people that have retreated, they live with mom and dad, they’ve had roommates or whatnot. And once we start getting out of this, which we got to be right on the cusp of getting out of this, I think housing formations is going to explode again. Right. So demand will again outpace supply. So I think housing is going to be pretty strong going forward. I don’t want to see 20% on top of 20%. That’s not healthy. I invested in Fresno, California for 20 years. And we had two years in a row where we were the top market, you know, year after year, I think, Oh, 30404 or five. And if that becomes a bubble, right, it just right. You know, it’s a problem. I think we should plateau. But man if if money stays cheap. And there’s there’s some things going on now where where money can stay cheap, meaning the 30 year mortgage, it’s a great time to buy. I mean, I did a 50 year chart the other day, going back on what wages, interest rates, payments, all of these things. And there’s some surprising things in there that your audience might want may not realize. First one is in the 1970s, which is actually a period that I think we are emulating right now was a year it was a decade of 8% inflation. That was the average. But what is interesting is interest rates went up 300 basis points. It was the last decade we had where rates were higher at the end than the beginning. The subsequent 40 years rates have been going down for 40 years, I believe that reverses this decade. But why is that important? Well, first and foremost, you would think have rates go up 300 basis points, that housing would get rocked. It simply didn’t. Housing went up 106% in the decade, how did it do that? Because the other thing, wages wages went up 87% I believe there are two things happening in inflation that are not being reported rent I’ve already hit wages is the next one, I believe we are going to see an era of wage inflation, which of course as it happens, feels good in the moment.
But guess what prices go up across the board, right Chipotle raise the wages of their employees, and they had to raise the, you know, cost of my burrito bowl by 4%. It’s just, it’s got to come from somewhere. So I think wages are going to go up a lot in the next couple of years. But then, you know, rents will go up and then assets will go up. It’s It’s It’s if you’re bouncing around the bottom of this, it’s not going to feel good because you’re going to feel it the most inflation is the biggest tax that nobody talks about.
J Darrin Gross 24:36
No doubt. I mean, you put all that money into the system. And you know, it’s financially I mean, the pie, the pie doesn’t necessarily expand, you know, to x, it’s pretty much the same pie just the cost of, of the piece of pies is keeps going up there.
Michael Zuber 24:55
That’s that’s basically the definition of inflation is more money chasing x Good, you just, you just pay more. Yeah, kind of what it is.
J Darrin Gross 25:04
And so, I mean, the borrowing rates? I mean, I, it’s funny, because I feel like, you know, there was a mindset in an earlier in some of my investing, there was a matter of, you know, by when the rates were up refiling or down and, and, you know, things would really cash flow then. And but now, I mean, I’m just kind of curious, you know, the Fed and just the supply of money and just, you know, is, is everything seems like it’s got some traction, do you feel like things are still somewhat fragile, and that if interest rates did go up? You know, the wheels could fall off? Or?
Michael Zuber 25:48
Well, it’s funny. Again, I read every day, right? So again, we’re talking on the 15th of September as an example. So just today, I read about the largest property developer in China $300 billion, not making payments, it kind of feels like a Lehman moment in China. And if there’s a lot of counterparty risk, which China’s economy is very opaque, I know very little about it. But that’s a lot of the property market in China could be a problem. Why, why this goes into your question is, what happens if the largest second economy in the world has another as their version of our great recession? that just needs more dollars from around the world, including euros in Australian dollars? And all the are you going to flood to the the USD, the US dollar?
J Darrin Gross 26:34
Yeah, seek safety,
Michael Zuber 26:35
see, they’re gonna win, the world is scared. They come to the dollar, that’s not going to change probably in my lifetime. And I think we could I think the world is a lot more fragile to your question, then people think I just I naturally think that the rates should be higher. But when I look at the overall world economy, I think the world economy is far shakier than people want to admit. And we could have a Do we have a recession next year? Oh, man, what could happen there? Great stay low rates. And then I think rates stay low, low longer than they naturally should. which hurts savers. So I’m talking about the people who’ve been crushed savers. I mean, you know, I got some money in the bank and earn point. Oh, 5%. I mean, no wonder people are buying real estate. That’s why Wall Street is buying rentals, because you get six or 8% on your money.
J Darrin Gross 27:27
Right. Now you’re getting point five, you’re winning. Yeah, I’m getting .02.. But I, I just have a hard time seeing a way where the rates can increase dramatically. I mean, I could see like, you know, a quarter of point here, a quarter point there. But I think the the bigger concern, and I am and I’m not an economist, but I guess, you know, the idea has always been if you had a little bit of cushion there, and you needed to kind of, you know, goose the economy, you could lower the rates. Well, if you’re already down at, you know, zero kind of thing that you haven’t given yourself much room for, if you need to do something, at least not with just rates. I mean, I know there’s other levers they can pull on. Yeah. And do that.
Michael Zuber 28:16
Well, they certainly have, right, they started what what the new thing, at least for my memory that they did is they started buying junk bonds this time, right? It wasn’t only lowering rates, but they stepped in to be the buyer of last resort during the like real thick of this thing. They still have those levers, right? They could start buying ETFs. And other I mean, I mean, they could get really squirrely, but by then, I mean, I’m not sure what that’s telling us, but it doesn’t feel good if the Fed has to come in and be that buyer.
J Darrin Gross 28:43
Yeah. So and we’re talking a little bit about man for housing, and you mentioned kind of the formation of housing changing. If If, presumably, the we have inflation, which would be associated with like wage increase and price increase, interest rates stay, let’s just say they stay relatively the same. Again, you’re still a payment buyer. I mean, it’s what, you know, buyers, ours is a payment. So if they’re, if they’re making x and the payment is, you know, less than 30% of that for I mean, kind of the the mark for housing, is that. Does that change? Or do you think that? No,
Michael Zuber 29:29
I think, I think I think real estate is much like cars. I think it is really for most people a payment decision. And again, that 50 year chart, I built the payments, at least in 2020. They were the lowest on record they were roughly 16% of your monthly gross income, which is called a front end ratio by mortgage brokers. Now in 2021, July, which was the last numbers I looked at it went up a little bit and went up to 20%. But when you look back historically, I 43 of the 50 years, the payment structure was 29 percent or less, we’re still very affordable today that said there is another wrinkle in all of this and that is the down payment is becoming a problem right in my assumption, I assume 10% which is, which is about this bout, right if you look at the entire market, but when you look at first time buyers, they’re more like 6% but downpayment is going to become the problem, right? Because downpayment is getting up there, right? The average homes now 366 or 369, and you take 10% of that it’s 34 grand, and then you look at the average person, they’ve got $18,000 saving, we are we are, if you can be if you can get the downpayment stuff is more affordable than it’s been most years, but the downpayment is is becoming a problem. And it’s higher than the trend line in the trend lines about 33%. Today, it’s about 36 or 37%. So it’s the downpayment is actually becoming a bigger problem, which is probably why we hear the administration talking about first time buyer programs in this that the other thing, so we’re always a payment buyer, because that’s what you get approved for but the doubt you gotta have a down payment. So that’s becoming a bigger problem.
J Darrin Gross 31:08
Now, it’s interesting, you bring that up, I know, like, even in commercial with just the cap rate compression and, and just the demand for deals. how, you know, the market may be axed, but, you know, the debt cover the debt service, coverage ratios are still at the same percentages. And I’ve seen, some lenders require a greater downpayment, to make the deal work. Again, if you’re doing commercial and you’re, you know, doing syndication, or you’re bringing capital from somewhere else, or other people or joint venture or whatever. But it does seem to make like just a slightly skinnier deal. But again, if the demand stays strong and housing clearly as a, I mean, nationwide, just the demand for housing is, is is there. Then if you add in all the the COVID supply chain, you know, question marks that have that have come up? I don’t see that changing anytime soon. I think it’s just a matter of I mean, I see the demand to be strong.
Michael Zuber 32:15
I yeah. Again, the beauty. The beauty about studying economics and watching it for so long is you realize that there’s some truth that and with with housing, housing demand is instant, nearly instant, where supply takes years, right permitting and zoning and building and you know, all of that, but demand, right? We come out of this crisis, and we have the next version of a baby boom, where couples get together and want to move in instantly get married and start popping out babies. Oh, man. Yeah, man is gonna demand not going away. No, that’s for sure.
J Darrin Gross 32:52
Hey, let me ask you a quick on your you’re a purveyor of all the news and what’s what’s topical? What’s your sense on the 1031 exchanges in taxes with regards to real estate?
Michael Zuber 33:05
I don’t think they’re going away. I think that was a thing put out there as kind of a trial balloon it’s in, in having studied this for a long time. It’s been floated for years. Basically, what would I think what what people now realize is if you got rid of 1031 exchange, which they absolutely could, but what would happen is the commercial market and the market of the largest production of housing affordability, it would slow down to a trickle. So if they got rid of it, they would stop people moving up, and thus creating more housing, which is exactly what they want to need. I think they’ve now come to realize that that would be so detrimental to housing, but in commercial housing, that they’ve got to get rid of that it’s it’s a foolish idea.
J Darrin Gross 33:49
Right? Any any crystal ball on taxes, capital gains, and then
Michael Zuber 33:54
I think I think what’s gonna happen is, again, if I was gonna bet on it, they they scared, they’re playing classic negotiation games, they want to scare you taking it to ordinary income and 39.6. Which for me, in California, when I add in California would take me to 53%. Guess what, I don’t sell anything at a 53% tax, they know that they’re not complete idiots. They’re only partially idiots. So what I expect them to do is to probably come in my guess is somewhere under 30%, you know, 25? I guess 25 30% is where they’re coming, because they got to raise taxes somehow, you can’t spend three and a half trillion dollars and not raise taxes, but they can’t take it the 39 because again, what will happen? Well, I will not sell any assets, I will simply refi them and take a loan which is not taxable. You know, so I think they realize that that’s a non starter to I hope,
J Darrin Gross 34:44
Wait a minute, are you saying trickle down doesn’t work?
Michael Zuber 34:46
Yeah. So yeah, I am saying it’s a sexy message that just doesn’t work.
J Darrin Gross 34:53
I mean, it’s, it is kind of an interesting thing. I mean, if you if you understand policy enough Basically, it’s, it’s a way to encourage behavior. And that’s the whole, this whole thing. And if if you look at the tax code, who rewards investors, and rewards people that that created LLC, or create businesses that go out and invest, and that that’s kind of the underlying current of our economy is you have to have investment if, if basically, I had everything I had, and you had everything you had, and neither one of us exchanged with each other, you don’t have an economy, I’m basically it’s that exchange of, you know, goods and services. That that makes it all work. And, and, you know, that’s, that is what, what has to happen for it all. I mean, we are all connected together, in that totally, you know, so you got to have that. Keep going. It is funny, though, when you think about how the tax, you know, taxes, and I, this whole notion about taxing corporations and stuff, and I keep reminding myself of the lesson, I learned that you can tax that, but reality is all that gets paid out to the shareholders. And I mean, you’re talking about very small piece with respects to or, and again, I’m not an economist, but but that as opposed to at the individual level where the money gets paid out to kind of thing, and I think sometimes it’s it’s a sexy, you know, notion, but I don’t know what it actually accomplishes when you have ways that corporations can, yeah, you know, I manipulate things. Yeah.
Michael Zuber 36:31
So I think there’s a big talk track about raising the tax rate for corporations, you know, 21 to 26, or 27, or whatever they’re going to call it. But unless they change the rules, simply moving the index is marginally effective. Because again, the big thing is Amazon, right? Everybody talks about Amazon, making gazillions of dollars and paying zero taxes, while the tax code says, if they make investments in warehouses to do this, that the other thing, they could take bonus depreciation and wipe it all out, and it’s still zero. So unless you’re going to go change the rules, ie the tax code, it doesn’t matter what the rate is, you can make it 90%. And Amazon still pays zero. Right? So
J Darrin Gross 37:10
Yeah, no, it’s, it’s again, it’s kind of a news bite, or, you know, kind of the, you know, attention getter kind of thing. But it’s, it’s, in reality, I just said, it’s noise. Michael, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with risk. And there’s three strategies we typically consider. The first is we look to see if we can avoid the risk. The second as we look to see if we can minimize the risk. And if we can neither avoid or minimize the risk. And we let’s see if we can transfer the risk. And that’s what an insurance policy is. And as a broker, I like to ask my guests if they can take a look at their own situation could be their clients, investors, the marketplace tenants, however, however, you would like to frame the question. And again, for clarity, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Michael Zuber, what is the BIGGEST RISK?
Michael Zuber 38:26
So the biggest risk? And again, I asked myself this all the time, right? Because I look at it, I go, what is my biggest risk? And if I can, if I can survive the downside, right? up through all those things, those that I think about it all the time. So in my portfolio, my biggest risk that I’ve been working on all year is variable interest rate risk. I have commercial loans, I own apartment buildings. And those loans reset 357 10 years, depending on what you have. And over the last year, I have feared that I could see at point of refi, where rates, you know, I had a rate of three and a half. I was like, what happens if this is seven, seven and a half? Right? So what I had been doing actively over the last year or so is taking all of my loans and looking for ways to get 30 year money. One thing you can do because there’s now for the first time, really in the last couple years are these vendors called non qm lenders, non non qm lenders. And I work with a lender who has taken all of my apartment risk and allowed me to get 30 year money at 3.99%. So it’s not a Fannie Freddie loan, it’s a 3.9 non qm lender. So I’ve been I’ve been actively working to get all of my apartment buildings, and I’m even paying prepayment penalties on one of my loans. Because I I’m deathly afraid of interest rates shooting up. And if that happens, of course, apartment buildings, if rates go to seven cap rates, gotta go to what 910 and then the valuation calls and they’re gonna say, hey, you’re now in technical default and you got to cut a big check. That freaked me out for a while. So I’ve been working very hard to Take all of my just double rate mortgages on apartment buildings and go get 30 year money even if I have to, even though my payment goes up slightly now, I’m okay with that. So that was the biggest one for me. Cuz I looked out years ahead and go, wow. Because again, I’ve been through the last crash, what caused the last residential crash? It’s all those adjustable rate mortgages that popped up that and their payments reset. I looked at that going, Oh my God, if that happens to my apartment buildings, and then the cap rate goes up and the value is cut in half. You know, where do I go? So that was a big one for me. So that’s, I’m working on my last one right now.
J Darrin Gross 40:36
Yeah, that’s never a fun. You know, letter to open that. Congratulations. Your loan is resetting and the interest rate is now? You know, yeah. Being nice if it’s going down, but no one is going up there. Yeah.
Michael Zuber 40:49
Yeah. And again, that the biggest thing for the commercial stuff, right is because if that happens in the cap rate goes in and you have a revaluation that your technical default, and they’re like, okay, you want to kind of check for 150 grand?
J Darrin Gross 41:00
Yeah, no, I don’t really know.
Michael Zuber 41:03
So, that was mine.
J Darrin Gross 41:05
No, I appreciate that, you know, interest rate is definitely, I mean, as an investor, the whole market, I mean, it’s pricing and everything sensitive to that. And if if that changes, your model changes. And, you know, if your cash flow is, is based on that, definitely want to pay attention to that. So I appreciate that. Michael, where can listeners go if they would like to learn more connect with you.
Michael Zuber 41:32
You can go to your Google search bar and type in One Rental at a Time, you should see a YouTube channel, a book, a website, Instagram, hopefully easy to find at this point.
J Darrin Gross 41:42
I check it out daily and encourage everybody else to as well. Michael, I can’t say thanks enough for taking the time to talk today. I’ve thoroughly enjoyed it. I’m a big fan. And look forward to doing it again soon.
Michael Zuber 41:56
Anytime. Thanks, buddy.
J Darrin Gross 41:58
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