GI283: Rent to Own Real Estate Investing with Adam Zach

GI283: Rent to Own Real Estate Investing with Adam Zach

Adam Zach retired from civil engineering 32 through real estate investing. He currently holds 50 single-family rentals in 13 different states, along with various alternative investments. His main passion is helping dads with young kids achieve time freedom through real estate investing.

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Transcript:

Charles:
Welcome to another episode of the Global Investors Podcast; I’m your host, Charles Carillo. Today, we have Adam Zach. He retired from civil engineering 32 through real estate investing. He currently holds 50 single-family rentals in 13 different states, along with various alternative investments. His main passion is helping dads with young kids achieve time freedom through real estate investing. Thank you so much for being on the show!

Adam:
You’re welcome, and I’m excited to be here. Excited to dive in.

Charles:
So you have an interesting background prior to getting involved with real estate, which I think everybody kind of does, that comes on the show. But you were able to become successfully free by 32 through real estate investing. Can you tell us just a little bit about yourself, both personally and professionally prior to you know, catching the real estate bug and doing your first couple investments?

Adam:
For sure. Yeah. I grew up in a town of 17,000 people, so there’s not a lot. So you know, kind of acres of diamonds here in North Dakota, a population of like 700,000 for the full state. So there, there wasn’t a lot of excuses of capital and deal flow. So when I was a civil engineer, it was a decent paying job. I think it was like 75,000 a year of what I was up to. So for me it was all about collaborating with other people. So I am a partner on almost any deal besides like two deals that I did personally. I’m always forming new LLCs. I think I have like seven LLCs. And so for me it’s all about how is it one plus one equals three? So that was the way that really allowed me to go fastest, the furthest ’cause like I did two, two myself over a period of five years. But then after that it was, okay, let’s really dive into here. How can I find someone that compliments my strengths and my weaknesses.

Charles:
And how did you find that person? So for

Adam:
This particular one, it was somebody that I was, that was doing construction, happened to be looking to get into real estate, but was really kind of just a, a friend. And so I’ve had deals that have gone south. I’ve had equity deals where it’s gone really well. So I’ve kind of seen both. I know Dave Ramsey’s always the, the only ship that doesn’t sales a partnership. And so I think that’s true, where it can go both good or bad, but I kind of think of it as a marriage too, where it’s probably higher risk, higher reward, but I’m, I’m of the adage, if you want to go fast, go by yourself, you wanna go far, go with someone.

Charles:
Yeah. And I think the thing with Dave Ramsey, ’cause I, when he says that it, it it is true. I get it. I think ’cause it’s true. And he, and he always puts a caveat on that for people that are in higher education professions that have partnerships. So attorneys, accountants, why? Because they’re actually probably going through the actual process of vetting and going through that everything. And I, I don’t think you have that with a lot of people in real estate, which is in business in general. I think it’s just like, oh, we met at a conference or we did here and this sounds fine. And then you find out later it’s not a, it’s not a match because you didn’t ask the hard questions upfront, which I imagine the ones that go 10 plus years do. Yeah.

Adam:
And I, and I, I think the rule of try to give your partner the better end of the deal if you just end up doing that and you kind of put the ego aside a lot of times there, you know, there was probably multiple times where similar to my spouse, like I was having conflicts with my business partner, right? Was like, oh, he is not dreaming big enough, or I’m doing sales and marketing and he’s doing operations. And like who is actually more valuable once you get over that and you’re like, man, like how awesome my life is, you know, without him, I realize that maybe at some point, you know, there, there isn’t that, but I feel like there’s kind of a quick division of labor. So I like to, similar to, I keep coming back to kind of yourself, but I like to date get engaged and then get business married.

Adam:
And so I feel like that’s a great way of doing business partnerships is to just get to know each other, do one deal together, do you like each other after that? Okay. Then maybe form the LLC start with a joint venture, do something like that where you can actually test out someone, go over a period of like a year, see the full season, the full cycle, is there anything else going on? Is it just a flash in the pan and then they’re off, you know, doing something else? What happens when things get hard? What do they do? And then from there it kind of, you know, grew from there. So I, I’ve gotten extremely fortunate that my first business partner who we didn’t really have like the formal agreement, you know, that I’ve done, you know, past where it’s like similar vision but complimentary skill sets or similar values, complimentary skill sets versus kind of like now the, at least the standard that I, that I currently use, which is like, you know, extrovert, introvert, you know, sales with operations and vice versa. We just happened to work really well where he’s now kind of COO and I’m CO

Charles:
Yeah, that works perfect. I mean, I remember the first property I bought decades back from a real estate investor and his partner and we’re at the closing table there and he and his partner and he was telling me about his first partner and why it didn’t work out and it was because he was like in his twenties and his other partner had money but was like 30 years older than him. And so obviously you have different things going on in your life versus, you know, guy in his twenties that’s hungry out there, whatever, finding deals, you know, we’re, you know, we’re pushing off everything to the end to get paid. And this person’s like, well, I’m already <laugh>, I’m already there already, so like I don’t need this. And that’s why it didn’t work. ’cause You know, you had different timetables of what you’re doing.

Charles:
And so I found that really very interesting. And one other thing too is I found that you know, you don’t count your partner’s money. And I think that’s really important. When you’re partnering people no matter how you’re getting deals done, whatever industry you’re in either, you know what I mean? If you’re splitting profits one way or another, and you might say, well, you know, I’m doing, I think I’m doing more than this. And that’s kinda like a black hole, you know what I mean? You gotta be like, listen, I’m doing what I’m doing. I’m getting paid what I was supposed to get paid, what I agreed on. And that’s kind of how this, you know, this is how it’s set up and we just need more, whatever we’re doing to make more money. You know what I mean? And I think when people start like trying to cut people out or do so, I mean, that kind of thing is the beginning of the end for relief partnerships.

Adam:
And, and it’s, and it’s so fun how, you know, I, I feel like sometimes at yo-yos we’re like, man, like I’m doing this and he’s not doing that, but then like six months later it’ll flip. I’m like, oh, I’m on a weekend vacation and he’s just running the entire business. <Laugh> like, you know what, that’s really awesome. Where it’s like, you know, all he does is the financials and it’s like, oh, thank God he does the financials. Right. So it’s like even myself. So like, you know, I I I totally agree with you Charles, where, where it’s like, yeah, you, if you start getting down that, that’s a, that’s a very dark hole. So

Charles:
Kind of I’m not sure if you touched on it, but it’s one thing I always like to ask how you chose real estate as your investment vehicle because there’s so many different things people can do out there to make money and quote unquote reach financial freedom, whatever that might be for each person.

Adam:
So I, I was, I did both theoretical, but I’m more practical. So like, of course you can read the books and that the majority of people make their mil, you know, become a millionaire through real estate. So like that was one stat that, you know, that was super beneficial to me. And like, I kind of heard about it. I did the Rich Dad, poor Dad, all that fun stuff, but then I was like, Ooh, I tried stocks day trading, fantasy sports, developing my own product and real estate. And so like, I, I basically failed fast as fast as I could in those ways. And it was like, oh, but real estate was the one that WW was the least bad, right? Like the product was like, oh, this didn’t really work and it take a bunch of capital, do all that try day trading. I was like, you get lucky for a little bit then you just lose everything.

Adam:
You could do long-term investing and stocks. And it’s like, okay, well now I don’t really have a unique advantage and I can only read so many, you know, scripts and profit and earnings. And I was like, I didn’t really think I had an unfair advantage. I was like, oh, real estate was the one. I was like, I’m actually valued for insider trading. Like I have a great combination of like, I can invest in my backyard, I can do sweat equity and I can like actually improve the value of it. And so since I did that and I was able to see, and so that’s kind of my philosophy is just find five dominoes flick at all of ’em, whichever one falls over, just like keep going down that path. So then it’s like I, I go down the real estate, I kind of revisit the other ones where I was like, you know what, this one worked.

Adam:
Okay, now do the next real estate. But then it was like another series of five dominoes. Okay, should I do storage unit, single family, multi-family this? And it’s like, okay, try to knock on all those. Okay, I tried Multipli family didn’t work for me. Okay, try the single family. Okay, it still worked and then it was kind of niching down and then eventually got into rent to own and now there’s another five dominoes of whether it’s a fund, if it’s capital raising, what markets, all the different things all within that same niche. And so I just like the idea of flicking a bunch of dominoes, seeing which one falls, and then just continuing to go down that path.

Charles:
Yeah, it’s always a, an interesting part. I realized it in my second property that I had done that one correctly and I was like, okay, now I see how this like business actually works. ’cause The first one was like, eh, you know, yeah, I, I didn’t do it correctly. I didn’t know what I was doing. And the second one I had a little bit more knowledge of what I was doing. And it, you know, kind of went from there. But what mistakes do you think you did on your first couple properties or your first property that really that you take with you now? Some advice and maybe when you’re talking to new people, new investors that you let them know about.

Adam:
Sure. So my first two properties, I feel like I got pretty lucky and did okay. First one was a house hack. So I rented out to my roommates. I was like, that’s like, it’s really hard to screw that up like that, that, so that’s just easy. The next one I, I bought a three bedroom, was gonna turn it into a four bedroom bath, but I actually was showing one property and they just filled the other property. So then they stayed in there for five years. So I got really lucky on that one third property. Then I finally was like, oh, I bought this 1904 house thinking that I could put like 10 grand into it. And I was like, oh, that got me one window. And I was like, I knew nothing about 19 hundreds house. So it cost about three times as much six months of, you know, extra time to get into it.

Adam:
So it was just, it was kind of a black hole. But I was like, but that was the one that was like, oh, and now I’m never gonna do that again. ’cause The only way I could meet, you know, Brandon’s Turner, 12% cash on cash was to buy a really old house that rented for a high amount and I just forgot about CapEx, right? I just didn’t think of that you could put in 10% or whatever the number is. I’m like, oh yeah, that’ll cover me. But it’s like, well it’s really not the same on a new construction versus an old one. Tried some turnkey properties, tried some for sale by owner ones where like we were self-managing it. And so there was, it, it just kept being like vacancies killed all the profits. It was like, okay, how do I not get vacancy? So those were kind of the early lessons on capital expenditures and then how much vacancy impacts yearly profit.

Charles:
So you said your third property was all the property. I started with properties built 1900, 19 0 4. I know all that. I know that whole game. So what was their first two properties that worked well, approximately one were they built?

Adam:
So the first one was in 1993 and the next one was in 1983.

Charles:
Yeah. So yeah. Completely different ballgame. Yeah,

Adam:
Very different. Yep.

Charles:
<Laugh>, you don’t have to touch any of the bones most likely on the property built in nineties and eighties, most likely not either. So it’s like that changes the whole ball game. ’cause Now you’re focusing more on like maybe cosmetic stuff and not so much on re piping and rewiring houses, you know what I mean? Which doesn’t add rent to your bottom line really. You know, NOI, ’cause people aren’t gonna pay more that their lights switches work. So

Adam:
Yeah, nothing infuriates me more than putting in $30,000 into something that no one cares about. Like, oh, let me get a new sewer line. Like, oh yeah, like, like just, just the worst kind of things, right? Where it’s like no one sees any value in that. Like you’re not putting that in the MLS description if you’re reselling it, it’s just like, just money that just seems like it’s flushed down the toilet.

Charles:
Yeah. Literally. Literally. <laugh>, can you explain, ’cause I mean doing some, becoming having some rental properties, which you’re extreme like now is is a great start, but it’s much different than actually becoming financially free. So can you kinda like break down a little bit about how that process was? You got, you know, you went through you found something that worked a strategy that you had an upper hand on and kinda like let us know kind of how you kind of exploited that a little bit and were able to kinda grow to where you are in a short period of time. Sure.

Adam:
So the first I would say, you know, two properties did myself just kind of saved up, put the 20% down. I was like, man, I run outta cash pretty quick. Then you form a partner and now we each only need to bring 10% down. And so then like you could buy a few more properties, you know, a little bit quicker. But I was like, man, we’re just gonna keep running outta capital like you could. And so our goal was two properties a year for 10 years, and if we could do that, we were like, and then you buy two and sell to, then you buy two and sell to. I was like, and the math kind of worked out where we could each get $10,000 a month if we were able to get, you know, three to $400 a month in cash flow. They appreciate over 10 years you sell to, you buy two.

Adam:
Like there’s enough of that equity gain where it’s like 10,000 a month. So that was our goal when we formed the company, you know, in 2017, each of us getting $10,000 a month is kind of like the magic number of, you know, whether it’s entirely passive or like, Hey, I’m working 10 hours a week or whatever the number is just to kind of keep things going. And so that was the intent. So then it was like, okay, we kind of maxed out our capital. So like, okay, how do I get the highest ROI then, so now it was like, well we could look at the burr and the fix and rehab we’re like, we really didn’t want to do that. So what we ended up doing is, you know, finding college kids pick a house that was listed for sale and then we’d buy it for them and they’d rent it to us at the 1% rule, but we would do a huge seller credit on it.

Adam:
So if it was listed for 200,000, they would rent it for two grand. So in general is the 1% rule, but then we would offer $215,000 on it with a $15,000 seller credit, use a commercial loan instead of a residential Fannie Mae loan. And so to the bank it didn’t mean a whole lot, but for us it was $15,000 or $13,000 less cash needed to close on the transaction. So that was one way that we kind of maximized our ROI by just putting less than 20% down. Then we did that for a few college kids just to kind of get the, the, the higher ROI and then we started doing the lease with an option to buy, where now our tenants come in with somewhere between 10 and 20% down. We’re coming in with whatever’s the remainder. So now we’re only putting, you know, five to 10% down on a property. So now I can do about four to one ratio on the capital versus what I was doing when I was putting 20% down myself.

Charles:
So this is this concept it’s really reverse investing I think is kind of how you coined it. How is this you, you know, you have a lot of benefits right there you mentioned, but how do you find this as a better path to real estate investing versus the traditional approach that you just outlined of 20% down and going that route?

Adam:
Yeah, so I, I think if you have nothing or if you’re just looking to buy properties, like there’s still nothing wrong with a 20% down, like a, any any, to me, any purchase is better than no purchase <laugh>. And so like, just with that caveat it so I, I just feel like if you’re going from zero to one, to two to three, like definitely do that. If you’re just trying to get one, you know, like you don’t have to get fancy just like just do something like, that’s probably the biggest advice. But for us it was like, okay, how could we, instead of finding the property and hoping I’m getting rent or market rent, it’d be like, oh, how do we reverse that? How can I find the person first and the property second? And so that’s the whole concept is like I was like, man, banks make so much money, how do they do it?

Adam:
Well, they like, they basically borrow money and do a yield spread. I’m giving them, you know, money, we’re getting 2% and they charge 6%. And so I was like, okay, so if I’m borrowing at call it 6%, how could I get eight or 10%? And it’s like, okay, well if someone can’t get a bank loan, then I’ll basically back it. I’ll be their personal guarantee or their signer and then based on how risky they are, I’m just charging a spread onto it. Very similar to what the bank is, but the bank is playing with, I can only lose one out of every a thousand. And I’m like, you know what, if I’m an investor, like I’m a little bit more savvy, I can take a little bit more risk so I can take kind of a higher yield. So it’s almost like probably whatever the, you know, the bond rating would be, it’s like, oh, we’re finding people that don’t have the debt to income ratio.

Adam:
Maybe they have a down payment but don’t have the credit score. Maybe it’s they went through a divorce or they went through something else. And so now it’s like, okay, not only can I be a co-signer, but it’s like, okay, I basically issue them the equivalent of a pre-approval letter that a bank gives me, but I just give them a rent to own pre-approval letter. Go pick a house over 300,000 as long as you’re putting 10% down and you pay the 1% rule, or whatever the number is that you know, that I’ve pre-approved them for through kind of like our underwriting process, then they get to go pick a house, I’ll buy it for them. And as long as they’re putting, you know, the 10% down, to me that’s like, okay, well I got seven months of extra rent in the bank as opposed to one month’s rent.

Adam:
And then we add on rent guarantee insurance, do a couple other, you know, creative things just similar to the banks, how they have private mortgage insurance. We apply rent guarantee insurance, make the tenant pay for that. If the credit score is, you know, you know, below a certain threshold that way it’ll cover for an additional three to six months if they stop paying. And so all it’s, all we’re trying to do is act like the banks where it’s like, heads I win, tails, we break even. And so then it just do that and then do it as many times as you can.

Charles:
Yeah. It’s also a second thing is that you’re not selling this on the secondary market. So I feel that a lot of banks with certain, certain loans, they’re gonna kind of bundle these and sell ’em off, right? Maybe not with some of their small commercial loans, they’ll keep those on the books, but some other ones, they probably will. So I think that’s why they need it to fit right in this box so that it can easily be packaged and get off, you know, other books. And so you can be a little bit more I guess flexible with what you’re doing. But can you explain, just, I, you went over it pretty quickly there, but how does the process work from the beginning end? So you, if I am somebody that can’t get approved for a mortgage, I go to you, I find you one way or another, and then you are pretty much pre-qualifying me and you know, can I go from there? Sure.

Adam:
So if Charles is like, Hey, I just recently left my corporate job, I started this real estate, you know, thing I, I have rental properties, I may be a real estate agent and I’m making $150,000 a year and I wanna buy a single family home. I don’t wanna rent, I can’t get a mortgage because they said I need two years of tax returns, but I got $50,000 sitting in the bank, like, why can’t I get a mortgage? And and Adam would look at you and be like, I completely agree. Like to me, I would bet on Charles, right? And so for me it would be like, okay Charles, if you got 50 grand to put down on a home, I would say go pick a house, you know, up to 500,000. And then as long as one, one third of your monthly rent is basically of your gross income, so kinda like the 30% front end ratio that like the DTI uses, I would say, okay, so if you’re making, you know, $12,000 a month, make sure your monthly payment is in more than four grand a month.

Adam:
But if you’re willing to pay four grand a month, put 50 grand down, go pick a house, you know, for 400,000 and I’ll buy the home for you. You’re paying $4,000 a month, maybe 400 to $800 of that is coming back to you in the form of equity, all of your down payment. And then you have a fixed buyback price at a 4% appreciation rate anytime in the next three years. So that if it goes above 4%, you keep it. If it’s at 4%, like that’s just my return on my investment as an investor. So then for me, I’m getting a 12 to 15 to 20%, you know, cash on cash. ROII feel like I’m hedged a little bit because you brought in 50,000, I brought in 50,000, you know, into this transaction. And then once you go to buy the home, hopefully there’s, you know, additional equity into it or I get my 4% premium, I don’t get, you know, a 10% or a 20%, but I just get a, a very basic 4% appreciation.

Adam:
And then that way it allows you to kind of have some market upside, you know, cap if it does go that route. So there, there’s a few more nuanced that way, but essentially you would pick the home, I would be the buyer and you would pick the real, because we’re actually picking homes listed for sale with a real estate agent. So you would go shopping in Atlanta, Georgia, you know Tennessee, wherever it is. And then just virtually we just write the offer, give our pre-approval letter from our bank, submit the offer, and then the same day that we close, we execute the lease with an option to buy with what would be the tenant?

Charles:
How long is that lease to option to buy? Usually

Adam:
We usually give people three years and then the ability to extend another year. But we’re typically getting commercial financing, which is like five year fixed. So that’s why we kind of give people up to, you know, maybe four years. But we really don’t wanna go past that because we don’t wanna be in a situation where we, you know, can fix a rate for 10 years ’cause we don’t know what our rate’s gonna be.

Charles:
Yeah, no, no, that makes perfect sense.

Adam:
And then in addition to that, you know, became a mortgage loan originator in, in 2023. So kinda understand what Fannie Mae, what Freddie ma what, what the underwriting, you know, automation system is looking for. And so the whole goal is you should be within three years, be able to get mortgage eligible and if you can’t, like there’s usually some other factors of spending or something else going

Charles:
On. Now you touched on it there in regards to the appreciation, which is something a little different than I’ve heard from, I haven’t heard from before. So can you explain a little bit how that works? So say I buy a house for 400,000, I put $40,000 down on it, I you purchase it, I’m paying you this mortgage every month and in three years I’m gonna buy it from you. So say it goes up, I mean, you know, 5% a year, how does that work?

Adam:
Sure. So so two, two quick things. When you’re doing rent to own, there’s actually I, I call ’em quick three buckets. So if it’s true seller financing, that’s when you as the person living in the home is on title and the seller’s in first position, then you have what’s called a land contract where the seller still is on title, but you have equitable interest in it and it’s an interest rate with title, you’re actually paying like the equivalent of principle and interest and then there’s lease with an option to buy. So the $4,000 is technically rent. Now if I wanna live in a home, I want seller financing or contract for deed. If I’m an investor, I want to sell my home on a lease with an option to buy because I still get to depreciate it if I have to, you know, if I need some to get someone out, it’s a eviction versus a foreclosure.

Adam:
And so depending on what side of the fence you’re on, there’s some negotiating tactics. But those are kind of the three main vehicles that kind of the creative financing space works. So we set up most of ours on lease an option to buy just because it protects the investor a lot more because a foreclosure could be three months, six months, nine months, that gets a lot more dangerous with, or you basically need 20% down, you know, otherwise like your risk is just too high. So in general, you know, kind of with that said, it’s a, it’s a monthly payment, but you do earn, you know, some version of a, of an equity, you know, credit every month. But let’s say that every year you can buy back the home. Let’s say we just use like a standard 4% appreciation rate. So after one year it’s four 16, then your buyback price is 4 32 and then it’s, you know, 4 48.

Adam:
So let’s say you exercised it at the end of 4 48, but the home appraised off at, you know, four 60 because it appreciated by 5% every year. So your balance due would be your buyback price, which was the, call it the four thirty six minus your 40 grand minus, you know, your rent credits. Let’s say that there’s another 12 grand in there. So your kind of net number is 388,000. The home appraised out at four 60. And so that’s your kind of balance due. But the way that we set this up is we want all of your 10% to be counted at it. We don’t want you to have to go buy a home then for 388,000 and come back with another 10% because that would defeat the purpose of you putting down 40 grand in the beginning. So we just count that all towards it so that you would essentially get a mortgage for 388,000 or 390,000 depending on how the equity split works. You don’t have to come with more cash to the table.

Charles:
Interesting. So yeah, that’s, that’s very unique. So pretty much I am gonna be rolling in, I’m, I’m, I’m paying you part of your return upfront and then on the backend I’m paying part of your return, which is really going on the backend ’cause I’m putting it into a mortgage. So yeah. Okay. Very interesting. That’s, that’s, so let’s talk about from the investors. I understand from my side of how I do this, it works perfectly. Definitely there’s a lot of people are self-employed I imagine is where your bread and butter is on something like this. How are investors protected in this rent to own arrangement? You, you talked about it quickly about how I, you know, you purchased the property and when you’re, if someone’s in your position, how do I make sure that I’m buying it today and I’m also getting it rent? You know, you’re not stuck in the middle of a house.

Adam:
Yeah. ’cause and so if I just, you know, land the plane on the tenant side or I call ’em tenant buyers, you know, on that one, it’s to me we did a podcast because I think rent to owns got a bad rep, rightfully so. A lot of people are like, gimme 10 grand move into this house and they just kick ’em out and they do it again. They do it again. It’s a, it is a great financial model, but I think it’s a, it’s a terrible, you know, ethical model. And so what we try to do is educate tenant buyers and be like, you know, what you probably should do is just rent, fix your credit or wait till you can get a mortgage. Get three months, six months like that. That’s the more traditional route in what we educate a lot of our clients on doing.

Adam:
It’s for the people that are like, I don’t wanna move twice. Here’s this home. I’ve either been living in it or I have a certain window, I don’t wanna, you know, go, go through a different options or this is the house that I want. And so there we’re basically a premium model where, hey, you know that the, the rent’s higher, you know that you have a buyback, almost kinda like the equivalent of origination. So we just know that it’s a, a premium model, but they’re paying for that convenience to be able to pick a house listed for sale and have an exclusive option to buy it back at any point rather than just picking a rental and who knows if they’re gonna be able to release it or do some different things. So once we’ve kind of identified that that’s that target market where it can be a win-win, then it’s okay from the investor side, you’re essentially getting it at a lower LTV because normally you’re buying it at market value or whatever you and the tenant agree to buy.

Adam:
But the 10 is coming in at 10 with 10% down, let’s just say in this scenario. So you’re essentially got a property at 90% LTV before you’re, and then you have a loan at 80% LTV with you having 10% in it. So like just from that math in itself, you’re essentially buying the home at a little bit of a discount. Of course if they buy back the home, it’s a win pretty much no matter what because you’ve built in, of course if you bought it for 400 and sold it for 400, that doesn’t make a lot of sense because you’re just, you know, in real estate, if you buy it for 400, sell it for four. Oh you know, there’s just not a lot of, you know, profit there to be made. It’s just like whatever the small rent is. But you gotta cover, you know, transaction costs you know, closing costs and different things.

Adam:
So in my experience, anytime a tenant exercises their option and purchases the home, it’s a win because you could add 1% a year, you could add 5% a year, you could add 10% a year, you could just do a flat 10%. Some people just do it on future appraised value, which I like less because if you just go tell someone to get an appraisal on a house and they have no purchase price to go for it, like plus or minus 50 K, like just pick your appraiser. And so that’s why we really like a very structured here is your buyback price at any point in the next three years. So there’s some really large companies that do that, do this. Home Partners of America Divvy Homes, Landis, like Divvy Homes raised $500 million Home Partners of America just got bought out by BlackRock for $6 billion or just bought out maybe last year.

Adam:
And so they have 30,000 properties across the major metros. And this is their entire business model. They just tell people, go pick a home in their major metros, any property built after 1979, they’ll buy it and then the tenant can exercise their option and buy it or not. And Home Partners of America doesn’t care. They just say, give me 2% down. ’cause All they wanna do is accumulate rental property. So whether the tenant exercises their option or not Home Partners of America, just because they’re doing it a at a, at a large enough scale, it was like, great, I got a tenant for two or three years, I got a great property and now I can just rent it again and, and move on that way. So depending on the risk profile of your tenant, the biggest leverage is how much of an option fee or a down payment that you’re gonna do.

Adam:
So we’ve screened over I think 500 tenant buyers, like the people that don’t qualify for a mortgage or the people that if they do, we just tell ’em, go get a mortgage ’cause you don’t need us. And so we’ve basically kind of created kind of like an underwriting criteria where we’ve seen these patterns of who purchases the homes, who doesn’t, who’s higher risk. And then we kind of approve ’em on an LTV very similar to what a bank would do, but just on the rent to own process. And so the only way that the investor loses money is one, the tenant doesn’t buy the home and then two, they sell it after below what they bought it for. So if the home didn’t appreciate, or you know, God forbid you have to put in, you know, $40,000 in repairs or something like that. ’cause I get the tenant could, you know, completely destroy the home, but so could a normal rental. But you have their down payment to offset that. And then typically you have home appreciation to offset that with. So there are some homes that we’ve, you know, bought and sold. We’ve had, you know, I think we’re, we’re closing in on a hundred single family homes, we’ve had 30 people go the full cycle, you know, two thirds of them have bought it, one third of ’em haven’t. And then every time we learn that we just get smarter as we buy new homes for people.

Charles:
And so it’s, you’re limiting that having to sell a home again, right? Is that what you’re saying? Yeah. Cuts down a lot on your hassle and also on fees, I would imagine.

Adam:
That’s right. Because like when, when we, when we buy a home for a tenant, we’re like, I don’t want this house back like it, it is not in my best interest for you to not exercise this. So I like, I’m gonna do everything I can for you to buy this home. Which I feel like is the intent from the very beginning. But of course there is like if people just don’t pay their mortgage, don’t pay rent, like then there has to be some pretty tough decisions. And so that’s, that’s the model that we use to then accumulate 20, 30 properties, which was enough of a cash flow for both my business partner and I to kind of leave the job. And then it was like, okay, instead of us just owning all of these because we had a lot of people wanting us to buy them homes, we started then giving ’em to my fellow engineers, you know, family members, investors. So then we just started assigning the properties. So we’d find the tenant, we’d find the investor, we’d get it under contract, then we’d assign it to an individual, they get the cash flow, we get an assignment fee. So now we were kind of like wholesaling MLS deals on a rent to own because we found that the tenant was willing to pay a premium and that the cash flow made sense for the investor. And then eventually the investors just said, why don’t you just create a fund? And so then we ended up doing that.

Charles:
That makes perfect sense. You talked about it before the screening of the tenants and the renters. How does this, how do you, how do you, like, how in depth do you go? And then you talked about I mean what what do we have like for losses on this when you’re doing this? I mean, I, I would imagine it’s much lower than a regular tenant for getting damages to the property, but if you just don’t mind going into a little bit about your vetting and kind of maybe losses that you’ve personally had on these properties or people that you’ve worked with.

Adam:
Sure. So the vetting has started off from just like, oh, just use a third party and then they do the screening. ’cause Like that was just super easy. Like you’d use apartments.com, you use he lane, you’d use, you know rent prep, you, and it was like, oh, here’s the information. Okay, great. And then you, you make a decision. It was like, oh, turns out if you’re buying someone a house, I’m like, I actually want to look at them almost more like a mortgage. And so we actually transferred from rental to mortgage, but we actually probably have one of the most difficult applications because we’re looking at past rental history. ’cause I think that’s important if they’ve ever got e victory or different things. But then we’re also, you know, looking at them from a debt to income ratio. You know, we’re pulling a full credit score, we’re looking at liens, judgements, we’ve got their full credit score, we’ve got their income.

Adam:
We’re using automated plus we’re getting tax returns and bank statements. So it’s, it’s probably, you know, that’s probably the biggest pushback we get is ’cause we’re just asking for so much information. But that’s because they’re already in this unique box. So we’re trying to get as much information as we can to give them the best answer. But they’re just like, yeah, I, I make some money and I add decent credit. I’m like, okay, well that doesn’t, you know, that doesn’t mean mean much to me. And so, and, and of course we’ve learned that because when you say talk about the losses, so we’ve had some where our investors have lost some, but most of them is when we bought ’em ourselves, we, we started off doing a lot of land contracts and then I noticed that once someone stopped paying, I was like, I went to attorney.

Adam:
It’s like, okay, now do we gotta do like, oh well you have to foreclose on them. And I was like, oh, what’s that? Like, they’re like, oh, well here’s this nine month process for you getting the house back. And I was like, man, that really killed ROI. So we had several land contract deals that went south that took a long time for us to get back. Where we took the hit as the investor, which is like the risk, right? Like somebody gives you $20,000 down, but even that you hold the property for nine months and then the condition that you get it back in like that, that that time didn’t help. You know, a lot. Like they didn’t offset the home appreciation. Then there’s some where the family gets divorced, there’s a death in the family, someone loses a job and they just say, Hey, like I’m out.

Adam:
Like take the house. And if it’s been like three months, it’s like, okay, well now you gotta just sell the house and they, you know it, you bought it at 2 75, you sell it at 2 75, you pay an agent 6%, you maybe put a little bit more into the home. And it’s like, okay, well then you lose money that way. So there hasn’t been you know, like maybe more than a, you know, 10 to 20%, you know, negative ROI. And what we, what we pride ourselves on is we’ve tracked every single deal that we’ve ever done and we have expected profit, actual profit and then current deal portfolio. So we kind of keep it in a running sheet of every single profit that we’ve ever done. Any property that we kept ourselves assigned to other investors or that’s in the fund. And then we just got a running average that we openly share with our investors and be like, Hey, here’s the six deals that didn’t make money.

Adam:
Here’s the six deals that made the most money. Here’s the average, here’s the ones that tenants didn’t buy. Here’s the ones where tenants did buy. Here’s all the different states. ’cause We’re in about 30 different states that were buying across the Midwest. And so all that’s just kind of feeding into our machine as we’re kind of this young, younger company. ’cause We only started this in 2019 you know, to kind of fuel us and just get us smarter. So there was a lot of 20 20, 20 21, you know, that we kind of figured out. But then there’s also the benefits of homes that we bought in 2020. The tenants got just an incredible amount of equity in the home after they locked it in for three years just because of what the home pricing did.

Charles:
Yeah, no, that makes perfect sense. So for your personal portfolio how do you, let’s talk about like the management on this. So servicing, I guess it’s more of like loan servicing almost, or compared to being a, you know, property management.

Adam:
Yep. Yeah, so, so on any of these deals we are, well I should I say we, but my business partner, because he’s doing it all, he’s just self-managing everything. And so it’s like, and and I was like, oh, we should outsource that. You know, we should do different things. But it’s like, well the tenant’s responsible for, you know, repairs and maintenance or, you know, almost all of it. So it’s really like a loan servicing. So it’s like if they pay a grade, if they don’t, you go through the local attorney and they, and they handle different things. And then if you really need some boots on the ground, we’ll just hire our agent, whoever we use to buy the home and just say, Hey, are you interested in listing this home? To which they’re like, pretty pleased. Like, I, I’ll take double commission on a property. And then they’ll usually, you know, have local handyman have different things to be able to, you know, kind of rectify a situation. So if we need someone locally, we can go that route. But in general it’s, yeah, it’s, it’s pretty hands off. But I’ll, I’ll admit that he’s a, he’s a saint for being able to do that because he, he’s able to track all of those, all those properties.

Charles:
Is that a full-time job or is that more part-time lifestyle kind of

Adam:
Very, very part-time. It’s just the, the check-in. I mean, if 80% of ’em or 90% of ’em are on time, like you literally have to do nothing, right? Because ’cause they’re, they’re all just set up on auto payment. There’s, you know, nothing really going on. Maybe besides keeping property taxes and home insurance, you know up to date it’s just the, the 10% that are delinquent where it’s like, are you gonna pay? How can we work with you? Let’s set up a payment plan. If it gets too, like we kinda have our own process, like 30 days late, okay, 60 days late, we’re starting something 90 days late, you’re out. Which we feel like is is fairly reasonable rather than just trying to keep them out 30 days late.

Charles:
Yeah, you want to kind of it’s like with Peel that purchase loans as I understand it and or notes and they are, you know, they’re trying to fix it, bring the person, you know current and kind of go that route. So you’re kind of doing that in-house, which hopefully isn’t that time consuming for you. One thing that you mentioned earlier on, was that about some sort of tenant insurance or rent paid insurance. Can you explain what that is and how that’s worked into everything? Sure.

Adam:
So there’s there’s three companies. There’s the guarantors, there’s Leap and then there’s vester. So just imagine you’re placing insurance with the intent that if your tenant defaults, they’ll cover X amount of lost rent. And in general where tenants are screening in like the default rates, like less than 10% insurance products are just like banking on there being less than more. And so what with, with this being our highest risk, like call ’em higher risk tenants, even though they’re putting higher down payment, like the biggest risk is if they stop paying. And so what we do is we place multiple rent, you know, coverages, which basically says, Hey, for six months after up to six months, you know, after they stop paying, like you continue to get paid rent so that until you re-rent it, until you sell it, you don’t have those holding those vacancy costs and then they’ll cover x amount of legal fees, X amount of repairs.

Adam:
So it’s like, it’s kind of just hedging your bet against like, hey, if they do default, this is just an insurance policy against them. So those are the three, the guarantor probably has the most comprehensive, they have their own criteria, but it’s just, it’s probably the equivalent of one month’s rent. So like a security deposit that you would pay up front. So if they’re paying four grand, like you could pay four grand, you could pocket it, but for us you’re basically paying four grand, which a lot of times we’ll just pass on to the tenant, especially if they’re riskier tenants. We just say, Hey, this is a cost because you’re below a five 80 credit score. Like you just need to pay another four grand cover this rent guarantee insurance just like you would with PMI on a mortgage. And so then that way if they default we have $30,000 of buffer to cover lost rent damages and evictions, which to us like really should negate the downside of a lot of things.

Charles:
Yeah, no, that makes perfect sense. One thing that I wanted to ask is what do you find that people are lacking that are doing business with you? Are they lacking the set two years? W2 nice and clean pay stubs? Are they lacking a credit score? That’s up to a certain amount. I mean, if they don’t have income, this doesn’t work. <Laugh>.

Adam:
Yep. Yeah, so we started off with our minimum income being four grand, then it was six grand, then it was, then it was, now I think it’s up to like eight grand. So it’s, it’s essentially for high income earners. So it’s like if you don’t make over a hundred thousand dollars a year and have at least 40 grand, we’re probably not your candidate. Which I’m now creating another startup with the intent of, of helping the a hundred thousand or the 200,000. But just from our business model, there was a lot of people in the a hundred thousand or 200,000 range that would just, for lack of a better like default. Like we’d get 10 grand, you know, which is 10% down. But like that doesn’t really offset a whole lot in that lower price point. Like, not that people don’t care about 10 grand, but when somebody puts down 40 grand, it’s really hard for them, you know, to walk away or for the investor, you know, kind of to, to to, to lose money on that scenario. And so that’s kind of what’s been our new sweet spot is kind of the maybe the 300 to 500,000 purchase price range where we’re doing this. But to answer your question, it’s probably, it’s probably 50 50, but it’s like they all have the income and they all have cash. It’s just a credit score or, or two years of tax returns are the, are the, are the one and the two.

Charles:
Yeah, the documentation. That makes, that makes perfect sense. Especially with a lot of people being self-employed these days. So as we’re kinda wrapping up here, I just want a couple questions here that we normally ask. I mean, what are common mistakes maybe you see real estate investors make, you’ve been doing this for many years in real estate investing and as you said, all different types of asset classes and where you are now. What do you see for that?

Adam:
Sure. I would say number one is just not acting. I would rather use the Tim Ferris where he is like, I could pay $25,000 and get a master’s or I could put 25 grand into a property or start a business and just assume that I’m gonna lose the money, but I’m gonna have a year’s worth of education in hard knocks. So it’s like, put the capital to work. If you do have a hundred grand that you’re looking to put to work, I like to put it in four different investments, $25,000 each. Figure out which one you like. Put some into commercial, put some into storage, do buy one property yourself and then do a turnkey. And then after that, like if, if you really don’t know what you want to do, you’ll figure out pretty quick which of those $25,000 investments that you really like.

Adam:
And then I would just go, you know, further into that. The next piece is probably, it seems like getting access to the good deals almost only comes from networking. But I have a hard time sometimes with networking ’cause it’s like I could sit and meet with people all day every day, but you don’t really know which ones are, you know, the, the right networks or how, or how you do this. So for me, I found that joining groups has been super impactful to me. So like, I’m in multiple dads groups, multiple entrepreneur, entrepreneur groups, multiple real estate groups where it’s almost like a, a pay to play, not necessarily pay for, you know, for the intent of doing deals. ’cause That’s not, you know, the intent, but it’s like, just imagine someone’s willing to pay $10 to get into a bar. It’s just like that, that level of people that you’re surrounding yourself with, they just value growth and what they’re putting their, their money into.

Adam:
So I don’t advocate starting there like the lowest cost, like great, like audio books, free stuff, podcast. Like I started that and I did all that, but then I noticed like, oh, like I, you kind of hit a cap or like, I’m actually looking for meaningful conversations with high caliber people. And so I’m currently paying for four different masterminds. I got a coach, I got different things. So it’s like just getting around those people. ’cause I don’t want just the normal social feed I need. I want the social media feed of people that are, you know, above my game or my peers from that aspect. And so that, that would be, I would say the three common things that they don’t get the network, they don’t act and then they don’t, you know, spread around their first investments. And then I like the idea depending on if you’re going truly passive or active, like once you’re going truly active, like know your niche and know your people and hammer on that, you know, hammer on that niche.

Charles:
What did you sacrifice do you think, Adam, to become financially free?

Adam:
I sacrificed probably four things. One was news just got it out. Two was a lot of tv three was most sports and fantasy sports. And then four was a, a strategic choice on when I was and wasn’t gonna be available for the family. ’cause It’s really easy to be like, oh, I’m doing this for the family so I’m just gonna spend all my time with the family. And so it’s, it’s setting up those, those boundaries. ’cause It’s like everything you say yes to, you’re saying no to something else. And so for me, I wanted to know what I had to sacrifice and to me it was just like all that stuff really, really wasn’t worth it, like all that kind of downtime. And so for me, I replaced 8:00 PM to 10:00 PM at night with four to 6:00 AM And to me that was like one of the greatest hacks. I would just go to sleep with my kids, like at eight o’clock and then turns out after eight hours of sleep, it’s already four o’clock in the morning. So my body would just kind of naturally wake up. ’cause I would always like eat junk food. Watch shows for two hours. Right. And I was like, just replace that and then four to six do the Miracle Morning. And I was like, you do that for five years. Like I, I’m a different human being.

Charles:
Yeah. That’s great. That’s a, a lot of great information there. Thank you so much for sharing. So Adam, how can our listeners learn more about you and and your different businesses?

Adam:
Sure. So email’s great. Adam@Homeequitypartner.Com. You can visit the website home equity partner.com. You can send me a text 7 0 1 4 0 4 9 1 3 7.

Charles:
Okay. Awesome. Adam, thank you so much for coming on today. I appreciate you sharing all this information with what you’re doing out there and you know, changing lives and looking forward to connecting with you here in the near future.

Adam:
I love what you’re doing here on the education piece and hope you get some good karma coming your way.

Charles:
Thank you.

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About Adam Zach

Adam Zach (pronounced Adam “Zock”) has a magnificent obsession with learning and is addicted to personal growth. He is a family man with a business, not a businessman with a family.

He retired from the Civil Engineering profession at age 32 through real estate investing. He currently holds 50 single-family rentals in 13 different states, along with various alternative investments. His main passion is helping dads with young kids achieve time freedom through real estate investing. At age 35, Adam lives in North Dakota with his amazing wife and 3 young kids.

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