REIA 416 Zach Winner: Investing in Apartment Complexes for Ongoing Cash Flow and Long-Term Wealth

Welcome to Real Estate Investing Abundance, the show for busy, fulfilled professionals like you to learn how to develop financial independence built on solid passive real estate investments. Now, here is your host, Dr. Allen Lomax.

Hello, enlightened investors, and welcome back to Real Estate Investing Abundance. I'm your host, Dr. Allen, and Thank you so much for being with us. As always, it is our pleasure to have you. And today we are going to have a very interesting conversation with Zach Winner, and he is investing in apartment complexes for ongoing cash flow and long-term wealth. And we have a whole lot to learn from Zach today. He is the founding partner and the CEO of Prosperity Commercial Real Estate, which is a private equity firm specializing in providing passive investment opportunities in multifamily apartment complexes. So Zach, take us into the show and share a memorable experience that helped you to be the person that you are today.

Well, thanks for having me on the show, Alan.

I really appreciate it.

You know, I've always had an interest in real estate, but I'm an attorney by education. And for many years, I practiced as an attorney. And my grandfather was into real estate, and he had a number of single-tenant triple-net lease properties.

Mm-hmm.

And when he passed away and his wife passed away, I kind of became the trustee of his estate.

That was my first foray into managing commercial properties. And so I got a good taste for managing a whole bunch of single-tenant triple-net lease properties in various locations around the country.

And, and I loved it.

And, and, and that was really my first introduction to real estate investing from a hands-on aspect.

It's always nice to have family members who can lead us into, into these profitable, uh, and worthwhile investments. And it's kind of a privilege. Not many of us have those opportunities. Well, how did you, uh, how did you go from investing in the single-tenant triple net, um, and transition into really multifamily investing?

So I started— so the triple net lease were my grandfather's estate, um, properties, and then, and then my father and his sister inherited them.

So I didn't really have an ownership interest, but I was was kind of managing them on a day-to-day basis.

But my first personal foray into real estate investing was I started buying single-family homes around the country. At the time, I was a—

I had a mortgage company, an escrow company, a real estate brokerage company. And so we were doing a lot of high volume representing investors buying homes around the country and renting them out. And so along the way, I started doing that as well.

And so that's how I personally got into investing in real estate.

And then over time, I realized there are many, many benefits to scaling up and investing in commercial properties. And so my first commercial property investment, which I also brought in passive investors through a syndication, was a 72-room hotel in Austin, Texas, which is a fantastic market for hotels. There's always activities going on there. South by Southwest, Austin City Limits, Formula 1 racing, UT Austin football. It's the state capital, so great market for hotels.

And that was my initial foray into commercial real estate investing.

Now we're focused on multifamily, and we've been focused on multifamily for a number of years.

And we have a value-add approach where we're looking for opportunities where we can buy large 100-plus unit apartment complexes where the rents are below market and where we can come in and you know, the units haven't been upgraded in a while.

So we'll come in, refresh the units, upgrade the common areas, maybe add some features to the common areas, optimize the income and expenses, increase the NOI, the cash flow, the overall value. So we have this value-add approach that we're really focused on now for multifamily specifically.

But we've also, you know, in addition to the hotel, we also still own a couple of industrial flex office parks, which are terrific investments.

So these are, multi-tenanted, triple-net lease industrial flex office parks that we continue to hold in our portfolio. But moving forward, we're really focused on, on value-add multifamily.

Well, other than the fact of the scalability of going from the single-family to the multifamily, were there other reasons for shifting from the single-family to the multifamily? Investing markets.

Yeah, you know, one of the key factors that, that I looked at is when you value a single-family home, its value is based off of comparable single-family homes in a 1-mile radius, right?

That's what an appraiser will do.

So it's very hard. Like, let's say you increase the rents.

That's not really a factor in a single-family home. On the other hand, when you look at commercial properties, the value is based off of the net operating income multiplied by a cap rate multiplier.

So for every dollar you can increase that NOI, you're tremendously increasing the overall value of the property. And so that's a huge advantage when you're looking at buying, for example, an apartment complex where you can come in and do things to you know, increase the rents. For example, if you can upgrade the units and increase the rent $200 a month and you multiply that by the number of units and you multiply that by 12 months in a year, that's a huge increase in the NOI. And, and so you're not only increasing the cash flow, but you're tremendously increasing the overall value of the property. So the big advantage in commercial real estate is you're not dependent on just market-driven appreciation.

you're forcing the appreciation by increasing the NOI and the cash flow.

Yeah, so from that, I, I'm— it would seem to me like that is a better hedge against recession and inflationary, uh, issues because assessing properties based upon, uh, comps, that's going to have, I think, more fluctuation, uh, in the markets than what rents typically, typically are going to have. At least that's what we've certainly seen, uh, in the last 20, 25 years, even Through the 2008 recession, vacancies did increase, but rental prices didn't decrease tremendously. They did too, a tad bit, but not, not, not terribly much. Whereas comparable single-family homes, there were places around the country that lost 20 to 30% in value. So there's a lot of reasons for going from single-family to multifamily, at least from my perspective. So what markets are you all particularly interested in these days?

We very much like the Midwest and the Southeast. You know, we're targeting markets that don't have rent control, that are landlord-friendly, that are business-friendly, that have population growth, net migration in, job growth.

We like diverse economies. We like economies that have a STEM focus.

So we're, we're in Kansas City, as we were chatting about. We're in escrow to close before the end of this year on a really nice apartment complex in Greensboro, North Carolina.

Terrific market, very diverse. Where our industrial flex office parks are in St. Louis, which is a good, very good market for industrial flex office parks.

And in certain areas of that market, they're also strong for multifamily. And we're continuing to look in a couple other areas in the Midwest.

Indianapolis, Columbus. We like Des Moines, we like Omaha. So those are a few of the markets that we're kind of targeting.

It kind of surprises me that the, the Midwest really in the last 10 years has really shown a lot of positive growth, and businesses are certainly interested in moving into those areas. Yeah, I particularly— the things that you just mentioned, Omaha and Des Moines, we've always thought of those as agrarian areas, and they, and they certainly are. What, what has changed in those areas that, that brings them attractive to particularly real estate investors?

Well, I think, I think for us, we're looking for, you know, a minimum size for the MSA to make us comfortable.

One of our traits is we're located in Los Angeles, our properties are all outside of California. So we partner with best-in-class third-party property management companies. So we need to find areas that are big enough so that there are a, a good selection of third-party property managers that are best in class. So we have a, a good selection to choose from, and then if it doesn't work out, you know, we know we can select with the fallback property management company. So, so the MSA has to be large enough, and then we're looking for some diversity.

And as I mentioned, you know, these areas are seeing Terrific growth.

Like, it's it's not the Rust Belt that it was thirty years ago. I mean, these areas, because the costs of living are lower, because the cities are incentivizing businesses to move out there, it's it's enabling this population growth and this net migration and business growth that that really helps.

And and then the cities that we're looking at, you know, have some diversity.

They're not strictly. blue-collar-oriented jobs, blue-collar and white-collar. And as I mentioned, we're looking for some type of STEM focus as well. So whether, whether it's, you know, for example, in Greensboro, there's, there's a big aeronautical aerospace component to the economy, to the economy, because the Piedmont Triad Airport is there. And there are lots of businesses built around that. In Kansas City, there's, there's a medical focus. And so we're looking for those types of, of components as well. So it's not necessarily that those higher-paying jobs are going to rent in our apartments, but, but if those higher-paying jobs are there, you know, then the more workforce housing will be supported by those higher-paying jobs.

Well, you mentioned diversity, and, and you were talking about diversity really in, uh, in jobs and, uh, and occupations and, uh, in industries. Does it matter in terms of racial diversity, is that a component of your interest, or is that something you really look at?

We don't really look at racial components. I mean, we certainly look at demographics when we're zeroing in on specific submarkets, but we're not looking at racial components. We're more focused on What's the per capita income? What's the median household income? You know, what's the number of single-person households compared to multiple-member households?

What's the crime in the area? How are the schools doing in the area? We're more focused on those types of things.

Yeah, I'm sure that's what most people are, but I just, I wonder if the racial diversity is something worth considering and just wondering about certainly Going back to Omaha and Des Moines, I mean, certainly historically they've been really white communities, and I wonder if those racial dynamics are changing in those communities as the economics change. Just be interesting to find that out.

Yeah.

So, what are the main benefits to investors in investing with you? And so, first of all, before you answer that question, just tell us about your company and what services you actually provide to investors. And also how we can get in touch with you to take advantage of the services you offer.

Oh, thank you.

I appreciate that.

Um, so the company is Prosperity CRE, and our website is prosperitycre.com. And investors can—

or people who are interested in learning more about our company can, can go to our website. I'm also on LinkedIn, and they're free to reach out to me on LinkedIn. And Our company, as you mentioned, we're a private equity company that focuses on providing passive investment opportunities to invest in larger multifamily apartment complexes. And our focus is on investments that deliver ongoing cash flow while we hold the properties. And because we have this value-add approach where we're forcing the appreciation and the value and increasing the value of the properties, we're able to sell them for very strong profits when we, when we ultimately do sell them. We typically have a 3 to 7 year hold period.

So, so the main benefits are ongoing cash flow and then significant upside when we sell the properties. Real estate is one of the most tax advantaged investments and we do take advantage of some key tax advantages.

We do cost segregation analysis after we acquire the properties, which gives us the ability to accelerate the depreciation tax write-off. We pass all of that on to our investors pro rata.

So when they, when they get their K-1, they'll have a nice paper tax write-off in addition to be—

to getting the cash flow that they've received each year.

And then when we exit the properties, we like to 1031 exchange.

So when we exit, we'll look to 1031 exchanging into a larger value-add apartment complex where we can start the process all over again. And investors that want to continue with us are welcome to continue along in that 1031 exchange and continue to defer capital gains and depreciation recapture tax.

Enlightened investors, if you haven't done so already, be sure and click that like button and also click that share so others can take advantage of the content.

And finally, be sure to subscribe so you don't miss a single one of our upcoming episodes. So you're doing 1031 exchanges primarily. Have you ever used tax-deferred trusts?

No, we have not. No, we have not. You mean like a Delaware statutory trust?

Well, it's a specific tax-deferred trust, and it's— that's what it is for, is to defer taxes.

Yeah, we have not used that structure before.

Yeah, not many people have. It's, it's a very useful vehicle, but, uh, not many people even know about it. But I thought you being an attorney, you probably would.

So I may have heard about it. I've— it sounds familiar. I think I might have had a couple people present about, about it. Um, we haven't done it.

We're—

yeah, but, but, you know, we, we are doing it.

Uh, we do do 1031 exchanges. Yeah.

And we do structure our deals so that people, investors that are selling something can 1031 exchange into our properties as tenants in common.

So, oh, okay, you can benefit on when they come in as well.

Oh, okay. Well, very interesting. So, uh, so you have a property that you are tentatively closing on before the end of the year, so you are going to be able to take advantage of the 80%, uh, bonus depreciation. So that is something else that those interested in investing with you probably would be interested to investigate because that bonus depreciation is declining to 60% after the first of the year. So closing before then will give the investors that 80% to be looking at. So the markets that you're looking at are Southeast and Midwest primarily, and they're growth areas in terms of jobs and in terms of population. STEM Markets in particular are, are the growing markets. And so what else would you like to, to tell us about your investment strategies and your, your plans for the future?

So we're closing on the one that we discussed in Greensboro by the end of the year.

So I think we'll be going back out to market looking for our next investment opportunity.

Probably in late January, early February. And, you know, our underwriting guidelines are very strict. So we ultimately—

well, we look at hundreds of deals and we're underwriting, you know, dozens and dozens of deals.

We ultimately end up purchasing just 2 or 3 a year.

So we're hoping to have another investment opportunity, hopefully, you know, by the end of the first quarter of next year.

But, but you know how it is.

It just depends on what's out there and we have to get it at the right price in order to deliver the returns that, that we need to deliver to our investors. Yeah.

And this is looking into your crystal ball here, but where do you see the markets going and where do you see interest rates going?

I think, you know, the Fed is meeting today and I think the last time I checked this morning, you know, on the odds website, there was like a 1% chance they were going to raise. So they're probably not raising today. From, from what I see with the prognosticators, they're predicting they're not going to raise again.

They're going to hold. And then at some point next year, they're going to start lowering interest rates. So my philosophy is if you, if you can find an investment opportunity that pencils out with with the interest rate you're able to lock in today, you're setting yourself up very nicely for an exit in 3 to 7 years when I believe interest rates will likely be lower than they are today, which means all other things being equal, that property is going to be worth more because if interest rates are lower, cap rates are probably lower.

Well, very interesting. So let's go into our last set of questions, Zach, and, uh, share with us one of the most difficult challenges you faced and How did you come through that and what did you learn from that?

Yeah, I'll tell you about the, the probably the worst investment I made early on in my career when I was buying single-family homes that I mentioned. This was in the mid-'90s.

I decided, I decided to partner with somebody and buy a mobile home park, and I was attracted to it because the cap rate on paper was so high. Right.

But the mistake I made was I was looking at the cap rate and I wasn't as focused on, on the class of the property.

It was probably a Class C, maybe C-, and the location of the property and the difficulty of managing it remotely. The property was located in Yuma, Arizona.

There's no easy way to get to Yuma, Arizona from Los Angeles.

It's a long drive.

And so if you're dealing with a Class C-ish property.

It's very management intensive. And, and so it just required a tremendous amount of work.

And the big lesson I learned from that is I'm, I'm not the type of investor that likes to invest in Class C, Class C-minus properties.

Like maybe if you really work them hard, they have good returns. But I don't, I don't want that brain damage. I don't want to spend all of that time. you know, having to manage very, very difficult properties. So my big lesson is, you know, you shouldn't— you should—

for me, I like to focus on, on Class B properties.

Class A trophy properties don't have the returns that we like. And I take a close look at, you know, what the management is going to be like in managing those properties.

Yeah. Well, I kind of learned the same lesson. I invested in In a minus C, probably actually a D mobile home park myself, and it is just a tremendous, tremendous emotional drain.

Yes.

And it is, I mean, if you can deal with constantly evicting underperforming tenants who have children and all kinds of other social and economic issues to deal with, it was just heartbreaking. I just couldn't do with it. So I just don't do that anymore. So 3 good things you've experienced in the last 24 hours.

Oh, in the last 20— let's see. Well, um, the last 24 hours, um, I've, I've gotten some legal documents that I've been waiting on my attorney to prepare, um, related to our current transaction.

And so I'm happy I've got those in. Now I need to spend the day reviewing 50 pages of legal documents.

And let's see what else. I had a great networking meeting yesterday, real estate networking meeting, and I had a terrific workout this morning.

Excellent.

So how are you putting your success as an investor and entrepreneur to work to create a world full of well-being?

You know, I love what I do. As I mentioned, I'm an attorney and I did not love practicing law, but I really love what I do. I love working on deals, helping to create value, helping to create cash flow. And I love being able to provide that to my clients.

You know, we're providing really good returns. We're providing great ongoing cash flow. And Yeah, it's something I really enjoy doing, and I know my clients appreciate it.

I've heard a lot of attorneys who experienced a lot of burnout early on. What was, uh, what was it about, uh, being in the law industry that you didn't like?

Well, when, when I went to law school, um, a show called LA Law was very popular, and Late '80s and early '90s.

And, and, you know, that show, just like current shows that have attorneys, they really glamorize being an attorney.

You're in court, you're fighting for your client, and you don't realize it until you get out of law school because they don't, they don't really teach you what it's like to practice law.

It's very theoretical in law school, right? You're learning statutory and case law. So when you get out there and you're actually working for a big law firm, you realize there's a lot of paperwork. There's a lot of discovery. You're stuck in the law library for hours and hours and hours, and there's a tremendous amount of paperwork, and you're dealing through a government bureaucracy. The court system is a large government bureaucracy, and it takes a long time to resolve disputes through the legal system.

So it was very different than what I had envisioned.

Yeah. Yeah, I could kind of imagine that it would be. Well, imagine, Zach, that you've come to the end of your life, and as you face your final hours, what do you look back on as your greatest sense of joy and fulfillment?

Well, without a doubt, it's my family. And, you know, I've got a great family, and, and, um, and, uh, Yeah, I'm very blessed. Yeah.

Well, Zach, it's been wonderful having you with us today. Thank you for sharing your wisdom and knowledge and years of experience with us. And Enlightened Investors, thank you so much for being with us again today. Please take a moment to like, share, and subscribe, and head over to Apple Podcasts, leave us a rating and a review. We would be most grateful. So until next time, live abundantly. And we'll see you in the next episode.

Enlightened investors, wait, wait, don't go just yet. I just want to remind you about our recently launched webinar that you will not want to miss. If you're at all curious and would like to learn more about how real estate investing can diversify your investment portfolio, alleviate the anxiety associated with Wall Street swings, leverage your 401s and IRAs to substantially increase the return on your investment, and do all of this with turnkey, hands-off, real estate investments, then you'll want to immediately go to stevetalker.com/webinar. In the webinar, we'll also address the common dubious investment schemes that you want to avoid. To access the webinar, go to stevetalker.com/webinar. I look forward to seeing you in the webinar.

Thank you for tuning in to Real Estate Investing Abundance, brought to you by Steve Talker Capital, a company working for passionate professionals like you to develop financial independence built on solid passive real estate investments. As part of our efforts to make the world a better place, Steve Talker Capital contributes to activities and organizations committed to better understand the equine. These endeavors attempt to enhance the human treatment of horses worldwide. Steve Talker Capital, working for a world where all creatures great and small flourish abundantly. For resources To develop your financial independence, connect with us at stevetucker.com.