Show Summary

Many investors, especially newbies, cheap out on rentals. The phrase “it’s just a rental” comes out, which means “take shortcuts”. Zack Wiest was once there too, but joins today to discuss why you shouldn’t take shortcuts on your rental properties. Doing it right the first time, and making investments in mechanicals that will minimize maintenance issues will save you money in the long run. Don’t miss this insightful expert interview…only on FlipNerd.com

Highlights of this show

  • Meet Zack Wiest, Founder of PA Deals (over 1100 properties purchased).
  • Join the discussion on why you shouldn’t take shortcuts when rehabbing rental properties.
  • Learn from Zack’s experience that better rehabs not only save you money on maintenance, but help you find better tenants that will stay longer.

Resources and Links from this show:

Listen to the Audio Version of this Episode

FlipNerd Show Transcript:

Mike: Hey, everyone. It’s Mike Hambright from FlipNerd.com. Welcome back for another Expert Interview show where I interview awesome guests from across the real estate investing industry to help you learn and to inspire you.

Today I am joined by my friend Zack Wiest. He’s the founder of PA Deals, a Pennsylvania-based real estate investment company that has purchased over 1,100 properties. Zack sells his houses to investors that keep them as rental properties, kind of a turnkey model. Sometimes he just sells them to investors that are going to keep them as rentals. He tends to rehab them beforehand to turn over kind of a ready to go property.

What we’re going to talk about today, we’ve talked about turnkey a lot lately, so we’re not going to get into the details of turnkey, but what we’re going to talk about is rehabbing rental properties to stand the test of time, instead of just bare bones. Some of what we’re going to talk about is going to seem counterintuitive between Zack and I both with our own rental properties. We realized over time that you used to say, “It’s just a rental. It just need needs paint and carpet,” kind of do the barebones, whatever it takes to get by because you’re afraid that somebody’s going to tear it up.

But the reality is sometimes it makes sense to put more money into a rental property because you want to keep it for a long time and you want to minimize maintenance and repairs and things like that, that can cost you a lot of money over time. So we’re going to talk about how to rehab a rental property right to maximize your profitability, minimize your maintenance and things like that. So it’s going to be a topic that we haven’t really talked about before and I’m glad you’re here to join us.

So after we talk about that for a bit, we’re also going to dive into creating networks. So Zack has created a large group. He works with a lot of landlords. He has a networking group of over 600 landlords that effectively is a large number of people that he’s built a relationship with that over time will feed his business. He will actually benefit even though it’s a free group and things like that.

So we’re going to talk about the power of networking to feed your business. Those of you that know me well know that I talk about networking a lot. It’s really important. I think sometimes people get hung up on thinking networking is, “I’m going to shake somebody’s hand and see if they can do something for me and if I can’t, then I’m going to go shake the next person’s hand.” But there’s something to be said for building networks over time that can help you for the rest of your career.

So it’s going to be a full show today if you caught all that. Before we get started with Zack, let’s take just a moment to recognize our featured sponsors.

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Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.

Hey, Zach, welcome to the show.

Zack: Mike, thank you so much for having me. It’s a pleasure to be here.

Mike: Yeah. Normally our show is about 30 minutes. But if you just heard all that, I’d just like to thank you in advance for our first two-hour show.

Zack: Very nice.

Mike: No, no. We’ll get through this. It’s interesting. It’s going to be some interesting topics. There are a lot of people out there that as you know, own some rental properties but they don’t own that many. As you know, once you start to scale up, you learn some things that you didn’t know when you were new and early on that are costly mistakes. But hopefully we can help some people learn from our mistakes today versus having to learn it the hard way themselves.

Zack: Absolutely.

Mike: Well, hey, before we get started, why don’t you tell us a bit about you and how you got started and how you got to where you are today?

Zack: Definitely, Mike. First of all, thank you very much for having me. FlipNerd, I’ve watched you guys grow over the last year or so and I think your growth is amazing. What you guys are offering is really, really cool, cutting edge stuff.

How I got started, I actually got started about 15 years ago right here in Harrisburg, Pennsylvania. I actually got started by purchasing the Carlton Sheets course off of late night television.

Mike: There you go.

Zack: I think me and a couple of other million people got started that way. But I did what most people don’t do. I actually completed the course and went on to get further education in real estate. I got started as a wholesaler just buying properties, really inexpensive properties that needed a lot of work, finding people, rehabbers, more specifically, who wanted to buy those homes from me, fix them up and flip them.

I made a pretty good business out of wholesaling in my first couple of years and then realized a couple of years into it that I felt like I was leaving a lot of money on the table and that the rehabbers I was flipping to were actually making more money than I was making as a wholesaler.

So about two, maybe three years into the wholesaling business, I transitioned into fix and flip deals with the primary exit being to retail buyers. I did that for about another three years up through about 2007. When the market collapsed in 2008 as you probably know, Mike, there were no buyers to be had.

So my entire business model of fixing and flipping real estate was dead on arrival and it really forced me to kind of rethink life and rethink business and come up with other ways of profiting and real estate. What I noticed in 2008 is as our country was in just tremendous turmoil and the real estate market was tanking, what was still working well were good buy and hold rental properties.

So when the buyers from a retail standpoint dried up, I segued into selling rental properties to landlords, well qualified landlords or really not even landlords, passive investors looking to experience the benefits of investing without all of the headaches. So in 2008, we really began to build up a fix and flip business model geared at passive investors. I’ve been doing that ever since.

We’ve sold about 600 properties through our turnkey model. As I was building the turnkey model, I also began accumulating good rental properties myself. As we sit on this interview today, I’ve got about 100 rental properties that I call my own personal rental portfolio.

Mike: Awesome.

Zack: Single family homes, multi-family and a few commercial buildings. It’s going great, man. I’ve been at this now going on 16 years. I’ve experienced the good and the bad of the business. As we talk today, things are pretty good.

Mike: Good. What’s interesting is, I want to kind of emphasize, we talk about this on our show a fair bit because I have a lot of guests that have been around for a while and they’ve been through some different cycles. Maybe you could just take a minute to not harp on it, but just talk about the importance of being able to evolve as markets change.

I think that’s one of the biggest lessons that real estate investors either get wiped out because they didn’t learn that or they can stand the test of time because they’re aware that whatever they’re doing, “Hey, this is working great.” But you also need to be looking ahead as to, “What am I going to do if this happens?” and planning for that evolution. Any thoughts on that?

Zack: Yeah, Mike. I’ve got to tell you, when I got started, I started in the year 2000 and from 2000 until 2007, we saw nothing but massive success. I didn’t even know what a down real estate market was. It hit me like a ton of bricks in 2008. Literally like I said, I was forced to rethink my entire business. I think the lesson that I got from that is you really need to be able to adapt to market conditions, whether it’s the great recession like we dealt with in 2008 or any type of local or national financial crisis that is affecting the real estate market.

For me, it was a matter of assessing the market conditions, trying to figure out a business model that worked for that particular market. In my case, it was selling rental properties because we couldn’t sell to retail buyers. There was no exit there. I think what I would say is just always as a business man, as a result investor, understand that markets do change, cycles happen and you’ve got to be quick to adapt and just adjust your business model accordingly.

Mike: Sure. I know we haven’t even gotten to the topics of the day today, but maybe you can take one more comment and just comment on the importance of building your own rental portfolio. So rentals aren’t for everyone. But the ability to build up something that will send you mailbox money and have some cash flow coming in . . . the thing about wholesaling and rehabbing, both great businesses, but when the market shifts, that can die overnight.

If you don’t have that revenue stream, it’s kind of embedded. Talk about the importance of how that’s allowed you to kind of shift and be more flexible in what you do.

Zack: Yeah, I’ve got to tell you. I got started buying rental properties as I was wholesaling about 15 years ago. Mike, I just did it all wrong. I was buying the wrong properties in the wrong locations. I was putting the wrong tenants in them as well. What I realized is sometimes it’s not the right thing to buy rental properties if you’re buying the wrong stuff.

But you’re buying the right stuff in the right neighborhoods and implementing sound management principles, buying and holding is, I think, the greatest wealth creator out there. It has shown me and allowed me to create equity and cash flow and diversity and favorable tax treatment in ways that I never knew existed as a wholesaler or a retailer.

For me, it’s kind of like my 401(k) plan. I don’t look to get rich today off of my rentals, but I look at it more as my legacy investments, the properties I’m going to leave to my children, hopefully their children’s children. It’s just really allowed me to create a stable income. Let’s face it, wholesaling is not stable. Flipping properties is not stable. You’ve got good months and bad months.

But the rental properties, if you’re buying the right stuff, they get paid each and every month. For me, it was the diversity of income, creating multiple streams of income, but also investing in good, tangible assets that I understood. I love the term that we’re providing, shelter. Literally, one of the human basic needs we’re providing with rental properties. It’s really had a profound impact on my finances.

Mike: Great. Thanks for sharing that. So in terms of, we’re going to talk about rehabbing rentals the right way. I know we were talking beforehand where I just was sharing some stories on how early on, and you still see it today, when people wholesale properties they’re like, “For a rental, it just needs this.” That’s how they sell them. “For a rehab, it really needs like $30,000, but for a rental, like $3,000. Yeah, old carpet? Just shampoo it.” And it’s like on some level, probably the largest level, the reason people do that is they’re cheap and they think the tenants are going to tear it up anyway, so, “Why would I give them anything nice?”

I don’t know if you’re familiar with the broken window theorem. If you come into a building and the windows are all fine, you would never throw a rock through it. But somehow if you see a window that somebody’s thrown a brick through, you’re like, “Let me knock out those other ones.” That makes it okay to do that. I think a lot of landlords fall into that, like, “This tenant is just going to tear it up, so I’m just going to leave that stained up carpet in there,” or somehow that’s acceptable.

I’m rambling here, but maybe kind of start to share some of the lessons that you’ve learned on why sometimes it’s better to take some extra effort and even put more money into a rental property than you would have in the past.

Zack: Yeah, Mike, I can speak with firsthand experience with regard to this. My first five, six years in the business, every property I wholesaled that I deemed as just a rental, I said the same thing. I would wholesale a property and say, “Oh, gosh, if you were flipping this it needs $30,000. But it’s just a rental. So you can get away with spending maybe $5,000.” We used to call it putting lipstick on a pig.

I’ve got to tell you, I felt that way before I owned rental properties. After a couple of years of owning rental properties, I realized that you should be taking the exact opposite approach. It is a rental, not just, “It is just a rental.”

Some things that I think are extremely critical to your long-term success is placing a major focus on the mechanical components of a home, more specifically up here in the Northeast, I’m from Harrisburg, Pennsylvania. We have brutal winters, freezing cold winters and so the days of providing inefficient oil, heat, those are dead. The days of being able to rent a property with electric baseboard heat, they’re dead.

We are really looking to bring energy efficiency to our homes, sound mechanicals, because let’s face it, if a tenant’s heating bill is $800 a month, you’re not going to get paid. All of their money is going to heat the home. But we’ve really taken a step back. We’ve looked at all of the things that can go wrong with the rental, heating, cool, roofs, windows, plumbing, electric. We start there. The aesthetics of a house, those are secondary. We make the homes nice and have mass appeal, but we really place a main focus on those mechanical components.

Mike: There are some great lessons in there in terms of helping minimize your cost. But I want to point out something you said that was really interesting to me. It’s actually the second time I’ve heard this recently about thinking about efficiency in your home because if they save money on utilities, you’re more likely to get your rent. That’s a powerful insight.

I have a mentor in my market here that he actually owns a couple thousand rental properties, has a huge management team and because of their scale, there’s been deregulation of energy in Texas. So they basically have been able to go out and buy wholesale energy from a company at rates that are like half of the kind of going rate. I thought they were doing it to be able to mark it up and make money on it.

They said they’re doing it to help the tenants understand that you can actually live here cheaper with us because of this, therefore don’t screw it up and pay your rent. It was more of a mechanism to make sure they get paid more often. So those are some powerful lessons there that, to be honest, I never even considered until I heard that the first time and until you said it again.

Zack: Yeah, Mike, not only that, but it’s going to really help in tenant retention as well. So tenants evaluating do they or do they not renew that lease, they’re going to look at their utility costs. I’ve got homes that before I bought them, they had super inefficient windows and oil heat and all of the madness that can be these older homes.

I honestly have seen heating bills at $600, $700, $800 a month. We’ve gone in, done high efficiency gas, forced air, new windows, new insulation. We’ve taken an $800 a month heating bill down to $150 a month. That really means a lot to somebody that doesn’t have a lot of disposable income.

Mike: Yeah.

Zack: So it not only helps the performance of the investment, but it helps the occupancy of that investment as well.

Mike: Yeah. Can you share some thoughts on . . . I have an example of over time, we realized with our rentals and I don’t manage them myself, but we pay the bills. What we used to do was we would rehab them, I would have my general contractor, the same person that’s rehabbing our houses, they would put nice-looking plumbing fixtures in, but not expensive ones. So the Home Depot-type specials, Glacier Bay or whatever those things are.

Over time, after we had done a ton of houses, he’s like, “These just have like kind of plastic valves. They’re going to wear out in a couple of years.” It’s like instead of paying $30, you pay $60 for a Moen or something that’s nicer, it looks the same but the reality is it’s probably going to last 10 times longer.

The difference in cost of, “Hey, I’m paying $20 or $30 more for a basic faucet.” It’s like, “Yeah, but if I have to somebody go out and replace it, not only do I have to buy another one, it’s going to be $150 of labor to get in there and all those issues.” So just talk about factoring in those labor and maintenance call repair issues that happen if you do things the cheap way.

Zack: Yeah. Rehabbing the cheap way, I’ve had to learn that is not the right way from the school of hard knocks. I’ll give you an example. It’s just like when you’re replacing the roof of a property, let’s say a flat roof on a property. A lot of investors will look at that and say, “Just throw road asphalt over that. That will be fine.” The reality is that junk lasts maybe three to five years up here in the Northeast, where our philosophy is do it right the first time and do road rubber.

You talked about plumbing fixtures. One of the largest maintenance headaches, nightmares and expenses with rentals is exactly that, faucet spigots, shower head, anything where water can leak out of, you’re going to have some maintenance surrounding it.

So instead of using the $30 Glacier Bay plastic faucet, upgrade it like you said. It can only be maybe a $60 or $70 faucet, but that extra $30 or $40 is really going to add massive quality and sustainability to those mechanisms. I think it will pay for itself immediately and certainly over time. We try to apply that philosophy to everything, Mike.

Another example is adding to energy efficiency of a home, we’re going to go in with high efficiency heating systems. We’re going to go in with energy efficient windows. Anything we can do to add to the sustainability of that asset, not only for us but for our tenant is going to help us in the long run.

Mike: Yeah. Can you maybe share, this could go in a lot of directions, so I’ll try to give you some direction here. In terms of giving the tenant a nice home, not that anybody wants to give them a not nice home, but it’s very true.

I saw this myself. I’ll give you a fairly recent example in the past year or so. Bought a house, totally rehabbed it. It was like new. Put a tenant in, they made one payment then it took us two or three months to get them out and they did $8,000 in damage in terms of a make ready. They just destroyed it. Holes in the wall in the drywall, destroyed the carpet.

That stuff hardens you. You’re like, “The next person, they’re getting cheap linoleum.” It hardens you as a business person. First off, you start to lose faith in humanity. Secondly, you question whether you should be in the rental business at all. Third, it kind of hardens you to say, “I’m just going to do the basics because they’re going to tear it up anyway. So talk about that balance between somebody making you bitter because of the way they treated your house and that value of giving somebody a good home to where they take care of it and stay for a lot longer.

Zack: Yeah, I think it all comes down, Mike, to durability. I’m not so much concerned with the aesthetic appeal. I’m not going to spend twice the price to bring a nicer looking vinyl into the home, but I am going to spend a little more money to bring a more durable product to that home.

Here in the Northeast, we have a lot of homes that were built with hardwood flooring. So any time we can go into a house and refinish hardwood, we’re going to opt to do that over carpet and laminate or anything any day. But you’re going to have those situations. God knows I’ve been on the receiving end of an $8,000 turnover bill. In fact, I had a $10,000 turnover bill a couple of weeks ago. You kind of scratch your head and say, “How the heck could this possibly happen?”

For the listeners who don’t own rental properties, I’ll tell you. Usually it comes back to the actual asset and the neighborhood, because let’s face it, good tenants want to be in good houses in good neighborhoods. If I look at my personal experiences, usually the heartaches and the headaches could be tied back to a marginal location with a marginal house.

Mike: Yeah. I could see that. Awesome. Well, let’s shift gears a little bit here. First off, any other comments, anything we didn’t talk about that you want to point out in terms of making sure you rehab a rental to make sure it kind of stands the test of time?

Zack: I would just say we’ve had a lot of success with flooring in common areas. We’ve tried to completely eliminate carpet from the equation. There’s a great product on the market called Allure. It’s distributed by Home Depot. We’ve been putting Allure in living rooms and dining rooms and kitchens and bathrooms, very durable product and it’s worked really well. There are some great finishes for a nice aesthetic look.

But I’d say don’t pinch pennies when it comes to rehabbing for rentals. Use durable products, sustainable products, energy efficient products and think about the long-term occupancy of that tenant and what you can do to keep that tenant in that home for the longest period of time. Mike, as you know, one of the biggest expenses with rental properties is turnover.

Mike: Absolutely.

Zack: If you can avoid those turnover expenses or at least minimize those turnover expenses by providing an energy efficient home to your tenants, it will go a long way.

Mike: Yeah. On the materials too, when you consider that I don’t know, you could see flooring as a good example. You’re going to know this number off the top of your head better than me, but a significant portion of the cost of that flooring is the installation of it. The more you spend a little more on a product that’s more durable, the installation is the same price.

Zack: Exactly. You’re exactly right. You hit the nail on the head.

Mike: Yeah. Awesome. So let’s shift gears here and let’s talk about networking. I know you’ve built kind of a mastermind group with landlords that want community, that want to talk about issues. And stuff and then ultimately, I don’t know if this is even necessarily your intention ultimately, but ultimately you end up finding customers to buy your houses. I talk a lot about networking and building relationships with people and trying to maintain those relationships over a long period of time.

Having been in this business for a number of years now myself, I have relationships that are coming back around in ways that I never expected. But I kind of went into it saying, “I’m going to meet people. I’m going to always do my best to serve somebody right. I’m going to educate and I’m going to do those things.”

Stuff will come back around. I know you’re seeing that. I think a lot of people tend to be more transactional, like, I want to go meet somebody to see if they can do this for me or whatever. I think if you’re doing that, you’re kind of cutting yourself off to a lot of opportunity. Go ahead and share your thoughts.

Zack: Yeah. I think that’s the whole philosophy, Mike, of you get what you give. So we did start a local real estate club here. We started it really with the landlord mentality in mind. We’ve essentially attracted every type of investor, wholesalers, rehabbers, you name it. They’re probably part of our club here in the Central Pennsylvania region.

What I’ve found early on is we do not charge any money for membership to our club. It really takes a lot of time and energy to create interesting, you know, you do this podcast. It takes a lot of time to create interesting, timely and relevant content. But I’ve made it my mission in life to truly be completely transparent with what we’re doing, how we’re doing it, what successes and failures we’re experiencing and sharing that information.

We don’t do one meeting a month. We actually do two meetings a month. One is based on analyzing deals. The other is based on a general real estate investing topic. Each one of those meetings either myself or my partner or a guest speaker is coming in and we are absolutely delivering the greatest content we have available to us at that given time.

I’ve got to tell you, there’s not a meeting that goes by that we don’t deliver content that we’ve got 10, 15, 20 people at the end of the meeting waiting to talk to us, begging in some cases to do business with us. It’s just really amazing what happens when you provide . . . let’s face it, Mike, there is a lot of crap out there from an education standpoint, a lot of pie in the sky, a lot of people who are teaching but not actually doing. There’s something to be said when you’re standing up in front of a group of 100 people who know you are actually investing in real estate daily.

So we’ve got perspective locally that not many people have and we share that. As a result, we are getting business, more business than I would have ever thought possible not just to sell houses to, but people coming to us asking about coaching. We don’t even sell coaching and we’ve got people asking us to coach them and willing to spend pretty good money for it. And not only that, but just the referrals and the strategic partnerships that come as a result of providing this information, it’s more plentiful than I could have ever imagined before we launched on this endeavor.

Mike: Yeah. And in your scenario, I’m sure there are people that are landlords in that group that become dismayed and they’ve got five rentals or three rentals and they’re like, “I like the idea of all this, but I just can’t do it anymore.” You probably get leads sometimes to buy houses.

One of the things that comes out of it I bet, because I’ve been in this situation, is when you do enough of referring a contractor or somebody to you, there are certain contractors in my business that I’ve had people that are general contractors, like they don’t have capacity to work for someone other than me because we’re doing so many rehabs.

But then I’ve had people like the guy that replaces glass on our windows and stuff like that, I just need him a little bit here and there. But I’ve referred so much business to him that he’ll literally drop everything. He’s like, “I have a three-week wait right now, but I’ll do yours tomorrow.” It comes back around, right?

Zack: It 100% does in every way imaginable. We did a study last year. We moved, I think, somewhere close to 100 houses, maybe 98 houses last year. Forty percent of those houses were sold to members of our real estate club. I could not believe it. This is free. We’re not exerting any advertising dollars to do this.

It’s just a little bit of time each and every month on delivering really good information. I’ve got to tell you, people really appreciate and they realize when you’re giving everything you have to give. It does come back to you in ways I can’t even begin to describe.

Mike: And I’ve never been to your club. I’m not familiar with it. It may be a little bit different than what I’m about to say. But the lesson here in terms of people listening thinking, “That sounds awesome, but I don’t want to start a club.” I’m sure you have members inside your club that are much more active than others. They end up forming these kinds of microcosm groups inside where they get the lunch, they get together with lunch, they share deals with each other and stuff like that.

If you’re hearing this and you hear this lesson with networking, it doesn’t mean you need to start your own REIA club or your own networking group or any of those things necessarily. Of course, you can if you want to. It means just get active in some clubs that you like and you and kind of build those relationships inside. Would you agree with that?

Zack: One hundred percent. I would say I’m, as the organizer, generating a lot of business organically through it. However, our members, and there’s not a month that goes by where we don’t get a testimonial, two or three, where members say, “Just as a result of coming to the club, networking with the right people, I bought this house or that house or I found this tenant or I got this referral.” It really just begins to have a snowball effect where success breeds success and you start to build up that momentum with your club. Not only does your club grow, but you begin to grow as an investor.

So it’s not just me as an organizer. Our members, even people who have never done a deal, if they’re networking right and sharing and being open about their challenges, there’s always somebody in most cases in these clubs that are willing to help and people like to help. Honestly, most good people actually like to help others. If you’re out there and dedicated to things like these real estate clubs, they can pay dividends in ways you didn’t even know were possible.

Mike: Awesome. Zach, thanks for your time today. If anybody wants to learn more about your company or you or get a hold of you guys in some way, where would they go to learn more?

Zack: They can check us out at PADeals.com. We’ve also got a special report available on buying and holding in 2015. They can download that for free at PADealsRadio.com. Everything we have to offer is either at PADeals.com or PA Deals Radio.

Mike: Awesome. We’ll add links down below the video for those that want to learn more. I appreciate you spending time with us today. Really good lessons in here. Hopefully folks that are listening in learned a thing or two. If you’re out there listening, thanks for joining us again. We will see you on an upcoming show. Zach, take care, my friend.

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