Hello, my friends. And welcome to another episode Passive Real Estate Investing. I’m your host Marco Santarelli. So my guest today, a guy named John has been in real estate for a very, very, very long time. He’s one of the OGs and he’s been through multiple recessions multiple tax law changes. He has seen interest rates as high as 19 plus percent. And of course the more recent historically lows of 3% or so, but he has been around for a very long time and he has purchased many properties. He’s also helped and coached dozens and dozens and dozens of people. In fact, if I’m not mistaken that number is actually well into the hundreds. He lives in Florida, and he has been using all kinds of strategies in terms of buying hold. He focuses single family homes, although he has invested in apartment buildings and pretty much everything else. But what is his favorite?
It’s the basic building block of residential real estate, the single family home and what he likes to talk about and what he has proven and help many people do is build wealth one house at a time. And that is the title of his book. So I hope you enjoy today’s interview. And with that, let us go straight to the interview and let’s see what John has to tell us.
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It is a great honor for me to welcome John Schaub to the show. John is the author of a great book that I bought many, many, many years ago called Building Wealth, One House at a Time. And doesn’t that ring a bell to you listening to of the show because that’s what we do all the time. We’re buying real estate and building our portfolio one property at a time. It is a great book. I suggest you pick it up. He also has a follow-up to that book called Building Wealth in a Changing Real Estate Market. He has prospered through the years through at least three recessions that I know of. He’s gone through multiple tax law changes and, and he’s seen interest rates ranging from a low of about 3% to a high of about 16% in his 52-year career as a real estate investor. So with that, John, welcome to the show.
Thank you, Marco. I am honored to be here.
It’s great to have you on you have so much experience. I mean, more than literally anybody I know, and I know a lot of people in real estate, it’ll be interesting to kind of get into your mind and just get some perspective, especially having seen everything that you’ve seen. Why don’t we start off by you sharing a little bit more about yourself other than, you know, the little bio that I have here, just so people have some perspective as to the breadth and depth of experience that you have in real estate investing.
Okay. Happy to when I was in college, back in the sixties, I, I took real estate courses and got my license while I was in college. And my senior year, I managed a little apartment building and a guy came along one day and wanted to buy it. So I sold it to him. So I made a commission my senior year in college and I made $5,000 commission, which was a lot of money in 1970. I had friends good friends in law school at that time. And they were irrigating starting jobs as five grand a year. So I said, you know, I’m on to something, let’s stick with this. So I, I took a chance. I got my broker’s license. I, I hired some salesmen. I developed some land. I did a lot of little things to start with, but I soon decided that I wanted to be an investor, not an agent.
So I started buying properties in 1973 here in Sarasota. And I still have the first property I ever bought. I continue to hold properties and I’ve learned over time that not all properties are alike of, for us. I’ve owned a little bit of everything. I’ve owned some commercial. I owned a motel, I owned some apartment buildings, I own duplexes and land and developed some land. So I’ve tried it all. And, and I settled, interestingly enough, on houses titled my book, Building Wealth, One House at a Time, because two reasons, one, they seem to make me more money. You know, it’s, it’s, it is funny. People compare ’em to trailer parks or other things. And then I had a, one of my best friends who was my partner with shared office space for years, went to root for mobile home parks. And he owns a number of mobile home parks.
He still owns some today, but his life is so much more complicated than mine is because when he buys a mobile home bar for 10 20 million, he always has to have partners and a lot of financing to pull that off. You don’t write a check for that much money. And so he said, had partners. He’s had a lot of employees. You have a 600 space park, you have employees. So, you know, his life is just so much more complicated. I love to title it your show because I, I consider myself a passive investor. You know, I try to delegate to my tenants as much as I can. He can’t delegate everything to him, but as much as I can, so I don’t have to interact with ’em very often. And I I’ve had success in, in buying properties that attracted long term tenants.
And that’s intentional, you know, I, I go for specific neighborhoods and a specific house. And in, in that neighborhood that will attract a tenant who has long-term potential. So there’s reasons they want to be there. You know, school district, shopping, churches, hospitals, whatever it is, there’s reasons they wanna live in these areas. And, and I rent, interestingly enough, all my properties off of signs. Now I do use the internet, but almost all my good tenants come from signs because I want somebody to drive through that neighborhood, see that sign, stop, get out of their car, look around and see if they like the neighborhood. You learn a awful lot by doing that. And if they like that neighborhood, that’s important to me. You know, if you go and advertise just on the internet, people from all over will come and call you, you get a lot of traffic.
But they, they, you know, they’re not necessarily interested in your house and that neighborhood, they’re just looking for a house. And so, so having this long term perspective and, and specifically my, the first question I ask prospective tenant is how long do you wanna stay in the house? You know, if they say six months or we’re gonna build a house, or we’re just here short term on the job, I won’t rent to ’em. I I’m looking for somebody who has long term potential. My average tenant stays about 10 years. Wow. And I’ve had people with me 30 years. I have 30 year tenants. I have several 20 year tenants. That’s a passive investment. You know, it’s like having a long term employee. You develop a relationship with trust with these people. You know, if a 20 year tenant calls me up and says, they have a problem, I’m gonna work with ’em.
They’ve been there 20 years. You know, they’ve made me a lot of money and I leave what they’re telling me. You know, if they said my grandparents died, I believe it. You know, when I, it was in the apartment building business, it seemed like grandparents died once every three months, you know, they were <laugh> nobody ever had any money for rent because their grandparents kept dying. They had lots of grandparents, apparently. But anyway, long term tenant has been the key to my success and having property and the best arts in my town, I encourage people to buy the best property they can afford. And if you’re in an expensive area like Orange County, you know, you really have to scratch your head and say, what can I afford and how can I afford it? How, how can I put together a deal?
That’ll work in my town, but I encourage people to do it in their town. I I’ve taught in orange county at, in Santana 50 different class, 40 different classes. I think probably more than that over the years. And my most successful students live right where you live. They’re, they’re all over California. And they’ve been buying houses since the seventies and eighties out there. And they’ve been buying one house a year. Sometimes they only buy one house. Every two or three years. You don’t have to buy as many houses in an expensive market to make it work in a town like mine, where the average house now is about four or $500,000. You know, one house a year is plenty. If you go some towns you could still buy a house for $150,000. So maybe more than one house a year would work there. But, but you know, the, the, the living expenses in different towns vary too. So mm-hmm, <affirmative> it all kind of works together. You know, if you live in an expensive, you don’t have expensive houses, you live it on a small rural town. You’re gonna have inexpensive houses, but it’s cheaper to live there.
Yeah. Very interesting story. I mean, it’s, it’s just funny how old school your methodology is for leasing your properties. Obviously you self-manage, you don’t use a property manager, but just to stick to a sign, I never really thought about it, but you’re actually attracting people who are already in the area or want to be in the area. And so that just might be so much easier. And you probably naturally draw from the tenant pool.
Well, I think it does, you know, and I do, and I don’t want you to think, I don’t understand the internet. I do advertise on the internet, but I just know that the people that I get and you relate to this, anybody on the internet relates to this, you know, they come from all over they’re they’re they, not that picky. They’re just looking for a place to live. And they don’t, they don’t really like your house. They just want any place. You know, I want somebody who wants my house and my neighborhood on that street. And I hear stories like you know, I ask them why they say, okay, my, my parents live, you know, a mile away or, you know, all my kids go to this school. I want to hear that story. That’s important story to me that that helps me select the right thing.
Yeah, exactly. And I, I love the simplicity of the question that you ask. How long do you wanna stay? I mean, it’s brilliant. I was actually taken back when I heard you say that, because I’m thinking why don’t more people ask that question. It just makes so much sense. Now, granted they’re, you can’t hold em to it. They’re not gonna put it in a contract saying I’m gonna stay for 10 years, but you can filter out people who have a very short term stay mentality from those who are probably gonna wanna stay for a long period of time. It’s so simple, but yet, so brilliant. Exactly. Right. I love it.
Yeah. Yeah. I’ve been my, my favorite tenant who lives just about four blocks in my office here wrote on our application when, you know, cause it’s first line of my application. How long do you wanna say she show it the rest of my life?
She’s my she’s been, she’s been there for, I can’t tell you exactly how many years, at least 15 years, she has spent thousands and thousands of dollars proving this house. Cuz she loves the house. You know, she just wants to live there. Yeah. And when you get that kind of tenant, it truly, it becomes a passive investment. The other, the spectrum of course is an apartment business. I, I had a bunch of apartments. You know, people would stay a year and you’d be happy if they stayed a whole year. Sometimes they only stayed three months or six months. And every time they moved out, you had to go back to work as a landlord, you know, you had to clean it, you had to fix it up. You had to find a new tenant that takes a lot of time. And for you to have a passive investment, you don’t wanna have to that kind of time. You know, if you have 10 or 20 units and they’d all move out once a year, you spend a lot of time just running those units back. Yeah. if your average tenants stays five or 10 years, you don’t have to work very much.
Yeah. So you have such a long history in the real estate investing space. And I know you’ve tried so many different strategies. You’ve bought multiple different types of properties. When you look back with the multiple recessions that you’ve been through and the housing market cycles that you’ve experienced, what stands out to you? What is your biggest takeaway or highlight if you will positive or negative from all these years of being in the real estate investing space?
Well, the most positive thing I think is even though a lot of things change and, and I don’t know how many recessions I’ve been through, but the first one was 73 and there was one in 81 in the late eighties and nineties, probably more like five recessions. Even though you have these down years, you have to be a long term investor. You know, you have to have a plan. And I, I tell people, plan to hold the property when you buy something to at least doubles in value. You know, however long that takes, maybe some markets going happen a lot faster than others. But if you have that mentality going in, that you’re buying for the long term, not short term, then you’re pickier about what you buy and about how you financing about who you rent to. I mean, you just spent you’re fussier and you know, the, the goal is not to have a whole bunch of properties.
One time I have properties in 10 different states and I was going toward a hundred properties. That was my goal. Well, that was a terrible idea because there’s nothing magic about a hundred properties. It’s just a lot of work and there’s a lot of risk. A lot of things can go wrong cuz you lose control. I’d much rather have a small operation where I have better control. Cause like most landlords, I think I, I do this because I like to be control. You know, I like to have some control over my investments. I can’t stand, I do own a few stocks, but you know, I have no control over the stock market, right. Who runs those companies and if they go up or down, at least in the house, I can make a good decision about who I rent to. And, and we’ve had this long term trend and I don’t see any reason it’ll ever change where we have, you know, we, we have a shortage of houses and, and that’s a relatively short then term thing.
They, they may solve that at some point, but we’re always gonna have inflation in this country. It is just a way we’re set up because we, we, you know, the, government’s gonna try to provide more services than gonna collect taxes for that’s the game. Well, as long as we do that, we’re gonna continue to devalue the dollar. So you need a hedge against inflation and especially, you know, if you’re going to use this as a retirement plan, you need to own something that will have increasing prices. Not, not the value is not as important, but increasing income, you know, increasing rents. So that’s why I stick with the high houses instead of going into some other off type of investment where I’d have less control and, and probably not be as profitable.
Yeah, I agree. And that’s why I love residential real estate. Like the one to four unit properties over apartments, I’ve had two apartment complexes and a, actually a small six unit. You could call that an apartment complex and you know, I got rid of ’em. I actually prefer the control and the simplicity of single family homes, the quality of the tenants that I attract, whether anecdotally or through, you know, what property managers will often tell you, you know, you do get a, a more quality, less transient type of tenant. I mean, I agree with you. I’ve stuck to single families for a long, long time. Something you said was kind of interesting. And I want to ask you to explain why you suggest holding a property until it doubles in value. I mean, what do you do with it at that point? It, it sounds kind of contradictory to my investment philosophy. So maybe explain yours first.
Well, I probably didn’t say it exactly the way. I mean, it, I mean, until at least to doubles in value, I don’t want people to, to look for a quick profit, you know, the folks that make a quick 10 or 20 or $30,000, that’s lovely. I mean, I bought a house last house I bought it bought for 200,000. I could sell today for 450 that’s three years ago. Now I bought it below to market and it did go up some, but I could sell that house a day, make a couple hundred thousand dollars. But if I hold that house for 10 more years, it’ll probably worth a million. You know, now I have a bigger paycheck. So the whole idea of delayed gratification is important. I think if you’re gonna build wealth, not cashing.
Oh, I see. So you’re just suggesting people hold it.
So it’s not, it’s not just sell it when it doubles, but hold it until it at least doubles, you know? And when I buy properties, I always say, I’m gonna probably own this the rest of my life. You know, I’ve owned properties now for 50 years. So another 50 years, if I’m still here, I’ll be surprised.
Yeah. And that’s exactly what I say. I, I say, if you’re gonna buy good quality real estate in a good location plan on never selling it, there’s never a need or a reason to sell it unless you have like some medical emergency and you, you know, your hand is being forced or you are doing a 10 31 exchange to leverage up and build a larger portfolio. So you’re just moving your equity from one place to another. Otherwise, why would you wanna sell you, just keep it and then pass it on to your family, your heirs or whoever. It may be simple stuff.
And that, and that gets you with this mindset that you wanna buy something that you really wanna own for a long time. I mean, it’s just that simple. Yeah. If you buy something and you decide you don’t wanna own this because generally because the tenants of the tracks, it becomes, you know, a management problem to you you probably should sell those because you know, you can do better, but once you figure out what you really like and the neighborhoods you really like, those are properties you’ll keep for a very long time.
Yeah, I agree. So you made a comment about a property bought, you know, for 200,000 it’s worth, you know, a lot more than that. And you mentioned, you know, recessions and the number of years that you’ve been in investing in real estate, what are your thoughts on where we are today with real estate? Very broad, general question. You know, I’m trying to keep it open ended for you here.
Well, the there’s different markets, of course, but I think most markets are hot right now. I mean, every, every polarity I talk to is in a market, that’s going up in value and rents are going up in price. So it’s just that time of the cycle. You know, there’s big cycles in this, in this business and it’s sort of like to tide. It comes in and goes back out again. I’m not predicting a crash, but I do think prices are getting so high around here anyway, where, where this house that I offer 200, probably if, if somebody would list it, they’d list it for 600 right now that that’s a crazy number. You know builders are making tremendous profits right now. They’re making a lot higher profits than they normally make. And part of that’s because the inventory is sure, but part of it’s because credit is, is pretty, pretty available right now.
And rates are still pretty low and all that’s gonna change here. It, it’s not gonna change overnight, but it’s gonna change over the next year or two probably where the credit market might tighten up. There may be more foreclosures, which will, will get the bank’s attention. And they’ll probably be a little tighter when, who they lend money to. And we’ll get to a point where the, the banks will be, will tighten up. The credit market. Interest rates are not as important as the availability of credit. If interest rates to 8% tomorrow, people will still borrow money at 8%. If somebody will make ’em loan, now they won’t probably be as smart as the people have borrowed at 4%. But if that’s all you can get you know, people still will buy houses. I bought 16 houses, 1981 from two different builders. They all had 14% loans on
That’s high.
I, a subject to those loans. We made money with every one of those houses. It’s it is interesting, but people are so used to so a very low interest rate now, especially if you’re fairly new to the business, you think three or four or five, percent’s kind of a normal rate. Well, I’m not sure it is normal rate. I think normal might be a little bit higher than that. And we’ve been below normal for a while. Yeah. So its rate go back up, there’ll be a pause. You know, people won’t be able to qualify for loans. You know, if you can qualify at 4%, you may not qualify at 6 or 8%. So it’s gonna it’s gonna affect the the demand side of the market. You know, the supply, side’s going, gonna be short. It’s not gonna catch up anytime soon, but the demand side certainly could change.
You know, if, if people decide it’s too expensive to buy, if people can rent a house cheaper and they can buy it and, and they will be able to, if the interest rates go up, you know, if they go at 68% and you compare your payment to the rent, the rent’s gonna be cheaper. So people make that decision. I’d rather rent than buy because it’s cheaper. And of course, there’s always folks that thinking, well, let’s wait till they come down. Yeah. Well, if you’ve been waiting, you might have been waiting 50 years for ’em to come down. Cause they haven’t come down. They’re bumps in the road. But if you look at the, the long term track record, it, it is pretty pretty solid.
When, when you were borrowing mortgages at 16%, I’m curious to know, were those 30 year fixed rate mortgages or were those interest only, or some other concoction of a mortgage type?
There were some of each, these were builder loans. So some of ’em are construction loans. Some of ’em were fixed. Some of ’em have been converted to fixed, but I didn’t borrow the money. I don’t want you to think I went down to the bank and applied to get those loans because there’s no way I could have qualified for, for that many loans, with that kind of interest or fact, this may surprise you. I’ve never borrowed money from a bank to buy a house in my life. I don’t go to banks. And there’s a lot of other places you can go to buy real estate to then a bank and, and the banks don’t make loans during recessions. This is a recession. I bought those houses right in the middle of the recession. If I had perfect credit and a good job, they still wouldn’t lend me money. They weren’t lending any investor money at that point. Well, when they stopped making loans to investors, that’s when the prices get good. Well, that’s when you wanna buy. And if the only way, you know, how to buy is to go to the bank and get a loan, you’re not gonna buy any of them. So there’s alternative ways. You’ve read my book. You know, there’s a lot of different ways to buy real estate.
So people are now thinking, how did you finance them? Well, I’m gonna ask you the question. Was it seller financing? Were you borrowing private money? Were you partnering like as in a syndication with other people, how were you financing those, those properties?
I, I took subject to all those loans. They were existing loans in the bank. So I took subject to all those loans. And then I went to the banks. I negotiated the lower rates and extensions on the terms. When we have a recession and banking business has changed since the eighties. But when you have a recession, banks don’t wanna foreclose. These are empty houses, they’re all brand new houses. And I love buying brand new houses. And I bought a bunch of ’em and I built a bunch of ’em over the years. But, but the banks still don’t wanna foreclose, even though it’s a good house because you know, the, the it’s just not their business. They don’t wanna manage properties. So when you have a lender, if it’s a private lender or an institutional lender on the other side, during recession they’re and we saw this during the last recession, they make all sorts of deals.
You know, they’ll, they’ll, they’ll work out some kind of a solution with somebody, especially if they know somebody, the person on the other side knows what they’re doing and credit. And, and I have good credit, you know, I have money in the bank so they can look me up and they can say, okay, John’s a better bet than the one we’ve got. Now who’s a builder. Who’s about to file bankruptcy. Yeah. <Laugh> you know, that was a bad bet. So they were trying to get a better horse than that one. That, that was a better looking horse.
I think it’s important to point out that a lot of mortgage loan financing today is not notable. Like it was decades ago where most mortgage loans were assumable.
Yeah. These loans weren’t assumable. These loans were just in default. <Laugh>
Different situation.
Yeah. The house I just bought this house we bought a couple years ago, had a loan chase mortgage. It was 160, some thousand dollars. I took subject to that loan. I gave the seller a note for part of their equity. And I wrote on a small check for part of their equity. But that’s, that’s a great way to buy houses even today. Now when you take subject to an existing loan, everybody has to understand the deal and you have to make sure it’s gonna work. Because if you take subject to somebody’s loan and don’t make the payments and it goes in the foreclosure, now they’ve got a problem. They’re gonna be mad at you. You’ve got a problem. Cause it’s on getting your name. The house is in your name. So you never wanna put yourself in that kind of situation. But this is a house that we knew we were gonna keep it’s in a good neighborhood.
You know, it, there no risk to us to take that. And we always have plan B when we take subject two and plan B is, okay, how are we gonna pay this loan off? If the bank wants their money, because the bank has the right to ask for their money, they just don’t do it very often. But if they called me up and said, we want our money, I’ve gotta have plan B I’ve, I’ve gotta know I can refinance that house and pay ’em off or sell house and pay ’em off or have the resources to pay ’em off outta my pocket.
Right? Right. So we were talking about Sarasota and orange county and other places. And, you know, we track, I track over 500 markets around the country of the core markets. About 82% of them are ranked right now as either strong or very strong. So we’re still seeing a lot of grow growth in terms of price and construction too. Granted, all real estate is local. Are you concerned that there may be some real estate bubbles forming in various markets? Or do you think I hate using the word crash, but do you think some markets are heading towards a correction or a crash?
Well, if we have a correction probably will. At some point it’ll be different than the last time. It’s always a little bit different, but last time, as you remember, we had a lot of, of people that had borrowed money without qualifying for loans. And I’m seeing a little bit of that now. I don’t know if you’re seeing in California, but we’re seeing more and more people out here advertising that you don’t have to qualify. We’ve got plenty of money, you know? So they’re starting to push money out to people with lower credit ratings. I’m sure. But last time a lot of people borrowed money who couldn’t pay it back. So there were a lot of foreclosures this time. If you think about what’s happened in the last five years, almost all the purchases have been with good mortgages, you know, three, four, 5% loans, or they’ve been cash purchases.
Well, that really stabilizes a market. And we found these hedge funds come in and buy, buy thousands of thousands and they pay cash. Now the hedge funds themselves may get in trouble, cuz they’re leveraging. You know, it’s not all, it’s not like they have an unlimited source of money like to government. They leverage their money too. If they get in trouble, you know, if there is a correction and, and so like Zillow lost 800 million on, on their last adventure. You know, these people are not Bulletproof. They can make mistakes. And if they do that, that could affect the market because they borrowed that money from somebody. And if they can’t pay it back, that could start sort of a domino effect. So I, there will be, you know, markets have our, market’s been going up 30% a year. This is our third year at, at kind of that pace.
That’s wrong. <Laugh>, you know, they can’t sustain that for another 10 years or so. I dunno when it’s gonna slow down, but it is gonna slow down. And we’re sort of in an area, irrational exuberance where people don’t think it’s gonna stop. They think it’s gonna keep going forever. Well, it’s I gonna keep going forever. It will slow down. And that’s when there’s gonna be buying opportunity. But you know, I’ve always advised people. Don’t try to time the market. It’s really hard to time the market. Nobody called the last market. Bruce Norris just moved to town. I dunno if you know Bruce, he’s a friend of mine.
I know Bruce very well. Yeah. Actually, he’s the person that was telling you about before that. Yeah, go ahead.
And Bruce makes for that, I listened to give a speech here a couple weeks ago and people say, well, what’s gonna happen, Bruce. He said, well, I’m not sure yet. Yeah. <Laugh> because nobody’s sure nobody knows a hundred percent what’s gonna happen, but we do know that it won’t go up 30% a year for the next 10 years. That just can’t happen because when prices get high enough, people will be able to rent cheaper than buy. And then that slows the market down. And that’s just a logical thing.
Yeah. Yeah, definitely. Yeah. I, I’m a actually good friends with Aaron Norris and Bruce and they, you know, they obviously moved up to Florida now, but they used to be in my backyard here.
Yeah. Well he lives in my backyard now.
Well, say hi to him for me. Will you?
I will. We’re supposed to have lunch, so I will.
So just to kind of wrap up my question there about real estate bubbles and potential corrections and crashes, do you think there are some on the horizon or is that I mean clearly localized, but do you think we’re headed in that direction or will there just be kind of.
Depends on how long your horizon is? Yeah. I mean, if you say the next 20 years, are we gonna have a recession? Yeah, there’s absolutely. Yes. You know, I bet I bet lots of money on that. I can’t tell you it’s gonna be next year. I’ve been advising people for the last year or two to first of all, get rid of your week tenants, you know, get the, as 10 as you can. You’ve got some sketchy tenants, good time to get rid of ’em. Cause there’s a lot of people we can rent to. That’ll be solid now. Some people will lose their jobs. If we have a recession, construction slows down, a lot of people will lose their jobs. So things could happen to churn this. We’re at a point in the economy where we have a tremendous shortage of people looking for jobs. You know, we have a lot more job and people looking for jobs right now. Yeah. That’s
Yeah. That’s. Labor crunch
That’s unnatural. And you know, and my memory, I don’t remember having that happen very often. I mean, I can’t remember last time we were, we were in this kinda situation and it, it is a combination of the pandemic and, and a lot of different things coming together. I think sort of all perfect storm situation, but it, it is gotta change some point. And so you just wanna be ready. You know, you can’t be perfect, perfectly ready, but you can get rid of if you’re ever gonna sell anything. Now today, you know, if you’ve got a apartment building you don’t like, or a duplex, you don’t like, or a piece of land, you don’t like get rid of it. Cause you can sell it today, get your tenants base as strong as you can. If you have a loan that you don’t like, if you have a bad loan and in my mind, a bad loan is a short term loan.
You know, something that’s due in five years or a variable interest rate loan, or maybe a loan you personally guaranteed. And you don’t like the collateral. It’s a good time to get rid of loan. So, so just make yourself safer. And then if you’re gonna sell something, we’ve sold a couple properties here. The last couple years, we’ve got some cash sitting in the bank. People think it’s a bad idea, but you know, it’s just, it is a way for me to diversify a little bit. I’m not gonna buy a whole bunch of stocks that, that doesn’t make sense. If every recession, the stocks won’t do well either I’d rather have money in the bank. If we have a recession, cause that money will become more valuable during a recession, I’ll be able to buy something in a, a discount or in a recession if I had money in the bank.
So having some money in the bank or having a way to get some money, you know, know some, know somebody who has some money who, you know, will lend to you other than a banker makes sense because when we have a downturn, if, if your houses are full with good tenants, if you have a little money in the bank and you don’t have any bad debt, you’re solid and you’ll be able to take opportunity avail, you know, you’ll be able to take a find some opportunities to, to buy during, during those times. And, and their rare times, the recessions don’t don’t come very often. They don’t last very long. It, it may only be like a six month or a one year deal. So just be ready.
Yeah. Although you didn’t come right out and say it are, are you suggesting or implying that within the next couple of years, two, three years we will have a recession. Is that, is that your prediction?
Well got, has signed the rational exuberance. I, I can’t find a pickup truck in my town. That’s more than about two years old. All the builders are driving Cadillac and Lincoln continental pickup trucks. That’s the dumbest thing in the world. My pool guy drives a brand new pickup truck. Everybody’s got a brand-new car. I don’t think they’re all paid for it. <Laugh> I think there’s some loans on some of those cards. You know, but people because everybody’s making good money. Now, most people are not very good financial managers, no matter how much money they make. So they’re going out and buying toys, you know, and they’re buying the probably more expensive houses as they can afford. You know, just because a house has got a, a 3% loan on it doesn’t mean it’s gonna be cheap to maintain the roofs getting more expensive. The ACU unit getting more expensive. You know, the cost of maintaining a big house is getting more and more expensive. You, you know, you see people who are just kind of normal folks going out and buying 3000 square foot houses. I said, yeah, that’s an expensive toy.
Yeah. It is a Due Dad is what Robert Kiyosaki would call.
It. Yeah. Yeah. They’re toys, their toys.
So circling back to kind of your investment philosophy strategy and what you talk about in the book, how do you explain to people or the general public, how buying one, how at a time can actually make you wealthy for some people they just can’t draw that, you know, connect the dots in their head that buying one house at a time can actually create the wealth you need.
Well, it, you know, if, if you start, my dad came to me when he was in his sixties and he owned a house, he lived in, he had a, a, a second home, a vacation home, but he didn’t have any investments. And he said, you know, I, I, and he is worked for the same company. He worked for the same company for 50 years. And he had a retirement check coming when he retired, but it wasn’t enough. And he has social security, but together they weren’t enough. You know, he was still gonna be short. So he said, I need to do something. I said, well, here’s a plan. Let’s buy a couple houses. So we bought some houses and we ended up selling a couple and paying off three. So when he retired at age 70, he had three free and clear houses. Now that’s not a lot of real estate.
And, and, and in this town, those houses were probably worth a couple hundred thousand dollars a piece. They weren’t, you know, meant a lot of money, but they produced about a thousand dollars a month, rent net each. So he had about $3,000 a month, extra money. Well, when you’re $73,000, a month’s a good thing. When he got to be 80, he had about $4,000 a month, or then he got to be 90. He had about five or $6,000 a month, you know, cause he kept going up. Well, you don’t have to do anything spectacular, learn in this business to make a difference in your life. And there’s not many people that should go out and buy 20 or 30 houses. Most people should just buy a few. And the nice thing about buying one at a time, it’ll become obvious to you when you have enough, <laugh>, you’ll wake up one day, say I don’t need anymore.
You know, I’ve got all the tenants I want. I’m doing all the work I want. And if I just hold onto these you and get ’em paid for, they’ll gimme the income I need. So for most people, you know, are we talking a class about 10, a 10 house plan? But if, if you’re, if you buy 10 houses and get ’em paid for, and almost any market, you’re gonna have as much money as anybody in your town. With the, the exception of the top of one 10th of 1%, you’ll be able to do any, anything you want, you know, 10 freely their houses anywhere. Let’s say the average house is $300,000. That’s 3 million bucks in your town is a million dollars. So it’s 10 million. My town’s a half million. So it’s 5 million. That’s really a lot of money and it’s not just money. It’s an asset.
That’s gonna continue to go up and value and the income will continue to go up. So having just kind of have mindset. And then I rewrote the book by the way, in 2016. So there’s a new addition now. But you know, I, the, the idea buying one house at the time is, is so powerful for a couple reasons, is, is it, you know, you get smarter, you do this. If you went out and bought 10 houses, the first year you made too pay too much for ’em, you may buy to write or wrong houses. You may not know how to manage it and put the wrong tenants in there. You may not make it. You may just go broke, but buying one house a year is not that scary. You learn how to manage one tenant at a time. And over time you get pretty good at this is not rocket science. If it was rocket science, I wouldn’t be here. <Laugh> I not a scientist.
<Laugh>, that’s such a simple plan that I, I mean, if there’s a big takeaway, that was that, you know, that you only need about three. I mean, your father did well with three properties now. No, he was five. What did you accomplish with five or six? I mean, it’s, it’s not a difficult plan and you don’t have to buy them all at the same time. So for most people listening to this, that’s a very achievable goal. And I think a lot of people could do that very easily within a, you know, 5 to 10 year period.
Everybody could. I, you know, I really believe that anybody who wants to can, because first of all, if, if you learn a little bit about the business, it doesn’t take a whole bunch of cash. You get into it a lot less cash than buying a pizza hu or McDonald’s franchise or some other business operation, you know? Yeah. And, and it’s a lot less work. You don’t have employees, you know, if you develop a relationship with a tenant one at a time, and then you have tenants to stay with you for a long period of time you know, you don’t, it doesn’t take a lot of your time. So you still get to do a lot of things that I love to do. You know, you get to spend time with your kids and grandkids and travel and do all that stuff.
You’re clearly do it yourself or when it comes to property management. I’m just curious to know why you don’t outsource some of it, or maybe in the past you have, and you had a full service property manager, but why do you choose to, self-manage just something you want to do and you enjoy?
Well, I do enjoy it. It’s not in a category of fun though. You know, it’s not like playing tennis or golf or doing fishing. But it, it is something I’m good at. And if you get good at anything, you, you, you tend to enjoy it better. So, so I, I try to be the best landlord of my town. That’s kind of my goal, probably not the best landlord, but I’m pretty darn good. You know, I keep people long time. I keep ’em happy. And the reason I don’t hire other managers is I know what that costs me. And it’s not just to commission you to not the five or 10% you’re paying ’em it’s the inefficiency is their not their ability, not to rent to somebody who will stay five years. You know, they rent to somebody who only stays a year or two that costs money.
If I can have a tenant state five years, I have five years of no vacancies. I have five years where I don’t have to replace a carpet or painting inside of that house all adds up to a lot of money. And if you manage you, you delegate that to somebody else who, you know, it’s not their money. So they’re not gonna work nearly as hard at it as you will. They’re more likely to rent to the first person that shows up with the money. You know, that says, I like the house. I’ll take it. They’ll say, okay, well, that’s not enough screening for me. I want a couple more steps in there before I agree to rent them that house. So when you delegate, it’s not just to five or 10%, you’re paying it’s the inefficiency because they don’t rent to the right people.
And then when they hire folks to do work, sometimes they don’t hire the right people. They don’t get the right prices. So I’ve had the same people do my work for years. They’re really good. They gimme good service. So if I have a plumbing problem, I call my plumber and he’ll go out to the same day and fix it. If I have an AC problem, I call my AC guy, he’ll go out the same day and fix it. You know, that’s a service that I can provide that, that most managers can provide. They’re they don’t have that kinda leverage, you know? Yeah. Interest. So, and by doing that, I keep my tenants happy and they stay a long time. That’s why tenants stay a long time. Cuz they’re happy. They like the house, but they like me too. They like to that I’m honest. We raise our rent fairly, but we give ’em good service. We take care of the house.
Yeah, sure. So something we talk about a lot on the show are the topics of markets and neighborhoods and how to choose them. What to look for the better ones at any given time, you sound like a guy who’s mostly focused on your local market. Something that is nearby because you’re self managing it. So let me ask the question about neighborhoods rather than markets. How do you choose the better markets or the best markets for you as an investor? Not markets neighborhoods. What are you focused on when it comes to neighborhoods in terms of where you want to buy?
Well, as we talked about tenants earlier, you, you want a house that will attract the tenant that has long term potential. So that house is probably in, in a safe, certainly a safe place, safe part of town. And I tell people, you should go out and walk around. If you won’t get outta your car and walk around and, and talk to people in that neighborhood after dark, you’re afraid of that neighborhood, you shouldn’t rent the, it, you shouldn’t buy there. You know? And when I teach, I only teach once. I haven’t taught for years, but I’ll probably teach maybe later this year we actually take our students out in neighborhoods where I own houses and we have them go out. I don’t go with, ’em have them go out and walk up and down those streets and talk to people in those neighborhoods to get to know the neighborhoods.
And they, they, I said, and if you talk to enough, people you’ll find a house for sale in there. That’s not listed, doesn’t have a sign in the front yard and you’ll be able to make a deal in that house. And we find those houses all the time in that class. So by doing those things and by knowing that that neighborhood, that it feels good to you, that you live there. I would move into any of my houses with my family and feels safe and, and be happy. I mean, and they’re good neighborhoods. They’re good places. They’re the right location, traffic wise and all that, you know? So it’s you know, it’s more of an art than a science, I guess. But when, when I go to buy a house in those neighborhoods, I don’t want a house that’s over improved. If anything, I want a house that’s a little bit under improved, you know?
So, so my houses are not the biggest houses in those neighborhoods. They’re, they’re generally kind of the, one of the smaller houses in the neighborhood. And, and the lots are important to me. So the location of that neighborhood, because it’s very desirable, the lots will go up and value. And, and if you think about it, it’s not the house that goes up and value over 50 years. It’s a lot that goes up and value over 50 years, the house I’ve own for 50 years is a tear down. It’s been rented to the same people for over 30 years and they’ll live there until I tear it down. They love it cuz they love the location. It’s you know, don’t tell you right where it is, but it it’s a great place to live. And but it’s not much of a house.
It is a three bedroom, two bath house and then probably 1200 square feet. But you know, it’s got the, it’s got the floors and they had carpet for a while, but then they threw the carpet out. So it just got the razzle floors, which is very popular around here now. But you know, I put two or three roofs on it, but other than that, the house is pretty much original, same kitchen, same bathrooms is built in fifties, you know? Wow. But, but they still like it. But again, this is an important point. It’s the lot that’s going up in value. The house has worth well or a million bucks a day. And, and it’s because that lot has gone up. Well, I try to buy in neighborhoods the best neighborhoods I can afford cuz I’m looking for that lot appreciation. Okay. And that, that comes where, where neighborhoods gentrify, where they improve. You take an older neighborhood that where the houses were built, like college park, where they’re built back in the fifties and talk like your town now. And, and those houses are small, but people love ’em cuz they’re they’re right there by to 5 and a 405 that go any place from there. You know, you get that location. The house is not more important than important it’s to land you’re buying. Yeah. And then you want a basic house that people can live in and be happy there.
Yeah. Goes back to the saying location, location, location, how important that is. It really is. And I use that.
And a nice thing about the house business is you don’t have all your eggs in one basket. You diversify, you end up buying a four different neighborhoods and maybe hit a home running. One of ’em, maybe one of ’em a stinker, but then the other two are about average and you do okay. You know, when I had apartment buildings, I had one big apartment building and you know, either gonna work or it wouldn’t <laugh>. And if they tear up the street in the front yard or the guy next door opened up a nightclub or so I think then I’ve got a real problem. So there’s a lot of safety in houses because they’re not all on the same street spread out. And it gives you a better chance of, of making some nice problems.
One of the chapters you have in your book is how do you choose the property? I’m paraphrasing here, but how do you choose the property? That’s gonna make you the most money, something to that effect. Mm-Hmm <affirmative>. If I was to ask you that as a question, how do you choose a property that will make you the most money? What would you tell me? Or what would you tell somebody?
Well, there’s two to this number one. It is a personal question. It’s not a generic question. So it’s not like everybody in the world makes the most money off of this house. It’s what’s best for you today. You know, do you need cash flow? If you have a good job and you don’t need any more cash flow, you shouldn’t be think buying things with cash flow, you should buy things that that will appreciate more. So I when I first started buying, I, I focused entirely on cash cause I didn’t have a job. I was a real estate salesman. And and you know, I shut down my office. So I wasn’t, wasn’t doing that at all. So I, I bought properties that had cash starting from day one. And the cash comes from how you finance the property. Okay. It has nothing to do with the rent.
You can’t raise the rents. The rents are the rents, the rents are market rents, but you, what you can do is change the financing. You can change how you structure that deal. So if I needed to have a, a house that had a lot of cash, I would structure a deal with a big down payment. I get the, an investor to make the down payment that drive the, the the, the mortgage down and the drive, the price down. And we’ve buy those houses where we would split to cash flow and I get half of, and they would get half of ’em. Some cases I’d take all the cash flow. They wanted all the appreciation. You know, if you’re an investor, if you let’s, the guys I invested with were all 23 years older than I was, they all had more money than I had. And, and they weren’t necessarily looking for more cash. They’re looking for more money. So, you know, if they put up 50,000 and they could that 50 into 250 and in a few years, that was happier for ’em than having a 5% return on that $50,000. On the other hand, I was looking for cash. So I would take all the cash flow from the property and give them more the appreciation. So I’m not sure where, where we started with this question.
How do you make the most money?
So you make a profit, you make your profits different ways. Okay. You know, sometimes you can buy things below the market when the market’s hot, pretty hard to buy below the market. But you know, people do people still sell things for less than what they’re worth. And, and an interesting thing is you’re, you’re dealing with folks, even the appraisers don’t really know what something’s worth today. You know, it’s hard. If I was an appraiser, I’d be scratching my head here. You know, because yesterday the household for 400 a day is listed for 695. What’s it worth? <Laugh>, you know, things are moving so fast and I’m not sure it’s worth there’s, there’s a house down the street here, not far from here, I, I bought one house on that street for 60,000, bought another house for 400,000. This house is listed for 895.
And I’m talking in a fairly short period of time here. <Laugh> that? That’s just crazy. So sometimes you buy below the market. Sometimes you’re able to steal stuff. And that’s generally during the recession, you know, when the banks are in where investors are in trouble where, where people are, are just, you know, can’t make their payments and, and you can, you can pick up houses back payments. You can pick up houses for mortgage balances and you get that discount going in. So that’s one way you do it. But the most likely way, and the way I’ve done, most of my deals is with the financing. So when I buy a house from somebody who wants maybe close to a retail price, the, the first house I bought, I bought it, a retail price. I made a 20% down payment and they carried back a 7% interest loan for 20 years.
Nothing fancy about that. Nothing fancy about that at all. The only thing that was a little bit fancy is I didn’t have the 20% down. So I borrowed the 20% from one of my salesmen and I agreed he could pay it back. As long as he earn some commissions, I didn’t the whole commission for, so that worked out so you can buy houses with good terms and that house immediately had positive cash flow and it’s had positive cash flow every day. Since I’ve owned it, you can buy houses on good terms. That’ll give you cash flow to start with, and that’s a way to have a profit. So I given a choice, I’d almost always rather get good terms than a good price and have to put a bunch of cash because, you know, I started, I had, okay, so I couldn’t write a check for $50,000 and today I can, but I still don’t like putting $50,000 down. I’d much rather find a seller who will finance part of that purchase for me in one way or the other in a lot of different ways to do it and have less cash invested in house and have more cash on the side for, for a safety net.
Do you think that’s harder to, to do today to find motivated or motivated sellers or don’t what I used to call don’t wanters is that harder today? Because of the environment we’re in, where property values are appreciating so much so fast.
The, the first real estate course I took was taught by a guy by the name of Warren Hardy, who coin that phrase. Don’t her <laugh> long, long. And then, yeah. And then Bob Allen took my class back in the seventies and he picked up that term for me in that class and native, famous, I think. Yeah, but there there’s always people mark, there’s always folks that have something happen in their life today, causes them to wanna sell a house. Okay. Regardless what the market’s doing. That’s nothing do with the market, you know, is they got a job transfer or they had some issue with their family or something happened, you know, where they decided today’s the day to sell house, that house I bought recently I walked into my office and knew who I was. I knew who he was.
He says, we have decided to sell this house today and we’ll sell it to you. And here’s the price I said, I’ll take it. You know, wasn’t much in negotiation, won anything fancy. But he knew I bought houses. And, and one thing you learn to do is tell everybody, you know, that you buy houses and you can close ’em fast. And the nice thing about owner financing deals is I close the same day. You know, if you come to me and wanna sell me your house and you know, you have good title and we can figure that out, we can buy it right now. Yeah. You know, I don’t have to go to the bank deal alone. I can make that deal today. But I think there’s still opportunities. Certainly there’ll be more opportunity when things change, you know, interest rates go up, banks, stop making loans. Now there’s gonna be opportunities. There’ll be, every place will be opportunities. But interestingly enough, it, it takes a lot of courage to buy during those times. You know, it, it’s easy to look at a chart and say, I should have bought here. Yeah. Yeah. And I say sure, but when there we had 20% unemployment, you know, it was hard to find a tenant. You know, things did a little scary and s.
You get prepared. That’s the one house at a time thing works so well because every time you buy a house, you get better at it. You learn something and you should learn, you should pay attention to what you’re doing and get a little bit better at it. Every time you make an offer. And so you start now, you start when it’s hard to buy, when it becomes easier to buy, you’ll have some experience and, and you’ll pick a, you know, better prices, not necessarily better deals, but better prices.
Yeah. And I love the title of your book, Building Wealth, One House at a Time. It’s not just the name of a book. It’s actually a plan that works. Let’s just wrap things up with one last question here, you know, this kind of just ties a bow on it all, but if you look back, what were the, what were the biggest or two mistakes that you made in your investing career?
Well, early on, I, I borrowed a lot of money, short term. I buy back in the early seventies, I bought a lot of properties and I would, my, my standard deal that worked like a champ is I’d offer somebody a note. And I’d said, I’ll pay you five. I’ll pay you for your equity in five years. I’ll take over your loans. I’ll pay you for your equity in five years. And I’d give ’em a five. Well, that was a genius idea until the five years went by <laugh>. Yeah. And you had a whole, I had a whole bunch of notes that I owed. So I, I had to scramble to pay those notes and I paid ’em all. But short term financing is easy. It is easy to get people to say yes to a deal like that, but it’s not a good strategy.
You’re much better off with longer term financing, which takes more work. But it’s so much safer, so much safer. You know, if you, if you signed a five year note today with somebody at 5%, five years from now, rates could be 12%. You know, you go to try to refinance the house at 12% and make it work. You may not be able to, which means you have to sell the house. And if rates ares 12%, you may have to sell it cheap. So if short term financing is, is a problem, that was one thing I learned. The other thing I learned was, you know, I, I was buying different kinds of property because I thought they had more profit. I thought they had more cash flow. And, and that was motels and restaurants and apartment buildings. And then 10 states, of course. And I learned all that stuff.
The grass wasn’t greener, you know, the grass was not greener just because somebody sold you something. And just cause there are more tenants there didn’t mean you were gonna make more money. It just means you’re gonna work more. I make more money in the house business because I’m the deals I make are all good deals. There’s no marginal deals. If there’s a marginal deal, I just don’t buy. So you have to learn. If you’re gonna get into this business, what a good deal looks like, you know, and what it looks like to you, you know, to you, you may have cash in the bank. So a good deal may be $25,000 down. Somebody who doesn’t have cash in the bank, a good deal may be a lease option where you just lease a house for 10 years with an option to buy it. So you take different techniques for, for different different sellers. I’ll tell you about a deal that just happened. Recently, a guy came to me, he had 13 houses for sale. He was willing to finance ’em for 3%. He was an investor. And the guy who came to me was the guy who wanted to buy him. And I helped him structure the deal. But he carried a note to 3% for 10 years. You know, if you’re selling a bunch of properties right now, you may think prices are high. You think prices are high. Marco. You think prices are high?
It depends.
I, I think they’re kind of high. Yeah. I’m not sure I’m gonna sell much more, but so somebody who’s been doing this for 20 or 30 years might say, Hey, I paid $50,000 for these houses or we’re $700,000 today. Well, if I sell ’em and carry back, I know to 3%, I make more, every year that I paid for the silly house, you know, it can be a good deal. So people have different perspectives. And that’s why when you’re buying the first lesson you have to learn, and this is a hard one. It’s not to think for the seller, not to not to kinda analyze this deal and say, well, they wouldn’t do that. But you should do is make an offer that works for you, where wherever you are that day, however, money, much money, you have whatever kind of cash flow you have to have off the property. You make an offer based on what you need out of the deal and then see how they respond to it. And if you can’t put the deal together, there’s always another deal.
Yeah. Great advice. When you’re in the middle of a dealer, a sale, you shouldn’t really look at what is in it for the person selling you. The question you need to ask is what’s in it for me. What is the value I’m getting? Am I gonna be happy with whatever that value or that deliverable is on my end of the transaction, regardless of how much they’re making, they could have bought the house for 10,000 and selling it to you for 200,000. And it’s a great deal of 200,000. So they’re gonna make $190,000 on that transaction. But if you’re focused on $190,000 that they’re gonna make the deal might not look like a good deal to you because you might be thinking that you’re over paying for it. But the reality is, is you’ve gotta look at what you are getting from that transaction and what it’s gonna be worth to you going forward. So you have to have a forward thinking mindset, not, you know, not focus on other people’s profit or loss. And I think that’s kind of what you’re saying. One
One more comment. And I, I think we’re about done, but don’t buy, hoping it’ll go up in value. Don’t buy based on appreciation, buy with the idea that if, if it never goes up a dime, it’ll still be a good investment for you. So you have to do the math. You have to say, okay, if, if, if this house, you know, doesn’t go up, will I still make money on it? And if you can’t say yes, you shouldn’t buy that house. I think they’ll go up. Don’t don’t be wrong. I think they’ll go up. They always have, but you shouldn’t buy base just on the hope of appreciation.
Great advice. That’s a great place to close, cuz I always say don’t be a speculator. So <laugh>
Same thing.
Well, John, I appreciate you taking the time today. You’ve been very generous. I love your wisdom and insight. Tell our listeners how they can find you and get more information about you and your articles, your books, and everything else that you do.
Well, I have a website, it’s just my name.com. So johnshaub.com and it it’ll have everything we’re doing currently. My book, the Building Wealth, the times available on Amazon and then bookstores, we don’t sell ’em through the office. We’ll just refer you to Amazon. I have recorded some courses and you know, I’m not here to sell anything, but if you want dig deeper, you wanna get more information on, on, on what we do get on a website and there’s quite a bit of information there. So johnshaub.com.
Beautiful. All right, thanks again, John. I appreciate you taking the time today.
Marco’s been a pleasure. Let’s do it again in a year or so.
Sounds good. Thank you.
I hope you enjoyed that interview with John. He is definitely one of the seasoned OGs in the industry and his books are very, very good. He is definitely one of the guys that likes seller financing strategies, but he is on the same page with us in terms of long term buy and hold buying good properties in good markets in good neighborhoods and just holding them for the long term and letting the equity build and your cash flows grow so interesting conversation. I know I could have talked to him for hours. I just couldn’t obviously I took up 45, 50 minutes of his time, but that’s it. I hope you enjoyed today’s interview. And if you enjoyed the show, remember to subscribe, we would appreciate if you gave us a rating and review on iTunes or whatever platform you use iTunes, obviously being the biggest one and that is it for today. So thank you for listening and we will see you all on our next episode.
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