A Little Bit About Zach:

Zach Winner is a licensed attorney and has been investing in real estate for over 20 years. As the Co-Founding Partner of Prosperity CRE, he provides clients with passive commercial RE investment opportunities that provide ongoing cash flow to help them build long-term wealth.  

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JP McAvoy: Hi, and thanks for joining us on today’s show. We go to California and speak with Zach Winner. He’s a licensed Attorney and has been investing in the real estate industry for over 20 years. You’ll hear how he does that, Bitcoin matters related there too. Here’s my conversation with Zach. 

Zach, thanks for joining us here today, I guess from sunny Los Angeles. How are things looking down there these days?

Zach Winner: Great. It is a nice sunny day, JP. Thanks for having me. I’m really glad to be here.

JP McAvoy: That’s great. You’re from the area originally, or was it your business endeavors that took you there?

Zach Winner: Yeah, born and raised in Los Angeles. In the middle of junior high school, we moved down to Irvine and then I went to USC, University of Southern California. So back up in LA for that. And then as you know, I’m a recovering attorney. So I worked for a Japanese trading company out of college, decided I wasn’t really into that and decided to go to law school. So I went to law school at McGeorge Law School, which is the law school for University of the Pacific up in Sacramento. So did spend a few years up in Sacramento. But then after that, I moved back down to LA.

JP McAvoy: I love having these chats with, as you say, recovering attorney, is oftentimes an evolution. And as we spoke offline, and it was just that for you. Let’s go back to those wide eyed days as a young attorney, though you’ve obviously gone through law school, what did you think you’d be doing? You can reflect back that time and think what you would end up doing, as you know what you’ve ended up being or doing? What type of law did you expect to be or envisioned to be practicing?

Zach Winner: Yeah. So when I decided to go to law school, I graduated college in 87, went to law school and graduated from law school in 91. So when I decided to go to law school, there was a show called L.A. Law that was very popular. And young, good looking attorneys are always in the courtroom battling it out in trial. And so I thought, well, if I’m a transactional attorney, I’m going to do transactional law. If I’m a litigation attorney, I’m going to be in court all the time and presenting my case in front of jurors, and it ended up not being that. So I ended up working for a midsize firm in downtown LA. We did some entertainment loss and class action litigation. We represented one of the owners of a lot of the entertainment venues in the area. And so I actually cut my teeth and learned how to practice law representing this entertainment venue owner on all of the slip and falls that happened there. And so as you know, they really don’t teach you how to practice law in law school. It’s very theoretical, and so that’s kind of how I initially started out and learned how to practice law.

JP McAvoy: Yeah. He’s talking of the television shows as they shift through time as well. I recently heard some people say that they’re Washington like suits and imagining that that’s what it would be like. Clearly, that’s not it. It’s just so interesting how different it is from what I guess how Hollywood portrays it, yeah. For what the rally is what you learn in law school and what the reality of it is. Yeah. As that sort of evolves, who you saw certainly saw that firsthand. As you say, start cutting your teeth on very specific issues. And that obviously led, I guess I should ask that, did that lead the real estate? Or what was the next step in the progression for you?

Zach Winner: So I did have some land use cases, some real estate related cases. And even back in law school and before law school, I was always attracted to real estate investment. My grandfather owned a lot of single tenant triple net lease properties. So these are like Walgreens, Rite Aid or so. And when he passed away as an Attorney, I kind of took over and managed the properties as the trustee of his estate. So I got a good flavor of owning real estate through that as well. But at some point in my career, relatively early on, I’d say five to seven years into having the license, I decided to get a brokerage license in California. If you’re a licensed attorney, it’s really easy to get a broker’s license. And with a broker’s license, you can both broker real estate transactions and broker loan transactions including loans or mortgages on home and commercial properties. And so I got the license and then kind of as a side gig or a moonlighting gig, I started a small mortgage company and started doing loans for the purchase of single family homes.

JP McAvoy: You’re raising the funds, or wherever the funds are coming from?

Zach Winner: I got connected with a local real estate investment group. And their thesis was, these were individual people. And the main thesis was, at the time, you could buy a brand new three bedroom, two bath house for $100,000. And at the time, you could get 90% loan to value financing. So if you have $10,000, you could buy a $100,000 brand new three bedroom, two bath house, rent it out, and you try to get breakeven or a little bit positive cash flow. And the main thesis was, if you have $100,000, you can do that 10 times. So you can get 10 properties. And then if you look at the average rate of just market driven appreciation over 10 years, that value will have increased so that your equity will have increased to a million dollars. So you’re turning 100,000 in equity to a million. And because that premise involves buying lots of homes, a relatively small group of real estate investors were buying lots and lots of houses around the country. And so I was doing lots of loans, these types of smaller loans around the country. And then along the way, I started buying homes too and renting them out. And that’s how I kind of got started in the real estate investment business from a personal level.

JP McAvoy: And then it just starts to take over. You say is the trustee, I guess, first for some family properties. But then yeah, it takes on a life of its own. You mentioned other areas, you and I think as things continue to expand. I guess you eventually became involved in a hotel in Austin as well. How did that come?

Zach Winner: Yeah. That was my first transition over to a commercial property, and also my first acquisition where I brought in passive investors to invest alongside me. So I handled everything. I managed the asset and oversaw everything. But I also brought in passive investors who shared in the ongoing cash flow and the profits on sale as well. And over time, I just realized for a variety of reasons, you’re better off buying larger properties. You can scale better, there’s more efficiency in terms of costs. There’s some significant tax benefits in the US if you’re dealing with a commercial property, both with respect to accelerating your depreciation loss by doing something called a Cost Segregation Analysis. And then on the back end, 1031 exchanging to continue to defer your capital gains and depreciation recapture tax. So there’s lots of reasons why I think going larger is better. Part of it’s like a comfort level. When you’re first starting out, you’re comfortable buying a house. Because maybe you already own a house and you can visualize yourself buying a house and renting it versus buying a hotel or 100 plus apartment complex. That’s a big jump. And so part of it’s just a mental game in being comfortable to make that transition. But when you do, you start to realize that there’s lots of benefits. And even though you may be sharing the pie with some passive investors, it’s a much bigger pie. So even though you have a small piece, if the small piece of a much bigger pie, so overall, everybody’s doing better.

JP McAvoy: And Zach, as you see, it’s almost that comfort level. If clients likewise who have started smaller or started in something that they got comfortable with and then they did some learning, as you mentioned that well, actually, maybe there’s a better way or there’s more torque here. If we’re able to buy a bigger project, how do you typically organize those groups? Or those passive investors, how are they typically involved in a project?

Zach Winner: Yeah. What we typically do is we syndicate. So there’s different ways to bring in passive investors. As you know, you could have a real estate investment trust. You could have a fund, and both a real estate investment trust and funds, they could have lots of properties in their portfolio. So as a passive investor, if you’re investing in that, you’re investing in a whole portfolio of properties. What we do is we have individual investment opportunities. They’re called syndications. And their SEC are Securities and Exchange Commission compliance. So they’re either a 506b offering, which are open to accredited and sophisticated investors, or a 506c offering open to just accredited investors. When we have an investment opportunity, we’ll put together a very detailed investor package that has everything about the market. We’re going into the sub market, the property, what our strategies are for the property in terms of how we’re going to increase the net operating income and cash flow that the investors receive? What is our holding period? What are our projected profits on sale? And then we’ll send that out to our investors, and they can decide if it’s something that they’re interested in investing in and so they’ll come in as a limited partner. And so there’s no liability as a limited partner. And then we’re the general partner so we’re the ones signing on the loan. And if there is something that happens and if we get sued, which we’ve never been sued, but we’re the ones that are holding that potential additional risk, and the limited partners have no risk other than their at risk capital, basically.

JP McAvoy: Percentage interest in the limited partnership that owns the property, it’s managed by the general partner who I assume has nominal interest. How are the gains distributed? I guess something that occurs on a regular basis, or is it the exit? Or what does that look like?

Zach Winner: So for example on our current property, we’re buying a 124 unit apartment complex in North Carolina. And with the way we’re structuring the waterfall, which is the distribution order of preference, the investors receive a full return of their capital before there’s a profit split. And we pay out for our main group of investors quarterly, and it’s based off of the cash flow, and they have an 8% preferred rate of return. So that’s cumulative. So for example in one quarter for one year, if we’re only hitting 6%, for example, they have 2% carry forward, and then they’ll get 8% plus the 2% that carries forward in the following year that makes–

JP McAvoy: What does it typically look like?

Zach Winner: Well, we typically end up exceeding. We’re very conservative in our underwriting. So historically, we’ve exceeded our projected returns. And today, once you factor in cash flow during the holding period and profit on sale, what our approach towards investing is we’re looking for opportunities that are called Value Add Investment opportunities. So basically at a high level, we’re looking for apartment complexes that are good complexes in good neighborhoods, but where the rents are below market, and where perhaps the unit apartment units and common areas haven’t been upgraded in a while. So we’ll acquire the property. There may be some efficiencies with respect to management. So we will put in our management. There may be some cost savings there, but then we’re coming in, we’re upgrading the common areas. We may be adding some common area amenities like a dog park, or barbecue area, and then we’re upgrading the units. And then when we do that, we’re able to re-rent them at a higher rental rate. So because of that, it takes us like two years to cycle through all of the apartment units and upgrade all of them and increase the rents. And so the cash flow is going to be lower than the overall average annual cash flow. So if the average annual cash flow is, say 9% in year one, it could be, say 7%. And then in year two, it could be 8%. And then after that, we’ve turned all of the units and upgraded the rent. So then it’s above nine.

JP McAvoy: I can appreciate this process. You say time, what would a typical investment hole look like?

Zach Winner: Typically, we’re holding for three to five years. So typically, it takes us a couple years to turn the units, and then we’ll season it for a year. And then we’ll go to look at the market and see if we can meet or exceed our projected investor returns? If we can, if it looks like it’s a good time to take the property to market, we’ll market it and sell it. If not, we’ll hold it to sell on your four or your five, we’re typically getting long term fixed agency debt. So if something happens to go wrong, if we happen to be going into a recession, we can hold it longer. And we’ve got this fixed interest rate debt that’s non recourse agency debt that can carry us through.

JP McAvoy: If an investor wants their money back, Zach, is there a lock up?

Zach Winner: We’re not publicly traded. I guess the potential negatives when you compare our investment to publicly traded real estate investment trusts where you can instantly go online and just sell your shares. With us, it’s a private investment. So we do tell our investors, if you invest with us, you should expect to invest with us until we sell it. You’ll get cash flow while we hold it. But honestly, you’re gonna get a huge bump when we sell it because that’s when the bulk of the profits are going to be realized. We’re creating all of this equity by increasing the net operating income, and we don’t harvest all that equity until we sell the property. We’re not doing cash out refinance and so you’ll want to stay until the end. If something happens and they do have to sell? All of our offerings are SEC compliant and they have full disclosures about the process that we go through to replace their shares. But typically, it’s incumbent upon the investor to find a replacement investor, and then we typically need to take it to our other passive investors and see if they want to acquire the shares as a first right of refusal. And then we’ll just need to vet those replacement investors as a creditor or sophisticated investor.

JP McAvoy: You say it’s not a publicly traded security, there’s a process and this is all disclosed through the limited partnership agreement, the disclosure documents right there made fully aware prior to making that investment there likely are just established, sophisticated investors who’ve probably been through some of this before.

Zach Winner: Yeah, that’s right. We’ll typically engage a transactional attorney to help us with the transaction negotiations. And then we’re also engaging an SEC Attorney that drafts all of the private placement memorandum, offering memorandum documents that the investors receive.

JP McAvoy: Is that state specific? You mentioned North Carolina. Is it dependent on where the investors themselves are from?

Zach Winner: So the offering memorandum is not state specific, but there are specific like blue sky law disclosures. So depending on where the investors will come from, we’ll include different blue sky law disclosures in the offering memorandum. And then we may have to have separate blue sky law filings in those states once we close on the purchase.

JP McAvoy: And what does a typical investment look like?

Zach Winner: We’re looking for at least an 8% average cash on cash return while we hold the property. And at least if you factor in the profit on sale, at least a 15% average annual return. That includes the cash flow while we hold it and the profit on sale, we’re typically doing that cost segregation analysis study once we take over ownership, and that gives us the ability to accelerate the depreciation tax write off. We pass all of that on pro rata to the investors. So it’s very common for them to get quarterly cash payments. But then when they get their K1, it’ll have a nice paper tax write off that will offset their income on this property and then other passive income that they may have. Or if they happen to bill it in the real estate industry, they can apply it to their activity.

JP McAvoy: They can make use of it. And that the typical side of investment, I guess, is the way I should ask that. What does a typical investor typically place with you?

Zach Winner: I’d say the average size is around 300,000. We set the minimum investment very low. It’s typically just $50,000. So it’s very accessible. So it’s quite common where we’ll have a large percentage of our investors investing 50,000. And then when they invest with this, again, they tend to increase it. We’ve had our investors as high as $3 million. On our last deal, we had a fund invest three millions

JP McAvoy: How many projects do you usually have on the go? Is it just one at a time and you fill it then move on to the next?

Zach Winner: Yeah, that’s right. We have like a three to five year hold. So right now, we have four properties and we’re looking at acquiring this one that I mentioned in North Carolina that we’re just in the process of acquiring. And then next year, we’ll look to acquire two to three more, and then we may look to exit depending on timing, etc.

JP McAvoy: How was the current state of the market bear on things? I mean, increasing interest rates, and fixed rates of return being the highest they’ve been in a long time, that’s obviously impacting everything. And I’m sure you are feeling the impact of that as well.

Zach Winner: Right. Yeah, it has. What’s interesting is the velocity at which interest rates have increased. They’ve gone up faster than I have in the last 40 years. And so in Q1 of 2023 for these larger multifamily properties apartment complexes, there were less transactions and then going back all the way back to the Great Recession, 2008, 2009, nothing was on the market. And so it was very quiet for us. We’re not seeing that many properties to underwrite and potentially put in offers to acquire. That’s shifted. Now we’re seeing a lot more, I think, the mindset between sellers and buyers. There’s more of a meeting of the minds. There’s not as much of a discrepancy between seller expectation and buyer expectations.

JP McAvoy: Nice way to say it because things were really getting out of line. I’ve watched many friends, not just real estate, valuations were really getting out of mind.

Zach Winner: Very frothy. Extremely frothy. And so that came down. I think seller expectations have come down quite a bit. I think for some sellers, their motivation is increased because they realize, okay, well, we’re not going to see the interest rates that we saw before that impacts valuation. And then there’s also a certain percentage of sellers that may have been that when they acquired the property, they may have gotten adjustable rate debt or bridge debt. So they’re in a bit of a bind if those debts become.

JP McAvoy: They’re feeling some pressure themselves.

Zach Winner: Exactly. They need to sell. If they haven’t created a lot of equity, they’re not going to be able to refinance, right? The lenders aren’t offering the same amount of loan to value that they were three, four years ago. Interest rates are a lot higher, valuations are lower. So that’s created some opportunities as well.

JP McAvoy: We watch the cycles, highest 40 years, and we deal with historically low rates for some time. Where do you think we are in five years from now? Nobody has that crystal ball, but we’re passing through interesting times right now. What would your throw a dart at the wall prediction look like five years from now?

Zach Winner: It’s so hard to predict where interest rates are going. But I believe that if you can find an investment opportunity that makes sense based on the numbers today and the interest rate, you’re able to lock in. And if you get a fixed interest rate, I believe that you’re going to be in a very good position to sell in 3, 5, 7 years. Because in all likelihood, certainly in five to seven years, interest rates, I think, are going to be lower. So if interest rates are lower, the next buyer will be able to get better financing terms than you got. If interest rates are lower, the value of that property, the capitalization rates are probably going to be lower. So the value based off of the same NOI is going to be higher. So you’re positioning yourself well today if you can get into a deal that makes sense today for a strong exit five years down the road.

JP McAvoy: The interesting thing is cycles and different types of investments. Well, clearly, we talked with that evolution as you’ve moved through the law to real estate, your day job. If we can park that for a second, Zach, and move to other things. Again, everything we say here is not legal advice, not investment advice. But are there other areas that you find interesting? And as we talked about that a couple years away from now, what’s going to be the impact on the markets? You look at the public markets, and you look at any particular equities, additional investment or an alternative investment to real estate?

Zach Winner: I don’t play in other markets. I certainly have some diversity, I have a slightly diverse portfolio. I am heavily invested in real estate, but I do have vanguard funds. I’m a Bitcoin, I believe in Bitcoin.

JP McAvoy: People always want to hear where people are on the Crypto, Bitcoin and other things as well. So yeah, let’s delve right into that. We talked with a range of assets to see this new, I think we can say it’s a new class. What’s the thesis for you?

Zach Winner: I’m a believer in Bitcoin not in other cryptocurrencies. But in Bitcoin, I think it’s proven. We’re recording this on October 24. If you happen to see the market yesterday, you saw Bitcoin was up, I don’t know, 14% in a day. And that’s basically based off of the news that BlackRock is going to be issued a (inaudible), and they’ve registered for the stock symbol for that.

JP McAvoy: 8 to 10 applications. So we hear that it’s coming, or we’re being told now or allegedly that’s coming.

Zach Winner: Yep. Yeah. So I think the other thing we have going for us is, every four years, there’s what’s called the having. So then, the amount of bitcoin that’s created through the mining process, which is verifying all of the transactions that get put on blockchain ledger is going to be cut in half in April of next year. Historically, in the past three havings that we’ve had, within a couple of months after each having, we enter a new bull market. And so it’s basic supply and demand. You’re cutting the supply in half. If demand is constant or rising, that should increase the variable, which is price. So historically, that’s caused a huge run up. So we have this confluence of events of all of these spot ETFs that look like they’re going to be approved. If you just look at BlackRock and Fidelity, they have $14 trillion in assets under management with just those two. So if just those two take 1% of their assets and management and invest in Bitcoin, that’s going to increase the amount of liquidity tremendously. And so just those two events could really cause another bull market run? It’s so hard to predict.

JP McAvoy: You say Bitcoin, or we’re talking Bitcoin ETFs? What are your thoughts, something like Ethereum, or if there’s an Ethereum spot as well that emerges?

Zach Winner: I am partial to Bitcoin. I actually owned Ethereum for many years. And a couple of years ago, I sold it and bought more Bitcoin. And one of the issues I have with Ethereum is the underlying proof of stake versus proof of work, who verifies it. And whether there are insiders that can control a theory? I mean, rewrite the coding. That could potentially be a fundamental flaw. It may prevent it from ever being viewed as a commodity versus Bitcoins, the only cryptocurrency where Gensler has come out and said, yeah, we think this is a commodity digital gold versus these others are more akin to a security, but it’s doing well. I look at it from a price standpoint, and theory seems to be doing well. One thing I noticed from a volume or asset, the amount of ownership, you are seeing a separation starting to occur now. The value of Bitcoin that’s held is much higher, it seems to be increasing versus Ethereum.

JP McAvoy: The dominance. You would have done well. As you say, if I submit a theory and put it into Bitcoin and ecological amounts, that’s the place that they either want it to be or wish they had it. Again, the effect thesis continues to be true. But other people on the show talk of other use cases, as opposed to just that store of value. But talking of all that’s being built on Ethereum and that network effect, do you subscribe to that at all?

Zach Winner: Well, I think there’s some validity to that. I’m also looking for Bitcoin at the Lightning Network, and it being used as a means of transacting. That’s one of the criticisms of Bitcoin. It’s so expensive to transact. So they have this Layer 2 Lightning Network, which really lowers the cost and makes it incident instantaneous. If you’re not using the Lightning Network, it can take quite a while for your transaction to be registered, 15, 20 minutes. But with the Lightning Network, it’s instantaneous, and the cost is de minimis. I’m hopeful that that will help the increased use of Bitcoin as a means of transacting. I think right now, the majority of people are using it as a store of value, as digital gold. So it’ll be interesting to see how much it continues to be adopted.

JP McAvoy: Yeah. Because we’re still very early in this. This would be interesting to revisit this conversation as well, that five year timeframe. How have things changed between now? And then it would be nice to have the crystal ball that way as well. Clearly things are changing. I think that we talked with the US dollars, that reserve currency, and are we going to be seeing a change in the way that currencies are settled as well? What are your thoughts on them?

Zach Winner: I have some concern, but it’s still such a dominant currency. The dollar is so dominant. What’s the alternative? I see these BRICS Nations discussing, trying to go off the dollar. I just don’t know how realistic that really is, and what kind of an impact that would really have?

JP McAvoy: How realistic are digital currencies?

Zach Winner: I think there are risks. I don’t like digital currencies because of the invasion of privacy issues that are inherent in them. They’re very different from Bitcoin. They’re not Bitcoin, right?

JP McAvoy: Yeah, absolutely. Another buzzword is the things that people are all asking for opinions on these days, or Artificial Intelligence. Have you looked into this? What are your thoughts on what things are gonna look like from that perspective in a couple years time?

Zach Winner: Artificial Intelligence is interesting. I’ve read a couple books on AI and the risks of AI. It can be frightening if you look at some of these risks too long term to really impact humanity and the survival of humanity. But in the short term, I think there are some incredibly exciting things happening in AI, and it’s moving so rapidly. That’s another thing, that’s like a double edged sword. It’s super exciting to see all these applications. And I think it’s going to continue to further and advance within the next couple of years. We’re gonna see huge, advanced new things being done with AI. But by the same token, it’s also a little scary.

JP McAvoy: It’s certainly scary. We’re sitting here attempting to navigate the future. Conversations just like this are stuff that people get together and discuss where we may be going, what does it look like for you in the next couple years? Where do things go for you and yourself personally?

Zach Winner: So we’re continuing to acquire new assets, and we’re looking to continue to grow our business. And so I think next year, our goal is to acquire three more larger 100 plus unit, multifamily apartment complexes, and then we’ll just take it from there. But it’s very exciting. We love what we do, and it’s a lot of fun. It’s an amazing time.

JP McAvoy: They really are amazing times. So Zach, appreciate you being here today. If someone’s interested and wants to hear more about a project and some of the ways that you’ve been able to develop things, what’s the best way of reaching you?

Zach Winner: Just go to our website, it’s prosperitycre.com. As in PROSPERITY Commercial Real Estate, prosperitycre.com. I’m also on LinkedIn, so feel free to reach out to me any time on LinkedIn.

JP McAvoy: That’s wonderful. We’ll have, of course, all of that in the show notes as well. Zach, I really appreciate having you here on today, hearing about some of the business, how you’ve been recovering from as to say your law school days, and giving us some predictions for the future. I’d like to end the shows with one thing that’s worked through you, through your business, your life. One thing that you’ve maybe heard a lesson you’ve learned along the way that has been used to you that might be of use to somebody here listening. Is there something that you can think of, or you could share a number of things you could share that you take with you on a day to day basis to help and lead to your success?

Zach Winner: Believe in networking and mentoring. If you need help, don’t be shy about reaching out to other professionals. I think networking and meeting with people you aspire to be like, I think that’s a good idea. I think it’s at least in real estate, it’s more of a team sport, and you’re better off treating it as a team sport than thinking you can do it all on your own. A lot of times, it’s also a mental game thinking, well, I can do this all. I’m going to do it all by myself. But this whole concept of having a whole, the whole pie, but it’s a much smaller pie versus sharing the pie. Maybe you can do it all on your own, but maybe you’re not the best at doing all of those various components. And so you can bring in experts from other fields to help you along the way.

JP McAvoy: Absolutely. It’s great advice. And again, I’ll share and prosper by virtue of that. Thanks so much for being here today. I appreciate you. I look forward to revisiting this conversation at some point in the future.

Zach Winner: Thanks very much.