JF1409: He Went From 1 Quadplex To Over 7100 Units, So Can You! With Keith Wasserman

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Keith got his start in the real estate investing business with a 4 unit that he bought with his cousin. They had to borrow money from friends, family, and credit cards to make it work. Once that deal was under his belt, Keith recognized the potential that real estate investing offered for his business and life. Hear how he was able to scale from that first property to over $1 Billion in real estate owned and/or controlled. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Keith Wasserman Real Estate Background:

  • Founder of Gelt Inc.
  • Has been involved in the acquisition of several commercial, industrial, and residential properties, now totaling over $1 billion in assets
  • Say hi to him at http://www.geltinc.com/
  • Based in LA, California
  • Best Ever Book: The Snowball: Warren Buffett and the Business of Life
  • Keith on Social Media:LinkedIn: https://www.linkedin.com/in/kewasserman/Twitter: keith_wasserman

    Facebook: Keith Wasserman

    Instagram: kfwasserman


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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Keith Wasserman. How are you doing, Keith?

Keith Wasserman: I’m doing great, Joe. Thanks for having me.

Joe Fairless: My pleasure, nice to have you on the show. Keith is the founder of Gelt, and they have acquired over one billion dollars in real estate holdings. They since inception have acquired over (another way to think about it) 7,100 units. That’s both commercial, industrial and residential properties.

Based in Los Angeles, California. With that being said, Keith, will you give the Best Ever listeners a little bit more about your background and your current focus?

Keith Wasserman: Yeah, sure. I started this company Gelt in December, 2008, and I graduated from college in ’07. I didn’t have too many resources, but I saw the market was in turmoil, the stock market crashed, the real estate prices were in the toilet, and I said “You know what, this is the best opportunity to get into the game.”

I’m young, I don’t have a family yet, and my cousin and I, we bought a small 4-unit building in Bakersfield, CA, which is in the central valley of California, for around $150,000. We got an FHA loan, so we only had to put 2,5% down. We maxed out, we got a cash advance on our credit card and we borrowed 5k from a friend. That’s what got us into the game. That was the hardest part, just starting.

Once we started, we started buying another one with one family friend, and then another one… We bought 14 of these little REO bank-owned fourplexes, we renovated them, leased them out, and just repeated the process until we realized there’s a real business model here.

We started syndicated larger deals. We started buying a 78-unit building a full year later, in Bakersfield, in 2009, and it just was a very exciting time. Very scary, because people were like “What are you doing in Bakersfield?!”, going out there, two-hour drive North of L.A. It’s a very good economy, based  on oil and agriculture, but most people in L.A. don’t really know where it is even, or don’t really deal with that city, but it was really growing fast and it got hit hard by the housing bust… But we felt like it was gonna be a nice place for recovery, and it did recover very nicely.

Joe Fairless: In total, you’ve acquired over a billion in assets… How many units do you have currently under management?

Keith Wasserman: We currently own and manage — I should take away “manage”, because we actually are outsourcing all of our property management… But we own over 5,000 apartment units and around 1,000 mobile home park sites currently. We’ve acquired now over 8,000, but we sold a couple thousand units over the last few years… But our goal is to really build a portfolio now and reach that 10,000-unit mark of current asset ownership, and really just expand from there.

We really started selling some buildings to create a track record, and it really did wonders, because we made a lot of money for our investors… We did well for ourselves in the process, but they then continued to give that money back to us for new deals, and told their friends and family and it really helped catapult us.

Joe Fairless: Why 10,000 units? What happens then?

Keith Wasserman: It’s just a nice, round number, big number, something to look forward to. We always kept pushing the goal post back further and further. Our first goal was, I’d say, 10 units, and we had our first fourplex. Then later on it was 50 units, then 100 units, and 1,000 units… It’s just a nice goal for where we’re at right now in our company’s formation and lifecycle.

To be honest, I always like feeling that we’re very new and we’re treated like a startup, and keep being very entrepreneurial. We have a pretty small, lean and mean operation; we have 17 people here in the office, we outsource all of our property management to third parties that we’re very heavily involved with, but it allows us to not have to be in the people business of hiring/firing/training. We constantly pay a third-party management fee of between 2% to 3% of gross revenue for the property management, and it really allows us to hone in and make money on the buy, which I’ve learned from early on in my career.

Joe Fairless: Prior to starting this, you were a college student – is that correct?

Keith Wasserman: Yeah, I was a college student. I started the University of Southern California in 2003, and I went until 2007… But all throughout my four years of college I had a different business. We were one of the largest sellers of general merchandise on eBay. I sold around 200,000 items, and I was going from my dorm room, to —  I had a warehouse in the San Fernando Valley here in L.A. I was going back and forth, and we had around 13 employees for that business.

I started that in ’01 or ’02, and I outgrew my parents’ house. I started very small in my house, in the garage, and just outgrew it. My parents sort of kicked me out, made me get a warehouse, and it was a good problem to have… So I learned from a young age how to deal with employees, customers, lenders, and just growing a business.

Joe Fairless: What specifically from learning about how to deal with employees, customers, lenders do you apply to your business now?

Keith Wasserman: A lot of the same principles apply. One of my dad’s clients — my dad’s an attorney, and he had a client in the apparel business. He taught me not to be scared of really negotiating, and you really make money on the buy… And one of the first things I did – in high school, I was 17 years old, I think I was a junior… I went downtown L.A. and I bought 100 leather jackets for only $10 a piece. They were irregulars, meaning they had a little blemish on them… And the  MSRP on these things (the suggested retail price) was over $300. They were Perry Ellis leather jackets. They were still brand new, intact, but they had little blemishes on them.

So I bought them very cheap, I wasn’t afraid to ask a very low price, and I ended up selling them for $80-$100/piece. It was a huge profit margin. I went selling them to students, to parents, to teachers, and to janitors, and to whoever I could sell a leather jacket to. My whole car smelled of leather jackets, but for a young guy, I made 8k-10k – it was a great feeling. I got some spending money, and really to be fearless, and really don’t worry about offending anyone; this is what I offered, and I was able to purchase them for that kind of price. You never know.

Just like in real estate – you’ve gotta make money on the buy. When you find a good opportunity, even if it’s paying market price, you still have to have a vision and gameplan for that asset. There’s no screaming deals, like there were back when I started, but at the same time they’re still out there; you’ve just gotta be more picky and choosy.

Joe Fairless: The deals still being out there, you’ve gotta be more picky and choosy – will you elaborate on that?

Keith Wasserman: Yeah, so when people zig, we zag. I’d say — we started buying in new markets, for example; we bought a great deal in Albuquerque, New Mexico. Albuquerque is historically a market that a lot of the big money has shied away from, they red line it just because it doesn’t as sexy of a story or as much growth. However, the property we bought was in the best part of Albuquerque, the Northeast Heights area – best school district… The property was around 100% occupied, meaning the rents were too low, and the asset was in our ’80s, kind of vintage, older asset that we usually buy. And larger, it was over 400 units.

So we acquired that, and we’re doing very well with it. There’s less competition compared to other markets that we’ve been in historically, like Southern California and Denver. We’re still buying in those markets, but we’re making a lot of offers and we’re getting beat up all the time. So we’re just staying with our guns, sticking to our prices.

That’s why we started buying a lot of mobile home parks as well, because apartments have been very difficult to find good opportunities, and the mobile home park is very fragmented. There’s a ton of mom-and-pop, original developers and the second generation in the business, not a lot of larger institutional kind of players, and we feel like there’s a good opportunity to acquire a lot of these parks, bring some more efficiencies and professional management to them and run them better… So we’ve started buying those as well.

We’ve even expanded to some development sites locally here in L.A. We’re buying land for ground-up development as well locally. So we are very opportunistic, but like I said, when people zig, we try to zag. We have a long-term horizon, which is very different from a lot of our peers that are more in the short-term 3-5-year fix and flip. We have sold some assets in that period of time, however we really aren’t trying to make a quick buck; we wanna really hold for the long-term, and real estate’s best friends are time and inflation, which I’ve learned from one of my very wealthy mentors who just passed a few years ago, named Jona Goldrich.

You can look him up, he was in the business for many decades. He was one of the pioneers of the early condo here in California. Time and inflation are really real estate’s best friends, so if you have that, you have a long-term horizon, you can withstand the market pullbacks, then you’ll be golden.

Joe Fairless: So for the Albuquerque property, for example, what’s the projected hold period?

Keith Wasserman: We bought it with a 12-year fixed rate loan. Most of them are Fannie and Freddie finance with 10-12 year fixed rate, because we’re very conservative. We don’t wanna take any interest rate risk. The rate was in the (I think) high 3% range, and we bought it over a 6,25 cap rate, so the cashflow was tremendous day one, with upside as well.

So we’ve put in our projections that we’re gonna hold it for that 12 years, however there’s a chance that we can hold it longer, and a chance that we can hold it a less period of time. We’re always [unintelligible [00:09:50].10] for our investors, and if someone comes to us with an offer way above market, we’ll definitely consider it, if we can find a suitable 1031 exchange opportunity to roll those dollars over. But for the most part, our gameplan is to hold it for that longer-term period and just refinance it when the loan becomes due and just continue to hold it if the area keeps improving and the asset is being well taken care of.

I always say, why get rid of the golden goose if it’s laying the golden eggs? We are long-term holders, and what does that mean? I’d say just generationally, if possible.

Joe Fairless: And with, say, the 12-year fixed rate loan, and your project is 12 years, and it could be more, it could be less… What are the projected returns to investors in that type of deal?

Keith Wasserman: We’ve pushed that one out at a 7% preferred rate of return to the investors, meaning the first 7% of cashflow annually goes to the investors; that’s paid quarterly. Anything above 7% we split 50/50. Let’s say the first year the property is projected to provide around 9% cashflow – the investors would get the first 7%, and the next 2% will be split 1% and 1%. They’ll get 8% on their money and we’ll get 1%.

If there’s an eventual sale, the investor gets back all of their money in full that they’ve put in, and then there’s a 70/30 split. 70% to the investor, and 30% to the Gelt team, and we call that [unintelligible [00:11:05].16] The other fees involved – there’s a 2% asset management fee; we charge 2% of gross revenues as an asset management fee.

We have weekly conference calls with the property management company, we oversee the entire business plan, we oversee all the major capital expenditures on the property… We’re very involved.

Then the last fee is the acquisition fee for putting the whole deal together, and that’s typically 1%-2% of the purchase price. It depends on the size of the deal.

So our investors are just very happy, because they’re passive, they can go on with their lives, working, or if they’re retired… We have people from all walks of life; we have around 600 high and ultra high net worth investors. As long as someone’s accredited, we’re able to work with them.

We’re just a nice alternative place for people to park money. Our minimum check size for any deal is $100,000, but if someone wants to start with $50,000, that’s suitable; you’ll also feel more comfortable with us.

It’s been a great way to grow, this syndication model.

Joe Fairless: So for that 12-year projected hold to your investors, what is the projected internal rate of return on a deal like that?

Keith Wasserman: A deal like that – I think the IRR at a deal-level was around 14%, like a mid-teen kind of IRR. We’ve always underpromised and overperformed. We’ve never missed any of our IRR hurdles. It is getting tighter and tighter, and investors are just getting more realistic… We just show them, this is what the market is and those are the deals that we’re buying. The ones we’re not buying are like single-digit kind of IRRs… And for certain kinds of investors, that’s okay, like big insurance companies, etc.

We’re talking on a little more risk, because we are buying a little older assets and we’re in secondary markets, and we need to hit at least that mid-teen IRR. But to be honest, we’ve sold around 13 properties and the average IRR has been in the mid-twenties on the deals that we’ve sold, as high as 50, and the lowest one was like a 15. But that’s a product of buying in the recession, ’09, ’10, ’11… We have a lot of unrealized IRRs on deals that we have no plan to sell.

I’d say when we’re buying deals now, if we could make that kind of mid-teen IRR, 12% to 16% range – that’s our conservative estimate, but we’ve always been able to exceed that… But who knows what the cap rates — it’s crazy, I thought they’d rise a little bit with the interest rates rising; they really haven’t. Most of the money — a lot of it has been on the back-end, on the sale of the property, but we buy properties that have good, consistent cashflow, so in case there is some cap rate expansion, the investors are still making a healthy return on capital during the hold period from cashflow.

Joe Fairless: What markets are you in?

Keith Wasserman: Right now we have apartments in eight different states. Colorado and West, so we’re in all the Western states. We’re entering Texas now, so we’re moving a little bit further East. And then on the mobile home park front, the additional states are Alabama and Pennsylvania. We have three parks in Pennsylvania, two in Alabama, one in Bakersfield, California, one in Reno, Nevada, and we’ve just bought an RV park in the Bay Area, in Monterey. But the apartments — the biggest markets for us are Denver, Colorado (1,500 units), Salt Lake City, Utah is a great market for us; we have 1,000 units there. We have apartments in Reno, around 500 units, Portland, Seattle, Southern California… And I’m probably missing one in here.

We were in Phoenix, in a big way. We had 2,000 units in Phoenix, that we acquired from 2010 to 2013. We exited all of those and made some huge profits for the investor. The reason we sold was to create the track record and to take some chips off the table. But anything we sold has gone up tremendously more in value… So if you believe in something and it’s a great location, I always recommend holding it for the long-term.

Joe Fairless: Do you have the same third-party management partner across all of the apartments?

Keith Wasserman: We work with three or four management companies. They are the best in those regions. We’re entering Texas now, San Antonio, and the management company that we were working with didn’t really have a big presence there, so we hired a local management company called UAG; I think they have over 10k-15k units just in that market.

Then our go-to property management company has been AMC or FPI; they’ve managed the  bulk of portfolio, just because we like working with them, we have a good relationship, plus they’re in a lot of these major markets. But if those guys aren’t in one of the markets, we will definitely interview two or three local management companies and try to form that kind of partnership with them.

Joe Fairless: I imagine your management companies that you work with for a lot of your units, when you ask them “Hey, are you in whatever city?” and they say “No, but we’d be happy to enter into that city and manage your portfolio…” – do they usually say that?

Keith Wasserman: It depends. It doesn’t make sense for them just to have one or two assets. If it’s a market where they have a few assets and they’re making a push to grow, they will try to get our business, but if they don’t have a presence — it just costs a lot for them to enter a new market, and they try to do it with some scale… So the companies we’re working with are pretty upfront and honest.

Joe Fairless: Let’s just go with this scenario where they say “We would like to get into that market”, and let’s say you’re buying a portfolio that’s large enough for them to get that scale… How do you determine if you should go with your management company that you have a relationship with, that you’ve worked with, but isn’t yet in that market, versus a new partner, but is in the market?

Keith Wasserman: That’s a tough decision. One is like the devil you know and one is the devil you don’t know, I guess. In the past, we usually have leaned on companies that have actual boots on the ground and they have economies of scale in those markets… I probably think we’d rather go with someone that we haven’t worked with maybe, that has a big presence.

We’re very thorough in talking to other owners like ourselves to get testimonials to see how it is working with these companies. What’s really cool is I’m a partner and a co-founder in a financial technology company called Domuso, and our customers are actually management companies and other self owner operators… So it’s cool, because we know a lot of different management companies, we know how they are working with them, and how they operate; we have good insights into that.

I don’t know how much the listeners know, but not only are we involved in the actual real estate, but the technology behind the real estate. We’ve created this whole company that’s a financial services business to service customers that are like Gelt, property management companies, owner operators, to handle all payments on the properties. We do certified online payments, credit card payments, cash payments… You can now go to any MoneyGram location and pay your rent there. Some really cool, innovative stuff we’re doing, all around the payment of rent. Flexible payments… We’re doing our own point of sale financing, where you could finance any payment due to the landlord… Really cool, innovative stuff. I’m involved with a lot of different things, but I pretty much spearhead real estate, and my cousin, who’s my co-founder, is now spearheading this new adventure, Domuso.

Joe Fairless: Just going back to selecting a management partner, just to bring it back there for a second… So what specific questions do you ask the management companies to determine which one you should go with? …either the one that you know, or the one that you don’t know.

Keith Wasserman: We always like to see the operating statements on some other properties that they manage in that area, to see how well they’re operating them. Usually, they have to get approvals from those owners. We do that.

It’s all about the people… Sometimes we’ve worked with a management company that we like, but the regional hasn’t been that strong in a certain region… And they have reputations, like “This one management company might be better in Denver and Salt Lake, but not as good in Albuquerque” or whatnot. It’s all about the people, and having the right boots on the ground.

We’ve seen it in our properties, in terms of performance. The on-site leasing staff and the manager is crucial to the operation. That’s the first impression that’s given when you walk into a leasing office. It’s all about the people. Even if the market is really strong, you’ve gotta have the right people that are doing the management, doing the leasing, taking care of maintenance requests in a timely fashion, and just really taking ownership of those properties.

We have different bonus structures that we provide the management companies. We have in the past worked with management companies where they’ve reduced their fee, but we gave them a back-end piece of our promote, and that really aligns our interests… They’ve put their best people on the deal.

Some of these apartment communities that are 400-500 units have 8-12 staff members between the leasing office and in the field. The maintenance techs, the maintenance supervisors etc. We really try to form a partnership, even though those aren’t’ our direct employees; we really try to form a strong partnership with them so they work hard for us… And we really empower them. We’re not very over-bearing and micromanaging. We really empower the management companies to do the best job possible, but we have checks and balances where we go in and we do unexpected site visits, we make sure all the unit turns are being done properly, the property is looking up to par… Just stuff like that.

It’s worked for us, and we’re continuing to utilize these third-party management companies.

Joe Fairless: When they have their fee reduced but they receive a back-end fee as part of your promote – is that a separate agreement, or are they in the original documents that are sent out (the PPM and the operating agreement)?

Keith Wasserman: Yes, usually a separate agreement. I think we show it in our underwriting, but it’s just a separate agreement between us and the management company. We’ve done that on multiple occasions, and by reducing their fee, that 1%, they actually made a lot more from the back-end than that extra 1%, and we like it because they really turned around the properties in a good amount of time and really went above and beyond to do a great job.

It was a really creative thing that we’ve done in the past, and we’re always looking to really form these strong partnerships with these management companies.

Joe Fairless: What’s a specific example of what that back-end promote fee would be for a management company?

Keith Wasserman: I don’t remember the exact percentage, but we calculated on a 3-5 year hold on one of the earlier deals how much money they’d be giving up by reducing the fee from let’s say 3% to 2%, or — I forget the exact number. So you calculate what the missed income would be, and then we underwrote the deal and then we said “If you hit these numbers, which we hope you could hit, this extra (I don’t really remember) 1%, 2%, 3% of the promote is gonna be worth let’s say double or triple what that 1% reduction would be.” So reducing their fee – they might be doing it at cost, but there’s gonna be a really big upside for them.

Business is tough, the margins are pretty tight. I incurred anywhere from 20% give or take as the margins on property management. It’s not glamorous, it’s very unrewarding, and we felt like we really wanna treat these management companies right, respectfully, give them these performance bonuses and treat them like gold. They’re our partners.

When we’re looking at analyzing a new deal to buy, we always run it by our management companies who are our eyes and ears. They have more mass in the local markets than we do, and we really lean on them heavily.

Joe Fairless: What is your best real estate investing advice ever?

Keith Wasserman: Man, the best real estate investment advice ever… I’d say, just like Warren Buffet’s advice – when people are fearful, be greedy, and when people  are greedy, be fearful. ’09, ’10 – we started buying in Phoenix, when there was blood on the streets. 100k people left via de immigration bill that passed, and Phoenix is the fifth or sixth largest city in the United States, it’s not going anywhere. I knew the population would continue to grow, and the industries would start firing up again, and it really did. They diversified the economy there, it’s not just based on housing, and… I didn’t think it would turn around so quickly, but I’d say that’s the first one.

And then two is have a long-term horizon always on any investment, maybe in the stock market or real estate… I like real estate because you don’t see the daily fluctuations, as opposed to your stock market account, where you can see the stocks going up and down daily.

I read a report recently that Amazon, for example, had a drawdown of 90% from peak to trough during the early 2000s or something, but if you were to hold it this whole time, you’d be up thousands of percents, or something crazy like that. So I’d say just buy in a good area that is appreciating, and take good care of the asset. We have a saying, “Run it like a Honda.” We don’t over-improve the properties, but we take really good care of them for the long-term. They’re the affordable alternatives for people in these nice areas, to be able to live in these nice areas, but have that affordable housing. That’s been our gameplan.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Keith Wasserman: Let’s do it.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [[00:23:00].26] to [[00:24:03].10]

Joe Fairless: Okay, best ever book you’ve read?

Keith Wasserman: Best ever book I’ve read… I like Warren Buffet’s The Snowball book. I think that was the title of it. It talks about his career and life, and I really realized, Rome wasn’t built in a day. Every day, as long as you’re pushing the ball forward down the field and making progress, one day you’ll look back and be like “Wow, we really did this.” It’s been around ten years since we started this business, and it’s pretty amazing what we’ve accomplished, but I still feel like it’s day one and really looking to continue to grow.

So I’d say that book from Warren Buffet was a good one.

Joe Fairless: Best ever deal you’ve done?

Keith Wasserman: Best ever deal we did – we bought a 415-unit property in Phoenix, Arizona in 2010 for 16 million, sold it three years later for 27,5 million. However, the next person put 4-5 million into it and sold it for 45 million… So it just shows, never sell.

Joe Fairless: How much did you put into it?

Keith Wasserman: Only a million probably. We were under-capitalized. It took us six months just to raise the money. We had to close with lines of credit and we brought  it from some wealthier family friends, and we raised over six months the equity. It was a 5,5 million dollar equity raise, and for the time, that was huge for us. Now we wouldn’t even look at a deal that’s that small. It’s crazy.

Joe Fairless: What’s a mistake you’ve made on a deal so far?

Keith Wasserman: Under-capitalizing, I’d say. Not coming in with enough equity. I always err on the more cautious side. Over-raise. Raise more money for reserves and for cap-ex. It’s hard, you can’t go back to investors ever (or you don’t want to; at least I don’t want to). So I’d say under-capitalizing for a deal.

Joe Fairless: Best ever way you like to give back?

Keith Wasserman: We’ve just started our own 501(c)(3), the Gelt Foundation. We’re providing rental assistance for tenants that are at risk to eviction due to financial crisis, so I’d say giving back in my own industry has been really rewarding.

Joe Fairless: And how can the Best Ever listeners learn more about what you’ve got going on and get in touch with you?

Keith Wasserman: Go to our website, GeltInc.com, or e-mail me, Keith@GeltInc.com.

Joe Fairless: Keith, I’m really grateful you were on the show… Incredibly impressive what you’ve done from 2008 to today, starting with that 4-unit, and now your company has acquired in total over 7,100 units… And then the management questions and the insight that you provided is gonna be really useful for the Best Ever listener who are looking to hire management companies and looking for some questions that they might not be asking already… For example, “Can I see operating statements of properties you manage in the area, so I can see how you manage them?” Obviously, there’s gonna need to be some approval taking place, but that’s a question that’s in bounds, whereas perhaps some listeners might have thought that was an out-of-bounds question.

Additionally, a way to show alignment of interests that I haven’t heard of, and I’m really grateful that you’ve mentioned this, is having your fee reduced and having the third-party management company participate in the back-end promote, and showing them “Here’s the missed income, but then assuming that you do what we are all projecting you will do, then you will get 2-3 times more on the back-end.” Really interesting stuff.

Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Keith Wasserman: Sounds good. Thank you so much, Joe. Take care.

 

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