Keith Wasserman, co-founder at Gelt, grew his real estate portfolio from a single fourplex in Bakersfield to an 8,000-unit portfolio in markets across the US. In this episode of Masters of Real Estate, Wasserman shares his experience buying multifamily properties during the Great Financial Crisis, his acquisition strategy today and the tax benefits and market research every real estate investor should know.

In this episode, we discuss:

  • Proper market research can result in finding great RE deals. (4:12)
  • Curate a portfolio that will generate cash flow and benefit from long-term appreciation. (11:45)
  • Investing in multifamily provides a consistent and safe cash flow. (15:33)
  • Homeownership rates have dropped over the past few years, which has led to an influx of renter households. (17:16)
  • Real estate owners can take advantage of a depreciation tax deduction, one of the many tax benefits of owning real estate.  (18:49)
  • Foster positive relationships with local brokers and other buyers. (21:10)
  • Gelt has found success buying properties in markets with high barriers to entry and avoiding markets with an excess of new supply. (24:40)
  • Wasserman shares strategies to retain tenants and fuel leasing velocity during COVID. (29:05)
  • COVID will drive demand for new amenities, such as on-site workspaces and day care. (31:07)
  • How the Rent Relief Program is providing aid to renters. (34:15)
  • Currently, underwriting is showing flat and even negative rent growth over the next year. (40:53)
  • Why Gelt prefers raising capital for each deal rather than through a fund model. (44:03)
  • How Gelt uses the 1031 exchange to reap tax benefits for their investors. (45:52)
  • Wasserman's advice for new entrepreneurs entering the real estate business. (48:49)
  • An inside look at Gelt's deal structure and investor payouts. (50:19)

Resources:

Current homeownership rate in the US at 65%.

Domuso - a rent payment platform co-founded by Keith Wasserman.

Resident Relief Foundation.

Interview Transcription:

(0:48) Justin Alanís: Hey, Keith. Welcome to the podcast. How you doing today?

(0:51) Keith Wasserman: I'm doing well. Thanks for having me, Justin.

(0:53) Justin Alanís: Yeah, we're excited to have you on. I wanted to start by talking about your early entrepreneurial activities. I know you graduated from USC Marshall School of Business in 2007 right before the Great Financial Crisis happened. Walk me through once you graduated how you were thinking about your life and how you ended up starting Gelt?

(1:12) Keith Wasserman: Yeah, it's a great question. So I've always been really entrepreneurial. I always knew I would run my own business. I didn't know in what kind of industry though. All throughout college I ran an online store on eBay actually buying and selling general merchandise. We became one of the biggest sellers. We sold around 200,000 items on eBay during '03 to '07. I slowly got out of that as I got a lot more competition on eBay. PayPal fees were going up, eBay fees were going up and I liquidated my merchandise. I graduated from USC in '07.

(1:48) Justin Alanís: What were you selling?

(1:50) Keith Wasserman: I was selling a lot of clothing, DVDs, electronics. Whatever I could buy for x and sell for y and it was pretty cool. You could sort of track on eBay what things were selling for so I already knew what my margins would be and work backwards. So just like in real estate, you make money on the buy and if I bought something right I knew I already had a built in profit. And so that was really cool. It taught me a lot about running a business and dealing with employees and customers and making money on the buy. So yeah, and then '07 hit and you know, the market started waffling and then '08. And I wanted to learn about real estate. I didn't know what I was going to do in real estate, but my parents had some real estate investments that had done really well. My dad's a successful attorney, but he always said that he's probably made more money in real estate than in the law. And you can only go a certain number of hours and you're limited by your time. In real estate, your buildings are working for you as you pay down your mortgage. You have tenants that pay your pay, the rent, etc. So yeah, I got my broker's license. I studied for that for a while. Got that and read as many books as I could about real estate, and went to any meetings my dad had about real estate. And literally just started networking with other people in real estate and I started with, looking back, with small buildings. How we got started, my cousin Damian and I... He had just gotten let go from his job of at least 5 years he was there or more, an environmental consulting firm in Santa Barbara. He was on the Obama unemployment, which was pretty nice, just like the unemployment now is I guess. A lot of people are making more on unemployment now than being employed. So he took the time off for around 2 years and we started buying 4-plexes in Bakersfield, California, in the Central Valley of California, around 2 hours north of Los Angeles. So it's pretty crazy how we bought our first building. He came to me with the opportunity, he said, you know, "Bakersfield", I said, "where the hell is Bakersfield?". I had no clue where Bakersfield was. So I learned all about it and you know, Damian's father was buying small apartment buildings, renovating them. He saw the huge boom and then bust.

(4:04) Justin Alanís: What kind of research and information did you have on the market once you got over the fact of like, hey, where's Bakersfield?

(4:11) Keith Wasserman: Yeah, I spent a good amount of time on the ground there speaking with local brokers, exploring the town, understanding what was going on there. I learned the economy was based on oil and agriculture and they got hit hard with the housing bust. But it rebounded really nicely out of the recession. It got hit harder first even. Before here in LA, prices really tanked first and we were picking up these 4-plexes for 150,000 dollars give or take that previously sold for 500 to 600,000. So they were pennies on the dollar, a fraction of what they used to be. And the rents didn't decline that dramatically so our mortgage payment was only like 600 dollars or 700 dollars in each unit, rented for 600 dollars. So it's pretty much a no brainer, I'd say. You know, the cash on cash was huge.

(5:02) Justin Alanís: You bought it for below replacement cost too I'd imagine at that point.

(5:05) Keith Wasserman: Yeah. Way, way below replacement cost and looking back, I mean, it was pretty crazy, the times. There were so many. 1 to 4 unit properties are considered residential. They're financed with residential mortgages so there was a ton of REO's and we were able to, we were the biggest buyer in '09. We bought like 15 of these little 4-plexes. But essentially, we bought the first one with no money. The second one, my dad put the down payment. No, I put the down payment on the 2nd one. 35,000 dollars was like a lot of my savings that Damian, my cousin and co founder, got on the loan. And then the 3rd one, my dad put the down payment, give or take 30,000 dollars. Damian got on the loan. And then we did something interesting. We sold 49 percent of that entity that owned 3 of these properties to an investor. And we marked it up because we showed them how much value we'd created. Taking these vacant buildings and, you know, fixing them up and putting tenants in there. So we used that new money to buy another 3 buildings or so. And then we started bringing in some outside investors, one investor at a time. And we made a big jump in December of '09. Like a full year later, from when we started, when we started buying larger apartment communities.

(6:20) Justin Alanis: Did you ever get any multifamily loans associated with that or were these all traditional FHA single family type of loans that you got?

(6:29) Keith Wasserman: So the first one owner occupant, Damien got FHA. The next one I think I got a traditional loan and it was really tough times getting loans. At those times countrywide, you know, was collapsing. All the lenders were not really making too much loan. So we bought the first 1 or 2 with loans and then the rest we bought all cash with our investors. Yeah. We had a unique structure where like the investor would put up 100 percemt of the money and they would lend us our half to buy in. So, you know, if they put up 150 grand, they would lend us 75 grand, around 8 to 10 percent for our half ownership. And we would own half and they would own half. That's sort of how we structured the deals. We didn't know any other way to really structure them. We started doing it much different later but that's how we did the first 4-plexes

(7:15) Justin Alanís: Yeah. It got more sophisticated as you grew, right? But you got to get started somehow. And with those 15 buildings, when did you end up selling them? How long did you hold on to them? Did you then flip those out in order to expand into what we call more institutional class Gelt?

(7:32) Keith Wasserman: So we sold them probably 4 or 5 years later. They were sort of pains in the butt. They were in rougher parts of town. We had a lot of vacancy, crime around there. We made a profit because we sold them for a good amount more than we paid for them. But they were pretty tough to manage so I learned that just because something's cheap doesn't mean it's a good deal. And a year later we graduated from these 4-plexes to buying a real, I call it, an apartment community with 78 units. And we had to get an agency. We got a Fannie Mae loan, which was pretty tough at the time. It was December of '09. And we brought in my dad as a partner who would qualify for a loan of that size. And he brought in most of our original investors that were clients of his or family friends. And we brought in another gentleman who had more experience owning and operating apartment communities with his family. So he wanted to attach himself to some younger guys that would really hustle and do the work. So yeah, we didn't own much of it. The 3 young guys combined, we brought in one other younger guy, I think our equity share was I think a 3rd. Yeah, combined. And then my dad was a 3rd and the other gentleman was a 3rd. So we really, and over the years, we kept gaining more and more equity as we proved we knew what we were doing and proved that.

(8:59) Justin Alanís: Where was this 75 unit building that you bought the first kind of bigger apartment community?

(9:05) Keith Wasserman: Bakersfield also because that's the area we knew and then we bought a 128 unit there. And so we had around 350 units in Bakersfield. We bought a 70 unit there. So 350, give or take, units in Bakersfield. And then we went to Phoenix in 2000, caught around 11. We started buying buildings there and it was also really blood in the street kind of thing. We were walking to the brokers offices and no one was there, pretty much. There was like, not much transactions going on. So yeah, we started really buying at the bottom of the last cycle in Phoenix, which is pretty awesome looking back.

(9:41) Justin Alanis: And so you had to then expand your capital base at that point. So you were bootstrapping all the way through Bakersfield, pretty much, getting close family friends in on the investment. And then once you went to Phoenix, how did you start to expand your investor base? And then walk me through how you've expanded and grown and evolved your investor base to what it is today.

(10:04) Keith Wasserman: Yeah. So the 4-plexes, we had maybe 1 family friend investor in each one. The 78 unit, we raised 1.3 million dollars from, I think 8 investors so we had most people put in like 100 grand, which is our sort of minimum investment per deal. And then a few people put in a little more, I guess. And then we, our acquisition fee, we rolled the whole thing into the deal so we didn't even take any money off the table, which looking back was good because it pretty much like doubled or tripled in value. So that deal had 8 investors, and the next deal maybe had 15 investors, the next deal had 30 investors. So the deals kept getting larger and larger in size in terms of number of units. And also value started rising so the cost per unit was going up. So we started doing 4.3 million dollar deals, the 1st one. That was a bigger one. Then we bought around a 9 million dollar deal, then a 12 million dollar deal. So we just had to keep expanding our investor base, which is just individual accredited investors. Anyone that is accredited could invest with us. Our stated minimums 100K, but if someone wants to get started with a little less, like, 50, that's fine. And we have, there's no maximum. We have some select very big investors that put in millions and but most people put in like 100,000 per deal kind of thing. And that's what's really the bread and butter of our business, is just people with savings that want access to institutional quality real estate with operators that have been doing it a long time. That have longevity and want to build a portfolio and hold for cash flow, long term appreciation, and that's the best way to do real estate. Just buy and hold and take good care of your buildings and just like the stocks, you know, like the Warren Buffett approach. That's the approach we take for real estate.

(11:58) Justin Alanis: Yeah. Absolutely. And so how much of that 2nd deal that you bought, that 9 million dollar deal, tied back to the track record and execution that you guys actually had on that 4.5 million dollar deal? And how much of that then pointed back to what you guys did in Bakersfield? Was that a big part of the story?

(12:15) Keith Wasserman: Yeah, I think so because we were always bringing our investors out to the properties and reporting to them and showing them the work that was being done on the property. And then they see see it in the numbers how we were able to increase the NOI. And their distributions started going up and every quarter that passes, they keep getting good distributions from the property. Then they start telling their friends and family and it just sort of snowballed. It just has kept becoming bigger and bigger, exponentially until, say the last year or 2. It's been tough to find opportunities that we feel comfortable buying so we've really slowed down the buying pace. But definitely we're able to raise a lot more money now for any one deal because of our large investor base that has loyally been with us for a long time, most people.

(13:07) Justin Alanís: Yeah, so where are you now as a business? How many units do you have? How many millions of dollars or hundreds of millions dollars of assets do you have now?

(13:16) Keith Wasserman: We've acquired around 8,000 apartment units. Sold, give or take 2,500. So the current portfolio is around 5,500 to 6,000 apartment units. We also started acquiring mobile home parks around 3 plus years ago. We acquired 7 mobile home parks around 1000 sites or pads they call em. We also bought an RV park in Monterey. We bought a self storage facility in Southern California here in South Pasadena a year and a half, 2 years ago and we're actually trying to scale the self storage portfolio. We're in contract to buy an 8 property portfolio in Memphis right now. We're closing next week on actually so, that's another asset class that we really like and we've been wanting to be part of for a while now. So we're sort of scaling back on the mobile home parks. The pricing has gotten crazy and it just was hard to really scale that business. It's good for mom and pops to own some smaller parks and most of them are owner operated and managed by the owner. Whereas our apartments, we always outsource the property management to 3rd parties. There's no really great 3rd party property management business in the mobile home park space that we've come across yet, so.

(14:31) Justin Alanís: Yeah. So it's harder to expand, especially outside of territory there unless you have scale. What was it originally about multifamily or these duplexes, that then expanded into multifamily, that was interesting to you? What is it about real estate? What do you like about it? Tell me about some of the underlying fundamentals and dynamics of the business.

(14:50) Keith Wasserman: Yeah. So I love real estate because it's real. You can see it. You could see the improvements physically to it. I love any kind of real estate that you have a lot of tenants that you don't have to rely on any 1 tenant to really hurt you. As like, if you have a shopping center, you have like a grocery store that was vacant or you have a big anchor box that goes dark. And then there's like CCNR's with the tenants allowed to drop the rent or pay percentage rent. It gets really messy. Office space, you could have a tenant occupying 20, 30 percent of your building go out and you have TI, the broker commissions and downtime. So the cash flow is a lot lumpier in those kind of things so I like multifamily because you're always going to be pretty well occupied and the cash flow is pretty consistent. And I think it's a lot safer than any other asset class. So self storage has the same kind of like, tons of tenants in each property. You have low capex costs over time, which I really like. You don't have to spend a lot of money upgrading, whereas like apartments every so often every, you know, usually 10 years or so you got to do a refresh renovation on the interiors and stuff but that's why I like self storage. And mobile home park also. If you don't own the homes, you own very little of the improvements. Make the clubhouse, pool, the road, landscaping, infrastructure but the actual homes, you don't want to own. You want the resident owning them and you want to just lease them the space, so I love these 3 asset classes. I think there's not much structural change happening in them like you have in retail where I think we're way over retailed and number of square feet per person in this country.

(16:36) Justin Alanís: Especially now.

(16:36) Keith Wasserman: Especially now, especially now. In office, I think you're seeing structural changes with the rise of remote work. And I think you're gonna have big changes in the way people work and non traditional office. But the way people live, I think they're always gonna, you're seeing the big sort of tailwinds in the apartment rental space. You have the Boomers on one and the Millennials in the other end and there's a huge demand. I don't see that going away. You know, I don't know what home ownership is now. Do you know what percentage home ownership is now? It was up to 69 percent then it dropped to like 63. It might have stayed around there but for every percentage drop in homeownership is like a million new renter households so we had a huge amount of renter households formed during the last..

(17:00) Justin Alanís: It's at 65 percent right now.

(17:31) Keith Wasserman: Yeah, so maybe it ticked up a little but I mean, are we going to be like a country like Germany has an even higher percentage of renters. But some countries have more homeowners and there's no such industry as multifamily. Some people, everyone owns their own home, like little condo, and then they'll maybe rent it out on a one off basis. So you're starting to see a market like in China, they're starting to try to build more for rent apartments as pricing is going crazy and it's very expensive to live. It's the same as like Israel, is another country where it's very expensive to live and they're trying to build more for rent apartments.

(18:07) Justin Alanís: Yeah, it seems to fit a narrative of the younger demographic where they want more mobility. Especially now with something like COVID happening where you see rents all of a sudden dropping 10 percent in San Francisco almost overnight. It's because people now are able to pick up and move really quickly so they like that mobility. And we're starting to see that in a lot of other industries as well. And I think multifamily definitely has tailwinds in terms of the trends that are happening for it. The other great thing that I love about real estate is the tax savings and the tax advantages. And also the fact that you can use leverage which we talked about, but how have you used taxes or tax savings in your real estate investments and what role does it play for you guys?

(18:49) Keith Wasserman: Yeah. So that's one of the greatest things about real estate, is the depreciation. We do something called like cost segregation or accelerated depreciation, which pretty much front loads it. But for many, many years, you're not really paying any taxes or maybe little taxes on the income you're generating from the property because of the phantom expense called depreciation. So and then once you sell the building, you have something called recapture where all that money that you've been saving sort of comes due but at the same time, if you do a content 1031 exchange, where you roll those full proceeds into something usually bigger in size, you don't have to pay any of the tax. No capital gain, no recapture so you could keep sort of kicking the can down the road and letting your money grow tax free. Rather than selling, paying a tax and then reinvesting after tax dollars. So that's a huge, like you said, the tax benefit is tremendous that you don't really get in other things. So if someone's earning maybe 70 percent in cash on cash, that's if they're in high tax bracket. That's to be earning maybe 14 percent on a different investment that was fully taxed. So definitely love the cash flow that's sheltered, love the appreciation over time, you know, pay down the mortgage. There's a whole host of benefits, definitely.

(20:10) Justin Alanís: Yeah, it's pretty nice. It's like a combination of stocks and bonds in terms of secure asset, appreciation of value, but also cash flowing really nicely and getting all the tax advantages. That's why I love it. And now that Gelt is growing up or grown up, how do you guys now look? I know that you're in what 6, 7, 8 different markets now. How do you think about market selection or even sub market selection within those markets, and the demographic step play into how you guys make this decisions?

(20:41) Keith Wasserman: Yeah. So the way we approach is, there's no right or wrong. Some real estate groups like focusing on the city that they're in and they hyper focus and that's the only place they're buying. Others like us will jump on a plane and hustle and find markets outside of where we live in addition to where we live. We have some holdings here in SoCal, but we first identify a market we like by doing their homework and research and studying the demographics and big employers in town and growth. And we try to look for markets that have a little bit higher barriers to entry. And then we go there and spend time on the ground and meet with all the local brokers and, you know, really make sure that we get on all their distribution lists. So the properties we are buying nowadays are usually 200 units and up and there's only a handful of brokers in the markets that we're in that deal with these kind of properties. And, you know, 99 plus percent of these deals are marketed deals, and if they're not well marketed deals of the size, they'll still be marketed to a select group of buyers. And you want to make sure you're on that shortlist of buyers, you know, that the brokers will bring it to you. So have good relationships with the brokers and other owners that are constantly buying and selling buildings is the way we've grown the business. And, yeah, in the sub market. So like we wanted to be in Denver 4 or 5 years ago. We started buying there and we were ahead of the curve. We saw a huge rent growth the last few years there. We bought in the Denver Tech Center, which we like that sub market, and then like Lakewood is a place we have I think 1,500 units give or take, around 15 minute drive from downtown, much more affordable, more like suburban. So, yeah, I'd say most of our buildings are for the most part 90 percent plus suburban, garden style, low density.

(22:25) Justin Alanís: Value add. Are you guys doing a lot of value add?

(22:28) Keith Wasserman: When you say value add like when we're buying buildings, we'll spend 3 to 10,000 dollars on average. Yeah, light upgrade, like you know some buildings we're looking at and bidding on already had all the units renovated. And we like that because they usually have higher in place cash flow and there's usually less buyers going after em. And the last couple of years people are paying up for value add and they're doing all the works and not it's not worth it because they're paying so much for it.

(22:58) Justin Alanís: You don't get the extra yield anymore because all of a sudden the markets saturated with it.

(23:03) Keith Wasserman: Yeah, exactly. In a time like now, we've halted all our renovations on our units. And, you know it'd be scary for someone to buy something and have a business plan of renovating units and getting dramatic rent increase and having bridge loan, maybe high leverage debt. And I know some groups that are doing that in markets that are very cyclical, and you know, it's great when the rents are rising, when the conditions are good, but when you have a time like this, where the rents aren't going to be increasing anytime soon... Maybe it'll eventually get back to normal, but it's, I don't see any upside in the near future, at least, but long term, yeah, sure. That's the thing, it goes in waves, it goes up, down, but overall, it's on an upward trend. So even if you bought now, as long as you don't do high leverage debt and you have ample reserves, you're able to withstand these downturns and you just never want to be a forced seller. That's the worst if you have to sell.

(24:05) Justin Alanís: And conservative assumptions also with rent growth, especially right now.

(24:08) Keith Wasserman: Correct.

(24:09) Justin Alanís: Because who knows what's gonna happen? You know, we'll get into the COVID stuff in a second. I want to hear all about how you guys are adjusting through this period. Really quickly though, I've heard you talk before about barriers to entry in market, so we've talked about demographics, and how the tail winds are really helping the multifamily industry in terms of the renter demographic. And obviously, demographics of sub markets are really important. How do you think of supply and barriers to entry of supply? Does that impact the markets that you go into?

(24:40) Keith Wasserman: Yeah. So like here in LA, we don't want to really look in Koreatown, or Downtown or Warner Center. There is just a ton of new supply coming online in those pockets. I think over half or more of the units coming online in LA are in those areas. So we try to either buy buildings or buy land to develop in areas that have higher barriers to entry. So like for example, in LA we bought a 60 unit building in Highland Park, which is probably like 15 minutes from downtown, northeast LA and most of the land around there is HPOZ, Historic Preservation Overlay Zone. So you can't really develop any of it. We were lucky we found 1 site that wasn't in the HPOZ so we're building 21 units ground up. My wife's spearheading that.

(25:28) Justin Alanís: Is that like off of Avenue 64?

(25:31) Keith Wasserman: The one we're building is on Fig and York pretty much, near the corner. Across the street from a school and we'll be delivering that in the next few months. I think it's going to hit the highest rents in the area, because there hasn't been any new construction there because of the lack of land that you could develop on.

(25:51) Justin Alanís: Is this a scary time for you to be bringing something to market that you've been under construction,  given the situation?

(25:59) Keith Wasserman: Yeah, absolutely. So the highest risk of our properties are the ones that we are about to deliver. So we have a 250 unit building that is also going to be delivered maybe end of the third quarter in the San Fernando Valley in receipt. And yeah, it's scary because, you know, when everyone was sheltering in place and stuff, there were not many leases being signed. But surprisingly, the last few weeks, we've seen a huge uptick. And yeah, I mean, we bought that site, maybe 4 years ago. It's taken so long to get it entitled and developed and so we sort of got bailed out by the rents going up a lot in that period of time. Construction costs have risen as well, though, so we're still gonna do fine with it. And it is a little scary, because maybe we're not gonna hit the rents that we thought we were going to hit like, a few months ago. Those would have been amazing, but we're still gonna hit good rents compared to where we originally performed it 4 years ago, when we bought the building, the land.

(27:03) Justin Alanís: And you guys are already in construction right now so you're not going to benefit from any potential construction cost savings as the downturn continues to happen.

(27:10) Keith Wasserman: For those 2 projects, no. But we have another one Gelena is spearheading that we're going to break ground on. And she's already also gotten price reductions from the GC, millions of dollars in reduction on that because of the time and, you know, number of jobs that are doing. And so there's substantial savings there.

(27:31) Justin Alanís: Is that due mostly to labor costs or CPI costs?

(27:35) Keith Wasserman: I think it's more labor. I was asking, you know, materials. I think there were some issues with delivery of materials on time and stuff, but I think it's more of the labor plus that their number of jobs have dropped dramatically. They're finishing up old projects, but a number of new jobs are really..

(27:54) Justin Alanís: Yeah, their fees are going down is what's happening. Really, yeah, the profits going down because they want the job.

(27:59) Keith Wasserman: I'm sure.

(28:00) Justin Alanís: Or else they're not going to have jobs. Yeah.

(28:02) Keith Wasserman: Yeah. They got to keep their workforce going and stuff so yeah. It is risky development in general, but there's higher potential reward. At the end of the day I like it because you're gonna have a brand new building that hopefully you're building it to a cap rate that's better than if you were to buy it.

(28:20) Justin Alanís: Now, so you've evolved from a small duplex in Bakersfield to 8,000 units purchased and diversified real estate portfolio, and now even you're doing new ground up development stuff. How does COVID change what you're doing? How have you reevaluated the portfolio and your strategy? What are you guys going to do now? What are you doing right now?

(28:42) Keith Wasserman: That's a great question. Um, so right, like when we first had signs of this in February, early March, we were one of the first ones to work remotely. Sort of shut down the office, had everyone work remotely which has gone pretty well actually. I sort of miss being in office with people but... And now at the site level, we decided not to do any rent increases. We halted all renovations, interior unit renovations. Any people that put in their notice to vacate, we called back and gave them good big discounts. We gave big concessions for new leases. Really started playing more defense and try to hoard cash. I'm surprised the leasing velocity stayed pretty good in some of our markets and even went up. We've been doing really good with this virtual leasing where you can click through and actually sort of feel like you're walking through the units. The technology is pretty, it's pretty cool. Also, I'm a co-founder of a financial technology called Domuso, which handles, it's a platform for handling all rent payments on large multifamily properties. And Gelt is a client of theirs amongst a lot of the other top like 25 management companies nationwide. And they have really gone to all digital rent payments. So we were the 1st one to roll out mobile check capture because in some states, it's mandatory still to be able to accept paper checks. So you could take a picture of your check in the office with an iPad or your own iPhone or device and then it'll deposit into the landlord's account. And we also have, we're the first ones to do certified funds, with an ACH where we'll guarantee the money to the landlord, rather than having them having to go get a cashier's check or money order. We have a point of sale finance where you can finance any payment due to the landlord. So it's all becoming digital, essentially. We're removing the paper checks out of the office. There's been theft of those things and manual errors and so we've digitized all that. We're growing tremendously. Yeah. We're doing around 2 billion of annual rent payments flowing through the system now and growing tremendously, so I'd say going more digital. We're trying to rethink amenities like, maybe expand. I think people are gonna be working more from their home or from their apartment community. So we have work areas and stuff, where people could come and work, but I think people will still want some quiet place to be able to talk on the phone and do some work. So maybe smaller little offices for people and then daycare centers.

(31:38) Justin Alanís: In the clubhouse or in the common areas, you're going to do that?

(31:41) Keith Wasserman: Yeah, if we can enlarge those kind of areas. We have one property with like a racquetball court that no one really uses. So can we convert that into workstations for people with some small private offices and stuff. And then yeah, daycare is another thing I think we're exploring right now because I think it would be a good amenity to have on the site for young kids. You know, daycare kind of center. But we have dog washing stations and we always add bike rooms and the biggest one is a pet park. Obviously, we encourage pets, you know we collect pet rent. 25 dollars to 50 dollars per pet per month. I never understand why some owners don't allow pets. One property we looked at would have been worth a million dollars more if they would have accepted pets. It was a big building like 400 units but if you had to put a cap rate on the amount of income they were foregoing, it's pretty mind boggling.

(32:44) Justin Alanís: Yeah. So you talked a little bit about the trends that are happening in your communities and how you're making adjustments. How's your P&L feeling right now? Have you guys felt the impact? How are collections going and what are you seeing on new rents right now?

(32:55) Keith Wasserman: Yeah, definitely. So the rent collection percentage was much higher than I anticipated when this first hit. I thought, oh, maybe only 70 percent of people are going to pay. And the last few months have been in the 90 to 93 percent rent collections, which is still a huge drop from our normal 99 plus. You're always gonna have some amount of bad debt and stuff, but so it definitely has dropped, but we're working with people that have job loss due to COVID. Where some of the states where we're allowed to evict it and we are just not doing it and we're working with residents and they've been there a long time. And hopefully a lot of businesses are going to reopen and stuff, but at some point, we're gonna have to make some hard decisions, I'm sure. But we're trying to work with people that have had temporary job losses. We don't want to just, you know, kick them out so...

(33:51) Justin Alanís: Yeah. I know that you also have a number of charitable organizations and one of them is the Rent Relief Program that you co-founded. I'd imagine that right now, this is going to be an important time for an organization like that with the looming housing crisis happening for a lot of these people who are going to be evicted and can't afford housing. Talk to me a little bit about what you're doing there and how you're thinking through that.

(34:15) Keith Wasserman: Yeah. So we started Resident Relief Foundation a few years ago, Damian and I, because we wanted to have like a grassroots approach. Which was like a win-win for the industry, the multifamily industry and for the residents. So the premise is, we help responsible renters that have been there for at least I think, 9 months historically. I think we might have dropped the requirements a little bit, historically no late rent payments, and they have a one time financial crisis. So that's how bad things start. People lose a job, they lose a family member, have a death in the family, have a big medical expense, like all kinds of things could knock people on their feet and that sort of housing stability is so important for people. And we've given grants to over 100 plus individuals and families that have helped them stay in their homes. And it's a temporary thing. It's not like a section-8 program where once you start making too much money, you're off of it, right? We want people to, you know, use this just as a bridge to get through what they're getting through. Our average grants only been 1.6 months of rent, around 2,500 dollars. And we work with management companies to identify these people. The money goes to the landlord or management company. Usually they'll waive late fees and really work with us. They want to keep this resident you know, let them get back on their feet, let them get back to paying normal rent. And then they avoid the term costs, the downtime, the eviction costs so it's a real win win for industry, which saves money for them and it shows. Our tagline is "we have a heart for renters". So I figured, and we've had a lot of big management companies work with us. Pinnacle has sent us maybe 30 plus residents, and the biggest donors, and it's a 501c3 public non-profit. We raise money from the public. Long term goal right now, we're raising money from other apartment owners, management companies, people we do business with, investors. But long term I'd love to get like family foundations, you know, stroking bigger checks and eventually, maybe some government funds involved for this rent kind of relief.

(36:23) Justin Alanís: Well, I certainly think it'll be needed through through this period. Who knows how long this is going to last, and I just read recently that I think there's 16 million renters out there who are going to be impacted by COVID. 7.1 million of those renters are already in a situation where they have insecure housing so I know that programs like this will be very important, whether it's the resident relief program or other programs out there. Now, what do you guys, you talked a little bit about Pinnacle, they're one of your property managers, I'm assuming. Who else do you use across your portfolio from a property management standpoint and why did you guys decide not to do property management yourself?

(37:04) Keith Wasserman: Yeah. That's a great question. So we originally started with the 4-plexes outsourcing that to third parties. We then saw that, for that size, small buildings, they're all pretty much mom and pop and didn't have the professional reporting and weren't up to our standards. So we then started a small management company and were like, what did we get ourselves into? So we then got out of that and from then on, we decided strategically never to be in the property management business. I just don't want to have hundreds of employees and have to constantly worry about hiring, firing, training, staffing, like you're in the people business at that point so the business is pretty low margin. It's not glamorous. I'd rather you know, pay 2, 2.5 percent, maybe on a smaller building 3 percent, 4 percent, it depends on the size of the building of revenue for a 3rd party to do it. And we just are, we're very hands on with the 3rd party so we have asset managers that have weekly calls with them. We help set the budget and we oversee all the major capex work. You know, we're very hands on, but we allow them to do the day to day rent collection and repair maintenance, stuff like that. But yeah, and we're geographically diverse so if we had all our buildings in LA, then I'd say maybe, yeah, maybe think about starting a management company. Maybe we could save some money, you know, here and there and feel like we have more control but ultimately it doesn't bother as much. We make so much more money for investors buying right and taking good care of the buildings and stuff.

(38:40) Justin Alanís: And staying lean at the organization level with which during a time like this, I'm sure pays dividends. How many people are you today at the corporate level?

(38:50) Keith Wasserman: Yeah, so we have around 23 people. We have asset managers. We have acquisitions people. Accounting is our biggest department. We have in-house legal. We got a guy that runs our self storage portfolio. You know, a guy that runs our mobile home parks. My wife oversees this development. My dad's sort of a senior partner plus oversees the big developments for us. My cousin co-founded it with me. So we have a good sized team, but it's relatively small compared to, if we did our own property management. We would need tons of like regional managers, and you know, each site has 5 to 15 members, staff members on it, so...

(39:31) Justin Alanís: You'd be at several hundred employees if you did property management on your own, I'm sure. And so and one of the benefits also is that some of these property managers have a ton of data and information about local market information. And so I'm guessing that you guys leverage your relationships there in order to help your buying efforts as well.

(39:49) Keith Wasserman: Absolutely, yeah. We always share our underwriting with them and they help us in that capacity. And yeah, our go-to has been historically AMC, based in Salt Lake. We like working with them. We also have used a host of other ones locally, Moss & Company. We have SPI in the mix, so yeah, we spread the wealth a little bit.

(40:11) Justin Alanís: Yeah. And so now moving into acquisitions, you guys said that you were slowing acquisitions in multifamily leading up to COVID. And so you don't have many new acquisitions, you've got a couple new construction projects coming online, but what's your strategy now related to acquisitions as of this moment? And how are you thinking about the future, particularly maybe related to the stimulus package and rent growth or rent reductions? How are you thinking about all that?

(40:41) Keith Wasserman: Yeah, we're just sort of waiting and seeing. There's not much being listed right now. If there are things that are listed, post COVID there's not much price change. Maybe 5 percent, give or take. So yeah, I think I need something much more substantial reduction in price in order to feel more comfortable. Because anything we underwrite right now we're showing 0 to maybe a little bit negative rent growth the first year. Whereas we'd normally be showing positive rent growth, right? We've been in a growing market. So if something underwrites where the first years flat, next year, maybe if normally we underwrite 3 percent growth, maybe 2 percent rent growth and it still hits that sort of minimum threshold of return, then yeah. Then I'll look at it but pre COVID stuff numbers is just not gonna fly right now for us.

(41:31) Justin Alanís: Yeah. It'll be interesting to see when things start opening up. And I've had a few other conversations and it sounds like the markets still just pretty dry out there and that seller expectations are still too high and buyer expectations are too low. And there's this bid ask spread still that deals just aren't getting done. And it seems like maybe what needs to happen or what will happen is that a ton of these sellers will flush out the other side who maybe are struggling a little bit or have seen significant rent reductions or are over leveraged, similar to the Great Financial Crisis. But how do you see COVID as differing from the Great Financial Crisis? You've got started during that period. Do you think that there's going to be as good of opportunities on the other side of this thing?

(42:16) Keith Wasserman: No one really knows. I mean, my guess is no. I think this is a hit and we'll get out of it, you know, but how deep is the hit gonna be? And I really don't know. I mean, we sort of, before we didn't have any legacy buildings to worry about. Now we have legacy buildings, but the good thing is we're pretty insulated in that, like we have very low leverage across the portfolio and no loans are coming due for another 5 years at least. So I sort of want to sit and wait and see how things go a little more. I don't mind like, I guess a lot of people, you know, '09, had a paralysis and they weren't buying and then '10 hit, '11 hit and then you know, they didn't buy anything. And they've missed out on a huge rally gain in the subsequent year, so I don't think anyone knows exactly. I mean, look, you saw what the stock market did. It tanked and then went way back up. It could tank again, you know.

(43:16) Justin Alanís: And frankly, the stock market isn't probably a good proxy for what's happening in the real estate market. Because one of the things that I've seen with this is that this is hitting the renters pretty hard in terms of unemployment being propped up currently through the stimulus package. And come July 31, we're going to see what happens in August and September and whether or not we have continued stimulus or whether Congress allows things to start to deteriorate a little bit. And I think if that happens, then we could see some more pain within the industry.

(43:49) Keith Wasserman: Yeah, yeah, exactly. So we're just sitting and waiting. I mean, we don't have to buy anything which is good. We don't have a fund we've raised that we have to deploy capital. We raise money deal by deal and so that's the benefit of the way we've sort of structured it.

(44:03) Justin Alanís: Yeah. Why have you decided to do it deal by deal? Usually when when folks get to around your scale, they start to think about raising a fund. Have you guys thought about that? Is that something that's in the cards for you guys?

(44:13) Keith Wasserman: Um, no. In a fund you generally have to sell. You have a lifespan, you know, maybe 10 years and stuff. And I'd rather be able to keep, if we do sell, just exchange and hold long term and build a massive portfolio and bring our investors along with us. You know, if we were to do a fund, you'd want more institutional investors and stuff. Right now, we were able to raise pretty good sums of money from our investor base and when you're working with institution, it's like, sort of working for them. You can't cut the same kind of deals. It's a little tougher raising from individuals deal by deal just logistically but it's good because it's sort of permanent capital long term. And that's matched with our belief in real estate, you know. It's not like a company where if we were buying companies and turning them around and we face a lot of maybe competition that could take us out. But real estate's always gonna have intrinsic value. It's always going to go up over time. And the only way it doesn't go up is if the area starts losing population, right? So if you've started losing population, and it's an area in decline, and sure the real estate values go down. But if the populations growing, and there's barriers to entry, and replacement costs cost more to rebuild it with time and inflation, real estate is going to go up and down.

(45:35) Justin Alanís: Yeah, I agree. If you have a long term outlook with real estate, it's a pretty secure instrument, given the appreciation and the cash flow that exists within it. And it sounds like you've been pretty upfront then with your investors from the get go. That this is going to be more of an evergreen type situation where we're going to buy an asset and if we sell it, we're going to 1031 it and we're all going to reap the tax savings associated with that. Is that accurate?

(46:00) Keith Wasserman: Yeah. They like that. Most sponsors don't do that. So 95 plus percent, most people, when we exchange and sell do participate in the exchange so it's really advantageous for them to do that.

(46:12) Justin Alanís: Yeah. And then obviously from an inheritance standpoint, when those investors die, they get a step up in basis, and they'll never pay tax or their ancestors. Their kids will never pay taxes on their investment. So it's a pretty great way to just store wealth for in-perpetuity really and the 1031 exchange vehicle allows you to do that without ever having to pay taxes. How do you think though about selling properties? When do you decide to sell properties? Is it related to depreciation run off? Or what are the events that cause you to think maybe we should sell this property?

(46:48) Keith Wasserman: Yeah. I mean, we've sold some buildings in our early years to create a track record. I wish I didn't have to because they've gone up tremendously in value. Anything we've sold then, whatever we bought next has gone up in value too as well, so it's okay. But I'd say maybe you could sell it if the buildings have way more capital needs than you anticipated. And, you know, you want to upgrade. We've been selling some 70's buildings and upgrading to 80's, 90's, 2000 built. Stuff that has lower long term like capex needs. I'd say if the area's, you know, turns for the worst. But for the most part, we try not to sell nowadays because we've earned some early liquidity for ourselves and we've built the track record. And now it's just refinance stuff when the loans come due instead of selling I'd say.

(47:44) Justin Alanís: Yeah, you can get liquidity through refinancing if the property appreciates enough, right. And so I'm guessing that you guys have refinanced a number of your properties in order to do that and distribute dividends to your investors.

(47:56) Keith Wasserman: We've done supplemental financing. There's big prepays on these. We usually do 10-year fixed rate debt so they're sort of onerous prepays but we've gotten like supplementals on multiple buildings. We did one refi, where we ate a big prepay because we cashed out so much and the new rate was way lower. And it was like 10 years of interest only so it just made sense for us. But I think in the next 5 years, when we start coming due, we'll just either sell an upgrade or just refinance and hold.

(48:26) Justin Alanís: Sales costs are also an issue, right? As you start to think about that, especially where you guys sit. You're probably paying 1 to 2 percent sales cost but in lower markets where you have smaller buildings, you could be paying 5 to 6 percent sales costs,

(48:39) Keith Wasserman: It's just a function of the size. I mean, we've been under 1 percent on these monster deals, so it definitely depends on the size.

(48:46) Justin Alanís: Yeah. Well, this is all great. What kind of advice do you have for newbie entrepreneurs out there who are thinking about dipping their toe in real estate or maybe existing entrepreneurs who have 1 or 2 assets? What advice do you want to give these people? You've been in their shoes before, you've grown your portfolio. Any words of wisdom that you think that they could benefit from?

(49:10) Keith Wasserman: Yeah. I mean, I always tell people if you want to be in the real estate business and do it as your career, then choose a niche. Try to come into what other people don't see and, you know, go after that and start small. And start with 1 and 2 and 3, sort of like how we did it. Or you could work for a bigger company and learn that way. That's just not my personal style. And then if you have a day job or a day business, and want to just allocate money to real estate, then you could invest with groups like us that, you know, we take care of everything, soup to nuts. And you get your quarterly distributions and big lion share of upside and all that. Or you could do a combination. You could buy a few of your own smaller buildings and invest with groups like us. But you'll see when you're buying your own smaller buildings, there's just a lot more things you have to take care of and it takes away from your business or your day job. I always tell people focus on yourself and make as much money as you can through your work. And you hand us over some of that money. We'll make that money work for you and you don't have to work for your money in the future.

(50:15) Justin Alanís: So on that front, how do you structure your deals typically?

(50:18) Keith Wasserman: Yeah. So basically, the deal is a 7 percent preferred return, paid quarterly. If for some reason, we're not able to hit 7 percent, it'll accrue. And then once we sell the building, we first pay any accrued preferred return, which we've never had because we've always cash flowed more than the 7 out the gate. And then we have a 70/30 split thereafter, so 70 to the investor, 30 to the Gelt team. And then about 7 percent on the cash flow, we split 50/50 on the cash flow portion, which has incentivized us to hold for the long term actually.

(50:56) Justin Alanís: Got it. What's your percentage asset management fee typically?

(51:01) Keith Wasserman: 2 percent of the gross revenue is what regards as the asset management fee. And then there's an acquisition fee, generally 1 percent, maybe up to 2 percent if it's a smaller deal of the purchase price.

(51:11) Justin Alanís: In terms of your next steps here, you're just going to continue to grow Gelt and do some more charitable giving on the side? What's your next steps here in life? What are you looking forward to?

(51:25) Keith Wasserman: Yeah. Just looking forward to growing our family. We're having our 3rd kid so that's exciting, growing our businesses, Gelt. Would love to hit 10,000 units and 20,000 units, you know. Just keep growing Domuso. Would love to just keep growing that and eventually either go public or sell to a bigger company. And then the Resident Relief Foundation help, you know, from hundreds of people to thousands to ten thousands of people. So just keep growing all these different organizations that are all in the multifamily kind of world and then giving back. Becoming a mentor and helping people just we've had mentors do for us. So that's the life cycle of this.

(52:05) Justin Alanís: It all sounds great, Keith and I know that people are really going to appreciate hearing from you given your track record and you growing your business and your portfolio over time. And all your charitable and giving back and doing mentorship things. And so I just want to thank you for doing that with us and for teaching our listeners and our audience and being one of our first podcast guests and doing that here.

(52:28) Keith Wasserman: Yeah, absolutely. I appreciate you having me on Justin. And if anyone wants to get in touch with me, they can shoot me an email. My email's keith@geltinc.com or follow me. I'm really active on Twitter, and LinkedIn, those are my two go-to's so you know, follow me there.

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