Episode 31: Real Estate Discussion with Keith Wasserman

To help you get started on your business and real estate investing journey, I’m creating a variety of courses to help you survive and succeed in the real estate industry.

I sat down with Keith Wasserman, founder of Gelt to catch up and talk about the real estate environment. While Keith’s business and mine are quite different–Gelt’s focus is primarily on multi-family residences and mine is on self storage units–our goals are largely aligned; we both aim to responsibly deploy capital in a rapidly changing environment, and that’s a perpetual truth in real estate.

Zigging and Zagging

Gelt’s multi-family units started with mobile home parks, although that proved tough to scale. They moved on to slightly older buildings, primarily from the 1970s and 1980s, but are currently focused on churning their portfolio to get those properties off their books and shift towards newer builds. Old homes are trading at a similar cap rate to new homes right now, and their cost of upkeep can snowball significantly. Similarly, Keith and his team have been trending towards more dependable markets than boom or bust hot spaces, which makes it easier to view their investments as long-term holds. Gelt’s business shifts provide an important lesson to avoid fixating on one niche of the market, and be willing to move on when a different space becomes more appealing.

These pivots have involved selling some properties for a low IRR, but that money is being used on new investments. Keith wants to zig while others zag to establish a portfolio of properties he’s confident about over the next 10-15 years. Hot markets can offer a lot in the short-term, but getting stuck at the tail end can be disastrous.

2022 and Beyond

Keith and I, and much of the industry, saw a hectic close to 2021 in what is typically a slow quarter. Our self-storage business signed half of our deals in December as sellers try to avoid capital gain tax hikes, and Keith’s team was working all the way up until New Years. Thankfully as volume has grown our time to close is down to just 47 days, which helped us secure one particularly chaotic deal in the nick of time.

Moving forward, there are macroeconomic concerns that we need to be prepared to work through or adapt to. Interest rates may rise by 50 basis points, making debt more expensive. In recent history long-term fixed rate loans have hurt deals because nobody wants to buy them down the road when rates have dropped, but now they’re. Bridge loans can provide shorter maturities and lower interest rate risk, but come with the pressure to be able to pay back in the near future. Setting a business up for success is a balance, and often requires a blend of different strategies, which is why I’m targeting long-term debt options to provide flexibility in our portfolio.

But the environment is always wild, unpredictable, and cyclical. Every month and year feels unique, and nobody can predict anything in the short term. That’s why Keith and the Gelt team deploy capital on a 10-20 year horizon, caring less about 3-5 year windows. Rather than trying to ride brief market waves, they position their assets like investments in bonds or the stock market, where you can park your excess cash for the future.

Balancing Stakeholders

Keith and I constantly need to balance the wants and needs of our investors while trying to promote a healthy business, ultimately trying to grow AUM and IRR at the same time. Investors always want more deals, but our focus needs to remain on finding good deals that we’re confident in. When we underwrite only 15% revenue growth in the first year of any property it means that the deals we land tend to look excellent, but we get priced out in a lot of negotiations and only buy one out of every 10 opportunities. We have to consider getting more aggressive in underwriting and know that with growing demand great deals are going to be harder to come by.

Keith’s risk-adjusted returns have thankfully been very strong, and his investors often invest because it’s their best alternative to the stock market, even if they have to underwrite lower returns. The desire to find the best risk-adjusted returns possible is what has led Gelt to shift from older homes to newer properties.

Entrepreneurial Advice

Rule number one of any asset-heavy business is be careful and don’t run out of cash. Many people were making money hand over fist going into 2009 and then had to declare bankruptcy shortly thereafter. Lack of long-term capital will make things challenging, and leading a lean lifestyle can help you put everything into the success of your business; Keith started by living at home for 5 years while he rolled all acquisition fees back into deals and living on a shoestring budget. This mentality is much easier when you start out than it will be when you have a family and bills.

Keith and I are both core investors following tailwinds in good markets with good properties, but there absolutely is a space for people to make money by adding value to properties. There are a lot of rich and lazy people in real estate, which means a lot of mismanagement, and there’s meat on the bone for people who want to get scrappy and improve things. Get creative and hustle, and don’t run out of cash.

Three Key Takeaways

  1. Take what the market gives you, don’t get pigeonholed into one niche if it’s not longer your best option
  2. Balancing aggression and patience is key to maintaining long-term business health while still pleasing stakeholders
  3. There’s tremendous opportunity in real estate for both core and value-add investors

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About Me

I started the Sweaty Startup in December of 2018 because I believe the Shark Tank and Tech Crunch culture is ruining the real spirit of low-risk entrepreneurship.