Stuart Gethner is the president of Gethner Education & Consulting, which finds, funds, and manages off-market properties with double-digit returns for investors. In this episode, Stuart discusses his business plan for value-add multifamily properties with the goal of creating long term wealth for his investors. He also shares his subject-to financing strategy and why cash-on-cash is always the focus of his deals.
Stuart Gethner | Real Estate Background
- President of Gethner Education & Consulting
- Portfolio:
- 80+ multifamily & manufactured housing units
- Based in: Scottsdale, AZ
- Say hi to him at:
- Best Ever Book: Illusions: The Adventures of a Reluctant Messiah by Richard Bach
- Greatest Lesson: When you go into business with someone, it’s like you’re getting married. Do your due diligence and really get to know your partners.
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TRANSCRIPT
Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed, and today I'm here with Stuart Gethner. Stuart's joining us from Scottsdale, Arizona. He's the president of Gethner Education and Consulting, which finds funds and manages off market properties with double-digit returns for investors. Current portfolio includes just over 80 multifamily and manufactured housing units. Stuart, can you tell us a little bit more about your background and what you're currently focused on?
Stuart Gethner: So my background, believe it or not, Slocomb is I'm a pharmacist. I used to own pharmacies here. In fact, my dad was a pharmacist, my uncle Max was a pharmacist... And the sad truth is I couldn't make it in Major League Baseball. So I decided to give real estate investing and try. It's always something I wanted to do, so from pharmacy, I migrated to investing in real estate, and my current focus is continuing to create wealth by buying and holding property, and creating cash flow.
I've done wholesale, I've done fix and flip... I've pretty much done everything in real estate, other than development, and I find that to create long-term wealth really, for me, is getting good cash-flowing properties. It doesn't matter if it's SFRs, condos, townhomes, duplexes, whatever they look like. At this point, we've scaled to multifamily, but creating wealth really is buying and holding.
Slocomb Reed: Building wealth comes from cash flow. That's something of course that I resonate with. That's one of my guiding principles for investing. I do want to come back to that in just a moment. 80+ multifamily and manufactured housing units. Find, fund and manage off market properties. Are you raising capital for these deals?
Stuart Gethner: Absolutely. Back in the day, I used to do fix and flips. I remember one time we did a fix and flip with a partner, and it was a high end fix and flip, and we made about $180,000, believe it or not. And my partner got 90k, and I got 90k. That sounds like a lot of money, until you pay down the Home Depot bill, pay off some credit card debt, buy yourself a pizza and beer... And at some point in time, believe it or not, whether it's a week, a month, a year, that $90,000 is gone. And I've learned to really scale in this business; if you want to be able to have partnerships, joint ventures with other people, everybody brings something to the table, and for me, what my people bring to the table are investors, and they bring capital.
Slocomb Reed: Tell us more about your business plans, Stuart. It sounds like you hold for the long-term. What type of properties do you target currently, and then what is your business plan with each of those acquisitions?
Stuart Gethner: Great question, Slocomb. Really, for us, what we target is - we have a name for them, we call them whales. We want to buy property from a seller, off market, that has a portfolio, more than one property. They're usually a little older, 60, 70, even older; they've maintained the property themselves, and over the past few years maybe they haven't done such a great job maintaining, and they haven't done a great job raising rents to market rents, and the tenants probably aren't calling for the leaky faucet, because if the landlord comes out, he's probably going to want to raise rents. So we got a little deferred maintenance on one side, we've got some undervalued property on the other... Those are perfect for us, that's my target audience, and we take those.
And I always use this example for my investors - somebody probably signed a lease on those units yesterday. So I have to honor that lease and wait 12 months before I can get in there and change out the [00:05:14.17] elongated toilets, update the flooring, update the countertops, whatever that looks like; bring value to the marketplace.
So our focus really is cashflow, long-term wealth... And I will say this to my investors as well - when they give us capital, we do a capital raise, I tell them it's a 3, 5, 7-year hold. Don't call me next month and tell me you need money for your kid's braces or college tuition. However, if someone should come around and offer us a stupid amount of money, we're going to have a conversation.
Slocomb Reed: I resonate with that a lot, Stuart. I've bought properties like that from a lot of those, owners where the tenants know that they have a well below market rent, so they really don't want to alert the landlord to anything other than the fact that they pay on time... I have acquired some of those, and I resonate as well - we're recording in early May 2023, and in July I bought a building with a partner where we had a really difficult tenant whose lease wasn't up until the end of this past April... And of course, they weren't out by April 30th. I just met them at the property yesterday to complete the willful set out; no bailiff involved, but to complete the willful set out for that tenant that we wanted to get rid of back in July of last year, but they were on that lease. Stuart, are you familiar with the BRRRR strategy?
Stuart Gethner: Sure. I'm familiar with the BRRRR strategy. And I always give this example - if you were gonna go to my house from here, you could go to my house many different ways. You could go to my house through the highway, local, a roundabout way... So certainly, there's more than one way to create wealth. The BRRRR strategy is one exactly perfect way.
One of my clients that I do a fair amount of consulting with, people who want to start or scale their business - one of my clients' name is Forrest. He likes to not just do the BRRRR strategy, but when he buys something, no matter how uncomfortable it is at the time, he'll move into it. So each day, he's there, working on it, developing it, and then when it sells, as he's getting ready to sell, he finds the next project that he's going to work on.
So certainly there's a variety of strategies we can do. That's what I love about this business, if you will; there is not one strategy or one way to do things. You don't have to be a wholesaler, or a fix and flipper, or a buy and hold guy or gal. It's not this or that. You can do this and that. So there's tremendous opportunities out there in real estate, and I know you know this, Slocomb, but there's an old expression, "There are two times in life to be buying real estate. The first time was 20 years ago. The second time is today."
Slocomb Reed: I believe that comes from a Chinese proverb about planting trees. Stuart, tell us more about the returns that you are offering investors. I want to get back to the notion of wealth building through real estate, have a conversation there. But in your bio, I said "Offering investors double-digit returns." Is that exclusively based on cash flow? And if so, what does that distribution of cash flows look like between you and your investors?
Stuart Gethner: Great question, and I'm happy to share. So I'm sure the listeners are familiar with the concept of the cap rate. And the cap rate is NOI divided by purchase price. So we use the cap rate -- we don't take into consideration the liens or loans or mortgages on the property, because the cap rate is an equation to be able for us as general investors to compare one investment from another. So be able to compare a real estate investment to investing in crypto, or the stock market, or the bond market, or precious metals, or in oil and gas. Or, or, or. But the realistic point of view, for us as I've worked with our investors, is we look for cash on cash return. And that's where we're talking about double digits. So for us, we tell our investors, just like I mentioned a moment ago, there may not be distributions in the first 6 to 12 months, because we have to honor leases that may have been signed yesterday. So you always want to under-promise and over-deliver. So if they do get distributions this year, they love me even more. But the fact of the matter is all our investors get monthly financial statements from our accounting department. All our investors have access to our bank account. And by the way, I'm not really a big fan of banks, so don't get me started... But we bank at Chase Bank, and Chase allows me to give you access to our account with limited function. So I can give you access to our investment account, but you can't make withdrawals, you can't wire out money.
Slocomb Reed: View-only access, I believe is what that's called.
Stuart Gethner: Yeah, thank you so much. So view-only access, and they can compare it with a monthly statements to make sure that their investment is sound, and that there's no Hanky Panky. Full transparency. And then we do quarterly distributions. So we give our accounting department to the 15th of the month to reconcile last month's bank statement. So February 15th, January's is due. March 15th, February's is due. But after April 15th, March is the end of the quarter, so we give them an extra week to the 22nd, to give out the quarterly distributions. And then I'll have a Zoom meeting with my investors, and we'll go over what's going on. We'll go over -- as we work with our clients, we talk about this all the time; you look in the rearview mirror, just like you would driving your car, just to see what's going on, and then we focus on what's next. We focus on the future. How do rents look, how does the outlook look, what capital improvements do we need to make? What capital improvements do we want to make to bring value, to be able to increase rents? Meetings - probably the last 15 to 30 minutes tops. I can honestly tell you, not every investor shows up. They just want to know if their check is in the mail, or if we've direct-deposited their check. But I believe in full transparency when we work with our investors, because I always think like this - what happens if I get hit by a bus or struck by lightning? What happens then? So for them, they know that their investment is secured by real estate, they know that they're still going to get the monthly financial statements from the accounting department, they still have access, view-only, to the bank statements... So they're protected. That's the most important things investors want to know, is "Am I protected? What happens if...?
Slocomb Reed: Stuart, tell us about your ownership structure between you and your investors. It sounds like currently distributing double digit cash flows on an annualized basis, cash on cash return - what does that ownership structure look like? What is it that you're getting in the deal?
Stuart Gethner: Probably before I answered the last question, I should have said this - past performance is no guarantee of future results. So there's the disclaimer; don't invest with me. I have no idea what I'm talking about. Okay. Now with that said, what we do is - I have not raised a fund. I have success with -- Slocomb, you have an LLC, your company is an LLC. I have an LLC. You and I will form a company together with our LLCs as shareholders...
Slocomb Reed: Joint venture. Yeah.
Stuart Gethner: And you'll put in capital, I'll put in capital, whatever that looks like. Everybody brings something to the table. I'll give you an example. I own some property out here in our Valley, I'm in the Phoenix Scottsdale area, with a gentleman named Art and a gal named Tamara. Art is a general contractor. Tamara is a bookkeeper. I'm doing the property management. I own a company that does property management. So when the tenant calls or goes on the platform and says, "I've got a leaky faucet. Oh, the window broke. Oh, the air conditioning is not working." I put in a phone call into Art, my business partner. Art's a general contractor. He's not going to get to it a week from Thursday, he's going to get to a right away. He'll probably hit it on the way home. Why is he going to do that? That's because he owns the property too, and it's just as valuable to him as it is to me. And then Tamara is our bookkeeper, and she, like I said, she'll do monthly statements, as well as quarterly distributions. And why is she on top of it? Because it's her business, and it's her property, too. So we have very successful joint ventures. Everybody brings something to the table. Even if you don't have money; not having money, in my opinion, is just an excuse to not be involved... Because money goes in cycles. Like I mentioned on my fix and flip; I came in at 90 grand, and a little while later was gone, and I still want to be in real estate investing.
So scaling and working with other people's money - you may have the time, you may have other skill sets, flooring, dry walling, whatever that may be. Roofing... Everybody brings something to the table, and that's what creates not just a successful partnership, joint venture or strategic alliance, but also I'll add the caveat to that - we all leave our egos at the door. This isn't about me being right, this is about us making money. So we all want to have the opportunity to express our opinion, we weigh each other's opinion, and then we do what we think is best for the company.
Break: [00:13:47.17]
Slocomb Reed: Stuart, when did you get into multifamily investing?
Stuart Gethner: I started, believe it or not, in manufactured homes. People call them trailers, right? But when you're in the business, we call them manufactured homes. And probably those built before 1977 were probably trailers, where you could hook them up to the back of your truck and move on down the road. So I started with manufactured homes, I learned all about pads, I learned all about two by six, two by four construction... We did a nice job.
From there, I started to get into single family residences, condos, townhomes and such. And this was back - 1997-1998, in that neighborhood, and the challenge leaving in the Phoenix area is you could get to anywhere in about 20 minutes. So in about 20 minutes, I could go North, 20 minutes I could hit a property South, East, West, whatever that looked like. Then our Valley began to grow. We're now the fifth largest city in the United States. We've surpassed Philadelphia. Now it takes me 20 minutes just to get to the freeway. So what I learned was driving all over back in the old days took me just a few minutes to get between properties. So being able to have multiple doors under one roof, that is for example a multifamily, became appealing to me. So about six, seven years ago we've started doing joint ventures on our five units or more, five up to 20, and now we've been able to scale, we've been able to 1031, we've been able to grow our business... And I still have many of those SFRs that I started with back then, but for the most part for me -- and here's another piece of that makes it a little bit easier as an investor/landlord. And that is if the water heater breaks in one unit, the odds are some other water heater's probably getting old, too. So the ability to scale and purchase - instead of buying one water heater, you could buy 2, 5, 7 whatever that is, your price, your cost of goods goes down. So that appealed to me, so that's what we've been doing ever since then. And not just in the Phoenix marketplace, or in the Cincinnati area. I'm looking at the Florida area... There's opportunity everywhere, and I'm sure your listeners can appreciate this - there's no emotion attached. I don't love it. It's about the math.
Slocomb Reed: Stuart, have you acquired anything in the Cincinnati area yet?
Stuart Gethner: Yeah, we've just tied up 16 units, subject-to, in Cincinnati, in Norwood.
Slocomb Reed: In Norwood. Nice.
Stuart Gethner: Thanks.
Slocomb Reed: I'm here in Cincinnati, and as an apartment operator I'm very familiar with Norwood. What's the plan with that 16 unit? You said you just tied it up, so you haven't gotten through due diligence yet. But what's the plan there?
Stuart Gethner: I'll be out there in a couple of weeks. So why don't we say hello to each other?
Slocomb Reed: We should.
Stuart Gethner: Three are on Grant, and one is on Flower. So you maybe know those streets. So the plan is they're buy and holds. And I learned a lesson many years ago, Slocomb... I bought a condo conversion in Las Vegas. And you figure, Phoenix and Las Vegas, they're pretty close to each other. But honestly, the property manager that I hired must have had a brother in law that was an out of work plumber, because every other month I'm getting a bill - 180 bucks, leaky faucet; 300 dollars, broken toilet. "Oh, there's mold in this unit, we've got to open up these walls." I just couldn't drive down the street to just double-check that I'm not getting ripped off. And I believe I got ripped off.
So in order for me to invest outside of my neighborhood, my state, if you will, I need a business partner, a joint venture, who I have boots on the ground. I can contribute the property management with platforms like today, like Appfolio, and RentFind, and such. You can property-manage from anywhere. But I want to make sure that the faucet really is leaking, and the plumber really does come out, and the plumber does a nice job before I pay his bill. So the goal is to create more opportunity, create more cash flow... And the only reason I picked Cincinnati - and it's ironic that you're there - my lovely bride's from Dayton. So we had family in Dayton. I have [unintelligible 00:19:37.26] going on 11 years, and I've been asked her family members, "The price point here is a lot better than Phoenix. Would you like to invest with me?" Finally, about a year ago, a young man named Ryan, in his late 30s, early 40s, civil engineer, married with a couple of kids, done some remodeling to his home... He reached out and said "I hear you're looking for a business partner in the Cincinnati area. I'd be interested." So we've been working together for almost a year, and finally tied one down.
Now, at the end of the day, are we looking for needles in a haystack? Yeah, we're looking for needles in a haystack. But guess what - you keep searching for needles in a haystack, seek and you shall find... But you've got to seek, and we've
found.
Slocomb Reed: Stuart, this is a predominantly commercial real estate investing podcast, and while we have a sophisticated listener base, our listener base is most familiar with deal structures that are not like the ones you're discussing now, and some of the ones that I've done. I've done a sub-to deal in Norwood, as a matter of fact, pre COVID. But explain to us a little bit more about -- you said you do have this under contract already?
Stuart Gethner: Yeah, we do.
Slocomb Reed: I'm not going to ask for addresses or specifics necessarily, but tell us about the subject-to component of this transaction. What does that mean?
Stuart Gethner: Sure. So I have worked very hard over the past X number of years to make sure that I have pristine credit. I've worked over the last number of years to make sure I have good relationships with lenders. Whether we like them or not, they're necessary evils, in my opinion. So there was always an opportunity from an investment standpoint. And I don't know if your listeners know this, but 1/3 of all properties in the United States are owned free and clear. And many of those properties are owned by investors. And as investors get older -- in fact, I have a guy that's in the Cincinnati area, happy to share with you... He owns 87 properties free and clear. And he said to me, "If I sell them, I'm gonna get hammered on taxes. And if I got the money, I'm probably gonna go invest in real estate anyway, because that's what I know. So at this stage of my life, I'd rather loan than own." So from that perspective, that would be a seller financing deal. Subject-to is a short for the expression "Subject to the existing financing." I teach a class on this, and this is how I explain it in class.
When we buy a property, we have what people call a mortgage, but it's really a deed of trust. We have the deed of trust or the mortgage, and we have the deed, and they get married. When you do a subject-to deal, they get divorced. The deed transfers to the other person, but the loan stays in the seller's name. So you would think to yourself, "Why on earth would anybody do that? Why would anybody want to deed a property to someone else?" In fact, most lenders have in their mortgage, in their Deed of Trust, a clause called the "Due on sale clause, the alienation clause, the acceleration clause." They all mean the same thing. And pretty much they said "Slocomb qualified for the loan. Slocomb gave us his tax returns, his W-2s, his pay stubs, his bank statements, his blood samples, his urine sample, a stool sample. He passed all our inspection. We gave the loan to Slocomb. Slocomb, if you don't want the property anymore, if you're gonna transfer it, sell it, or just abandon it, the lender says "We would just like our money. We gave you, Slocomb, the money. We'd like our money."
Slocomb Reed: Stuart, a couple of things there from my experience, sub-to... The first is when we did it, we just made the payments, we just mailed the check to the lender the same way that the original borrower had... And the lender never batted an eye, because they were getting paid, and they were getting paid on time every month. Speaking from my experience, doing a subject-to deal in Norwood, the reason why they wanted to go subject-to with us was because they would make more money. They were willing to trust us that over the period of three years that we would need in order to honor the lease as the seller had gotten themselves into before vacating the property, what we were willing to give them in three years after we were able to reposition will be significantly greater than what we'd be willing to give them up front, needing to inherit some difficult tenants and keep them in place for three years. So there are a handful of reasons why that makes sense.
Stuart Gethner: Well, you mentioned right up front, there has to be an element of trust. There has to be an element of trust, because if you don't make the payments, Slocomb, what happens to Slocomb's comes credit?
Slocomb Reed: It plunges.
Stuart Gethner: Nothing happens to Slocomb's credit, because the deed--
Slocomb Reed: Oh, yeah. Right. Sorry. The borrower's credit. The original borrower's credit.
Stuart Gethner: Yeah, the seller's credit. So there has to be an element of trust between the seller and us, and the seller and the listener, in order for them to get the divorce, put the deed in my name, and leave the loan in their name. So you're spot on. We do the same thing. Although back in the old days, they used to give people a coupon book to make payments with; now everything's done online. So we just do - just like you do; we just make the payments, the same way the seller does. And for the most part, banks have sold the loan. They sold the loan to a servicing company like [unintelligible 00:24:35.11] or Mr. Cooper, or someone, so that they can get the funds back and the lenders can make more money off loaning the money. So you're spot on with that answer.
Slocomb Reed: Stuart, are you ready for the Best Ever Lightning Round?
Stuart Gethner: Sure.
Slocomb Reed: What is the Best Ever book you recently read?
Stuart Gethner: The Best Ever book obviously is called "The adventures of a reluctant Messiah", written by Richard Bach. He wrote a book called [unintelligible 00:24:58.19] That kind of put him on the map. But for me, "The adventures of a reluctant Messiah" really hit home, and has helped change my life.
Slocomb Reed: What is your Best Ever way to give back?
Stuart Gethner: And by the way, when you hear the word Messiah, it's not a religious book. So don't think that that's that at all.
Slocomb Reed: Gotcha.
Stuart Gethner: So the best way for me to give back - I love teaching. I love educating. That's why I have my consulting business. I've taught for 15 years for our local REIA. I've 12 online classes for the National REIA. I've been fortunate to be picked up by Forbes, put on the Real Estate Council. I've written articles for Forbes Magazine. Educating. So I do that by helping people achieve to start and scale and grow their real estate business. That's how I give back.
Slocomb Reed: Stuart, thus far in your real estate investing career, what is the biggest mistake you've made, and the Best Ever lesson that resulted from it?
Stuart Gethner: Well, Lord knows, I've made plenty mistakes. So I would say the biggest mistake I ever made was not doing my due diligence when investing with other partners or joint ventures. And that's why I wrote a class on it. And my experience has been - when you go into business with someone, it's almost like you're getting married. And most people I've seen, as they start to grow or scale, they'll go to McDonald's, or go to Denny's and they'll have a cup of coffee with each other, and they'll go "I'm interested in this business." "Oh, I'm interested in the same business", and they'll laugh at each other's jokes, and before you know it, they're going into business together. And you wouldn't do that to get married. So I've made the mistake of doing that, learned the hard way, that - just because someone's friendly, and we seem to have a lot in common, does not mean we'd be good business partners.
Slocomb Reed: I've had similar experiences, as well. On that note, what is your Best Ever advice?
Stuart Gethner: I'll give you a quick story, but it's a true story. There was a study done in the '50s, I believe it was by Harvard University, and they interviewed all the people of the day - the Fords, the Rockefellers, the presidents, Martin Luther King, Mother Theresa, and they said to them, what would be the best advice? What would you recommend to people? And most said, "I wish I would have started sooner." So everyone thought that would have been the advice. However, Dr. King and Mother Teresa, who I'm sure we all know, they both had the same, but different answer. And that's what I'd like to pass on. I think it's just amazing. Their advice was, "Think bigger." If you take a look at Dr. King, you take a look at Mother Teresa and the lives that they touched, you'd say to yourself, "How could these people even start to think bigger, because they've touched so many people all over the world?"
So for me, thinking bigger, and getting my mindset, my mind shift in a better place so that I can continue to scale and grow... Because really, that's all that stops us. There's so much opportunity out there. What only stops us is our mindset.
Slocomb Reed: Where can people get in touch with you?
Stuart Gethner: I would love it. You see, we're not a very big company. We run pretty thin. And we're very efficient. My website, I'm sure you'll put it in the show notes - [unintelligible 00:27:50.03] Here's my phone number: 4044345004804434500. And I know in the show notes you'll put my email address... But I'm always looking for more partnerships and joint ventures and opportunities. And if I could give a pearl of wisdom and advice to someone now and then, it'd be my pleasure. I appreciate that opportunity, Slocomb. Thank you for that.
Slocomb Reed: Quick point. I believe the website we have is StuartGethner.com.
Stuart Gethner: It works, too.
Slocomb Reed: Great. That link and the other links are in the show notes. Stuart, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show. Leave us a five star review and share this episode with a friend you know we can add value to through our conversation today. Thank you, and have a Best Ever day.
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