Best Ever Tweet:
Heath Silverman Real Estate Background:
- Part-time real estate investor and full-time technology entrepreneur
- Actively maintains a portfolio of 10 multifamily buildings comprised of over 60 units across the US
- Co-founder and CEO of Stessa, a software platform that lets property owners track, manage and communicate the performance of their investments
- Based in San Francisco, CA
- Say hi to him at https://www.stessa.com/
- Best Ever Book: All You Zombies
Sponsored by Stessa – The simple way to track rental property performance. Get dashboard reporting, smarter income and expense tracking and tax-ready financials. Get your free account at stessa.com/bestever
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, Heath Silverman. How are you doing, Heath?
Heath Silverman: Fantastic. Excited to be here.
Joe Fairless: Well, I am excited to have you on the show as well. A little bit about Heath – he is a part-time real estate investor and full-time technology entrepreneur. He actively manages a portfolio of ten multifamily buildings comprised of over 60 units across the US. He is the co-founder and CEO of today’s sponsor, which is Stessa. And Stessa, as you know, Best Ever listeners, is a software platform that lets property owners track, manage and communicate the performance of their investments. Based in San Francisco, California. With that being said, Heath, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Heath Silverman: Definitely. I’ve been working in tech for 20 years, investing in real estate for almost as long. My first property purchase was actually a single-family home that I bought back in 2001 to live in, but I ended up house-hacking. I got a few roommates while I was fixing the thing up, and I got totally addicted to the supplemental income, coupled with that potential for appreciation. I tried doing a number of deals in the years after 2001, made a number of offers, nothing really penciled out, but post-financial crisis I saw a huge opportunity and I really doubled down on real estate in a big way.
I started buying distressed properties, primarily in the SF Bay Area, and these days I would say I do around 1-2 deals a year, and I still get that rush, that combination of both excitement, and also that little bit of fear that comes with every new acquisition.
At the end of 2016 I combined my passion for real estate with technology and I founded Stessa.
Joe Fairless: And what is Stessa?
Heath Silverman: I’ll jump right into it, yeah. As you said, Stessa enables real estate investors to track, manage and communicate the performance of their real estate assets. I spoke to hundreds of investors when we were starting out with Stessa, and I learned that most still manage everything on an often out-of-date spreadsheet, sales spreadsheet or Google Doc. And while it’s great to have a basic system in place, they honestly have no idea whether they’ve made or lost money except one time a year, when they get their returns from their accountant. Stessa really solves all of this by enabling investors to really track their investments with intuitive reporting dashboards. They can manage their income and expenses with their iOS app using our machine learning-powered receipt scanner, and they can also communicate the performance of their properties with investment partners through portfolio collaboration tools.
Joe Fairless: I wanna talk both about your investing experience and stories, especially given that you started investing after the crash… So I wanna talk about that and the timing of it. And then also I wanted to learn more about your software platform.
On the Stessa note – what’s the difference between having a bookkeeper provide you with a spreadsheet of the P&L statement and what you all provide?
Heath Silverman: Most of our users and our primary focus is what I call kind of the long tail of investors – people who have two to maybe ten buildings under management. Many of them don’t have a bookkeeper today. Many of them are managing things on their own; as I said, they have this shoebox of receipts, everything is in a spreadsheet… It’s just a big stack of paperwork, and at the end of the year they kind of dump it on their accountant. Now, maybe they go through it all, spend a very painful weekend or even a week preparing for taxes… So we’re really there to automate things in real time, and give them a clear picture into how their investments are performing.
Joe Fairless: How big or small has the challenge been to convert people who are currently keeping their receipts in shoeboxes to being on a software platform to do that?
Heath Silverman: That’s a good question. It’s funny, because we always say that our main competitor today is spreadsheets and inertia… [laughter] Yeah, I mean — basically, people have this system and they’re like “This is my system, this is how things work”, but the reality is that when you go into the tool and you see in real-time how your investments are performing, and we can draw insights to inform decisions, through analytics and notifications we help investors monitor the rental properties, so they know when to make those high-impact changes, like improving operational costs, raising rents, or even making big acquisition and disposition decisions… When people see that, they get excited.
And of course, did I mention it’s free? There is no cost to get started, the service is fully free for everything I’ve mentioned, and we intend to keep it that way.
Joe Fairless: And how do you make money?
Heath Silverman: Today we focus primarily on the free platform; we’re in an interesting place – we actually were acquired by JLL Spark at the beginning of this year. Prior to that we were focused on mid-market investors going after a bookkeeping solution with a premium SaaS product. And then post-acquisition, now that we’re backed by these incredible resources of JLL, and also their real estate expertise, we have the ability to make the product free.
Long-term we hope to add some value-added services for all these investors. We have some ideas, there’s some premium things that we can build on top of it, but the core functionality that we offer today is and will always be free.
Joe Fairless: What has been a decision that you’ve made with your portfolio that has had a high impact on your business, as a result of seeing it on your platform where it was aggregated?
Heath Silverman: I think with that question I’ll jump right into the origin story, because it’s a pretty interesting one. Back in 2016 my co-founder Jonah Schwartz and I – we knew we were starting a new business, and we started off by contemplating a number of big ideas around the future of work… Crazy stuff that we were white-boarding in my attic. And we kept on getting totally distracted by our real estate portfolio. We had a number of properties that we’d had on auto-pilot, and we did a deep-dive into one of our multifamily buildings that really the past couple of years we had done very little. In just a couple of weeks we ended up nearly doubling the value of the building, through a combination of operational efficiencies, and also bringing some rents to market.
This added real value, and when I say real value – we took the new numbers to the bank, we did a cash-out refi and we took that real money and purchased a new property to grow our portfolio. So we were shocked by how much value we were able to create in such a short amount of time, and had three big takeaways. One, as real estate investors we should be applying these learnings we had to our entire portfolio. Two, as tech product people we could build software to automate nearly everything that we just did… And three, as entrepreneurs, there was a huge opportunity in this space to build a company around a technology solution that we could make available to the millions of investors just like us, who used little more than a spreadsheet to manage their portfolios.
So now with Stessa on a day-to-day basis it’s automating a lot of what many people are doing manually, saving them time and creating them value by providing those real-time insights.
Joe Fairless: You bought your first place to live in 2001, but you ended up house-hacking… You made offers from 2001 to up until the financial crisis, did not buy anything, and then after the financial crisis you started buying distressed properties in the San Francisco Bay Area. What year – and if you remember, what month – did you buy your second property?
Heath Silverman: I believe it was August 2009.
Joe Fairless: Wow! I mean, you were — maybe not even post financial crisis. You were on the tail end of it, I guess.
Heath Silverman: Yeah…
Joe Fairless: So what gave you the confidence to buy it, and then tell us the numbers, please.
Heath Silverman: Yeah. So I actually bought three properties, all right around the same time. Two were with some partners, we all put in some money and created an LLC called S3 and we started buying up properties in the East Bay, just outside of San Francisco, cities like Suisun and Oakley. And I think what gave us the confidence on those buildings in particular was that at that time – this is before I got into multifamily – single-family was something that I had a lot of experience in, so I’d already done the whole house-hacking thing, I had a home that I lived in for a number of years, and fixed things up, I kind of knew what everything should cost…
And then two, just looking at the numbers, these are houses that had sold for $450,000 back in 2006-2007, and these are in neighborhoods where it was kind of crazy post financial crisis; many people had lost their homes, they were all in foreclosure, and you could pick them up direct from the bank for 90k. Sometimes they didn’t have doors, and the windows were busted, and they were definitely distressed properties, but with just a little bit of fixing them up we were able to then rent them out for $1,400-$1,500 a month. So the numbers penciled. We were cash-flowing from day one, and we were super-excited.
From there, I kept on learning more about the trade, I got some mentors, had people help out, and ended up eventually 1031-ing the single-family homes into multifamily buildings closer to where I live in San Francisco, so places like Berkeley and Oakland, and just kept on expanding from there.
Joe Fairless: With workforce housing, what have you learned through that experience, and what’s that been like?
Heath Silverman: I love it, I love multifamily. This was still classified as a residential property, because it was four units.
Joe Fairless: Did you buy the four-unit, or did you buy it as a three-unit and you added the fourth?
Heath Silverman: I bought it as a three, and I’m finishing up in the process of constructing the fourth.
Joe Fairless: Okay, got it.
Heath Silverman: And it’s interesting – the whole area has been rezoned by the city, because in San Francisco there’s definitely a housing crisis in terms of supply and availability and all of that… But when it comes to workforce housing, I’ve definitely used that as my strategy when evaluating and purchasing multifamily properties, whether it’s in Berkeley, Oakland, certain other parts of San Francisco, or even my most recent purchase now that was in Chicago, which was a 1031 exchange from a building that I sold over in Oakland. That purchase was my first experience stepping into buying something out of state. With that building in particular – 16-unit building, just over two million dollars, in Rogers Park, which is an area that I know pretty well, because my sister’s husband grew up there, and my dad actually lived there way back in the day when it was a very different neighborhood. But again, short distance outside of the city, housing you can buy below replacement cost, and right next to transportation that can get you downtown quickly.
Joe Fairless: Are those three things that you always look for?
Heath Silverman: Yes.
Joe Fairless: Below replacement cost, right outside of the city, and public transportation.
Heath Silverman: Yes. And I should also add that I very much focus on distressed properties. And when I say distressed, it’s usually either they’re financially distressed in some way, there’s sort of a difficult kind of situation that maybe the owner doesn’t wanna deal with, or there’s a lot of deferred maintenance, where you just have to go in and get some significant work done in a short amount of time.
Joe Fairless: You live in San Francisco, you’ve got – I imagine – your plate full with Stessa, as well as wherever else your time goes… This property that you just purchased is in Chicago, and you just said that you buy distressed properties, or distressed owners, or some sort of distressed situation, so how do you plan on overseeing the successful execution of the business plan being remote?
Heath Silverman: That is a great question. These days I have property managers for everything, for all my properties. In the early days I tried managing myself, it was great for learning the ropes and kind of understanding everything, but now I’m very reliant on the property manager, I do a lot of due diligence on finding the right one [unintelligible [00:14:20].16] recommendations, and that can really handle all of the day-to-day operations.
Then I have Stessa, of course, that’s processing all the financials, helping me to better understand what I should be getting in terms of rents, and getting those regular insights… Things like if a water bill suddenly spikes, I can get those notifications and then check back in with the property management to make sure I am able to stay on top of things without spending too much time on the day-to-day management, or having to really dig in too deep into all the details.
Joe Fairless: That’s huge. That’s a big deal, because 99 out of 100 property managers would not proactive enough to let the owner know if a water bill is spiking, or they might not even have access to know that, depending on how the bills are set up. That’s a big deal.
Heath Silverman: And I didn’t really go into the details of a building where I doubled the value back in 2016, that was the inspiration for Stessa… The things that we really looked at – it was a combination of raising the rent… I bring up the water bill, because that was one of the things that we noticed in the analysis, that the water bill had gone up dramatically, and had been that way for almost four months, and just nobody had ever noticed.
Joe Fairless: What was the reason for it?
Heath Silverman: There was a water leak…
Joe Fairless: D’oh… [laughs]
Heath Silverman: Yeah. Not only did we end up saving a lot of money on it, but we increased the value of the building as a multifamily property. We got the NOI up by bringing the operational costs down, and we saved potential ongoing damage to the building. Who knows, if you have a water leak going for a year or so, what could have happened. And at that time, if you’re looking at the NOI [unintelligible [00:15:52].25] it was around 2015… And this is also the Bay Area, so things were trading at a 4-cap back then. $333/month (around that) that we could save translated into about $100,000 in real value in the building. [unintelligible [00:16:08].00] like “Oh, we can change property managers and get their take down by 1%”, and then “Oh, the water leak” – that was kind of ridiculous; I think we ended up saving like $500/month just on that alone.
Joe Fairless: Wow.
Heath Silverman: And then we found a number of areas, especially on the income side with rents, where there were some interesting opportunities to get them up to market… Which is often somewhat tricky in rent-controlled areas like Oakland.
Joe Fairless: Please elaborate.
Heath Silverman: Most of the deals that I’ve done in the Bay Area, because they’re older housing stock and because they’re in Oakland, Berkeley and San Francisco, they all have rent-controlled tenants, and I think a lot of Best Ever listeners are probably very familiar with rent control… Basically, the amount that you’re allowed to raise the rents is dictated by certain city rent control guidelines.
In Chicago we were able to basically see, “Hey, all the rents in this building are probably 20% under market. We can go in and renovate the units, bring the rents up to market”, and we can either choose to stay or leave, but there’s no issues with just turning things around really quickly out here. It’s a much more delicate situation.
Joe Fairless: Based on your experience as a real estate investor, and also being really focused on the technology aspect of real estate, what is your best real estate investing advice ever?
Heath Silverman: There’s a common theme out there that everybody often kind of repeats around holding real estate forever, and that it’s this incredibly passive investment. This type of advice is especially true when talking to investors who focus on residential rentals, with long-term renters.
My advice is that you really need to make it a consistent practice to continuously optimize… And me personally, whenever I’ve maximized the value and I no longer see significant upside, I move on to the next building.
Joe Fairless: Yeah. That’s why I love your platform, because — I think I mentioned it in the ad that I recorded… I’ve got three single-family homes; they make me $100/month total, for the whole year; it’s just ridiculous… Although they should make money, I have someone move out and then I have to pay for repair costs, and turnover costs, so I basically breakeven on the three homes. But I have about $350,000 in equity that’s essentially trapped — well, it is trapped; not essentially. It is, it’s trapped there, because I bought the homes at a good price relative to where the market is at now and what they’re worth…
So having something like Stessa, where I can say “Okay, wait a second… What’s going on here? I need to really maximize my portfolio”, and now I learned about it a little bit too late, so I regret that, because all my residents are on 12-month leases, so I can only sell to an investor right now. But what I’m doing as a result of what you’ve just said, and learned more about your company, is when the residents in each of those three homes – their lease expires, then we aren’t gonna renew it and we’re gonna either sell to them, or sell to someone who is gonna move in and live there, and I’ll be able to recapture that equity that is just trapped there, instead of making $100/month, to actually get $350,000 and then I can go invest that.
Heath Silverman: That is awesome, and that is the way to do it. Find a new property where there’s tremendous value-add opportunity, and then you continually create more value.
In the last six years I think I’ve done one 1031 exchange each year. Of the one or two deals I do, at least one of them is always an exchange into something bigger. Basically, I get to the point where I’ve done the analysis – more recently Stessa is giving me that analysis – where I’m like “Yeah, I don’t see that much more upside. Let me get into another newer distressed building, ideally workforce housing, where I see more significant upside.” It’s crazy if you just keep on climbing the ladder and getting to a bigger and bigger building. It’s amazing.
Joe Fairless: Yeah, real estate is truly the backbone of how to scale. There’s two ways. One, you buy a property, you hold on to it and you just get lucky that the market appreciates – and you’re in a good spot in San Francisco, at least recently, where that has happened, and you bought at the right time. Or two, what you do is buy something that is distressed and then add the value, so you’re forcing the appreciation, and there’s not as much luck involved, although there’s always some when dealing with real estate and people… But it’s more of a proven process.
We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Heath Silverman: I’m ready.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Break: [00:20:43].21] to [00:22:00].04]
Joe Fairless: Okay, best ever book you’ve recently read?
Heath Silverman: I normally like to share business books or real estate books I’m reading, but if we’re talking about the best ever books, then I’ll call out this one — it’s actually a story that I’ve shared endlessly throughout my life, and when people ask me for something provocative to read. So if you haven’t read it, check out “All You Zombies.” It’s a sci-fi short story by Robert Heinlein, from the fifties, and it’s a story that I read as a kid, and it’s the one that got me addicted to science fiction.
It’s incredibly short, like ten pages, and you can blow right through it… It deals with time travel, questions around existence and causality, and it’s quite dark and it’s a bit of a mind-screw… It was my sci-fi gateway drug, and it led me to discover many other greats in the space, and kind of set the stage for me to always be thinking about technology and implications on our future.
Joe Fairless: *cough* nerd alert *cough* Sorry about that. [laughs] I’m looking it up right now and I will check that out. That sounds like fun, and I know one of my brothers will certainly enjoy that, too; I’ll tell him about it.
What’s the best ever deal you’ve done?
Heath Silverman: The best ever deal I did was a real estate deal where I tripled the value of a building in just over a year, thanks to — I’ll call it insider information. And yes, I realize it’s ridiculous that real estate is the only asset class where insider information, or really the level of information asymmetry I’m about to talk about is allowed… But let me just tell you the story.
This particular building – it was a 5,000 square foot fourplex in San Francisco, in the Mission. It had sold for nearly 1.7 million back in 2006, and then the crisis hit. So the owner tried to sell it shortly after, but they were unable to unload the building, and it eventually went into foreclosure. Once the bank had the property, the building was just ignored for a long while, with no consistent management, and the property itself became seriously distressed from both a maintenance and a tenant perspective.
The end result is I was able to pick it up with a partner in 2012, in foreclosure for less than half of its former price that this owner had bought it for, and much less than they tried to list it for. But here’s the kicker – it goes back to the whole rent control thing. That stuff is rent-controlled, the leases have been lost somewhere in the shuffle, and the tenants lied to the bank about the rent, so they were paying a small fraction of what they actually owed, hence the low price that it was being marketed for. And here’s where the crazy information asymmetry came into play – I dug up the disclosure packets from when the former owner tried to sell the building, and I realized that in the disclosure packets it had all of the original leases, and the tenants who were residing in the building at the time I was looking at it – they were all still the same. Same people.
I went and I told this to the selling agent once we got under contract, and his comment was simply, “Yeah, good luck with that.” I of course was able to immediately get the rents back to market after purchase, and then I had some luck with the tenants choosing to leave while we were doing the much-needed deferred maintenance work that was required, and I was able to unload the building shortly after for triple the purchase price.
Joe Fairless: How much did you make in total on it?
Heath Silverman: On that particular deal — first of all, I would say [unintelligible [00:25:00].04] that one we probably netted somewhere around 1.7.
Joe Fairless: What made you think to look that up?
Heath Silverman: I was obsessed with real estate, and I tracked every single listing that hit the market at that time. Every day I was looking at listings that hit the market in San Francisco, and I saw the building and I was like “I remember this building. I’ve seen this before”, and I realized it was a friend with somebody who they had actually gotten into contract when the former owner was selling it, and we had actually talked about it. So I just happened to remember it, and then I just dug up the disclosure packet. Yeah, it was crazy.
But yeah, I made about 1.7 and transferred it into a 21-unit apartment complex in Berkeley via a 1031 exchange… So it ended up a great deal.
Joe Fairless: The evaluation was kind of low to begin with, so that also triggered something that was like “Wait a second, why is this a little bit lower”?
Heath Silverman: Yeah. It came on the market at a crazy low price, and if you were just obsessed over a very specific area, which I was, because (again) of this whole workforce housing thing, the Mission is really close to bars, and people can get to downtown San Francisco incredibly fast, and again, lots of really old buildings… So I was honed in on this one area, tracking all the deals, and then saw this come on the market and I’m like “Whoa, that is too low… What is the deal?” So I reached out to the agent and started getting all the information, and found out that there was just some crazy tenant situation in the building.
Joe Fairless: What’s a mistake you’ve made on a transaction?
Heath Silverman: Maybe I’ll focus on a mistake that I made… I can think of a bigger mistake, a fun story that the Best Ever listener might like – a mistake on just a building and real estate in general is just not doing your due diligence. On that first single-family home, the one I house-hacked, that I spoke about earlier, I needed to do some significant work into the garage, that required a contractor… And I wanted to do it really fast and affordably, because this was my first dabbling into real estate, so I found this contractor who gave me a verbal quote that seemed amazing, and he was ready to start immediately at a time when you just couldn’t find contractors.
Looking back, I clearly should have realized it was way too good to be true. And beyond all that, he asked for a pretty healthy portion of the payment upfront, which again, should have been a red flag… But he demoed the whole garage and then he disappeared. I was trying to reach him, couldn’t find him, but to make a long story short – this is crazy, and this is a true story… After months of trying to reach this guy, I learned through the news that he had been arrested under suspicion of being [unintelligible [00:27:22].04] sniper.
Joe Fairless: Oh, gosh…
Heath Silverman: It was insane. I ended up going through the Contractor State License Board [00:27:30].03] and they had to send somebody into the prison to interview him for his side of the story. True story, crazy. But what I’ve learned from that – that particular situation was extreme, and I learned my lesson, and I make sure to always do my due diligence, whether it’s checking references prior to signing contracts, modeling everything [unintelligible [00:27:43].08] pre-purchase, or pre-sale, or simply just really staying on top of my portfolio performance. Over time, that is all about Stessa.
Joe Fairless: Best ever way that you like to give back to the community.
Heath Silverman: I guess mentorship. I really wouldn’t be where I am today without the teachers and the mentors that I’ve had throughout my life. Whether it’s helping fellow investors on real estate deals, or advising entrepreneurs on starting a business… I’ve always made myself available to others and make it a priority to pass on my knowledge.
Now that I’m a bit more time-strapped growing family, I use my company Stessa to pass on that knowledge… So whether it’s through our newsletter, our blog, our insights within the product, I wanna enable other investors to be more successful and be able to maximize the value of their assets.
At Stessa we really have this mission to democratize real estate as an asset class, and that translates into supporting all investors, all along the way, as they build out and continue to grow their portfolios.
Joe Fairless: How can the Best Ever listeners learn more about Stessa?
Heath Silverman: To learn more about Stessa, I recommend everyone with an investment property just go to stessa.com and register for free. It only takes a few minutes to get up and running.
Joe Fairless: Well, Heath, thank you so much for being on the show. Holy cow, lots of insights here. Your best ever advice about not holding real estate forever, and consistently practice the optimization process, so you can maximize value, and your 1031 comment – that right there is I think the theme here for our conversation… Because you’re constantly looking to force appreciation through value-add deals. You talked about what you look for – below replacement cost, right outside the city, public transportation and in a distressed situation… Then you optimize the performance of your overall portfolio through your platform Stessa, and you’re able to continually scale up and scale up and scale up… Not only interesting, but something that can be applied to anyone’s portfolio, that thought process.
Thanks for being on the show, I really enjoyed it. I hope you have a best ever day, and we’ll talk to you soon.
Heath Silverman: Fantastic, thank you.
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