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SHOW NOTES FOR EPISODE 293: LEVERAGING TECHNOLOGY FOR BETTER ROI AND PORTFOLIO OPTIMIZATION
The only thing tech engineer, serial entrepreneur and CEO of Stessa Heath Silverman loves more than launching new tech start-ups is investing in real estate. Yet, with all of the amazing technology out there, he couldn’t understand why real estate investing still has so much paperwork and time-consuming processes. In this podcast, Heath shares how he successfully merged tech know-how with his love for real estate investing to automate and eliminate much of the cumbersome paperwork and record-keeping normally associated with real estate investing, resulting in better portfolio optimization and more time to grow his real estate holdings.
What You Will Learn
- How taking a “deep dive” into your properties can help you optimize operations to double the value of that property
- Why cheapest does often translate into best when it comes to hiring contractors
- Three important lessons learned from optimizing a rental property
- How you can automate and optimize your real estate portfolio optimization at no cost to free you up to grow your portfolio faster
- What are S.M.A.R.T. goals and why they can help you grow your portfolio faster
- How to succeed by expanding your “luck surface area”
About Our Guest
Heath Silverman
Heath Silverman is a part-time real estate investor and the CEO of Stessa. With nearly 20 years’ experience working with investment properties, Heath has managed all aspects of residential and multifamily acquisition, rehab, management, and disposition. Today, he actively maintains a portfolio of 10 buildings comprised of over 60 units across the US with the majority in the San Francisco Bay Area.
After years of frustration around the lack of technology available to the individual investor, Heath was inspired to streamline the entire real estate ownership lifecycle. In 2016, he co-founded Stessa, a software platform that gives the millions of real estate investors with single-family rentals and multifamily buildings a powerful new way to track, manage, and communicate the performance of their real estate assets. Stessa was acquired in 2018 by JLL.
Heath received a BA in Cognitive Science from UC Berkeley and an MBA with High Distinction from the University of Michigan, Ross School of Business where he was recognized as Entrepreneur of the Year.
More About Heath
- Has been working in tech for 20 years
- Has been investing in real estate for about the same amount of time
- His first real estate purchase was a single family home in 2001 in Albany, California – it was his primary residence
- It was an older home that needed much work, so he lived in the home while he worked on it
- Rented out some of the rooms to friends – became a “house hacker”
- He loved the supplemental income and the potential for high appreciation
- He tried to buy other properties afterwards but nothing happened until 2009, in the midst of the financial crisis
- He saw great opportunity at that time and he jumped in as a part-time investor, while working full-time in his tech job
- Started buying distressed properties
- Most were in the San Francisco Bay area
- Most were single family homes
- Bought in the far East Bay – places like Suisun & Oakley
- Homes that once sold for $400K plus were selling for $100K
- They were cash flowing on day one because people still needed a place to live
- He would fix them up and rent them out
- Would buy a house a year
- Today, most of his deals are 1031 Exchanges. Does one a year as he moves into bigger properties
- Started with SFRs and started moving into multifamily
- He still loves the excitement of finding the next big deal
- Was focused primarily on California properties but last year bought out-of-state for the first time for a property in Chicago
Applying Tech to His Love for Real Estate Investing
- In 2016, he founded Stessa – A software platform that gives real estate investors with single-family rentals and multifamily buildings a powerful new way to track, manage, and communicate the performance of their real estate assets.
Biggest Mistake
- His first single family home that he house hacked
- Didn’t do his due diligence
- Had leak in roof over the garage, causing water damage
- Wanted to move quickly and cheaply
- Hired a contractor
- He found out that cheap (in real estate) is not the best approach
- Found a contractor that gave him a cheap verbal quote (sounded “to0 good to be true”)
- Asked for a big part of the payment up front, demoed the entire garage and then disappeared
- After months of trying to reach the contractor, he learned that he had been arrested under suspicion of being involved in high profile local shooting (580 sniper)
- He learned the importance of proper vetting, checking references, getting multiple bids, modeling, proper pre-purchasing, pre-sale and staying on top of your portfolio performance overall
Biggest Success
- Tripled the value of a building in just one year
- Had “insider information”
- 5,000 sq ft fourplex in the Mission District of San Francisco
- Sold for $1.7 million in 2006
- The owner tried to sell it for years after that (Heath looked at it) but it was way overpriced and it eventually went into foreclosure
- Once the bank obtained the property, it was ignored for a while
- The property became seriously distressed – poor maintenance
- Bank put it on the market in 2012, Heath and a partner bought it for less than half of the former price
- The Kicker:
- San Francisco is under rent control
- The leases were lost at some point
- Tenants lied to the bank about their rent amounts (this was why the sales price was so low) – a small fraction of the actual rent amounts
- He dug up his old disclosure packets from when he was interested in the property years before, when the former owner tried to sell
- Heath found out he had copies of all the original leases
- He hired a lawyer and was able to get the rents back to the original amounts
- As he was repairing and doing much of the deferred maintenance on the property, some tenants left, making it easier to get the rents back to where they were supposed to be as well
- Later, they were able to sell the building for triple their purchase price
- There is such a wealth of information (city/county records, development plans, etc.) out there on properties. With just a little digging you can give yourself a tremendous advantage when seeking out deals and with other decisions on your property holdings. The public information is out there!
- This spawned his current passion to bring more transparency to the asset class through information aggregation and technology
The Founding of Stessa
- Real estate investing is a part-time endeavor for Heath
- Common theme around holding real estate forever – passive investment, over time, gets you to financial freedom. This is especially true of investors who focus on residential rentals with long term renters
- In Heath’s early days, that was his approach: find a building, buy it, rent it out and hold on to it forever. It will cash flow well and I’ll never have to work again
- While that can be true over a long time horizon, he realized that he wanted to create meaningful value over a much shorter period of time
- To accomplish this, you need to optimize. But once he has maximized his optimization of a building and he sees no further upside, he usually will do a 1031 exchange, and trade up to another property to do the same thing
- One building where he did this, lead to the creation of Stessa
- Heath and a partner with him in real estate and other tech companies (and who is now the co-founder of Stessa), knew they wanted to start another tech company
- They were batting around ideas about “the future of work” and a lot of other big problems that would have been very challenging to tackle. However, they kept getting distracted with their real estate portfolio. Their real estate was something less daunting and could get to immediate results in a shorter period of time
- They ended up doing a “deep dive” into one of their multifamily properties in Oakland, California that had been on “auto-pilot” for a couple of years
- Ended up doubling the value of the building through a combination of operational efficiencies and also bringing some rents to market
- This added real value
- Took the new numbers to the bank
- Took out a cash-out re-fi
- Purchased a new property
- Things they found:
- Fixed a water leak that prevented future property damage and reduced expenses significantly – reduced bill by two thirds
- Property management did not find the leak
- Changed property management, brought costs down
- Swapped out landscaper and janitorial
- Was under rent control
- All tenants in the building were there prior to purchase
- A couple of the units were sponsored by local organizations
- They researched and found out that…because the units were subsidized, they were not under rent control
- They were able to raise the rents up to the Housing Authority’s “fair market rent” for the area
- They were totally shocked by how much value they were able to create in such a short period of time
- Three Big Take-Aways
- As a real estate investors, they should apply these finding to their entire portfolio
- As product people, they could create software to automate what they just did
- As entrepreneurs, there was a huge opportunity in the space to create a company around a technology solution that we could make available to the millions of investors like them who use a little more than a spreadsheet to manage their properties
- Other investment asset classes have software to help your better manage your investments. There is nothing like this for real estate before Stessa – Rental Property financial management with a bunch of great reporting features
- After they had this idea, they spoke to hundreds of real estate investors, they found that most managed everything with an often outdated spreadsheet
- Most investors don’t know if they made or lost money on their investments except maybe at tax time
- The focus of Stessa is:
- On simplifying and streamlining the normal time-consuming processes that investors muddle through everyday so they can concentrate on growing their portfolios
- Key performance metrics are all in one place, on one central dashboard
- Scan your receipts and invoices right from your Stessa phone app – Stessa automatically reads and categorizes them for you, eliminating any data entry
- You will receive notifications if anything looks usually (for example, an unusually high water bill)
- It’s all about simplifying and streamlining the traditional time-consuming processes that real estate investors muddle through every day
Current Upgrades and General Info on Stessa
- Just launched a new tax-time solution
- Makes tax time very easy with a new report
- The report generates a tax package which you can just forward on to your CPA
- The end result is a new degree of visibility into your investment holdings that investors didn’t have before
- Saves investors both time and money
- The service is focused primarily on single family and multifamily buildings only
- More for longer term buy and hold investments
- The home to expand into other asset classes down the road
- It’s “purpose built” to make it very straight forward
- Easy to use
- Cloud-based system
- Stessa pulls information from a lot of different online resources and aggregates it together so you don’t have to
- Resistering for Stessa
- Three State Process
- Accesses and pulls in data from public records on property details, acquisition price, even loan balances
- Link in your bank accounts, pulls in all transactions from each property, then machine learning algorithms categorizes the data, based on what you categorized before (trying to reduce data entry tasks). Security is top priority of Stessa
- They use bank-grade encryption technologies
- Strict internal controls
- Designed for security
- Use third-party provider that does the bank account linkage
- Stessa employees never see people’s user names and passwords
- Robust authentication
- Multi-factor authentication
- If people are not comfortable linking accounts, you have the option to manually input data
- Input data details on rent roll information
- After the 3 steps are complete, they create great dashboards creates with KPIs (key performance indicators) that show…
- Aggregate portfolio evaluator
- Asset return
- Debt
- Cash flow
- Income
- Charts that show performance
- Gives you insights that show you where you can make meaningful improvements to continually maximize the value of your portfolio
- Three State Process
His Current Real Estate Investing Efforts
- Still very focused on investing
- Minimum of 1-2 deals per year
- When he maximizes value of a building, he usually will do a 1031 Exchange (he’s done six 1031 exchanges in the last six years)
- He currently has a building in San Francisco that he hopes to 1031 exchange in a property in Chicago or somewhere else
- He’s continuing moving up with each 1031 exchange
- His goal is to eventually hold on to buildings forever and grow his portfolio and eventually handing everything off to his kids
Personal Attributes/Gifts That Have Helped His Success
- Rational optimism – helps him ride out the ups and downs of real estate and business
- Contagious excitement – helps recruit good people (investors as well as employees) to “come along for the ride”
Advice for Old Dawgs Interested in Real Estate Investing
- Set meaningful goals
- S.M.A.R.T goals
- Specific
- Measurable
- Achievable
- Relavant
- Time-bound
- By setting realistic goals you can…
- track progress
- with the reward of hitting goals along the way
- Nothing really happens “overnight” but if you set goals, you can get there faster
- S.M.A.R.T goals
- Expand your “luck surface area”
- At his wedding, his business partner talked a lot in his speech about how Heath has a crazy amount of “luck surface area” (defined as what happens when you’re putting yourself out there and commuting your goals passionately to as many people as possible and these magical, serendipitous things happen)
- By directing your energy into a passion, you create value, the value is multiplied by the number of people who know about it or who enter into your sphere of influence and all of that comes together to create lucky outcomes you could have never predicted
- On a practical level, for example: you find a crazy deal, find someone to invest with you and it happens
- At his wedding, his business partner talked a lot in his speech about how Heath has a crazy amount of “luck surface area” (defined as what happens when you’re putting yourself out there and commuting your goals passionately to as many people as possible and these magical, serendipitous things happen)
- Get started and go out and make your own money
Future of Stessa
- Stessa was acquired by JLL (Jones Lang LaSalle) is a big Fortune 500 real estate professional services company which gave Stessa the opportunity to:
- Grow faster
- Work with a company that is aligned with Stessa’s goals
- Offer Stessa’s online services for free
- He’s excited and inspired by their mission to “democratize real estate” as an asset class and streamline the whole real estate ownership life cycle
- “Stessa’s built by investors for investors”
- They have a big vision that eventually gets into improving access into real estate as an asset class and offering new value-add services that will help investors maximize their portfolio value while saving time and money
- As investors themselves, they want to support other investors all along the way as they build out and continue to grow their portfolios
Get the FREE Ultimate Rental Property Tax Guide
- As part of their commitment to fellow real estate investors, they recently worked with top real estate CPAs to compile the “Ultimate Rental Property Tax Guide” – a comprehensive 45 page document for real estate investors to help them maximize their deductions, optimize for the new tax laws and essentially understand the best tax strategies they need to know as real estate investors
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Get the ultimate Guide to Rental Property Taxes from Stessa. Packed with valuable advice from top real estate CPAs, you’ll learn how to:
- Maximize your deductions
- Optimize for new tax law
- Use the right strategies for your taxes
- Download for Free!
Rap it Up
- Favorite real estate book: Rich Dad Poor Dad and Cashflow Quadrant by Robert Kiyosaki
- Favorite business book: The Hard Thing About Hard Things by Ben Horowitz
- Favorite website for success (other than your own): YouTube
- Favorite App: LinkedIn
- Favorite quote: “What gets measured gets done.”
- If you had to start all over, knowing what you know, and you only had $1,000, what would you do to launch your real estate investing business? Knowing what I know now, it’s all about the networking and relationships. Nearly all of my deals have been done by connections and I always invest with a partner. With the $1,000 I would work hard to find a great deal, and would use that opportunity to get a partner excited about it and fund it.”
How to Reach Heath
- Website: Stessa.com (register for free)
- Email: HeathS@Stessa.com
- Don’t forget your free Tax Guide!
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