Real Estate Investment Success like a Pro with Stewart Heath

I like real estate. The math is easy. Yeah. Okay. I'm going to rent this for this. And I've basically got four expenses, taxes, insurance, management, and repairs and maintenance. Those are generally pretty controllable. It's just the whole thing comes down to picking the right tenant. When it comes to the right tenant, you're going to do well. If you're lazy on picking your tenants, you're not going to last very long. How I got into this, I watched other people do it. And then I bought my first duplex in the year 2000 and just realized that I just loved it. I love the dirt. I love the brick and mortar and have just scaled since then. Welcome to super entrepreneurs podcast. Today we have with us Stuart Heath. Stuart is the founder and CEO of Harvard grace capital, a private equity, real estate investment firm that helps people build wealth faster through hands off real estate investing that generates passive income, reduces risk, maximizes tax efficiencies. Welcome to our show Stuart. Thank you so much for having me. It's a pleasure. My pleasure as well. So tell us more about this. So is it different than your traditional real estate investment REIT? Of course, different REITs have different focuses and may specialize on a specific asset class, but you could, we're not doing a fund. A REIT is essentially a fund that goes out and picks the properties. Right now we are identifying projects and then we go and raise capital specifically for that asset. And then we also manage it, manage the property ourselves. So our focus is geographic, not on a particular asset class. So a REIT might be a multifamily REIT. They might invest in apartments from Montana to Boston or all over the country, and they'll be working with different property managers on sites and things of the like. We are focused on what's essentially the Tennessee Valley, which is south of Nashville, Tennessee, down through Northern Alabama in the Huntsville area, which is one of the fastest growing cities in the country right now. And we're focused on that mainly because we all live here. We know this area. We like to do the property management as well, because we think that helps us to ensure that we deliver the returns that are promised to the investor, because we are very hands-on with the properties that we select. Very good. And what is the reason for the growth? Is there any specific reason why that area is seeing some tremendous growth? Yeah, Huntsville has been a sort of a sleepy little technology center. Mainly NASA is based here. And so Huntsville was just a small little town of about 200,000. Northern Alabama, if you lived here, you were probably an engineer or a rocket scientist. But in 2008, the Nonpartisan Base Realignment Commission of Congress chose to relocate three army commands to Huntsville. There is a very large army installation here called the Redstone Arsenal. And that's where NASA exists as well as a few military commands had existed for a long time. But when they combined these three other commands there, which one of them was the procurement command, now everything that is purchased for the United States Army goes through Huntsville. And so that's just a massive amount of personnel. It's handed up by a four-star general, which the Redstone Arsenal had never had before. There are other commands here as well. And then the Base Realignment Commission moved more commands here in 2012 and so forth and so on. On top of the very already robust research and development business that was located here, that's just expanded. Now the FBI is essentially moving the Quantico training facility to Huntsville and several other federal government commands. At the same time, there are private industrial concerns that are moving plants here. Facebook has a massive data center here. Toyota and Mazda located a joint venture manufacturing plant here where they're making engines together. And there are many others. I could go on. I'm just a big fan of Huntsville. It reminds me of Nashville 30 years ago. And so just when you have all this movement of people, there is opportunity in cash-flowing real estate. Very good. How about vacation properties? Are you guys have interest in that as well? I think vacation properties are, can be very attractive. I haven't really figured out how to do them yet in a syndicated way to deliver the kind of consistent returns because Harvard Grace is about stable and increasing recurring revenue. We're about delivering income streams to investors. Vacation properties, just by their very nature, tend to be very seasonal. And those seasons can make good returns for you throughout the year. But I'm looking for properties that are just consistently throwing off similar amounts of cash every month that we can grow as we raise rents, reduce expenses, and things of that nature. I love vacation properties. And I think those are probably more appropriate in a person's individual portfolio rather than in a syndicated portfolio. Very good. And what kind of investors are you guys looking for? Accredited, non-accredited? Yeah. So far, all of our deals have, have been regulation D, 506C. Exempt transactions. That means every investor must be an accredited investor, which means they must be relatively high net worth. That allows us to do general solicitation, advertising for our transactions because they are accredited. So they have to be verified as accredited before they can invest in one of our transactions. Very good. So what do you, how did you get into this? What was it? What's the story behind it? I'm a CPA and followed my dad's footsteps, my dad's path in becoming a CPA. And he was a partner with what was Archton Winnie when he retired for years and years. He liked public accounting and I was in public accounting for more than 20 years. But I saw my clients who were in real estate, either fixers and flippers, or they'd own an apartment building and their wealth just grew year over year. And, you know, in 10 years into this, I'm like, gee whiz, I just come out of another busy tax season and I don't feel like I'm getting anywhere. My standard of living is getting higher. I'm making a little bit more money, but I'm not really building any of that. And so real estate is a pathway to build value in a very tax advantaged and debt advantaged way, as you can, unlike borrowing in stock, you can borrow and buy stocks, but not always a great idea, but you can borrow a reasonable amount, leverage your real estate and where the bank gets their fixed amount and you get all the upside. So that that's kind of benefits of leverage. So financially, I really got into the whole math of it all. I like real estate. The math is easy. Yeah. Okay. I'm going to rent this for this. And I've basically got four expenses, taxes, insurance, management, and repairs and maintenance. Those are generally pretty controllable. It's just the whole thing comes down to picking the right tenant when it comes to at the end, you pick the right tenant. You're going to do well. If you're lazy on picking your tenants, you're not gonna last very long. How I got into this, I watched other people do it. And then I bought my first duplex in the year 2000 and just realized that I just loved it. I love the dirt. I love the brick and mortar and have just scaled since then. And I still do some fractional CFO work with my CPA license, but just over time just was able to leave public accounting and I get to go kick dirt every day and I like meeting tenants. So I guess I'm just weird like that. Oh, that's good. You know, the business is always do better when you have passion behind it. It's something that you love to do. Right. Yeah. So is there a, you charge a percentage, right? When you're syndicating, is there a specific percentage that you charge? Well, typically our deals are under 15 million so far. And so we will charge an acquisition fee of 2% of the total transaction. That's pretty standard. When you get up above 15 or 20, a lot of times that drop drops to one and a half or one and which total makes sense. Yeah, frankly, with the amount of time that we've put in and the costs that we've put out, we're not making a whole lot of money on that just looks like a big number at the closing table, but that's most people have been around that they understand. We make a little bit of money on the property management and that depends on the asset type. Our most recent acquisition was, it was a self-storage deal here in Huntsville, a big boat and RV, 125,000 square feet. We did for $11 million and I get a 4% management fee for managing that on a monthly basis, 4% of what's collected. That's almost half of the market. And we're okay with that because we're going to be down here babysitting it. Anyway, for the most part, this facility has stayed full. It was full when we bought it, it's going to stay full. And so it doesn't require as much management effort. So we're happy to do that at half the money because our intent is to deliver the returns that we projected that when we got our investors to invest and we're investors too, we always put money in our own deals. That's great. So this property management company is that you mentioned, I just want to clarify that is your own. That is our own property. It's true. It's not. When did you start that? When did you guys launch that? That's been doing property management for several years. Okay. It's through my fractional CFO business. As it happened, I got drawn to clients that had real estate that had needs. I would end up managing their properties for them. So I've been in the business. We're not licensed property managers, but in most States you can manage your own property that you own and control. And those are the only times that we're going to do. We're never going to try to scale the property management business. I think that that business has issues that the sort of the revenue model is broken and the amount of talent that you need to hire to, to do something right and bring the proper attention. You can't really pay for it on your. Four or five or 6% commissions are just not enough money in it. So that the model tends to be broken. So I don't really want to deal with a property. I've had very bad luck over time. Pardon? A lot of work as well. It is a lot of work. It's it's not really, it's not always intellectual work. It's just really about knowing, all right, what's the next, you know, in this situation, what do I do? So it's repetitive and programmable, but from what I see, the property management business as a lot of businesses are having trouble retaining talent. And so to me, they're kind of like the convenience stores of the real estate industry. They're trying to do good work, but they're having to hire people that aren't qualified, which is your typical convenience store. So that may be unfair. I'm sure there are good property management companies out there. I've just never had the pleasure of being able to work with them. So for now, we're going to manage everything that we, that we sponsor. That's awesome. So Stuart, now here's the exciting part. Can you share some deal that you have on the table right now that investors can hop on? Very possibly put out three letters of intent that you can share on the, yeah. It can't really go public yet, but I expect I'll be able to go public with it by the end of the week. And, but we've got a great suburban office slash retail building in Madison, Alabama, which is, which is an upper scale city right next to Huntsville in the same County and it's full, it's cash flowing. The leases were done properly. And I think that we should be able to get in there and deliver a 22 to 25% IRR over the next five years for investors. So it'll be about a $6 million acquisition. So we'll be looking to raise a couple of million dollars of equity and commercial rates have come back down a little bit. We'll get some commercial lending rates have come back down. We'll be able to get some lending borrowing on that piece as well. Have you noticed a change in the market with what's happening with the recession that you're speaking about? Yes. The transaction volume has definitely slowed down. There was a big rush to sell and to buy as interest rates were coming up back three months ago, back around Thanksgiving. I was looking at a deal and talking to bankers and they were quoting me rates at about seven, seven and a half. Well, when I started talking late last week, now they're talking about below 6% again, which traditionally I'm an old guy, traditionally those, I mean, below 6% to great rates. We did our first deal, our first deal of 2022, we did, we locked in for 10 years at 3.25%, which is crazy. And then our second deal, we did mid fives, which was still a great rate. So we're in the mid fives to low sixes, that we're going to see some activity continue to be healthy because those are great rates long-term and historically. The biggest change that I've seen is that sellers still want the values they could get when rates were in the threes and fours, and that's just not reality. Real estate, we talk about cap rates and the lower the cap rate, the more expensive the property. And so they're still wanting very low cap rates, like in the low fives, sometimes high fours, and that's just a dream line. Especially in the multifamily, there've been so many buyers of multifamily, a lot of sellers could get. I think that's reality. I'm a finance guy. And if you're paying, if you're buying a property at a cap rate, that's lower than your interest rate, then you are betting on some pretty massive income increases in the coming years. And that may not come to pass. And we have seen the rate of growth of rent rates low down, not that rents have come down, but a lot of multifamily deals were being done on the premise that rents are going up 12% a year. That's not the case anymore. But right now they might be going up three or four, maybe 5% a year, depending on the market and the property type. I hope you didn't buy one of those deals last year, expecting 12% rate increases for the first three years. Have you? I have not. Okay, so good. I don't really boring deals, but like I say, have steady cash flows. If you're going and buying, let's just say you bought an apartment building. Yeah. I know of one in Nashville that sold for a three and a half percent cap rate. So yeah, that's what you're saying is that you expect that property to throw you, throw off three and a half percent, basically net income. No, thank you very much. And, oh, but by the way, you're going to go borrow 5% interest to do that. It's like you're underwater and a lot of these people will raise more equity so that they can maintain returns back to their investors while the income catches up with financing, if that makes any sense, so that they're raising more equity so that they can maintain a steady cashflow and I just don't think that's a smart way to do a deal. But do you see people actually going for a 3.5 cap rate? That's pretty low. It's very low. So the first half of last year that he in Nashville, especially in the luxury apartment market, as well as in Texas, yes, these transactions have closed at 3.5 to 3.7, but don't blame the seller. I get what you can get, but it's the, on the buy side, that just doesn't make any sense to me. Stuart, can you share what you feel your innermost superpower is that got you to this point in your life? In all honesty, I have an inability to sum up and analyze a deal in a very quick basis. Now that doesn't mean that that's, so I can push away a bad deal fairly quickly. Now, if I like one and then I want to dig in, a quick decision, I'd use the, because to me, all real estate is a financial transaction when you're doing it from a, pretty much from a cashflow position and I can fairly quickly say, Oh yeah, no, no. And then when I find one, then I will dig in on that for days. And, but usually I usually, I don't end up really wasting a lot of time on transactions that I only later find work a good deal. I have a, I'm pretty good at picking out a good deal. I don't always win them, but, but I still think they were good deals. Yeah, that's excellent. So if anybody in the audience wanted to share a deal with your, bring it to your attention, could they? Yeah, sure. Absolutely. I'd love to talk with, we help, I work with many other investors across the country on deals that they bring. Yeah. Your website. Yeah. harvardgracecapital.com. It's all spelled out the best way. There's a link there that you can get on my calendar. We can have a zoom call or phone call, whatever. That's the easiest way to, to get with me. And I will absolutely love to talk with anybody who wants to talk about real estate. That's awesome. That was great, Stuart. I appreciate your time, my friend. It was lovely talking to you and learning about this and definitely being a CPA and doing what you're doing. It is quite attractive because you feel a little bit more safer because it is at the end of the day, a financial deal. It is. Yeah. So thanks for having me. I really appreciate it. No problem. My friend and audience. Thank you so much for joining us once again. Appreciate, love you guys. Without you guys, we wouldn't be growing as we are growing and how you guys share these episodes is wonderful. Thank you. Love the reviews. Love the feedback was because without that, we don't know what we're doing, if we're doing the right work, good work and who we're bringing on or questioning. So it's really wonderful to have you guys part of our family. Thank you once again. And thank you, Stuart. Thank you. My pleasure.