Keith Wasserman—‘real estate Twitter OG and 800-pound gorilla of the Los Angeles real estate private equity community’—knows a thing or two about getting results. And it was his decision-making prowess that helped him grow his firm into what it is today.
Gelt, Inc. owns 6,000 apartments in markets from Denver to the Pacific Coast. They also own 600,000 square feet of self storage with another 150,000 in contract. And they’re busy building a few hundred units in and around Los Angeles. All told, it’s a portfolio worth nearly $2 billion.
What did it take to go from Bakersfield to billions? Hard work. After Wasserman graduated from USC in 2007, he got his real estate licence and read as many real estate books as possible to learn about the industry. But the real education started when, along with his cousin, he bought that first fourplex in Bakersfield. Ever since, Keith’s been making good decisions and getting great results.
“My cousin Damian and I are serial entrepreneurs,” Wasserman explains. “We had ideas, but they didn’t always work. But in 2009 Damian had an idea that did. There had been a huge run-up in Bakersfield real estate prices during the mid-2000s housing boom. In the subsequent bust, prices got hit really hard. There were REOs galore and they were available for a quarter of what they had been selling for. The rents had fallen, too, but not as drastically. People—including Damian’s father—were buying real estate and making money, so we figured we could do something similar.”
The pair bought their first building—an REO fourplex for less than $175,000 (it previously sold for $550,000). Damien borrowed money from a friend, got a cash advance on a credit card to cover rehab expenses, and secured an FHA loan. (A frequent topic on Twitter, Wssserman says FHA loans are a great way to get started in real estate.) Wasserman put a down payment on the second fourplex. Wasserman’s father purchased the third.
“We had three fourplexes, but we weren’t sure how to grow,” Wasserman says. “We spoke to real estate experts who advised us to sell 49% of the buildings. When we bought them, they were dilapidated and broken-down, but we turned them into performing assets. We marked them up to reflect the value we had created and used the proceeds to buy another three. Next, we partnered with family friends to buy a few more. All in, we bought 13 or 14 buildings in east Bakersfield that year—and Gelt was up and running.
We hired a property management company, but eventually took it in-house. “That was a really big mistake,” Wasserman recounts. “ My wife and I were going up on weekends to rent units. We don’t really speak Spanish so we often relied on Google Translate to speak with potential tenants. We quickly realized that we weren’t the right people to manage those properties so we eventually sold those assets, too.”
Bakersfield taught them some important lessons:
- Just because something is cheap, it doesn’t make it a good deal.
- Buy in better areas if you can.
- It takes the same amount of time and energy to buy a four-unit building, a 40-unit building, or a 400-unit building.
Next stop, Phoenix
“Phoenix hit our radar because my grandparents live there and we had been going there my whole life,” Wasserman says. “We saw firsthand that the market was decimated—rents were down around 20% from peak to trough and there were foreclosures everywhere. But Phoenix is the fifth-largest city in the United States. It’s not going anywhere. Sure, it had some temporary issues–and it could have dropped even lower–but we thought the timing was right.
It wasn’t easy raising money. But the per-unit costs were ridiculously low so they were willing to do whatever they had to do—borrow money from friends and close with lines of credit—to get that first deal in Phoenix. Six months later, they had raised $5.9 million and were able to purchase a 415-unit apartment building on prime real estate right by the Biltmore Hotel for $16 million. Not bad, especially when just a few years prior the Gelt team was struggling to raise their first $100,000.
The art of give and take
After their rough experience with self-managing back in Bakersfield, the Gelt team picked a local management company to oversee their new building. It turned out to be a smart move. “They gave us a lot of attention and really helped us grow our business in Phoenix,” Wasserman explained. “They were very hands-on with us so we learned the right way to partner with a management company. Later, we negotiated to reduce their fees in return for a piece of the backend to incentivize them. It was a win-win: we got their best people and, because of that creative fee arrangement, they were motivated to crush it for us.”
Deal by deal
Phoenix was Gelt’s main market from 2010 to 2015. They bought 2,500 units. In 2017, they started selling some of those units to expand into other markets. They didn’t make much money at first—but they never lost principal for their investors and that has become Gelt’s ethos.
Gelt was a five-person shop at the time so they brought in a few people to take care of acquisitions and asset management. They started buying in Denver, then Salt Lake City and Reno, and finally expanded to Portland, Seattle, Albuquerque, and Southern California.
At 23 people today, Gelt is still a relatively small firm, primarily because they don’t do property management. That was by design. The original partners decided they didn’t want to be in the property management business. The margins are low and you need to hire hundreds of employees. “Property management can be a good business if you’re focused, control costs, and dialed in to your local market,” Wasserman explained. “But for us, it just wasn’t practical because we’re in so many states and markets.”
In the early days, Gelt sold properties to return capital to investors and create a track record. “We were still green back then, so we didn’t know that we could take our promote off the table and let investors keep rolling,” Keith says. “Later, we learned how to do this through another sponsor and that’s really helped us a lot. Essentially the whole LLC has to do a 1031 exchange and upleg, so once the money goes to the accommodator and we close on the upleg, any dissenting investors who don’t want to participate—and there typically will be one or two—will call it. At that point, we swap out old investors with new investors that want to participate in the new acquisition. That’s been invaluable because it allows our investors to compound their investment without incurring long-term capital gains and recapture.”
Not all of Wasserman’s decisions have worked. One even destroyed his dreams. While some people dream about becoming a rock star or winning the lottery, Keith dreamed of owning mobile home parks. When he found out that the brother of a Gelt teammate was a top regional manager for Sun Communities, it seemed like a sign. Gelt hired him so they could expand into mobile home parks.
They ended up with nine before realizing how difficult they are to manage. There simply are no good third-party mobile home management companies. The parks are typically very dispersed and inconveniently located far from major metropolitan areas. Gelt tried taking management in-house, but they couldn’t make it work. “Our lowest return was on a portfolio of three parks in rural Pennsylvania,” Wasserman says. “We hit an eight or nine IRR—if that turns out to be my worst deal, I will be ecstatic. I never want to lose my investor’s principal and, so far, (knock on wood) we’ve been doing that.”
Expanding into storage
One of Gelt’s investors is the managing partner of a self storage management company and ownership group. Over the years, he would tell Keith about his business. It sounded like pure gold to Wasserman. Eventually, Gelt partnered with him. Their first deal fell into their laps. A broker friend was marketing a deal as a development site and they wanted top dollar. There were a lot of uncertainties on what could be built there so Gelt decided to underwrite it as a self storage project. The space was only being marketed as an apartment deal so the self-storage crowd never saw it. “It was a steal,” Wasserman explains. “The rents was 40% below market, it was in South Pasadena so local to our office, there was a moratorium on new expansion there, storage space was undersupplied at only three to four square feet per person in the region (the national average is eight), and it will make a great redevelopment site over the long term. But I don’t even think we will develop it because it is crushing it as a self-storage space. We were able to raise rents, had limited drop-offs, and storage has been a great business for us ever since.
Getting over uncertainty
Gelt had the audacity to go into secondary markets early, and it worked out. Then they expanded into other asset classes, and that worked too. How did they get over uncertainty? Wasserman explains, “We bring in experts. We had a top regional manager from Sun helping us with mobile home parks. On self storage, we partnered two experts, let them own it, and give them big pieces of the upside. I work on other things like raising capital, building a brand, and all the things you have to do running a business from accounting to back office to investor relations. We try to zig when others zag, but we’re still 90% apartments”.
Wasserman also says keeping the team small lets them really discuss what markets they want to be in and how they want to focus their time and energy. “There’s no right or wrong. We just love what we do.”
Gelt has more than 1,000 investors. Their stated minimum is $100,000, but as long as you’re accredited and Keith likes you, they might let you in for less. Their average check size is around $175,000, but they occasionally get investments of $3 to $5 million. Once investors are in, they stick around. That’s because Gelt cares about their investors. As mentioned earlier, they’ve never lost an investor’s principal—and they intend to keep it that way.
Clearly, their investors appreciate that. Gelt has raised $650 million so, if you do the math, that’s an average of $600,000 per investor. “We recommend investors put a little on every deal,” Keith explains. “We want to be the outsourced real estate arm for our investors. Instead of buying a 5- or 10-unit building in LA that is going to cost $500,000 per unit, they can invest with us and let us do the work.”
Investors also appreciate the access to Keith. Gelt has an Investor Relations team managing communications, K1s, and distributions, but Keith is the one that first onboards them and develops the relationship. “All of our investors have my cell phone and my email, and I’m available to them 24 hours a day,” he says. “We give our investors the white glove treatment. Without them, we wouldn’t have a business, right? From the very beginning, we have been very hands-on with all our investors and we still are. Our first investor was someone who used to work for my dad. He had moved out of the country, but he was excited by what was going on in the U.S. real estate market so he gave us money to invest. Then family and friends started investing. They started telling their friends so we grew by word of mouth. Over the past few years, I’ve been focusing on broadening our network. That’s why I’m active on social media and podcasts, I want to build awareness that there are good Sponsors—not just Gelt—that will be good fiduciaries and grow family wealth over a long period of time. That’s what my goal is.”
Gelt 1.0 was older buildings that were harder to hold long-term. They had major capital needs that ate away at Gelt’s CapEx account quicker than they anticipated. Now they are selling older buildings and rolling into newer ones, ideally those built post 2010. As cap rates have converged, and the markets aren’t differentiating between older and newer buildings or really good markets and tertiary markets that maybe aren’t as good, okay, we obviously take the better one if the cap rate is similar.
“We’re focusing on Southern California—mostly Long Beach and Anaheim—right now,” Wasserman says. “The cap rates are similar or higher than Phoenix, Vegas, and other markets that are historically very boom and bust. There’s not as many barriers to entry here so it’s more insulated. We’re going newer and we’re going core. It’s patient capital”
When he’s not out finding deals or talking to investors, Keith is on Twitter. His DM is open and he’s happy to answer questions, the more specific the better.