Charles:
Welcome to another episode of the Global Investors Podcast; I’m your host, Charles Carillo. Today, we have Stewart Heath. An entrepreneur and leader with over 35 years of experience transforming organizations into efficient operations and being a real estate investor for over 20 years. Heath’S experience includes commercial and multi-family development, construction, and management. During the GFC in 2008, he learned many lessons on the best practices of holding and operating real estate. He now applies the wisdom he gained to the syndicated offerings his firm, Harvard Grace Capital, brought to market. So thank you so much for, uh,ng on the show today, Stewart.
Stewart:
Thank You for having me. It’s quite an honor.
Charles:
So please give us a background on yourself both personally and professionally prior to getting involved with real estate investing.
Stewart:
Sure, well, I’m a CPA, my dad was a CPA and when I went to college, well, that sounds okay. You know, I’d had a pretty good life <laugh> yet, and no, I had really didn’t have any idea what all that involved. And but majored in accounting graduated, got a job with back then, what was called the big one of the big eight firms Pricewaterhouse, and then immediately started into auditing and taxes and things like that. And and, and, you know, I love my dad, but I’ve got an entrepreneurial streak that he didn’t have. He literally had one job his, his entire career after college and with the same firm, you know, he grew up through the ranks and became a partner at at at what’s now Ernst and Young. But back then, that was before a couple of other mergers.
Stewart:
And, and while I took a path, I went to Pricewaterhouse and, and fabulous, fabulous education for, for, for just general business. But as I said, I just had an entrepreneurial streak that I, I suppose I got from my mother. And and so I, I, I, I was trying to be intellectually honest, and so I left Pricewaterhouse after four years because I wanted to do all these other things and, and I didn’t want to be doing that on somebody else’s dime. And so I started a, a, a, a bookkeeping practice and which would give me leeway to start over things. So I got outta college in, in 85. And, and then right after that was the 1986 Tax Act where they retroactively you know, basically devalued a whole bunch of commercial real estate because they took away a lot of the, the tax breaks and, and things of that nature, and a whole bunch of property, you know, hit the market.
Stewart:
And so commercial real estate was on the skids for three or four years after that. And, and so I sort of came up in my business, infancy, infancy, hearing that real estate was bad. You know, I would, I would be at meetings with bankers and, you know, you know, breakfast meetings and conferences and well, real estate’s bad. You’d hear bankers say, yeah, but we’re not loaning on real estate anymore. Oh, okay. That must, that’s sort of a universal declaration that the most secure asset in the world I is was, was no longer bankable at the time. And so all of that just, just got embedded, you know in, in my brain. But then in my small bookkeeping practice, I picked up a, a whole lot of real estate entrepreneurs who were making money hand over fist and doing fixes and flips, buying small apartment buildings, doing construction.
Stewart:
You some combination of all of the above. You know, that I, I, I had one client that was into halfway houses for substance abuse recovery participants. And they ended up buying a bunch of apartment complexes and then, and, and, and, and doing it that way, and built a great deal of wealth through that process. And, and finally about the year 2000, I realized there must be something to this real estate thing. And, and, and so I started to pursue it and and, and, you know, went out and bought one duplex and, you know, realized, oh, I kind of like this. And, and, and then my next deal was 14 duplexes. And, and, and after that I started building houses and I bought a group of condos. And, and then I ultimately bought all the condos in that, in that complex and, and then rehabbed those and remarketed those for sale.
Stewart:
And and then along time, you’re the first person I’ve ever heard referred to as the GFC. It took me a minute to figure that out, and Oh, yeah, I remember that. <Laugh>, you, I loved that one. And, and so you, frankly, it built up a portfolio of real estate you know, with a net worth in excess of 10 million bucks. And and, and then it is beginning in 2009, started giving it all back to the banks. And, and so it was a, it, it hit me pretty hard because I was doing what some people I think call the equity ladder. I, I bought this one, and then you wait a year, year and a half and refinance that one, take cash out to buy this one and then buy that one. I just walked it all the way up to I fairly sizable estate.
Stewart:
And and then, you know, as Warren Buffet says, you know, the tide went out, now we’re gonna be, now we’re gonna say who’s swimming without their trunks on? And that was me you know, all of that did without reserves, without much fallback. And, and assuming that you know, everything would just continue to go up forever. And, and, and of course it didn’t. So that’s kind of my story. I got back into real estate after that in about 27 about 2020 and, and with Harvard rates capital, and we’re doing things very differently now. So,
Charles:
Yeah, it’s amazing you’re talking about lending in the eighties and lending during the GFC or global financial crisis. And it’s, it’s something that, it always amazes me that banks don’t lend when property prices are like low. You know what I mean? Right. It’s like, <laugh> is, am I the only person that sees this? And you’re like, Hey, man, if everything just went down 20 or 30%, like you, I don’t know. I’m just, I don’t know. I’m just like, it’s, does anybody ever thought of this? It’s just it’s an interesting way. And I remember I was trying to refinance a, a, a small commercial property in 2010, and a bank I’ve worked with just in other businesses. ’cause I was just a small landlord. And they would give me 15% loan to cost <laugh>. That was the one that they were gonna give. And like my family, my family had had a almost 10 year relationship with this local bank.
Charles:
You know, this isn’t like, this isn’t a large bank you one a large for. It was, and you’re like, just say you don’t want a loan on the property, <laugh>. I mean, it’s just like, it’s insane. Like, I can, you know, it’s just like things fully rented, all this kind of stuff, and like loan the cost, not even like what we would, if we could even figure out a value because it would probably be, you know what I mean? But it was just like, it was, I don’t know, it just they don’t loan, then they start up again, and then you find yourself an issue. So,
Stewart:
Yeah. And you know, the real reason for that probably had nothing to do with you or the property. No. It probably had everything to do with regulators that were gonna be coming in the next month. And, and they were worried about their concentration of commercial real estate.
Charles:
That’s exactly, that’s probably exactly correct. Yeah. It’s, and they, when they did that concentration review, they probably didn’t look at any loan to values or anything in depth on the property, you know what I mean? It was just like, oh, you gotta get this off your books, or We don’t want that on our books anymore. You know what I mean? So, but anyway, a whole, whole banks and lenders a whole nother episode.
Stewart:
Oh, yes, absolutely. <Laugh>.
Charles:
So tell us about I’m really interested in kind of how your investment strategy has evolved over the years from obviously going through some rocky rocky times in the past, and how you’ve done it differently. As you said, you’re doing things differently with your com current company. Like what’s going on there? What are you guys doing and what have you changed?
Stewart:
Yeah, so, you know, lessons learned first and foremost, you have to prepare for what you don’t know what’s coming. You don’t know what you don’t know. And so big believer in having reserves, we, we, we will build in 12 months of reserves into every deal that we do now every deal stands alone. That does, that does weigh down returns. ’cause You got a bunch of cash sitting around that hopefully you’re never gonna need. But that’s okay. You know, we’ve all been there where, oh, you in fact did need it. And, and, and had I had six months of reserves, I would probably still own some of those assets that, you know, today that, that I had acquired back then. So, so that’s rule number one. And, and the other lesson learned is just the sheer importance of stabilized cash flow.
Stewart:
You know, I, I listen to the financial media all day long. You know, CNBC’s always on in my office, sometimes Bloomberg, whatever. And, and no matter what you know, to me they’re all talking about trading. They’re not talking about investing. And so I’ve done a big study, what, what is, what is real investing and what is good? And so, so it’s really the long term we invest for the long term. And, and just my firm belief that stabilized cash flow should be the core of everyone’s portfolio. And once you have a sufficient foundation, and that’ll be different for everyone, then by all means go out and do a development deal. You know, take a little bit more risk, go out and do a, you know, a, a, a value add rehab deal that, that will have, you know you know, unknown timeframes and unknown issues.
Stewart:
But that’s okay. It’s not going to, you know, it shouldn’t, you should never do a deal that’s gonna take you down. But, but you know, having that foundation with which to stand on that, that, that covers everything it needs to cover that gives you the right to go be a little bit more risky with things. So, so, and so that is what Harvard Grace Capital is really designed to do, is to provide investors with those stabilized cash flowing assets. Do I want to go do development again? Sometimes, yeah, I do. ’cause They’re fun, they’re creative, but at the end of the day there’s, you could be a lot very creative with a lot of boring stuff too. And, and, and I literally almost named the company Boring capital, but but, but didn’t, I actually saw PNC Bank running a series of commercials about being boring. You know, and and that’s really what we’re about, you know stabilized stuff long-term tenants. And, and that’s, that’s, that’s what we’re about, you know, smart use of leverage. So give
Charles:
Us like an overview of kind of what your investment strategy is, like, what type of assets you guys are looking for. What are the markets that you guys kind of focus on currently?
Stewart:
So currently our portfolio consists of four assets. We sold one off earlier this year. So we are into what I call suburban office. Some people will call that service retail. We’re into medical office, we’re into retail, and we’re into storage. And sometimes we do both of, you know, multiple of those in the same location. You know, we bought a medical office a year ago down in Huntsville. And the doctor that sold it to us kept a garage downstairs where he worked on his race cars and, and and so we just, rather than build that out his office and, and go out and get, you know, 25, you know, 30 bucks you know, a a year, you know, and I’m gonna spend a hundred bucks, you know, building out, we put storage in there, had to get a variance to do that.
Stewart:
But we’re able to get 30 units of odd sizes in there, and we’re right in the middle of this medical park, and all medical people have massive record storage issues. And we just got that opened in May. And we’re releasing those up pretty fast. So, so I’ve got, you know, 25% of the build out cows cost I would have on that space. And I’m gonna get the same top line revenue for that once it’s once it’s fully leased. We expect it to be fully leased by, by November. So that’s how we sort of combine the two. But, you know, we like, we, we like medical office and I like like I say, suburban office.
Charles:
Yeah, that’s a medical office is are great, but I I love that value add that you had. That’s a, a very unique value add kind of situation there where adding storage to medical office, and obviously it all makes sense when I listen to it, but it would be not the first thing I would think of when, you know, you’re trying to a value add for an off for a medical office space.
Stewart:
Yeah. I, it was not my idea. It was actually the idea of the seller’s broker. And then independently, four or five people came up to me and, and I just said, no, that’s stupid. No, that’s stupid. And, and then, you know, <laugh> one night it’s like, maybe that’s not so stupid, you know? And, and, but then we’ve executed it, it wasn’t, it wasn’t easy. We had to get the City of Huntsville to, to grant us a variance, but we had done a little canvassing and had so much demand from the committee around us that that they, they went along with it. And, and you’re not gonna drive up to this building and think that there’s storage. There’s, they were all, they were all worried about what’s it gonna look like from the outside, and yet you can’t tell. Nice.
Charles:
That’s perfect. That’s great.
Charles:
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Charles:
So you know, it seems to be commonplace for a lot of syndicators to kind of like switch asset classes and focus on different different kind of different asset classes during different market cycles, right? I mean, how has it, with, with your company moving from your past, which is in like a lot of multifamily and other and then construction stuff like that, going into what you’re doing now and obviously like medical office is a fantastic asset class. What were some of the reasons for switching and to what you’re doing now?
Stewart:
Yeah, you know, I’m a member of some groups that are nationwide and, and, and I always felt like the oddball out because they’re all single asset class, they’re all all in on multifamily. And, and, and for, for one back be back before my crash, I had over 200 personal rentals from duplexes to condos to houses. And, and, and I, I just said, that’s the nearest definition of hell on earth, you know, to me and, and I, I don’t like residential rentals. I completely get that. Multifamily is the, is is the mother the king of all commercial properties. ’cause It’s, you know, housing plows the way for, for everything else. And so I follow that market but I also manage everything we do. And I don’t wanna manage multifamily I don’t mind doing storage you know, it’s a bit retail, but but it’s, it, it, it’s awesome.
Stewart:
And office and stuff is much more like dealing with my clients as a CPA over the years. So, so I come to this, you know, from my own personal likes and dislikes. I, I think multifamily is an awesome class. So, you know, I I I think the answer to your question is we’re doing, we’re doing what we’re doing now because there were good opportunities in their assets that I like. But differentiating from the other people who focus on an asset class, and I don’t, I don’t necessarily think that’s wrong. I’m focusing on my own geography though. So I, I call it the eight forty five sixty five corridor that refers to two interstates, one’s in Southern Middle Tennessee, one’s in northern Alabama, and, and anything that’s sort of in between those, we love these tertiary markets. We love Huntsville. Anything south of Nashville that, where everybody’s still driving north to Nashville, it’s you, you know, these, these are great markets.
Stewart:
I don’t know. The first thing about Phoenix, Arizona, I hear it’s great. I don’t know the first thing about Dallas or Houston, I got friends down there. You know unless I’ve got Google Maps, I don’t know how to get around either one of those places. So I don’t, I don’t know those markets, but I know Huntsville and I know Nashville, I know Southern Middle Tennessee. So we are investing in markets that we know we live here and, and, you know, we’re breathing it in every day. So that, that was our choice. Again, I don’t think anybody else is wrong. This is just the right choice for us.
Charles:
Yeah, no, no, just every, every investor kind of hones their investment strategy, which worked for them over the years. And the same thing too. It’s like if you speak to lenders and what they, what they lend on, you know what I mean? Certain lenders lend on certain things have worked well for them and their company and they do more of it, which is fantastic, and they understand it even more. It’s just one thing you, you know, as an investor with office space, and obviously office space has gotten a bad, bad name over the last few years, and and I don’t think it’s that bad. I wanna like kind of break a little bit more into your kinda strategy of how you, you know, how, how do you go about finding you know, recognizing and identifying specific office assets and knowing that there’s gonna be, you know, even seeing what that kind of value add or what can happen to add value for your investors and yourself.
Stewart:
I’m gonna answer that two ways. So how we look at office assets is one, who are the tenants, obviously. And, and we’ve already mentioned medical, it’s already a, an awesome class. But e even in, in our first acquisition as Harvard Grace Capital I had managed this building, it’s, it’s in Spring Hill, Tennessee, which is a suburb of Nashville. It, it is what I call suburban office. And, and so here’s the bottom line. Are the tenants consumer facing or are they just, or is it just a place for their employees to gather? Because it’s that latter one, it’s those properties that are having all the kinds of problems. So it’s the downtown office spaces and or the class A office spaces in suburban office parks that are having the problem. Those are the places that the 10 that the employees don’t wanna go back to, but, but if it’s a dentist’s office or a State Farm office or you know, a mortgage company, that’s where they meet their customers.
Stewart:
And, and, and, and just like a medical office you know, they’re not going remote. Your doctor’s not going remote, and he is not coming to see you. So he has to have a place to, to put all that very expensive equipment to, and, and he has to have a place that’s built out to, in order to service, you know, his, his patients. And, and that’s the way it is for most of these places. You know, the problem is, and I love to pick on the media, but the, the problem is they have declared office is dead. Well, apparently none of my tenants has figured that out, you know, and, you know, it’s just a stupid statement on the there’s many, many subcategories to, to office medical’s, one of them, you know suburban office is another and, and you, and at the end of the day, you end up back at rule number one of real estate investing, which is all real estate is local. So you, you know, my, my building in Spring Hill, there’s not another building like it for 10 mile radius, you know? I wish I had three more just like it.
Charles:
Yeah, I think that’s a, that is a great point about what the use factor is of the building in the sense of how it’s being utilized by the firm and how it’s being utilized by the customers of that firm that are gonna rent it. I never really thought that, but now after going to my doctor’s office last week and not finding a parking spot in their apartment comp, in their complex there, office complex, it’s makes perfect sense. It all does. It’s one funny thing too about what you’re seeing about the media and I think I was part of a mentor group and this is right around 2020, and they were telling me that within a week of Twitter saying that everybody could work from home, right, right. When everything started right, forever, they could work from home.
Charles:
Within a week they were telling me that a GC that they worked for signed a contract with Twitter to build a new headquarters. So you, you know, you hear all this here and then you just don’t see what happens behind. And I think you really have to take all that with a grain because it’s like, they knew it wasn’t gonna last. Obviously they’re not gonna sign a contract on a, they didn’t even already sign it. It wasn’t like something that was already in process. So here’s stuff like that. You kind of understand exactly what’s really happening and maybe you know, people thought it was gonna be temporary and that’s great. It’s great that you know, you’re working and you’ve been able to work through office space and is it, I mean, are you finding those deals? Is there less competition for it because of what’s being said in the market? Or I imagine there’s other investors as knowledgeable and astute as you, that are there trying to pick up those deals as well?
Stewart:
I, I am certainly not the smartest guy in the room, and yes, other people have figured this out. And, and, and I think in large part because again, all real estate is local. I’m playing in some very healthy but, but balanced markets, yeah. We have moved from it being a, a seller’s market to what I call a balanced market in that negotiations are very difficult right now, very tough. But, but last year we weren’t even having negotiations. You know, there wasn’t, there wasn’t a deal hardly that would pencil this year. We’ve, we’ve underwritten many, many, many deals we’ve had to drop out of a few. But, but you know, it’s a balanced market. There’s plenty of lenders. And, and if it’s the right deal structure there, there’s still a fair amount of investors in large part because of the deal structure, because of the location, because of asset class.
Stewart:
And so I’m calling this a balanced market. And so yes, there are many other people that that are also pursuing these deals as well. And you, you win some, you lose some. That, going back to that to your other point a minute ago you know, back in 2020, retail was declared dead, if you remember, you know, and, and I was just reading stuff yesterday for this month’s newsletter and what’s, what’s the hottest asset class so far this year, retail and, and the rates on them are unbelievable. That’s ’cause there was a two year lag in people doing new retail deals, and now there’s not enough space for the demand. So
Charles:
We probably read the same chart. It’s like
Stewart:
Probably yeah,
Charles:
The amount of vacancy time between it, which usually from before, and it’s like, oh, something else you’re not gonna read in your, let’s just say mainstream media, right?
Stewart:
Yeah, yeah. The, whenever somebody references commercial real estate is, well, you know, just, just turn ’em off. ’cause I mean, it’s so much more than one thing, so,
Charles:
Yeah. Yeah. So Stewart, as we’re kind of ending up here you, you gave a lot of knowledge about kind of how you changed your business plan over the years, but from seeing other investors, you’ve been doing this for decades, what are common mistakes maybe you see other real estate investors make? Whether they’re new investors, whether they’re seasoned investors, and kinda give us like some points on that.
Stewart:
Sure. you know, I think my dad told me the first time I ever heard this the only way you ever learn anything is the hard way <laugh>. So, you know, and, and so fortunately now I’ve lived long enough that I I I’ve learned an awful lot of things. I think most people overbuy, they overpay rather on their buy. And I don’t know who said this first, but you know, you make your money on the buy, not the sell. And that’s true in your stocks, that’s true in on your house, that’s true in almost any type of investment. And, and, and even though you might get an okay price you know, if you don’t work it hard to get the best price, you’ll never make as much money on that deal as, as you would have if you’d bought it, right?
Stewart:
And, and so there’s an awful lot of number of reasons. You know, people will take a deal rather than the best deal. Perhaps their shop is fee driven, they need a deal, they need to close one this quarter to, to generate fees. That’s something that, that you know, I’m very fortunate that we don’t have that pressure and, and I don’t ever want that pressure. But, you know, there’s all kinds of things, but I think, I think that’s the number one thing. Are you, are you buying it? Right? and, and, and then, then beyond that, what’s the quality of the cash flows? You know, ’cause here’s, here’s my third rule I I is whatever business your tenants are in, you’re in that business too. Because, you know, being a landlord is an extension of credit. You’re, you’re almost banker, like and, and we love retail and we’re, there’s an awful lot of competition for every retail strip center that hits the market right now. But I passed on one and, and, and it’s right next door to one we were trying to buy, and I, well, let’s get that one too. And then I kind of looked at the tenants and like, nah, they’re all second tier. They’re, they’re mom and pop restaurants. I, I’m not a big restaurant fan unless they’re multi-unit operators. You know, restaurants don’t tend to last all that long as tenants. And so yeah, I, I didn’t like the tenant base and so we passed. So those are my lessons.
Charles:
Yeah, that’s great. I love on the tenant you know, we do like a, a lease audit and figuring out when, what’s going on. Yes. And like you’re saying, you wanna focus more on like credit tenants, you know what I mean, solid tenants that’re working with. And the same thing for us when we’re, you know, when we’re getting into it. You just have to know what you’re getting yourself into and have an idea, like you said, and knowing it’s all about the market too, making sure it’s a little bit diversified because yes, you are. If they don’t get paid for what they’re doing, you’re not gonna get paid for what you’re doing. So so a lot of great information there, Stewart. So Stewart, how can listeners learn more about you and your business? Harvard Grace
Stewart:
Easiest way to go is to harvard grace.com. There you can find lots of free resources especially if you are a passive investor. There’s some resources there for you guys. It’ll cost you nothing but your email address. You can also poke around to contact us. You can find my Calendly link, and I do invite in all sincerity. Anybody use that link, find some time, talk with me. I can talk with anybody almost anytime about real estate anytime you want. So lots of people do take me up on that and, and it’s a genuine offer.
Charles:
Well, thank you so much for coming on today and looking forward to connecting with you here in the near future. Thank
Stewart:
You, Charles. Thanks for having me.
Charles:
Hi guys! It’s Charles from the Global Investors Podcast. I hope you enjoyed the show. If you’re interested in get involved with real estate, but you don’t know where to begin, set up a free 30 minute strategy call with me at schedulecharles.com. That’s schedulecharles.com. Thank you.
Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.
