Like any business venture, the ability to be able to track the performance and success or failure of your rental properties with a good system is vital. For some of us, that means tracking everything in a spreadsheet or maybe even QuickBooks or TurboTax. Whatever the case may be, keeping good records of your financials will help you secure future funds as well as keep excellent records for tax purposes. After years of frustration around the lack of technology available to the individual investor, Heath Silverman was inspired to streamline the entire real estate ownership life cycle. Heath is a part-time real estate investor and the CEO of Stessa, a software platform that gives millions of real estate investors a powerful new way of managing and tracking their income and expenses as well as communicating the performance of their real estate assets. He talks about that in this episode.
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Tracking Your Income And Expenses On Autopilot with Heath Silverman
Like any business venture, you need the ability to be able to track the performance and success or failure of your rental properties with a good system. For some of us, that means tracking everything in a spreadsheet or maybe even QuickBooks or TurboTax, whatever the case may be. Keeping good records of your financials will help you secure future funds when you go to purchase additional properties as banks may want to see records of your cashflow and the reserves from your current investments. You will also need to keep excellent records for tax purposes, especially if you go through a tax audit. You need to have everything in order and well documented. Some investors rely solely on spreadsheets or even pen and paper to track their rental property accounting, income, expenses, whatever may be happening.
The system is okay if you have one or two or maybe as many as five properties, but it tends to breakdown and become laborious after that third and fourth and even fifth property. QuickBooks, which I do use, not all the time but for general accounting, is great and it’s one of the top picks for professionals. It’s at the top of the list when you think about accounting software. QuickBooks has its limitations for managing rentals. It’s great for general accounting, but it misses all the tools that truly make it stand out as potentially being the best property management system. It works but it doesn’t work great. It’s extremely detailed. It’s somewhat complex. It’s not designed for real estate investors. What if there was an easier way to track income and expenses as a real estate owner and investor, something that saves you time and makes it simple? That’s what we’re going to discuss and share with you here.
It’s my pleasure to welcome, Heath Silverman, to the show. Heath is a part-time real estate investor and the CEO of Stessa with nearly twenty years of experience working with investment properties. Heath has dealt with all aspects of residential and multifamily acquisition, rehab, management and the disposition of those properties. He actively maintains a portfolio of ten buildings comprised of over 60 units across the United States. After years of frustration around the lack of technology available to the individual investor, Heath was inspired to streamline the entire real estate ownership life cycle. I know that’s a big mouthful. We’ll talk about what that means here on the episode. Back in 2016, he cofounded Stessa, which is a software platform that gives the millions of real estate investors with single-family rentals and multifamily buildings a powerful new way to track, to manage and communicate the performance of their real estate assets. Heath, welcome to the show.
Thanks, Marco. Thanks for having me on the show. I appreciate the invite.
It’s good having you on. I’ve looked at your software and I’ve played around with it. I think it’s brilliant. It’s something that I know can help most if not every real estate investor, especially in the single-family and the residential space, one to four units, maybe small apartments. You have an interesting background. You’ve been investing for a long time. You are essentially what I refer to on this show as a passive real estate investor. Tell us about your real estate background. Let’s begin with you, then we’ll get into your journey and what led up to Stessa.
I’ve been working in tech for several years and I’ve been investing in real estate for almost as long. I’ve always been very entrepreneurial. I started my first company with my cofounder who is the same cofounder with Stessa while we were in college and sold that first tech company right afterward. I used some of the proceeds to buy my first property. This is back in 2001. That initial purchase was a single-family home I bought to live in. I ended up house hacking it. It was an older home. It needed quite a lot of work. I brought in a few friends as roommates to help with the bills. As always, which seems to happen with a lot of real estate investors in the beginning, I quickly got addicted to the whole supplemental income thanks to being in the Northern California Bay Area.
I also offer that whole potential for significant appreciation. I knew I wanted to do more in real estate. I tried doing a number of deals in the years after I made a whole bunch of offers but nothing penciled out. That’s all until 2009. As a result of the financial crisis, I saw this huge opportunity. At that time, if you were able to invest, you couldn’t go wrong. I got into real estate in a big way. I started very much with foreclosures, single-family homes in outlying cities in the Bay Area like Suisun and Oakley. I started buying these distressed properties.
These days, I do around one to two deals a year. A good number of those being 1031 exchanges. I would say I’ve done about one 1031 exchange each year over the last six years as I’ve been continually moving up my portfolio into a bigger property. I got my start doing single-family rentals. I now focus primarily on multifamily. It’s pretty amazing all these years later, I still get that insane high, that incredible rush. It’s a combination of both excitement and a little bit of fear that comes with each new acquisition I make. At the end of 2016, I combined my passion for real estate and technology and founded Stessa.
You’re in the Bay Area, which is extremely pricey. I’ll call it expensive. You’re still investing. You’re doing 1031 exchanges into more property, other property. What states are you investing in? I can’t imagine that you’re still investing in the Bay Area.
You say it’s pricey but it’s interesting going back to 2009, 2010. Buying back then in those cities I was mentioning, in those outlying areas in the Bay Area, I was able to pick up homes that two to three years prior had sold for $430,000. They were like 75% off. You can pick them up for $100,000. Granted, they were distressed. Some of them are missing doors. They’d been thrashed a bit and needed a little bit of work but it was affordable. Once you fix them up, they had rented for $1,300 to $1,500 a month. Everything very easily was cashflowing from day one. Nowadays we’re almost back in those outlying areas, almost back to those old prices. In core like San Francisco, prices now are higher than they’ve ever been before. Same with Berkeley and core Oakland areas. I continue to find a deal every now and again but it’s definitely harder. My last 1031 I did, I ended up moving to Chicago. Overall my investment strategy has all been around trying to find distressed properties, value-add where we can create significant value in a short amount of time, a year or so. Specifically, I focus on workforce housing. Homes that are outside of big NSA’s but in transit corridors which is easy to get downtown.
Chicago is one of the markets we’re in. We love the outer outskirts of the Chicago market. The numbers make sense. The numbers that you rattled off of there with San Francisco, a $400,000 distressed home. Did you say you rented it for $1,500, $2,000 a month?
It was a $400,000 home. Prior that, we were able to pick it up for $100,000. We rented it out for $1,500 a month. It’s a $100,000 purchase.
Was that an all cash?
Yes, because at that time they were distressed and many of them were foreclosures. One, some of them weren’t financeable because they weren’t habitable. Two, the only way you could win because there were a lot of investors going after some of these opportunities. You had to offer all cash for the very quick roll.
You made the numbers work. Your acquisition was in line with what you were able to rent it for, which is pretty close to 1%. A $400,000 property renting for $1,500-ish plus or minus a month is not going to cut it. It’s a value-added approach. You’ve created your own equity, which is great because now you can leverage that up into more property.
It’s funny you say that 1%. When I first got started and I was focused on residential, so anything from one to four-unit building, I followed the 1% rule. I wanted to make sure that any property I purchased, I could get to that 1% rule within nine to twelve months of purchase. Now that I’m doing more multifamily stuff, it’s a little bit different. The 1% rule is a lot harder to find in multifamily but also in the markets. It’s challenging. It’s slightly different methods for evaluating properties now.
That 1% rule still applies now. You could go down to 0.9%, 0.8% in certain markets and the numbers still work. You still have a great deal. That number always applies. It’s the way the math works on these properties is you want it to rent for about 1% of what your acquisition is. Heath, you’ve been investing for over twenty years now in real estate. That qualifies you as a seasoned investor. Through that time, I would imagine that you’ve had successes and failures. Maybe share, if you can, one of your biggest successes in real estate. We always like to learn from other people’s successes, ride on their coattails or stand on their shoulders and see what we don’t see.
I’ll give a San Francisco example here where the numbers get a little bit crazy. My biggest success I would say was this one deal where I tripled the value of a building in over a year. I attribute it loosely to what I call insider information. I realize it’s totally ridiculous that real estate is an asset class where you often have this asymmetric information. It’s all totally legal. I’ll tell you the story. The specific property was this massive fourplex in The Mission neighborhood in San Francisco. It was a victim of the financial crisis. It sold for nearly $1.7 million in 2006. The crisis hit and the owner tried to sell it shortly after. It was on the market for quite some time. He wasn’t able to unload the building. It eventually went into foreclosure. Once the bank had the property, the building was ignored for a while due to not having consistent management. The property became very distressed from both a maintenance and attendant perspective. Fast forward a few years to 2012, the bank put it back on the market where I was able to pick it up with a partner in foreclosure for less than half of its former price.
Here’s the kicker. San Francisco with an older building and it’s rent controlled. The leases were lost somewhere in the shuffle. It turned out all the tenants lied to the bank about their rent. They were paying a small fraction of what they owed. Hence, the low price that the bank ends up putting on the market. Here’s where the crazy information asymmetry came into play. I dug up all the disclosure packets from when the former owner tried to sell the building. I realized that I had all the original leases and the tenants residing in the building were all still the same people. I had the current rent roll. I was totally open about this. I share this detail with the selling agent. I said, “I got this. I don’t know if you need to disclose this.” He didn’t care. He simply said, “Good luck with that. See what you can do. You probably won’t be able to do anything.” Once we bought the building, we pulled up the leases. We were able to get to rent it back up into the market with the help of a lawyer after the purchase. We have some real luck when the tenants decided to leave as we were doing a lot of this much needed deferred maintenance. There was significant work that needs to be done in the building.
I mentioned it was everything from a new roof, siding, windows. There’s quite a bit of work and some of the tenants were like, “You raised around that. I don’t want to deal with it. I’m out of here.” When all is said and done, this whole information asymmetry thing is super common in real estate. There is so much totally public information out there such as city record, development plans, etc. that doing a little bit of digging can give you this tremendous advantage when you’re seeking out deals or even making decisions and you’re holding. The long and short of the story is once the building was vacant, we were able to unload it for triple our purchase price over a year later because now it’s a vacant fixed up building in San Francisco in a great and approving neighborhood. As a result of all this, this is an area I’ve become passionate about, which is bringing more transparency to the asset class, three things like information, aggregation and technology.
If you put in the time to do your due diligence and research, you can find not only good deals or potential good deals, but you can also turn a situation that on the surface looks like a not-so-good deal into a great deal, which is exactly what you did by having that “insider information” by simply doing your research and finding that the rents are much higher than what people were paying. That essentially created a value-added deal that you held for a very short period of time and were able to take equity out and build a large portfolio for yourself. We love finding good deals, especially if you have the time and energy to turn it around and renovate it. That’s an interesting strategy. Sometimes we learn more from mistakes that we make small or large. I’ve made my fair share of those many years ago. Maybe tell us about one of the biggest mistakes you’ve ever made in real estate.
I know that sounds totally unbelievable. It’s happened. I don’t know if he was ever found guilty or not. This particular situation was very extreme. I did learn my lesson. I now make sure to always do my due diligence. Rather than saying, “That’s good. Let’s get started,” I recommend everyone to do the same due diligence, everything from doing your research on a contractor you’re hiring, research on the building if you’re doing work, in multiple bids, checks references prior to signing contracts. All that is incredibly important. This also extended to simply staying on top of your portfolio performance. That’s one of the things that Stessa does for you automatically.
Definitely, due diligence is so important. Fortunately, for a lot of people are more of a passive than active real estate investor. They’re not directly dealing with contractors. In fact, they’re not dealing with tradespeople for the most part because they’re typically dealing with one company or one individual, and that’s their property manager or property management company. They’re the ones who are taking care of any contractors or repairs that need to be done. You make a good point regardless of who you work with, you want them to have a good reputation. They have to be solid. You want to check references. It’s doing your due diligence. You should do that regardless of whether it’s real estate investing or any real estate investing or anything related to finances. It’s definitely a hard lesson to learn if you miss that and screw that up because we all do that at least once.
Let’s segue a little bit here. The thing with having a passive portfolio or any portfolio of investment property is tracking. I hate taking care of books. I do not like dealing with receipts and entering stuff into QuickBooks or into a spreadsheet, although I do like working with spreadsheets. I don’t like having to track that information on a regular basis. We all have to do it or somebody has to do it for us. I know that’s a pain point for a lot of real estate investors is, “How do I track this information? How do I organize and file it? How do I deal with it every year before April 15th?” That must have been a pain point for you. Maybe tell us how that came to be a pain point for you and what was that journey that led to you creating Stessa because of that. We can talk about Stessa and what it does a little bit more after you paint that picture of how you got there.
I’ve spoken to hundreds of real estate investors. It turns out that most still manage everything on an often out-of-date spreadsheet. While it’s great to have these basic systems in place, many investors, and I was like this before Stessa, you have no idea whether you’ve made or lost money except one day a year when you get your returns from your accountant. We’ve all been there overwhelmed with tons of paperwork. You have a shoebox of receipts. Although if you have a property manager, most of the expenses are hopefully with them. You still have those other expenses you’re dealing with. Maybe you’re doing your mortgage separately. You’re juggling multiple bank accounts. At the end of the day, you’re unsure how much money you’re making.
Stessa lets real estate investors automate a lot of that busy work so you can focus on what matters. The origin story of Stessa is an interesting one. It ties back to what you were talking about passive investing. I’ll jump into that. My cofounder and I did not start off working and knowing that we’d be doing a real estate technology company. We were thinking about all these big ideas like the future of work, etc. We kept on getting distracted trying to map out these huge big grandiose ideas by our real estate portfolio. We did a deep dive into one of our multifamily properties that had been on autopilot for a couple of years. We ended up nearly doubling the value of the building through a combination of operational efficiencies and bringing some rents to the market.
We took the numbers to the bank. We did a cash out refi. We purchased a new property to grow our portfolio. Specifically, we found things like there was a water leak. We hadn’t realized that the water bill has increased dramatically until we looked at the analysis. We did things like we changed vendors. We changed property management and multifamily expenses out. We swapped out our landscaper and janitorial. I mentioned we were also able to get some of the rents up. In the end, we were shocked by being a bit more organized and getting in there and doing some of this work that when you’re a passive investor, often you feel like you can sit back and relax.
Putting in that extra effort to do some of that analysis on a regular basis is important. Because we were able to create so much value in such a short amount of time, we had three big takeaways. One, as real estate investors, we should be applying these learnings to our entire portfolio. Two, as tech product people, we could build software to automate nearly everything we did. Three, as entrepreneur, there’s a huge opportunity in this space to build a company around in technology solutions that we could make available to all the millions of investors like us, who use a little more than a spreadsheet to manage their portfolios. A good analogy is as you look at other asset classes like equities. You have all these tools that provide straightforward valuation, performance benchmarking, real-time analysis and ongoing optimization whether you have an active manager or a Robo advisor yet little of that exists in real estate. We wanted to bring the types of solutions to real estate and make them available to every single individual investor out there.
How you created this was brilliant. In fact, it’s such great software that I wish I came up with this many years ago, but it does fill a need. I look at tasks and I asked myself, “How do I eliminate this? How do I automate it or how do I delegate it?” You can’t eliminate the fact that you have to track your income and expenses. Ultimately, you do your taxes or you give it to somebody. You can’t eliminate it. What’s the next thing? You automate it. That’s what you’ve done is you’ve automated a big chunk of it. The remaining pieces is the tax portion of it. You either do it yourself or you give it to your tax advisor or your CPA. You delegate that task. Do you have a sense of how many people do their own taxes versus hand it over to a CPA or a tax advisor when it comes to doing taxes related to their investments like their real estate investments?
We did not know that until we did a survey of our users. We were pretty surprised by the results. It turns out that the vast majority of these individual investors, even people with a couple of properties, they use a CPA.
Most people are not doing it themselves.
If they don’t do it themselves, they hand it over to somebody else to do it. A lot of the design decisions that we have done within Stessa are to help those people to do it much easier to save them an incredible amount of time. At the end of the day for everyone, whether you’re handing it over to a CPA or you’re doing it yourself, the most painful part of tax time is all that effort it takes to pull together all that paperwork. I mentioned the receipts in the shoe box, the statements from the banks and property managers. All that work that goes into organizing it all on the spreadsheet either for giving to your accountant or for TurboTax. I usually personally would end up spending a weekend or two pulling everything together.
Now Stessa has totally changed all that. For my LLCs, which I personally give to an accountant whereas properties that don’t have an LLC that I end up doing myself in TurboTax, I was able to generate tax-ready financial to share with my accountant in under an hour. Stessa automatically pulls in all your bank transactions. You can scan receipts with our mobile app. It automatically categorizes everything into tax-ready categories. For tax time, there’s a very simple tax package report. It will send you an email with your income statement, your net cashflow, your capital expenses and all your transactions for the last calendar year. By linking bank accounts, everything, it’s been pulling it in, populating it and categorizing it. You simply can forward it onto your accountant. You’re done or it takes the numbers and put them to TurboTax. It’s straight forward. It’s simple. It saves you lots of time. It also saves you money. You’re paying your accountant time to do bookkeeping.
You’re not only automating the tracking of your income and expenses but you’re simplifying the whole thing because you at the end of the year, spit out a report that summarizes everything that has happened over the last twelve months or the previous year. You hand that over to your tax advisor. They punch it into your tax return and take care of whatever reporting needs to be done. Explain the model. I know the answer to this. You have a freemium based model. It’s essentially free to sign up and free to use. What’s beyond that? How does that model work?
Stessa is totally free for individual investors. With the property owners, they can do all their key property metrics in one place with a visual dashboard, automate the income and expense tracking. They can save time with tax-ready financial reports and that core functionality is and will always be free. Part of the reason why we’re able to do that is we were acquired by JLL, Jones Lang LaSalle, a big Fortune 500 real estate professional services and investment services company. We’re able to make this functionality free for individual investors. Longer term, we plan to add additional value-added services that will be premium. This core functionality will remain to be free.
The majority of our audience are passive real estate investors and they’re reading this and they’re thinking, “This could be a great tool for me. It certainly helped me streamline things.” There’s always someone who’s asking, “Who’s it not for?” I’m curious about that myself. I can see who this is for but who is this not for?
The typical customer or user now is a passive investor with more than one property or a single building with multiple units. It’s people who currently do a lot of manual paperwork. They want to reduce the complexity and increase transparency across their investment properties. These are the types of people who want that piece of mind with their rental properties. The person who it’s not for is probably somebody who is a full-time investor with a massive portfolio, who has a staff and a bookkeeper. They might even have asset managers assigned to individual properties. We’re about automating the work for the individual investor more for the little guy who’s getting bogged down with manual work, spreadsheets and ongoing paperwork.
That covers a lot of people. Where are you taking this business? Where do you see Stessa a year from now? What is it going to become?
Our current product is the beginning. We started with analytics and income and expense tracking and we’re getting more into more automating investor’s workflow to get rid of all that busy work. It’s doing more auto-categorization, real-time insights, notifying people when there are changes in the financials that they should be aware of and that they should act upon. It’s also better reporting. We’ve found that those are the things that provide a lot of value to our users. I’m mostly excited about continuing to scale the user base and for people that recognize us as the essential tool for real estate investors. It’s almost a critical application that should be in every investor’s toolkit. We have this big vision that you mentioned, which is all around streamlining the real estate ownership life cycle. Eventually gets into improving things like access to the asset class and offering new value-add services to help investors maximize portfolio value. At the end of the day, I would say as investors ourselves, we simply want to support investors all along the way as they continue to build out and continue to grow their portfolios.
You guys created this tax guide. The tax guide is good. I downloaded and looked through it. It’s very good. I know the person who wrote it. I speak highly of him. He was on one of our podcast episodes. Why don’t you tell us a little bit about the tax guide because it will be helpful for a lot of people? Provide people some information about where they can find more information about you or Stessa. Why don’t you tell us what Stessa means?
The origin of the name is three things. One, Stessa is assets backwards. Two, in the early days we had this concept of a virtual chatbot because you can go and talk to him. We thought that sounded like a nice person you’d want to have a conversation with. You could ask questions about your real estate performance and find out about all your income and expenses and have this nice conversation. We eventually scrapped the idea. That may come back in the future. We couldn’t get it enough to do the trick instead we focused more on the reporting dashboards and all that. Three, it is a good six-letter dot-com domain name. The easiest way to remember it, Stessa is assets backwards.
The website is Stessa.com. Is that the best place for people to go to learn more about the product and connect with you? Where can they get the tax guide?
First, I’ll give a little bit more information on it. We worked with some very talented real estate CPAs to compile the ultimate rental property tax guide. With the new tax laws, there definitely are some changes that people should be aware of. It’s a comprehensive 45-page document for real estate investors to help them maximize deductions, optimize for these new tax laws. At the end of the day, understand the best tax strategies they need to know as a rental investor. We’ve made the guide available for free to all of our existing users. We want to give it to everyone. We’re giving it away to everyone who registers now at Stessa.com/taxes.
This is a cool product. It’s long overdue. I know it’s going to help a lot of people. This is good that we can share this with a vast audience of real estate investors. Is there anything else you want to add, Heath, to the conversation or anything that I didn’t ask you but probably should have?
For your readers, I would say if you want to reach me directly, simply email me at HeathS@Stessa.com. To learn more about Stessa, I would recommend everyone who has an investment property to simply go to Stessa.com and register for free. It only takes a few minutes to get up and running. From there, you can more easily track and manage your properties.
Heath Silverman from Stessa, I appreciate you taking the time to come and talk to us about your background and your relatively new site because it’s pretty cool. I know it will help a lot of people. I know this is a pain point for a lot of people. The fact that you can help solve some of it or most of it is pretty refreshing because let’s face it, nobody likes to do their accounting and taxes. Heath, thanks for coming on. I appreciate you taking the time.
Thank you. It’s great being here.
Thank you to everybody for your ratings and reviews. They are greatly appreciated. I do read them. If you’re interested in real estate, definitely contact my team for a free strategy session. Let us help you get on the right track. Download our free report, The Ultimate Guide to Passive Real Estate Investing. If you have a question about real estate click the Ask Marco button at the top of the website at PassiveRealEstateInvesting.com. If you haven’t already, please remember to subscribe. We will see you on the next episode.
About Stessa
Stessa is a software platform that helps property owners track, manage, and communicate the performance of their real estate investments, for FREE.
Rental Tax Guide:
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
Tax guide – https://www.stessa.com/tax-guide?utm_source=PREI&utm_medium=email&utm_campaign=taxguide
About 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 dealt with 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.
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.
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