Stewart Heath 0:00
I think most passive investors probably don’t pay enough attention to the timing the intended timing the state and timing of the investment on the front end. And And likewise, it’s not necessarily the investments fault but they’re not paying enough attention to the their own cash needs and seeing if it’s an appropriate investment for them. So it’s not something that they should be that they should go in lightly. I’ve had investors that I’ve done now yeah, you know, you hear how I’ll send you money and it always make sure you understand what what you’re buying and like both of these guys are very, very sophisticated, but I think a lot of them don’t do a proper planning on the personal side.
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J Darrin Gross 1:14
Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals to provide their experience and insight to help you grow your real estate portfolio.
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Today, my guest is 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, generates passive income, reduces risk and maximizes tax efficiencies. And just a minute, we’re going to speak with Stuart a bout the hidden mistakes to avoid and key criteria to look for when evaluating potential passive property investing opportunities.
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With that, I want to welcome my guest, Stewart Heath, welcome to CRE PN Radio.
Stewart Heath 3:17
Thank you so much for having me. It’s a real honor. Appreciate it.
J Darrin Gross 3:20
Well, I’m looking forward to our conversation. But before we get started, if you could take just a minute to share with the listeners a little bit about your background.
Stewart Heath 3:29
Sure. I have lived my entire life in Tennessee, Alabama area. I am a Certified Public Accountant graduated from Auburn University a long, long time ago. And I still practice as a CPA, but my main focus is on sponsoring cash flowing real estate investments and syndicating those to investors. Where that fits their portfolio needs.
J Darrin Gross 3:59
Got it? And so you’re based in Tennessee, right? I am. Yeah. And is that primarily the the area that you invest in? Or Or do you get further out or
Stewart Heath 4:10
it is primarily the area that we invest in. It actually it’s a little bit more narrow than that. Generally the area we invest in is called the Tennessee Valley. More specifically and sort of almost as a marketing gimmick, we say we invest in the 845 65 corridor, and that refers to two interstate connectors. One of them 840, a south of Nashville and 565 runs through Northern Alabama, which includes Huntsville. And so we’d like to invest in between those two interstates in in some suburb towns, even some smaller towns that are impacted, but the real heartbeat of that geographic area is not so much Nashville as you might think. A which obviously is a big regional influence but Huntsville Alabama is growing and growing and growing. And is just it’s just creating lots and lots of real estate opportunity. And I like to tell investors that it reminds me of Nashville about 30 years ago. And I don’t want to really miss the Mr. Train this time.
J Darrin Gross 5:22
Yeah, like, you know, I I’ve heard about Huntsville, I think, mostly and correct me if I’m wrong, is it not like a NASA base there is air. I mean, I
Stewart Heath 5:32
It was, you know, most people in this space NASA is is based in in Florida and in Houston. But a great deal of the research and development for NASA since its beginning, it has been in Huntsville. It’s been quiet. It’s been a it’s been a real defense contracting research hubs. So awful lot of rocket scientists living there who really can’t talk about what they do for a living and, but that all changed in 2008 when the congressional Base Realignment commission, relocated three army commands to the Redstone Arsenal, which is the army facility in the middle of Huntsville. And in that Bronx, a bunch of new generals and all the commands that come with that, there was also a new big push in defense spending. That if you’re a defense contractor, you’ve probably had facilities in Huntsville for a long time, but, but now they’re increasing their staff as they come out of California or out of other parts of the country, they increase staff there. And simultaneously with the big government push, there’s been a private industry push. Toyota, who already had a plant there, has built a brand new joint venture manufacturing facility with Mazda to build some engines. And they’ve hired they came in saying they’re gonna hire 3000 People now they’re up to 6000. So Facebook has a big data center here, which employ employs several people, but it just keeps going and going and going. There’s a lot of a lot of affordable land, a lot of good workforce available there. So we’ve seen this big manufacturing push and, and all of that creates needs for housing and other commercial real estate needs.
J Darrin Gross 7:32
Now, that’s great. And what is the size of the MSA there for them? The I guess, the Huntsville and then I guess I just ask is the Tennessee Valley? Is it all populated throughout? Or is it is it kind of like two ends? Or how I’m not looking at a map?
Stewart Heath 7:50
Yeah. So Huntsville is sort of at this dip in the Tennessee River. And it continues to flow towards the Mississippi obviously. And so you’ve got Huntsville, which is the big, influential city. It’s now the largest city in the state of Alabama. There’s a little bit of semantics. The Huntsville MSA is not larger than Birmingham’s MSA, but city limits to city limits. Huntsville is larger. But the Huntsville MSA also includes Athens and Decatur. And the MSA actually includes several southern Middle Tennessee towns as you cross the border where I live in Fayetteville, Tennessee, you know, we’re in the Huntsville MSA I’m a lot closer to Huntsville than I am Nashville. So there’s about 450,000 in that Huntsville MSA in that might just be the Northern Alabama population don’t include perhaps another 75 or 100,000 in that middle Tennessee area, where you pick up favorable Pulaski when towns like Winchester all all of whom also have some sort of a distant defense contracting employment base in these little towns to
J Darrin Gross 9:18
Yeah, well, I mean, you’ve mentioned one of the favorite employers of real estate investors as government from a standpoint of, you know, stable workforce and, and, you know, it’s not like the the government’s gonna go out of business. So that’s that’s a good thing there. We don’t think so. Anyway, yeah. Fingers crossed on that, I guess. Knock on wood. So, what, are there any specific asset classes that you focus on?
Stewart Heath 9:51
Yeah, we’re a little different, because we do focus on a geographic area that we know so well. I’ve been here my entire Life. So we’ve not really limited ourselves to one particular asset class. I think that’s an appropriate philosophy, if you’re expanding geographic area, because apartments are pretty much gonna run and operate the same and have the same similar issues, whether you’re in Kansas City or if you’re in LA. But because we focus geographically we have and we invest in all types of commercial real estate. Save one, we don’t do we’re not we haven’t really bought into the big built for rent communities, single family homes, I have a worry about that building a bubble in that particular asset class that will probably start showing up maybe five to eight years from now, as in my worry, is that the that the institutional buyers who go in and build 500 homes, they’re gonna they’re just gonna all sudden dump them on the market in about 10 years. And, and I think it could have a damaging impact on that. I might be wrong, they might not do that. But yeah, I suspect somewhere around the 10 year mark, which is where most brand new homes start to have things like water heaters and HVAC units and stuff like that. I think once the maintenance really kicks into that asset class that there will be a wholesale dumping of those assets on the market. And that might impact pricing, it might not they might be willing buyers ready to gobble them up and turn it back over for rent. But so we’ve we’ve done storage, self storage, we’ve not done industrial yet. Haven’t found industrial deal that I like. We’ve also not done a multifamily yet because we are cashflow buyers. We are not fixers and flippers. And every multifamily deal that I’ve found that has already been renovated and is stabilized, I think is way too expensive. So we have not bought it because it’s if you gotta wait a couple of years for the cash flow to to kick in. That’s that’s not a deal for us. We’ve done some office, we’re doing another. When I say office, I’m talking about suburban office, which a lot of people classify as retail. I’m sitting in one of our assets here in Spring Hill, where, you know, our tenants are doctors, dentists, mortgage companies, things, things that are consumer facing. But they can’t really be done remotely, that you can’t remote your dentist, you can’t remote your doctor, he’s not coming to see you. And in mortgage companies, by law have to have a physical office, even if people are working from home, they have to have an office. So there’s lots of uses like that in the office realm that is slightly different than glass for at retail. So and we’re we’re under contract on another one in Huntsville, very similar to that. Right in the heart act. Technically, it’s in Madison, Alabama, which is an upscale community that is surrounded by Huntsville.
J Darrin Gross 13:27
Gotcha. I was gonna ask you, i Hey, if I’m if I’m correct, I believe that Tennessee has no state income taxes. And that is correct. Yes. And how does that compare to Alabama? And does it? You know, is there an attraction to to Tennessee over Alabama, based on that, or is it not been an issue?
Stewart Heath 13:50
It’s good question. I have made some money in past opportunities at state line arbitrage. But state income tax is not one of those that you that you can do because if you live in Tennessee and work in Alabama, you’re still subject to that state income tax. There are some things where you can do some retail on the Tennessee side, if you live in Alabama, and so there’s some opportunities like that. For instance, Tennessee has a lottery. Alabama does not. And there’s a particular property owner I’m aware of at the state line on one of the major highways coming out of Huntsville. That’s the largest seller of lottery tickets in the entire state of Tennessee, because it’s 15 minutes away from a massive population of people that don’t have a lottery and it’s quite the spectacle. So Alabama is seen as very, very, very business friendly. They do have an individual and a business tax. They are not very onerous. There are lots of exemptions from them. It’s in there otherwise, we’ll tax and property taxes are generally low. So all in taxes, you know, total to total, Tennessee and Alabama might be fairly comparable. With Tennessee getting the edge with probably Texas and Florida being the leaders in sort of the State Taxation game, as they have been for a long time.
J Darrin Gross 15:30
On in I want to say that i i read or saw something here recently talking about three of the top fastest growing states mentioned Florida and Texas. But does Tennessee not like number three? I think I’d heard that.
Stewart Heath 15:47
Depending on how you look at Tennessee’s either in the top 10, or the top five. So I heard our governor at the State of the State Address claim that you know, we were I think number three or four, because I hadn’t seen us that high yet. But I mean, Tennessee has been sort of quiet and but but growing very, very, very friendly business day. And, you know, we just over my shoulder, General Motors built the Saturn plant back in 1987 or 1988. While they don’t have Saturn anymore, they still build several Chevrolet vehicles there. And that is the campus of the site where they’re building their new Evie assembly plant. And their evey battery plant, which is going to bring lots and lots of jobs here to Spring Hill, as this Spring Hill wasn’t thriving already. I mean, it’s Tennessee, it’s a good state. They don’t they don’t go crazy. Too far, one way or the other, we just I think they just put out reasonable policies. So one of the reasons we like the areas we like these suburban, rural areas.
J Darrin Gross 17:05
Yeah, I was talking with somebody else from yesterday, I think it was from Texas, and he was telling me about a slogan they have it was something about like, Welcome to Texas, please leave here. Your values, you know, where he came from? Or they’re afraid. What was good was gonna change based on the be in migration from all of the blue states or whatever they you know,
Stewart Heath 17:27
We have, you know, we have some of that going on here. We have a lot of people coming in and from the western states, in some in Yeah. Yeah. I’m glad you like it here. And you’re welcome. But there’s a reason you like it here.
J Darrin Gross 17:45
Stewart Heath 17:49
We also like to remind all the people from Texas that there wouldn’t be a Texas if there wouldn’t be Tennessee. So going back to the to the early 1800s When Tennessee Volunteers, which is why we’re the Volunteer State, they just picked up and went to Texas to fight Mexico, you know, even before they were a state.
J Darrin Gross 18:11
Yeah, and I forgot that little bit of American history there. But that’s, it does have a rich history there. I probably because Daniel Boone was he was gonna be down there and all that, but that’s great. So, talked a little bit about asset classes. And I wanted to ask you a little bit about passive versus active investing. When you work with people, you focus mostly on on helping them and in a passive way so they can invest with you or do you also work with people to do some active investing, it sounds like you are clearly actively investing. But tell me a little bit about how you work with
Stewart Heath 18:59
Well, coming from a CPA Breton background, I meet people where they are, I had a meeting with a group of investors who wanted to have me put together a you know, basically a private deal just for them on a storage deal that they their restaurant tours, and they’re very, very successful in their restaurant business, and they want to expand in storage. And, you know, I was introduced to them as somebody who’s operating storage in so that would not be a syndication deal on our part, but they’re very sophisticated business people and and want to put some money to work in storage. And so that would be me meeting them. And, and I would they would be active investors at that standpoint. And I would be a partner with them. But for the most part, I am working with investors on a passive basis Not just by good common sense, but by law, we need to get to know these investors a little bit to be able to understand their needs in our last raise last fall, you know, there were a couple of investors that we just had to say, I don’t think you’re a good fit for us. Yeah, they said they were accredited, sort of doubted it. And you and it’s possible for people to meet the definition of an accredited investor and really not know what they’re doing. And, you know, so we like for everybody to have a good understanding of the business. Nobody has to, you know, it’s totally passive. Once you’re an investor, you don’t have to make any decisions or guarantee any debt or show up and clean any toilets or anything like that. All of that is handled, but we do like for you to understand the economics of the transaction and the risks involved. So we have good conversations, most of our investors will admit, to date all of our investors have reinvested with us latter deals, and we always pick up additional investors along the way, as well. So we’ve got 100% reinvestment rate, which I’m pretty proud of. in all truth, that’s some pretty small numbers. But it’s still a good thing to say. But but we make sure we get to know what their achievements are, and that, you know, the the investment will be illiquid for a period of time, even though we will start throwing off cash flow in the very first quarter after the deal, because that the deal will cash flow from day one, because all we do is stabilize properties.
J Darrin Gross 21:51
So when you say stabilized properties, are you are you not looking for ways to improve it? Or is it more about just it’s all it’s it’s a turnkey thing and you you’re able to get it at a price where you’re able to generate cash flow?
Stewart Heath 22:07
Well, the ladder is key, we do get it at a price where we can generate cash flow. But yes, we’re always looking at ways to improve because tenants needs change it like this, this office building that I’m in right now. My dentist wants to expand, somebody else wanted to reduce. I had some storage space that was just used, it was just extra space on one piece that the previous seller had used to keep a boat in. And so you know, it’s it’s almost like the game where you got to move things around. So I got a small tenant to go up to that space, we built that up for him. And, and he’s happy as a lark in his own little space up there. And it and so that space that was never previously rented. So I have a new income generating space there, the dentist is happy because he got to expand and my other tenant is is happy because he got to reduce and actually in between the dentist and the other guy. I created a whole nother space. That’s that’s already been leased. So yes. And in the whole process, I was able to move everybody up to new longer leases at market rates. So yes, there is always room to improve because a piece of commercial real estate is is a living, living, breathing thing because tenants are living breathing people and their needs change. I mean, my dentist is 70 years old and has a 10 year plan. I just, you know, he’s an amazing Dynamo. But and you know, he’ll, he’ll sell that practice to somebody, but he wants to lock in that piece before he does that. So, yes, there are always opportunities to improve and so we’re getting a real step up and we’re we’re going to beat our pro forma on this building in the beginning later this year once all those new grants kick in and we spent some money to do that. But we were able to do that without any capital calls between reserves we had and the bank who’s very happy with us it will pay all that off over the next three four years.
J Darrin Gross 24:32
Got more cash flow. What’s uh, you mentioned that the investors you’ve got have reinvested with you. What’s an average hold time for you on your your investment.
Stewart Heath 24:45
Our average hold time is going to be about five years. But because we are cashflow investors and this is a little bit counterintuitive to a lot of professional real estate investors getting you need to understand the industry of people like myself, you know, we make money when you’re buying or selling, so you know, there’s fees involved in profits and stuff. And, and that’s great. And I think that’s correct for a lot of, but I’m also trying to build a recurring cash flow stream for myself, because I invest with the investors. But we always tell them, it’s a, it’s an average five years. But actually, I try to talk them into holding, because you can refinance the property as it goes up in value. And you can take advantage of advantageous rates, you pull the cash out, you give the money back to the investors, which might get them you know, made 100% Home Plus a preferred return, and then the and then they stay in and just keep getting the cash flow, it might be a little bit reduced cash flow, because now you got a higher note, but the property continues to grow. And then they’ve got more money to go invest in another deal with you. And so you start stacking your cash flow opportunities, and you pull that money out the first one that’s, that’s tax free, because that’s just borrowed money. And capitalism, there was no, there was no income event for that. And ultimately lent one day you’re going to sell the property. But commercial real estate has a long, long life to it. And as long as you’re taking care of it along the way, you’re going to extend that life much like having the maintenance plan on your HVAC, you haven’t come out and do the maintenance. And guess what you can get a lot longer life out of HVAC unit than you would by just waiting to fix parts when they break.
J Darrin Gross 26:47
Yeah, no, that’s definitely you’re gonna pay one way or another. And then it’s usually a lot less expensive to pay, pay as you go and maintain it. Plus, I find the newer appliances, whatever, whatever you’re buying, they’re built to go just past the warranty. So someone was working, hang on to a
Stewart Heath 27:08
I’ve got a 1974 refrigerator that’s that was left in the house that we that we live in. And that thing is still running. It’s the coldest it makes the best ice. I mean, it’s I hope it’s never going to kind of quit.
J Darrin Gross 27:24
Yeah, I don’t even like tempt fate talking about some of them. Because it’s I mean, I just, you know, like, you know, not because someone they just they, they were built to last? I mean, there was no there was no you know, they weren’t building them just to to go pass a warranty back in the day. They didn’t understand that that. What’s that? There’s a phrase for it. It’s some
Stewart Heath 27:48
J Darrin Gross 27:50
There you go. Yeah, I don’t think they they did not understand that in the day, that was not a not a
Stewart Heath 27:56
marketing team wasn’t running the company yet. You know, the manufacturer,
J Darrin Gross 27:59
Right, right it was all about your, your good name and how you’re a quality and how it last. But anyway. So let’s talk a little bit about some of the mistakes, some of the hidden mistakes that you see investors make, and potentially ones that you’ve made, that you didn’t recognize until they were made. Tell me and tell me a little bit about some of the mistakes you’ve seen.
Stewart Heath 28:35
I think most passive investors probably don’t pay enough attention to the timing, the intended timing, the state and timing of the investment on the front end. And And likewise, it’s not necessarily the investments fault, but they’re not paying enough attention to the their own cash needs. And seeing if it’s an appropriate investment for them. So it’s not something that they should be that they should go in lightly. I’ve had investors that I’ve done Oh, yeah, yeah. You know, you hear how I’ll send you money. And it always make sure you understand what what you’re buying and like, both of these guys are very, very sophisticated. But I think a lot of them don’t do a proper planning on the personal said, because generally on your real estate investment, your money’s going to get locked up for about five years. Whether or not it’s it’s an income generating thing we like. We like cash flows, and so we pay out income but that’s not paying back to your original $100,000 that you perhaps put in mistakes that I’ve made on underwriting early on is Failing to realize that GE when you buy the property, the local taxing authorities are going to reset the value of the property. And your new your new property taxes are not what the seller was paying, it’s going to be based on the purchase price. And so yeah, I did that in my first deal. And I still kick myself for it, because I’m a CPA, I knew better. Even in some of these districts that don’t raise property taxes very often, yeah, they aren’t going to do it when the property sells. I mean, that’s just, that’s just low hanging fruit for them, and it’s appropriate. And you got to plan on that. Likewise, your insurance, you’re not going to keep a similar insurance premium. From what your seller was paying. Sense, I’ve come across many sellers who were just being kind of dumb what they were insuring anyway. But your insurance is going to be based on the price you just paid is, you know, as a replacement value and, and things of that nature. So you’ve got to get to take those simple things into account. Whether or not you think it’s likely, like to date, every deal we’ve done has been a 100% full property. You still have to underwrite for the possibility of vacancies, that you can start that after leases expired, but you shouldn’t just assume 100% That all leases will renew. I had one just last month, who had been telling me their lease renewed February 1. They’ve been telling me for six months. Yeah, I’m going to renew I’m going to renew and I was being slow at sending them the lease. But we haggled out the price, we had all the details worked out before Thanksgiving, then they informed me on January 15, they were not going to renew. I never liked that tenant anyway. Because you know, that wasn’t the first time they hadn’t they had been untruthful with me, but so yeah, we had exactly 17 days of vacancy, because I was able to turn that unit around and rent it that quickly. And but it could have been it could have been 90 days could have been six months. Commercial doesn’t turn that fast. We’re just blessed to be in a very vibrant area. And in that it was there was a need in the first part of the year. There’s a lot of people looking for new office space. It was good timing on our part.
J Darrin Gross 32:52
Yeah, 17 days on a vacancy, I’d say sign me up. Yeah. And I’m curious on on a commercial turn. Was there any significant work he had to do?
Stewart Heath 33:08
No, no, we went in, and we had renovated that space for that tenant in 2019. They were very gentle on it. So we went in and touched up some wallpaper and gave it a nice cleaning. And that was about all there was to it. So we were fortunate in that realm was that you see that a lot in, in commercial, unless they’re just packing people into their office. And it’s not like when I was managing residential properties where even the good tenants would do so much. I mean, you were repainting the whole unit every two years and replacing flooring and stuff like that. The commercial with a lot less wear and tear.
J Darrin Gross 34:00
Yeah, no, I have come to appreciate words, it’s two sides of the same coin, I guess, you know, you have one, at least in the residential, which is mostly where I play as you know, if you keep pushing around, there is going to be turnover. And the good news if it’s, if it’s, you know, only a couple of years, they probably haven’t beat the place up too bad. If you have somebody staying as long time that’s a good thing because you’re not having turnover but usually when they do leave, it’s like an encampment and there’s usually some you know, quite a bit of stuff that was left that isn’t yours that you’ve got to you know take care of and basically helpful rehab on a you know, mostly like a single family property or something like that. So I that the commercials appealing just from you know, I’ve kind of come to learn this even about talking to some people about like these Airbnb models about how, you know, people they come and they they’re basically just, they’re they’re in there they’re kind of on their best behavior they’re not, you know, it’s not a kind of where now you’re gonna have dogs running around and kids and peanut butter and jelly and you know, whatever crayons on the walls and that kind of stuff, it’s more kind of come get to work down the professional kind of turn the lights off go home, kind of thing. So
Stewart Heath 35:20
That’s, that’s why I have gravitated to commercial. I’ve done residential, personally, I’ve done it professionally. In because at Harvard grace, we manage all of our own properties, which I’m actively involved in, we do that because it’s probably a whole nother show. But we think the model for property management, third party property is kind of broken. So we do that ourselves to ensure that we can deliver the pro forma that we sell to investors. But I don’t like dealing with with residents. They’re not business minded people. You know, it’s, it’s not personal, you know, when you go to collect rent from somebody who’s behind it, it’s at their apartment, it’s very personal. And they get emotional and and even though you can be behaved, you can, you can do it well, and you can treat people right. At the end of the day, you know, they gotta pay or get out. It’s the, to me the laws are actually more in favor of commercial landlords in the our residential landlords. And anyway, it’s just call it a lifestyle thing. I like dealing with professional people. Self Storage is sort of the same way. People don’t live that well. They’re not supposed to live there. But but, you know, the laws are such a hey, hey, are unlocking Yeah, you know, and it’s, it’s very straightforward. A dude, it ain’t personal. You know, but it’s, it’s it’s pay to stay. You know, it’s that kind of stuff. And I wish residential could be more like that. But, you know, when you’re dealing with people’s residences, you know, the laws are probably correctly in favor of the tenant. Primarily, because for 1000s of years, there have been bad landlords. So in mistreating people.
J Darrin Gross 37:28
Yeah, no, I think the most of the laws that we have came from, like you said, a need. There was some abuse somewhere that that occurred. And, and, you know, unfortunately, a lot of times, it’s it’s the rare exception that is that. But then the law basically says, Greg, don’t tolerate that anymore. And, you know, for the most, most people that were operating all along, you know, within the realm of reasonable, it’s not really a big deal for him. But still, like I said, there, there’s definitely a longer list of laws that affect residential tenants, and landlords, as opposed to the commercial leases are so Hey, Stuart, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And as such, I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk, when that’s not an option with a to see if there’s a way we can minimize the risk. And if we cannot avoid or minimize the risk, then we look to see if there’s way we can transfer the risk. And that’s what an insurance policy is at risk transfer vehicle. And as such, I like to ask my guests if they can look at their own situation, could be the market interest rates, political your, your tenants investors, however, you would like to frame the question and identify what you consider to be the biggest risk. And, again, for clarification, while I am an insurance broker, I am not necessarily looking for a an insurance related answer. And so if you’re willing, I’d like to ask you, Stewart Heath, what is the Biggest Risk?
Stewart Heath 39:32
I am willing, and I will dive into the pool. I think it’s a brilliant question. To me, the biggest risk is tenant selection. It’s not an insurable risk. You know, I do live in Tornado Alley. So you know, severe weather can be a risk but you can insure around that the biggest risk is essentially the income from the property. And the income from the property comes from tenants. And it is a professional, I think it’s a professional expertise that is developed to be able to underwrite a new tenant for a lease. It’s not just the first person that called and say, and is willing to pay you the deposit. And I use that example, because I’ve made that mistake before. But if you will take, you know, an hour’s worth of due diligence, either residentially or even commercially, and check into them yet third party reports, and do reasonable and customary means of verifying what what the tenant is telling you. And yet, then, then you will most of the time, select a proper tenant. If you don’t do that homework, your property will have income problems. And so what is a bad tenant? Well, number one is bad tenant that doesn’t pay. That’s one. But part and parcel with that is people who don’t pay usually bring other kinds of people to your property, whether it be multifamily, whether it be to your commercial office, your storage space, whatever, I have seen this over and over and over again, which actually begins to make other tenants feel uncomfortable. And so now your problem is a lot worse than just the one guy who’s not paying. And it was also easily headed off. By doing some basic due diligence on the front end, that’s the biggest risk I have in what we do. There are obviously other kinds of risks slip and fall risks, and we get sued by somebody whose coffee was too hot or whatnot. And, again, that’s insurable risk, we carry general liability as well as property coverage and, and on most of our properties. Like, we also get business interruption insurance, or, like, if a tornado takes out a lot of our storage buildings will, you know, we’re, we’re not only going to get repaid to have that rebuilt, but we will get income that we’re missing from those units that were that the tenants can’t use. So, but the biggest risk is the one that’s not insurable. And that, to me comes down to tenant selection.
J Darrin Gross 42:49
That is so appropriate for myself, and I’m sure all the listeners to know that, you know, selecting the tenant, and I know on commercial, it’s, it’s a lot more of a, I mean, you have the ability to to credit check and check, credit check, but just to really establish, you know, how credit worthy they are. But, in fact, if I understand, right, I mean, a lot of the commercial real estate is basically valued on the you know, the strength of your, your tenants, you know, if you’ve got, you got a bunch of people that have only been there for a little while, and they bear and they rarely pay or, you know, they don’t have a whole lot of credit, that’s probably a tougher sell than if you got, you know, name brands or established businesses with with significant credit history to do so.
Stewart Heath 43:41
Just in this building, I have a public company tenant. In your they’re always fun to negotiate leases with because they never want to pay a security deposit. And this will look at us, you know, anyway, we usually arm wrestle over that, but I’ve got everything from the public company to the single CPA, who is a great guy has been a great Senate, but there’s no backup there. So that’s essentially at least to a person in that situation. Great tenant, look glad they’re here. But, you know, it’s not exactly triple A credit. Like, you know, in some commercial properties, where you have a great big company that leases an entire building, well now that building is valued entirely on the credit in the terms of that lease. So you’re right.
J Darrin Gross 44:42
This is this is good stuff, and I appreciate you sharing with us the kind of mistakes and you know, what your experience has been and and how we can avoid historic where can the listeners go if they’d like to learn more or connect with you?
Stewart Heath 44:59
The best place to get information on me and connect with us is Harvard Grace Capital.com. You can find my Calendly link there. If you’d like to book some time with me, you can look at our resources there. We have lots of resources available for free, you can join our mailing list there and just follow what we’re doing. And I always say, I, I encourage people to use my Calendly link. I do love talking with people about real estate. Whether you have ever invest with me or not, or you just want to call me stupid. That’s okay. I still enjoy talking to you.
J Darrin Gross 45:33
That’s great. Well, Stuart, I cannot say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot. And I look forward to doing it again soon.
Stewart Heath 45:44
Thank you so much. I appreciate you having me.
J Darrin Gross 45:48
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