Host: Trey Stone
Co-Host: Gary Blumberg
Topic: Transitioning from Employee to Business Owner
Future episodes will feature different investors and their experiences investing with Trey Stone
Background on Gary Blumberg
Trey and Gary worked together and have been close colleagues since. Trey has owned over 300 million dollars in apartment complexes in the Houston area. He went to school at UT Austin where Gary attended years before. Gary was the president of Dinerstein for 25 years (https://www.dinersteincos.com/). Dinerstein was the largest student multi-housing developer in America. He also worked at Trey’s company for 5 years and elevated it during his time there with his financial experience. Gary holds a broker’s license and a CPA’s license. He also served as the President of the Texas Apartment Association and as a Regional Vice President for the National Apartment Association.
Gary got started in the apartment business after he established his career in accounting. He worked as a CPA for a national firm for about 9 years then was approached by a college friend who worked for Dinerstein. They were looking to grow and thought Gary would be a good fit for their management company even though he hadn’t worked in the apartment industry before. Gary learned the industry and gained experience in conventional apartments, student housing, senior housing, and tax credit housing all over the country. It was a learning experience the entire 25 years. Gary’s accounting degree and CPA background is unique and serves him well in this industry because he understands the finances in a deeper way than most. He also has a reputation as a teacher and nurturer.
The Key to Success
Gary feels like his success is dependent on the people he works with. He always tried to create a good work environment and company culture. The most important people to him were the people out there doing the work. Most people in the industry worked through the ranks and Gary recognizes that his background is different because he started out running the company. He needed them to be successful and focuses his concentration on his people as opposed to some of the other elements of the ownership. Trey agrees that the people you employ have the biggest impact on your investment. It’s great to buy a property for a lower price, get a better deal, have a good renovation, but it really comes down to your people. That’s going to have the biggest impact on what your return on your investment is, what your occupancy is going to be, and what your tenant turnover is going to be. Trey appreciates this lesson he learned from Gary during the years they worked together and applies it in his company today.
“Spending time with people is not a distraction from the numbers. It’s the time with the people that leads to better numbers.” Trey Stone
Above and beyond Gary’s expertise, board positions, values, and accolades- Trey is most fascinated by Gary’s transition from a high level employee to a business owner and real estate investor.
The Risks of Success
Deals are Nerve Wracking, but that’s Healthy
Trey asked if Gary’s transition into real estate investment is scary and Gary replied that it’s still nerve wracking until a deal closes. It’s often recognized that you should be nervous in these situations- even on Shark Tank, Mark Cuban will comment if someone isn’t nervous enough. Anxiety in a deal is a healthy thing. Specifically for Gary, his anxiety comes from a concern that he’s spending too much on a deal when it’s quickly accepted. Also, he invests with other partners and is responsible for putting the deal together himself which can be nerve wracking. Trey expressed full confidence in Gary’s ability to serve as the lead investor in a deal due to his immense experience.
Gary Blumberg “It’s a risky business and you have to be able to step out there and understand what you’re doing but take some risks.”
Trey explains that sometimes the transition from an employee to an entrepreneur is really difficult. Being a really successful employee feels safe vs. “going for it as an entrepreneur.” Even if you’re experienced, when you’re brand new to a business as an entrepreneur it feels very different. The shift in mentality can even be difficult- from employee to business owner. He asks Gary to explain if any of these sentiments factored into his decision in making the transition to business owner.
Gary responds that it wasn’t an easy transition- it is comfortable to get a paycheck every month when you have a family to support. Gary has a conservative, CPA, mindset and that consistency felt safe so naturally the transition was not easy.
Gary is currently working on a deal that hasn’t closed yet. His investor group is small and consists of close acquaintances. They purchased a property in 2017. They considered refinancing it while rates are really low but a real estate broker reached out with a potential buyer. After some back and forth with potential buyers, Gary accepted an offer and it’s scheduled to close in the coming week. The deal includes a 140-unit property plus a smaller 12-unit property across the street from it. The return on this will be higher than $10,000 per unit which translates to more than 1.5 million dollars.
To make the property more appealing, add value, and command a higher price than what they paid for it Gary did some basic things to upgrade them. Gary likes these types of “value-add” investments in C market apartments. This classification means they are older apartments, typically from the 1970s or 80s. On this property, Gary upgraded the exterior with fresh paint and new roofs. He also upgraded the leasing office and worked on the pool. On the interior he upgraded the flooring, electrical fixtures, plumbing fixtures, fresh paint, and made them look cleaner and nicer. This adds value to the units that people are willing to pay more for.
“Improving the quality of the tenants life, that’s what allows you to increase the rent.” Trey Stone
This type of deal really does require an investment into the property to add value and improve the lives of renters to make a profit from the deal. Value- add investments are also good for the community- all those who live there and also the surrounding areas.
When you upgrade apartments in this type of investment you have to be careful because you still have to make it work for the market they’re in and ensure you can collect enough rent to see your return on the “value-add” investment. If you over do it, you might not get enough increase in the rents to cover the upgrades. You also have to consider the competition in the area and what they’re doing. If you’re fixing yours up and no one else in the area is doing the same then it doesn’t improve the area and attract people to live there- not because your property isn’t nice but because the neighbor’s isn’t. It’s a supply and demand business and you want the competition doing well because that means the area is doing well. If you can add value and you’ve seen it happening in that market then the market will sustain it. It’s also important to look at other parts of the area. If retail centers in the area are empty, that doesn’t bode well for the market. You want to see that the apartments are in a thriving area and that there are jobs. If people are working and we’re adding jobs, everyone does well. If people are losing jobs, everyone hurts. It’s important to know where the potential renters are working and that they have an opportunity to work.
Houston’s Job Market
One of the reasons that the apartment business has been a good investment, specifically in Houston, is because jobs are added every year, it grows the population, it grows the demand, and that makes these types of investments more valuable.
In the C-market, there is no competition in terms of more apartments like that popping up but you still depend on the job market. The people that live in those types of apartments are good and hardworking people who depend on a thriving economic market.
Gary Blumberg believes in Houston and its ability to rebound in tough times. Even when the market has been over-built, Houston has always grown its way out of it and caught up. He is confident that Houston will recover even from the current crises. He’s been watching these ups and downs in the business cycle in Houston since the 1980s when he got into this industry. Gary has seen Houston recover from economic blips over the years.
Today’s Challenges vs. The Past:
B & C Asset Class
In the 1980s the market crashed so hard that people actually bumped up and out of these asset classes. People in B asset classes moved into A and people in C asset classes moved into B because the values dropped so low. The challenge then, was not the competition but the number of renters for these specific asset classes grew thin as they now could move up into higher asset classes.
Gary doesn’t see potential for this to happen again during the current crisis because now there is a bigger disparity between the asset classes. For the type of assets that are being built, even if they lose value, it would be really rare for them to lose so much value to drop to comparable prices of B & C asset classes.
Any new properties being built, by definition are not B & C class assets so no new competition will arise. From 2010-2020 prices have been steadily increasing and now the current downturn is causing a large amount of loans in forbearance. This will cause a lot of deals to open up in 2021. Distressed owners can’t raise rents because people can’t pay so there could be opportunities early next year to make investments as people offload these assets. Now is the time to prepare for those opportunities and B & C asset investments are still wise investments.