Gideon Pfeffer, CEO and managing partner at The GSH Group, joins host Slocomb Reed on the Best Ever Show. In this episode, Gideon discusses his pivot from investing in single-family homes to the multifamily space, investor sentiment and what he’s seeing in 2024, and why the “Stay Alive Till ‘25” approach is beginning to wane.
Gideon Pfeffer | Real Estate Background
- CEO and managing partner at The GSH Group
- Portfolio
- 7,500 apartment units
- Say hi to him at:
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Transcript
Slocomb Reed (02:57.666)
Best ever listeners. Welcome to the best real estate investing advice ever show. I'm Slocum Reed and mark your calendars for the best ever conference, April 9th to the 12th in Salt Lake city. You can go to best ever conference.com secure your ticket today and you can use the code connect C O N E C T to say 15% on your tickets. That's besteverconference.com.
Today we're joined by Gideon Pfeffer, who's joining us from Claussen, Michigan. His company is the GSH Group. He's the CEO and managing partner. GSH Group owner operates large apartment communities throughout the country. Their current portfolio consists of 6,500 multifamily units in 20 communities spanning six states. Gideon, can you tell us a little bit more about your background and what you're currently focused on?
Gideon Pfeffer - The GSH Group (03:52.006)
Yeah, thanks, Logan. It's really nice to be here. Appreciate the invite. My background is residential investing of all shapes and sizes. I started as a residential mortgage broker, right? When people were buying a house and they needed to get a mortgage to buy that house, that was me. That was like right after college. And I wish that I could say I had like a vision of what I wanted to do when I got out of college, but that's kind of where I ended up.
I learned about real estate and was convinced by a friend of mine to go out and buy an investment property together. So we pulled up some cash, we bought a property, we fixed it up, we put a renter in it and then we sold it to an investor as like a cash flowing property. And then we took that profit and we bought two more, did the same thing, bought four more, did the same thing, bought eight more and before we knew it, you know, we were, you know, a couple of years later, I guess we were, we were buying and selling a hundred, 150 houses a year. Yeah. So that was, that was kind of in my late twenties and early thirties, a high volume single family aggregator. We raised some money and we started aggregating pools of 50 to a hundred houses for institutional capital. This is kind of in the early days of the single family push.
Slocomb Reed (05:17.846)
What years was that?
Gideon Pfeffer - The GSH Group (05:21.15)
2010 to 2013, kind of in the midst of the global financial crisis and foreclosure crisis, we were opportunistic. So firms like, for example, like Blackstone, right? Like Blackstone's arm of single family is invitation homes, but invitation homes either didn't exist or was kind of just getting started and they needed boots on the ground to deploy capital.
And so we were one of those groups, dabbled in Build to Rent back then. It was called Build to Rent, believe it or not, in 2012 and 2013 also. And that was solving for builders with developed lots that couldn't build for folks because banks weren't giving out mortgages. So we'd pair up a builder who controlled the subdivision of unbuilt homes with an institutional group that wanted new construction, single-family homes.
Um, and, and play arbitrage, make some fees in the middle. And, um, 2015, I finished a, uh, a joint venture on, uh, where, where I bought and fixed up and sold about 700 houses. And, uh, and I was tired. And so my wife and I took a break throughout 2016, traveled to a bunch of conferences and, uh, unique destinations envisioned, like, what do we want the next chapter of our life and career to look like? And, um, overwhelmingly multifamily was what kept hitting the board for us. How do we create a business that's a little bit less of a trader business? It was always fees, fix and flip, sell, make a fee, all ordinary income.
How do we use what we learned over the last 10 years and create something that could make us cash up front, but also passive income and create wealth? And so I reached out to a couple of guys that were a little bit older than me, that had specific value in creating the GSH group. And we set out to build a portfolio of multifamily homes. That was in 2017. And I guess the rest is history, but there's a lot of stories along the way.
Slocomb Reed (07:43.622)
Yeah. Can you tell us more about what it sounds like you were succeeding at a very high level in that single family aggregation space? You may have mentioned already or started to mention, but why is it that you transitioned out of that?
Gideon Pfeffer - The GSH Group (08:03.13)
Yeah, so I had a lot of success in the single family aggregation space. And the main reason I transitioned out of it was at the time, my experience in that space was that it was hard to raise organized capital around single family in general, right? Scattered sites, single family.
And it was harder in 2010 and 2012 and 2014 than it is today, frankly, right? Like I think at this point, single family is a well accepted space and it's easier to get equity in debt financing for that. But that wasn't my experience up into that point. And also my experience in that space was even though I was fixing up properties and selling them, it wasn't your true fix and flip. You know, I would put a renter in and I would sell it as a cash flowing turnkey investment. I didn't enjoy the management of scattered sites, single family properties.
And the business model was all based on ordinary income and sales. So at the beginning of the year, I needed to start over. Like I may have sold 200 houses in a year, but you know, come January, I had to start all over. So I wanted to take what the lessons that I learned in single family residential and, and a residential investment, I should say in construction and property management and evolve into a business model that would. Not only pay me some money upfront, but it would also create wealth, create passive income and give me upside whenever the exit might be, right? All the reasons that a lot of us wanna get involved in multifamily or commercial real estate, that was true for me as well. And so I felt like the next evolution of my career was to move from scattered site single family to larger multifamily.
Slocomb Reed (10:44.758)
Gideon, I'm leading up to a question that I want to make sure I ask the right way. It's, it's going to be fairly kind of like a blunt cut to the chase kind of question, but I want to make sure my assumptions are correct. So when you were big in the single family space, you were effectively an aggregator for larger firms. Uh, it sounds like you were still in the sort of owner operator space where you were expected to manage these properties after they had been acquired.
Gideon Pfeffer - The GSH Group (11:14.978)
Uh, yes and no. So we had one division where we were selling to larger institutions. We didn't manage those, but we were also selling to your more mom and pop individual investors who were buying one to maybe 10 houses. Turnkey straight up turnkey. Yeah. We're, we're, we're not the original turnkey, but we were kind of doing it relatively early in the space, coming right out of the financial crisis. And so we had, at one point, I managed 400 single family houses for 200 investors in five different countries, and it was a nightmare. And I don't think I did it that well. But I learned enough. I learned enough to be dangerous about property management.
We did all the construction in terms of our homes and renovation. So I learned a lot about construction. And I just wanted to up level to a more institutional type. I wanted to create a more institutional type organization. And I wanted to do it under a larger footprint. You can buy 200 single-family houses as 200 roofs in lots of different locations, or you can buy a garden-style multi-family unit, excuse me, a multi-family complex with 200 units in one location. They just seemed to make a little bit more sense to me. At the time, I thought it would simplify things a bit more. And I've learned over time that when you have 5,000, 6,000, 7,000 units.
You have a whole new set of challenges and complications. But yeah, it just seemed like the next evolution of our career.
Slocomb Reed (13:34.306)
Gideon, you made the transition from residential real estate investing to commercial real estate investing on a, at a very high level and at a very large scale, but the same questions and concerns that a lot of residential investors have getting into commercial, I think still apply here. And I know one of the things that held me back from real estate syndication in the value add business plan at first was understanding the financial models for the general partnership, how it is that I was going to make money. And so I want to ask here, Gideon, when you were doing single family investing at a very large scale.
Slocomb Reed (14:25.014)
Where is it that your profit or your company's profit or your income came from? Was it in the transacting? Was it in the management or the operation of cash flowing rentals? And then again, where does the profit for GSH come from the way that you're currently structured with the larger apartment buildings?
Gideon Pfeffer - The GSH Group (15:40.834)
All right, so back when I was doing single family, the nature of the business was not to earn money off of, we didn't own the properties long-term. We didn't own them and manage them for ourself and earn money off of the income from rents collected. We would buy a property, and we would put our own renovations dollars into it, and then we would sell it hopefully at a profit, or we would buy a property, immediately sell it to an investor, and then have the investor send us the renovation dollars. So my money was always earned on a sale, which was typically, I would say, all the time, I would own the property less than a year.
So I didn't benefit from capital gains. And I was only as good as my next sale. So fast forward to the multifamily business. We, like many syndicators or many GPs, were able to earn a fee upfront upon acquisition. We also invest our dollars some of our own money in the property, pair up a suit with investors that earns a, hopefully earns a distribution, and some sort of return on that money. And then we also earn a promote or success fee.
So I've gone from one transactional income stream in single family to a three tiered income stream in multifamily through an acquisition fee upfront, through ongoing passive income from cash flow from operations, hopefully. And then if the property is successful as the general partner or the GP, there's a promote where I get, or my partners and I get a portion of the profits above a certain preferred return. So we're making money in the beginning, during ownership and at the end. Hopefully that answers the question.
Slocomb Reed (17:58.515)
It does, that makes a lot of sense.
This podcast is not an opportunity to promote any deals that are currently going on, Gideon. So I'm not asking about anything that may currently be under contract or anything you'd currently be raising for, but what is the most recent deal that you all have closed?
Gideon Pfeffer - The GSH Group (18:26.97)
closed in acquisition or closed in sale? So I'm going to give you two answers, if that's OK, because it's a unique time. I'm going to give two answers because it's a unique time. Yeah, so we've not been super active in 2022 and 2023. We purchased a $1,000,000, two properties in 2022 and started development on 90 units ground up. And then the last property that I bought that was an existing property was in March of 2023. And that was a 320 unit brand newly constructed and delivered A class asset in Grand Rapids, Michigan.
That we paid about $95 million for. In Grand Rapids, we're based in Michigan and Grand Rapids is on the west side of the state and it's, besides Ann Arbor where U of M is, which is its own little bubble, the western part of Michigan is probably the best for real estate and demographics and population and average median income. So we really liked the location and had already owned about 200 units there.
The most recent, acquisition that we've made, which is not like an existing community, was we bought, through an RFP, we bought a old schoolhouse in an affluent community in Michigan called Gross Point. We bought it from the city and we're doing an adaptive reuse on that property, turning it into 18 luxury apartment units and building eight town homes for sale on the site. And that's like an active project that we're working on at the moment.
Slocomb Reed (20:33.591)
Yeah, those are three very different kinds of projects that I was asking because I wanted to ask what kinds of do you will let me ask first are you involved a lot in investor relations for GSH?
Gideon Pfeffer - The GSH Group (20:48.87)
Yeah, as the CEO, I'm the face and the mouthpiece. I've got great investor relations support team that make me look good, but I'm the one doing the final review on all the reports. We over communicate. We're given property updates on a monthly basis and quarterly reports, but I'm also doing webinars and videos and such. So I'm...
Slocomb Reed (21:13.162)
Where would you say your specialty is?
Gideon Pfeffer - The GSH Group (21:43.198)
Coming from and knowing my background, having talked about my background, having been in residential investment of one way, shape or form from the finance side originally to brick and mortar boots on the ground with the single family plays, I've got a lot of tactical experience from identifying opportunities, underwriting opportunities,
organizing equity and capital around the opportunity and then communicating the ongoing, overseeing the operations and communicating the ongoing. I have done every single part of the business other than accounting, right? That's like the one piece that like, I've never gone into QuickBooks and messed around, nor do I really want to, but I can read a balance sheet and P&L pretty well at this point, right? Or a financial package of a property.
But I think that my superpower is people seem to know, get to know me and like me and trust me very quickly. I'm very transparent and communicative. And so that's really served me well as a leader within the organization, as well as organizing and being able to raise the amount of money that we raised to be able to acquire and build the portfolio that we have. I think my superpower is that people like and trust me pretty quickly. And hopefully I'll continue to use that superpower for good.
Slocomb Reed (23:21.858)
Nice. With the, you have a, in your acquisitions, the last couple of years, Gideon, you have a variety of business plans involved, you know, from ground up construction to repurposing a church building, to buying, just delivered uh, class A new construction in grand app rap as you were saying.
Slocomb Reed (23:57.834)
I'm sure the answer to this question is complex Gideon, but I want thinking about our limited partner listeners and thinking about your experience, um, in investor relations, the last couple of years in raising capital for those deals that are now closed. What, speaking broadly and I want you to get into specifics, but I have to ask the question broadly. What what is investor sentiment right now? among LPs What is it that you're seeing about? the return Expectations that they have and how they impact things like preferred returns and promotes.
Gideon Pfeffer - The GSH Group (24:42.258)
So I think from my experience, what I'm living on a day-to-day basis today in 2024, but even in 2023, investor sentiment is completely different than what it was in 2021 and earlier. I'm seeing investors be a lot more cautious about deploying capital. I think a lot of folks are waiting for a lot more some fear to subside and the idea of good deals to surface, distressed deals to surface, and the idea of preferred returns and promote splits have gone backwards from a sponsor perspective.
Where originally when we started off in 2017, we were offering a high preferred return, a higher preferred return. And then as the years went on and our track record grew going into 2020, 2021, as our preferred return offering could become lower, which is more advantageous for a sponsor.
Now we're having to offer much higher return profiles for investors. It's just, it's harder to raise money. I think that it has to do with the market, the sharp rise in interest rate. I think it has to do with, um, on a micro level, like from, from our existing investors, you know, um, we were very active throughout 2017 to through 2021, but you know, we purchased properties in late 2020, 2021 and 2022, um, at the top of the market.
Um, and, um, uh, circumstances and market factors, uh, around, you know, post COVID, um, inflation, high interest rates have turned those business plans a bit on their heads. Um, so what we're doing is, you know, solving for that over communicating. Um, but when I think when an investor sees that a business plan isn't going according to plan, despite, um, you know, whether they're, it's within an operators control or not, they become more hesitant. They become more cautious. And I think that we're in kind of that trough period within a market cycle where a lot of folks are waiting until others jump in. We hear about hundreds of billions of dollars on the sidelines waiting for distress. I think it's starting to slowly be deployed.
But I don't think it's in vogue at the moment to be making a ton of alternative investments. I thought that as the Fed, once the Fed said we're done raising rates and the market had a little time to stabilize to what the new normal looks like, then things would open up a bit. And I think we're kind of in the middle of that period, where we believe the Fed is done raising rates.
And we are where we are now, and I think we're going to have to wait until, unfortunately, there are sponsors out there that can't refinance or sell their properties at what they wanted to and have to get out quickly in urgency and in distress. And I know that I can raise money around distress, and I know that I can raise money around a brand new asset. But kind of just your bread and butter existing multifamily deal with a decent return, something that would be very easy for us to organize capital around in 2019, 20 and 21. That's a little bit more of a challenge. It kind of has to have a story and a sizzle right now. That was a long-winded answer, I'm sorry.
Slocomb Reed (30:03.51)
Gideon, your long-winded answer makes a lot of sense though. And it makes sense that while we may be experiencing a shift in the commercial multifamily market, the sentiment about the market may be lagging the actual shifts that we're experiencing when it comes to limited partner investors, especially because they are not as actively involved in their investments as you and I are in ours, if that makes sense.
But also, you know, there are people out there with 5% CDs. And so it takes a lot more for a return to be compelling at the moment.
Gideon Pfeffer - The GSH Group (30:49.67)
Yeah, and we're not seeing those compelling returns yet. There's still this disconnect, I think, between sellers and buyers. Because a lot of sellers purchased in a four to five cap rate environment. So to sell in a six cap or higher environment, where I believe we are today, would cause equity losses or worse.
In order to get the returns that investors are looking for, there's going to have to be a reset in market pricing or a reduction in interest rates. And when you look at the forward curve for the five-year treasury and the 10-year treasury, it looks like it's going to dip a bit in the next three years, but three years from now, literally, we're in the same place as we are today.
Now granted, we're in the same place, the forward curves didn't do us any favors in 2021 when we were deciding if we should buy rate caps or not. But like, conservatively speaking, the only way that we're gonna get to lower prices is for people that absolutely have to sell. And look, I mean, even in our portfolio, I'd be lying if I said that we didn't have some properties that aren't going according to plan.
In fact, we bought five properties at the height of the market using bridge debt. And we're actively negotiating loan modifications with our lender. Thank goodness we've got a good relationship with the lender and all five are with the same lender. So they're looking at us as like a large aggregate loan amount to solve rather than five individual deals or one small individual deal. So we're getting that done.
But that causes concern, I think, to a smaller, potentially unsophisticated in real estate LP. I'm on the newsletter. I get the emails from Best Ever. Just the other day, there was a video shared from a presentation last year about capital calls. The presenter was prepping the audience, he was like, I'm sorry that I might bring you guys down, but like everybody needs to know about this. And I thought it was probably one of the best presentations that could have been done at the beginning of last year.
Because for those who purchase properties in 2021 at the top of the market, looking at, and who perform using a look back of the last three years of expenses, everything changed interest rates went up, values went down, and expenses ended up being a lot higher than we anticipated. And so those business plans are upside down. So how are you gonna solve for it, right? And I think that that's what's gonna shake out the syndicators that are here a few years from now from the ones who aren't. Are they well-capitalized? Are they well-trusted? How are they responding to adversity?
You shouldn't really pick a sponsor for when times are good, you pick a sponsor for when times are more challenging and how are they gonna respond and do everything they can to protect your underlying investment. And so these are a lot of the things that my team and I are having to grapple with over the last 12 months. And the way I look at it is, if I wanna benefit as an operator and a sponsor from the good times, I have to respond also during more challenging times. And I think that that's where we are right now in this market cycle.
Slocomb Reed (35:20.962)
Gideon, but it was very much, there was a, it was a more somber tone at the conference in, in 23 and there were a lot of people saying things like stay alive till 25. Um, I, I can't miss the opportunity to plug the conference again. Uh, I know, uh, you, you were saying you're planning on attending or hoping to be there.
Gideon Pfeffer - The GSH Group (35:40.904)
Yeah.
Slocomb Reed (35:48.794)
I'll be there, so will the other, all the other hosts of this podcast, including of course Joe Fairless. Fantastic networking opportunity. I always have great conversations with really high level operators. In this context, I have to say operators, you know, and capital raisers and acquisitions people and all that, but people who are performing at a high level in what they do, I always have great conversations at the conference.
But the last question before we transition the episode, Gideon, with regards to the difficulties that are being experienced in the multifamily space right now, um, the debt difficulties for people who, uh, got short-term debt, um, at the peak, the, uh, difficulties of expenses increasing while, uh, revenue stagnates or rent rates go down. Are you in now that it's Q1 of 2024. Are you in the stay alive till 25 camp or what is your outlook right now?
Gideon Pfeffer - The GSH Group (36:59.402)
Um, I, so I have a, I have a gentleman, uh, named Mark Benyus who works for me, who's, uh, was around in the nineties when, uh, when the stay alive till 95, uh, phrase was coined and, uh, he was, he, he was sharing that with us as back, far back as 2022. I'd say that, um, I guess the short answer is yes, but it's not so dire, right? Like GSH will stay alive till 25 and much farther past that, but we have properties that we need to address inconsistencies with our business plan. Everything that you just said, there are much higher expenses than planned and revenues are stagnant or even less than what they were.
We found occupancy softening and delinquencies going up ever since 2022. And it's a much more challenging and management intensive time. And it's more of like on a property by property basis. Can we stay alive in certain properties until 25 or after? I believe that real estate is a long term play.
And the more time that we can buy a property that might not be performing, the better we will all be. So if there's properties that I have that I'm modifying the loans on, it's in a purpose specifically to buy ourselves more time because I believe that over time, three, five, seven, 10 years, we'll all do fine. We just need to get through an unforeseen challenging period in this real estate cycle.
Slocomb Reed (38:57.238)
That makes a lot of sense. Gideon, are you ready for the best of our lightning round?
Gideon Pfeffer - The GSH Group (39:01.69)
I'm ready. Bring it on.
Slocomb Reed (39:03.338)
What is the best ever book that you recently read?
Gideon Pfeffer - The GSH Group (39:09.336)
I'm more of a listener and I love listening to the All In podcast.
Slocomb Reed (39:14.85)
The All In Podcast, remind me who that is.
Gideon Pfeffer - The GSH Group (39:37.566)
So it's a, the All In Podcast is a group of tech investors and private equity investors, four guys that have been doing it for three or four years now. It's Chamath, Pali Hopatia, Jason Kalkanis, David Sachs and David Friedberg. And they're not real estate guys. And I find their dialogue about current events and business in general fascinating on a weekly basis.
Slocomb Reed (40:08.31)
Nice. Gideon, what is your best ever way to give back?
Gideon Pfeffer - The GSH Group (40:13.905)
My wife and I get back in a variety of ways, financially and with our time. I enjoy coaching and mentoring individuals who are younger than I am on a variety of different platforms, whether it be business, real estate, or relationship, or personal growth opportunities. I love being able to help others and see them flourish. That's probably one of the most rewarding things that I've been able to be a part of.
Slocomb Reed (40:53.494)
Gideon, I'm gonna change this question up. Within your current portfolio, I'm gonna say debt structuring aside, what is the biggest mistake you've made and the best ever lesson that you've learned from it?
Gideon Pfeffer - The GSH Group (41:10.098)
I think probably the biggest mistake that I made.
So there's a lot of mistakes and opportunities to learn throughout my career and especially recently. But I would say for me, looking at properties as, let me restart that. I was really, I was really interested in building a large portfolio. How many units can I have? Because the idea was if I can get up to 10,000 or 20,000 units, that ongoing free cash flow is just massive. And that goal of building a large portfolio took me away from the fact that I had purchased a lot of assets that had really increased in value.
And as there was talk about interest rates going up, I probably could have exited more than I did and taken more chips off the table, which would have made these last two years a little bit easier for me.
Slocomb Reed (42:24.254)
Is that an option that you were considering at the time?
Gideon Pfeffer - The GSH Group (42:27.746)
No, not really.
Slocomb Reed (42:29.634)
Gotcha. That being said, Gideon, what is your best ever advice?
Gideon Pfeffer - The GSH Group (42:41.306)
Success doesn't happen overnight. It's the stringing together of ongoing daily repetitive steps forward. I work every day at setting that big audacious goal and stepping towards that goal every single day and trying to detach from the outcome. And before I know it, I'm there or even farther.
Slocomb Reed (43:12.847)
And last question, where can people get in touch with you?
Gideon Pfeffer - The GSH Group (43:16.426)
Shoot me an email at Gideon at gshrealestate.com.
Slocomb Reed (43:25.142)
Those links are in the show notes. Gideon, thank you. Best ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show. Leave us a five star review, share this episode with a friend, and remember the discount code for the conference tickets is connect, C-O-N-N-E-C-T, for 15% off of the best ever conference tickets.
Thank you again and have a best ever day.
