Latest / The Land Development Podcast with Ryan Glick / What Investors Look for Before Funding a Real Estate Deal with Mark Khuri - TLP185

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What Investors Look for Before Funding a Real Estate Deal with Mark Khuri - TLP185 · The Land Development Podcast with Ryan Glick

• 0:00
  SPEAKER_01: You know, I just told him, I'm like, look, I've ran the numbers so many different ways.
• 0:04
  SPEAKER_01: I don't see how we're not hitting a 20% average annual ROI to our investors.
• 0:08
  SPEAKER_01: He said, Great, show them 15.
• 0:10
  SPEAKER_01: And so just that idea of, and you know, I was young and hungry.
• 0:14
  SPEAKER_01: I was like, wait, why do we do that?
• 0:15
  SPEAKER_01: I'm telling you, we can get 20.
• 0:17
  SPEAKER_01: And he's just going back and forth about, you know, always trying to underpromise and over-deliver.
• 0:37
  SPEAKER_00: Hey, what's going on, everybody?
• 0:38
  SPEAKER_00: Welcome back to the Land Development Podcast.
• 0:40
  SPEAKER_00: I am your host, Ryan Glick.
• 0:42
  SPEAKER_00: I'm excited to have with me today Mark Curry.
• 0:45
  SPEAKER_00: Mark is the co-founder and CEO at SMK Capital Management.
• 0:48
  SPEAKER_00: Mark, thanks for joining me.
• 0:49
  SPEAKER_01: Yeah, thanks for having me, Ryan.
• 0:51
  SPEAKER_01: Good to be here.
• 0:52
  SPEAKER_00: Well, I, you know, I want to get into your background before we jump into some of the topics that we're going to get into.
• 0:56
  SPEAKER_00: And, you know, before we press record here, I was kind of talking about a lot of the people who listen into the show are developers and builders.
• 1:04
  SPEAKER_00: And so, you know, you have a breadth of knowledge, you know, in the capital space and being able to, you know, talk about real estate investments and everything.
• 1:13
  SPEAKER_00: And, you know, we're going to, we're going to really focus today on, you know, some of the fundraising.
• 1:18
  SPEAKER_00: We're going to talk about really things that will help developers and builders.
• 1:22
  SPEAKER_00: And before we get into some of those topics, I first want to get into your background.
• 1:26
  SPEAKER_00: And can you share how you kind of your early career and walk us through that and how you got into your company right now?
• 1:35
  SPEAKER_01: Yeah, yeah.
• 1:35
  SPEAKER_01: Happy to.
• 1:36
  SPEAKER_01: Thanks, Ryan.
• 1:37
  SPEAKER_01: So essentially, I started a career in corporate finance.
• 1:42
  SPEAKER_01: So a lot of spreadsheets, budgets and planning, internal auditing.
• 1:46
  SPEAKER_01: And uh that transitioned pretty well into real estate investing.
• 1:50
  SPEAKER_01: Um I also was in operations management for a number of years.
• 1:55
  SPEAKER_01: And so yeah, those two meshed well for real estate.
• 1:58
  SPEAKER_01: And I started uh, like a lot of us do, very active investing on the side after work, buying a fixer upper and going there every single day and going to Home Depot and you know, doing everything yourself, and then pulled some money out of that one, partnered with my brother, bought a fourplex.
• 2:15
  SPEAKER_01: We overpaid, over-renovated, overspent, over everything, learning a lot by doing.
• 2:22
  SPEAKER_01: Um, but that was uh, geez, when was this?
• 2:24
  SPEAKER_01: 2005-ish.
• 2:25
  SPEAKER_01: So during the previous cycle before the recession.
• 2:29
  SPEAKER_01: And so then we just kept going, right?
• 2:32
  SPEAKER_01: It was like, okay, wow, everything's on sale.
• 2:35
  SPEAKER_01: You can see 2008, 9, 10, you're buying stuff at 50 cents on the dollar.
• 2:41
  SPEAKER_01: And so just partnering with my family, my folks, my aunts, uncles, cousins, anyone that was interested at the time.
• 2:48
  SPEAKER_01: And we built up a small portfolio, again, all while working full-time.
• 2:52
  SPEAKER_01: Uh, mainly heavy, kind of distressed value add, all cash from the bank kind of purchases, REOs, short sales, foreclosures, and uh forcing appreciation through, you know, construction, renovations, uh, upgrades.
• 3:10
  SPEAKER_01: By 2010, I was hooked.
• 3:12
  SPEAKER_01: I left the W-2 and uh started our company, SMK Capital Management.
• 3:17
  SPEAKER_01: Actually, partnered with my father.
• 3:19
  SPEAKER_01: He's since retired, but SMK is his and I's initials.
• 3:22
  SPEAKER_01: And we went out and started raising capital from people outside of just our family, you know, those that already knew, liked, and trusted us, um, and started diversifying into other real estate sectors.
• 3:35
  SPEAKER_01: And, you know, that was what, 16 years ago now?
• 3:38
  SPEAKER_01: And so we've done a lot since, but that's that's the early days and kind of how I got started.
• 3:42
  SPEAKER_00: Well, that's really cool.
• 3:43
  SPEAKER_00: And I I'm curious, did you, was your dad or anybody in your family in this industry before you got into it, or did you kind of all figure it out together?
• 3:53
  SPEAKER_01: So my father's been a real estate investor since the 70s.
• 3:56
  SPEAKER_01: And so uh uh he's a retired surgeon by trade as well, and so just always doing something.
• 4:03
  SPEAKER_01: But yeah, we had real estate in our family growing up.
• 4:06
  SPEAKER_01: You know, some of my earliest memories are are when we're sitting in the family room and he comes home with a bag of quarters from the laundry machines at the apartment building, and we had to sit there, my brothers and I, and count them and stuff them in the little sleeves to deposit them in the bank.
• 4:20
  SPEAKER_01: And so you start learning that money comes out of properties often, not always, but that's that's the early days.
• 4:27
  SPEAKER_00: Yeah, well, I love that.
• 4:28
  SPEAKER_00: And I I love those stories of when you grow up in a family that's in the industry, and maybe from a young age you feel like, hey, you know what?
• 4:34
  SPEAKER_00: I may not start down this path, but this is where I want to end up.
• 4:39
  SPEAKER_00: Did you have that feeling early on, or did you legitimately maybe didn't know that you were gonna end up where you're at right now and you thought you were gonna go a different path?
• 4:47
  SPEAKER_01: Yeah, I did not know that real estate was the path for me.
• 4:50
  SPEAKER_01: And what's interesting, I remember uh uh in college, you know, I had to pick some some elective courses, and uh one of them was RE101, and I didn't even know what that meant, and I signed up, and sure enough, it was real estate.
• 5:05
  SPEAKER_01: And so I was in my first real estate class just because I needed to pick something to get the credits, and uh I loved the class, and so that was a big start.
• 5:15
  SPEAKER_01: But um, I always wanted to be an entrepreneur that was in the back of my mind, and I I did like the numbers and the math and the money side of things, but uh didn't know that real estate was gonna be the way I went, and so you know, here we are.
• 5:27
  SPEAKER_00: Do you uh have any early memories from you know, from your dad that maybe he taught you or things that you still keep with you today?
• 5:34
  SPEAKER_00: You mentioned the the quarters that he brought home and you kind of understood where that came from.
• 5:38
  SPEAKER_00: It wasn't magic or anything like that.
• 5:40
  SPEAKER_00: It was from these investment properties and everything.
• 5:42
  SPEAKER_00: Do you have any other lessons learned from those younger years?
• 5:46
  SPEAKER_01: Yeah, there's a couple.
• 5:48
  SPEAKER_01: Uh one, we were walking a you know, pretty distressed property in Florida.
• 5:53
  SPEAKER_01: This is probably 2008 or nine.
• 5:57
  SPEAKER_01: And sure enough, we went in the attic to check it out, which wasn't a smart idea.
• 6:01
  SPEAKER_01: And uh he stepped on he was not walking on the two by four, and he went right through the ceiling and huge nails, scraped up his leg, there's blood everywhere, and we had to pull him out of there.
• 6:12
  SPEAKER_01: And so, you know, it was uh it was definitely a memory of, you know, if you don't have to walk in the attic, don't let someone else do it.
• 6:19
  SPEAKER_01: But on a more of a deal level, I mean I remember we were we were we were underwriting a deal.
• 6:27
  SPEAKER_01: And I forget if it was a duplex or a triplex or something, but it was uh uh vacant and we were gonna renovate it and then rent it and sell it.
• 6:35
  SPEAKER_01: And you know, I I ran the numbers, you know, five, six, seven different ways to try and figure out what's the likelihood case, the best case, and then like the downside protection case.
• 6:46
  SPEAKER_01: And, you know, I just told him, I'm like, look, I ran the numbers so many different ways.
• 6:52
  SPEAKER_01: I don't see how we're not hitting a 20% average annual ROI to our investors.
• 6:57
  SPEAKER_01: He said, Great, show them 15.
• 6:59
  SPEAKER_01: And so just that idea of, and you know, I was young and hungry.
• 7:03
  SPEAKER_01: I was like, wait, why do we do that?
• 7:04
  SPEAKER_01: I'm telling you, we can get 20.
• 7:06
  SPEAKER_01: And he's just going back and forth about, you know, always trying to underpromise and over-deliver.
• 7:11
  SPEAKER_01: And so that was a big part of some of my earlier lessons when he taught me as well.
• 7:15
  SPEAKER_00: Well, let's talk about your company.
• 7:17
  SPEAKER_00: So SMK Capital Management.
• 7:18
  SPEAKER_00: Uh, for those who are listening in that may not be familiar with your company, could you talk about what you guys do?
• 7:24
  SPEAKER_01: Yeah, we are a essentially evolved to a private equity real estate investment firm.
• 7:30
  SPEAKER_01: We utilize uh relationships with other operating partners to access a lot of private real estate opportunities.
• 7:39
  SPEAKER_01: We raise capital from our investor network into an SPV or special purpose vehicle that we will create and manage.
• 7:48
  SPEAKER_01: And then we deploy and allocate capital to different deals that we we like and that meet our investment criteria.
• 7:55
  SPEAKER_01: And so, fund manager, investment manager, you know, all accurate descriptions of what we do in our firm.
• 8:03
  SPEAKER_01: We do focus on diversification.
• 8:05
  SPEAKER_01: So we like to invest across different real estate sectors, regions, operating partners, strategies, you know, a big one for us.
• 8:15
  SPEAKER_01: We do like cash flow.
• 8:16
  SPEAKER_01: And so uh we're trying to almost always provide our investors with, you know, immediate cash flow in year one.
• 8:25
  SPEAKER_01: Um, we're looking for average cash flow, usually 7 to 12% over the hold.
• 8:31
  SPEAKER_01: Still usually starts a little lower and then it ramps up.
• 8:35
  SPEAKER_01: Average annual ROI targeted is uh you know, call it in the low to mid teens these days.
• 8:41
  SPEAKER_01: And equity multiple uh 1.5 to 2.5x is where most of our deals land.
• 8:48
  SPEAKER_00: So you mentioned you're doing projects or investments uh around the country.
• 8:52
  SPEAKER_00: Uh what's where's home base?
• 8:54
  SPEAKER_00: Where's your headquarters at?
• 8:55
  SPEAKER_01: Live in Bend, Oregon.
• 8:57
  SPEAKER_01: So it's a great place to raise a family, but uh we don't do much investing out here.
• 9:02
  SPEAKER_00: Yeah.
• 9:03
  SPEAKER_00: Well, what's uh so being out in that area, is that just uh where you were raised out in that area and that's why you live out there, or what is it about Oregon that uh has uh no?
• 9:10
  SPEAKER_01: I'm actually from the Northeast, upstate New York, born and raised, and so uh moved to California when I was working in finance.
• 9:18
  SPEAKER_01: My company moved me to to the Los Angeles area and just never left the West Coast, honestly.
• 9:24
  SPEAKER_01: It's a lot better weather, and we my wife and I just kind of stumbled on Bend, Oregon about 10 years ago.
• 9:31
  SPEAKER_01: Um, and we moved up here and haven't looked back since.
• 9:35
  SPEAKER_00: What's it like uh managing, you know, projects or investments or even doing due diligence on certain, you know, prospective investments and everything from a remote location or a location where you're not necessarily doing the projects in your backyard.
• 9:49
  SPEAKER_00: What does that process look like for you?
• 9:52
  SPEAKER_01: Definitely fine-tuned over many, many years, but we uh we're looking at two to three investment opportunities every single day.
• 9:59
  SPEAKER_01: So roughly six to seven hundred a year.
• 10:02
  SPEAKER_01: From that, we invest in about 1%.
• 10:04
  SPEAKER_01: And so it's a filtration process.
• 10:07
  SPEAKER_01: We have a 40-point due diligence checklist that we've created and follow to really fine-tune and weed out most of the nose to find specifically what we're looking for.
• 10:19
  SPEAKER_01: Um, you know, sponsor operating partner evaluation is critical.
• 10:24
  SPEAKER_01: That's one of the first and most important steps.
• 10:27
  SPEAKER_01: And it never really ends because even after we invest with a group, we're on asset management calls with them and constantly tracking, monitoring, following progress, you know, what kind of hurdles and obstacles and challenges do you have to overcome, and how do they handle those, and how well do they communicate, and how transparent are they, and how accessible, and all these things matter, right?
• 10:48
  SPEAKER_01: Because we're relying on them to execute on the day-to-day operations and deliver.
• 10:53
  SPEAKER_01: And so that's a big part of the due diligence.
• 10:56
  SPEAKER_01: And then, you know, from there it's deal analysis, underwriting, market analysis, financial analysis, uh, lots of metrics, due diligence.
• 11:07
  SPEAKER_01: We often visit the properties, we're looking at the division on ground, right?
• 11:12
  SPEAKER_01: The team, who's gonna handle the day-to-day, and then you know, we're always trying to weed out red flags, yellow flags, get clarification and that kind of thing.
• 11:21
  SPEAKER_01: Um, so yeah, it's a it's a process.
• 11:24
  SPEAKER_01: That's where we spend a lot of our time.
• 11:26
  SPEAKER_00: Well, doing, I mean, you've obviously done thousands, you know, evaluated thousands of these different opportunities over the years and, you know, digging into 1% or even probably less than 1% of these that you actually invest in.
• 11:37
  SPEAKER_00: You know, what's what are some of those first things that you're looking at that allows you to just quickly say, nope, nope, or I'm I'm moving on.
• 11:43
  SPEAKER_00: Are there certain like these red flags that you speak of?
• 11:46
  SPEAKER_00: What are those that um may be helpful to people listening in?
• 11:50
  SPEAKER_01: Yeah, I'll break it down into a few categories, right?
• 11:53
  SPEAKER_01: So let's start with the first one, like the sponsor and operating partner.
• 11:56
  SPEAKER_01: Um, pedigree, expertise, size of the team.
• 12:01
  SPEAKER_01: You know, we we we were not going to invest our investors' capital into a one or two man team.
• 12:06
  SPEAKER_01: It just doesn't work for us.
• 12:08
  SPEAKER_01: God forbid something happens to them, you know, it could greatly disrupt the business and and our capital.
• 12:15
  SPEAKER_01: And so that's a a big one where it doesn't mean that the deal can't go well, but we just find it to have too much risk.
• 12:21
  SPEAKER_01: And so we're constantly measuring risk and reward.
• 12:24
  SPEAKER_01: And so that's that's one factor.
• 12:27
  SPEAKER_01: Uh if the operator team is potentially, you know, new to the sector, maybe they pivoted from senior housing to apartments or something like that.
• 12:38
  SPEAKER_01: We'll pause, right?
• 12:39
  SPEAKER_01: It's it's new for them, let them learn on someone else's money or their own money.
• 12:44
  SPEAKER_01: Um, so those are just a couple quickies on size and uh category that they're focusing on.
• 12:51
  SPEAKER_01: From there, you know, there's a lot of things in the underwriting that we'll look at uh that can be red flags or have us just pause, but some structural, like we don't like preferred equity ahead of common equity.
• 13:07
  SPEAKER_01: If we're gonna invest in common equity, it just having pref ahead of us, especially if the amount or the terms aren't disclosed, which we see a lot of times.
• 13:16
  SPEAKER_01: It's like, hey, we're we're gonna have this tranche ahead of you, but we don't know exactly how much yet.
• 13:21
  SPEAKER_01: And so it just adds as more debt and increases risk for common equity, but it also can increase return.
• 13:28
  SPEAKER_01: And so some people like it, but we we just tend to stay away from that.
• 13:33
  SPEAKER_01: Floating rate loans, you know, without adequate rate caps or maybe expensive renewal costs, you know, we tend to stay away from those.
• 13:42
  SPEAKER_01: Uh short-term loans, again, we're trying to weather a storm if there's something that happens in the economy or the local market, you don't want to be forced to sell at the wrong time.
• 13:54
  SPEAKER_01: And that's where you can lose money in real estate.
• 13:57
  SPEAKER_01: Waterfall splits, all can be deal killers, just to be honest.
• 14:01
  SPEAKER_01: We've seen some.
• 14:02
  SPEAKER_01: It's just like eye-popping at what people invest into, and we'll just throw the deal out within a matter of minutes.
• 14:07
  SPEAKER_01: And so if you want me to get into numbers, I'm happy to, but those are just some of the the categories we could dive into.
• 14:14
  SPEAKER_00: Well, I think what uh I think would be interesting is do you have any like a deal in the past that you walked away from and you're able to look in hindsight and say that, yeah, I'm glad I walked away from that one?
• 14:27
  SPEAKER_00: And then I'm curious on the flip side too.
• 14:29
  SPEAKER_00: Do you have some that you look back on and uh you know you passed on it, but then you know, you look back on it and you say, Man, we we uh missed on that one.
• 14:38
  SPEAKER_00: But it's still, I mean, obviously still okay, but do you have any examples like that?
• 14:42
  SPEAKER_01: Yeah, totally.
• 14:43
  SPEAKER_01: I'll give you an example, excuse me, of an apartment deal we passed on recently that, you know, within five minutes of looking through the deck, we just threw it out and we're like, whoa, run away.
• 14:52
  SPEAKER_01: So I don't remember the exact number of units or where it was located, honestly, but it was in the um in the Sunbelt region.
• 14:59
  SPEAKER_01: It was an acquisition, you know, over 90% occupied at the time of purchase.
• 15:05
  SPEAKER_01: But some of the red flags for us, they had a four percent acquisition fee, which was you know, one, two percent is normal.
• 15:13
  SPEAKER_01: Double that is a lot.
• 15:15
  SPEAKER_01: Seven and a half percent construction management fee.
• 15:19
  SPEAKER_01: And it was unknown, like I'll keep going anyway.
• 15:24
  SPEAKER_01: What what what it came down to on this deal, we like to look at what's the purchase price versus the total all-in cost.
• 15:32
  SPEAKER_01: And it was 33% higher, the total cost versus the purchase price.
• 15:36
  SPEAKER_01: And so that's with all the fees and the different front-end loading.
• 15:40
  SPEAKER_01: Um, I I think that also included CapEx.
• 15:43
  SPEAKER_01: So you have to always look at that because that's money that's gonna go back into the property for renovations, upgrades, and hopefully improve rent roll.
• 15:53
  SPEAKER_01: But you know, if you have that big of a delta between purchase price and all in cost, it means that the value needs to increase by 33% before you can even break even.
• 16:04
  SPEAKER_01: And so that's just a big, big uh uphill battle to get just to break even right off the gate because again, fee structure was way out of line.
• 16:14
  SPEAKER_01: And so that was a big red flag.
• 16:16
  SPEAKER_01: There was pref equity ahead of common equity, the amount was not disclosed, uh, floating rate loan with two one-year extensions.
• 16:25
  SPEAKER_01: Um they built over a hundred basis points of cap rate compression into the projections.
• 16:30
  SPEAKER_01: So they expected the market to significantly improve.
• 16:35
  SPEAKER_01: And um, pretty sure they had negative leverage on it going in day one, and they had a category in their pro forma called operational reserve release, which is a fancy way of saying we're gonna overraise capital and return it to you in the first year or two because there isn't enough cash flow coming out of this thing to show you a return.
• 16:57
  SPEAKER_01: And so, you know, return of investment versus return on investment, it's a big all these are no-nos that we saw them all in just one deal.
• 17:08
  SPEAKER_00: So wow.
• 17:10
  SPEAKER_00: Do you you had mentioned uh when you saw you saw the pitch deck and you know within five minutes you threw it out?
• 17:15
  SPEAKER_00: I I'm curious for I'm sure a lot of the developers and builders out there listening in, many of them probably raise capital or they're in the process of now or they will at some point in the future.
• 17:27
  SPEAKER_00: What are your thoughts on how they should approach the capital raise as far as the presentation side of things, right?
• 17:33
  SPEAKER_00: So the the details that are put together from your thought process, you know, is it, you know, keep it simple and really focus on only certain things, or what what are the what are the things that people can do that you feel will catch the attention of the investors?
• 17:47
  SPEAKER_01: Yeah, it's a good question.
• 17:49
  SPEAKER_01: So I think we might not be your typical retail investor, right?
• 17:53
  SPEAKER_01: We're analyzing this from more of an institutional lens and and raising capital from our investors.
• 18:00
  SPEAKER_01: And so it it it does, it's not a one size fits all answer, right?
• 18:04
  SPEAKER_01: You've got uh maybe your retail investor who's looking for something more simple and easy to follow versus us, you know, we want to see the details, we want to see the financials, you know, too much is is not an option, right?
• 18:19
  SPEAKER_01: You can can't give us too much detail, right?
• 18:21
  SPEAKER_01: When it comes to projections and transparency and underwriting.
• 18:25
  SPEAKER_01: Um, and so we like to really get in the weeds.
• 18:28
  SPEAKER_01: Now obviously sophisticated investors are very similar where if the deck's too thin and there's just not enough detail, all you're doing is is creating this, you know, series of questions that need to get answered that could have already been answered in the first place.
• 18:45
  SPEAKER_01: And so it's uh oftentimes can be a sign of, you know, I don't know, lack of effort, maybe, or too simple isn't always very good, in my view.
• 18:56
  SPEAKER_01: I I'd rather have more information than less.
• 18:59
  SPEAKER_00: Do you so you had mentioned you guys do um roughly two to three of these deals per day, or you analyze two to three of these a day, and then you know, over the course of the year, 600 to 700 of them.
• 19:10
  SPEAKER_00: Uh what is it about?
• 19:12
  SPEAKER_00: Is it ever just something where you look at one and it it like stands out to you?
• 19:17
  SPEAKER_00: Or I mean, are you literally digging into every single one so how it looks isn't as big of a deal as the substance inside of it?
• 19:25
  SPEAKER_01: Yeah, visually appealing isn't that big of a deal as long as there's not, you know, typos and we've seen that too.
• 19:32
  SPEAKER_01: Um math that doesn't add up, we've seen that.
• 19:35
  SPEAKER_01: But when you're a little more sophisticated, you don't tend to find those issues.
• 19:38
  SPEAKER_01: It's more looking through the deck and trying to figure out is this something we want to look further into or not.
• 19:45
  SPEAKER_01: And, you know, two, three, four no's in a deck, boom, we just throw it out.
• 19:51
  SPEAKER_01: We don't waste more time with it.
• 19:52
  SPEAKER_01: And so it's not always like someone's doing something wrong.
• 19:56
  SPEAKER_01: I don't want to give that impression.
• 19:57
  SPEAKER_01: It's just that the deal may not fit for what we're looking for, right?
• 20:00
  SPEAKER_01: If there's too heavy of a value add and there's no cash flow, there's nothing wrong.
• 20:05
  SPEAKER_01: It just doesn't work with what we're trying to do.
• 20:07
  SPEAKER_01: Or if it's in a sector that we don't invest in, like hotels or office or senior housing or student housing, you know, again, we'll might take a look at it, but it's probably not going to be something we'll put capital into.
• 20:19
  SPEAKER_00: What asset classes are you really interested in today?
• 20:23
  SPEAKER_01: So, yeah, I mean, we've invested in probably over a dozen real estate sectors over the years.
• 20:29
  SPEAKER_01: I'd say over the last eight years, we've really fine-tuned it down to kind of our top five or so, which is uh mobile home parks, some self-storage, uh industrial, which can be small bay industrial or triple net sale leaseback industrial.
• 20:48
  SPEAKER_01: We also invest in some multifamily and uh industrial outdoor storage is another one that's pretty new for us, and some private debt as well for income.
• 20:58
  SPEAKER_00: When uh so kind of going back to what we were talking about with the presentation side of things, so say that you go through, you look at the the pitch deck or the you know the financials and everything, and you're like, all right, this we should, we should go to the next step with this and we should have a conversation with the operator or take a look at um at the asset.
• 21:16
  SPEAKER_00: What are you looking for in that conversation when you're actually meeting the operator or you're looking at the asset for the first time in a little more detail?
• 21:24
  SPEAKER_01: Yeah.
• 21:25
  SPEAKER_01: So assuming we don't really already have a relationship with the operating partner and they're new to us, I think is probably what you're asking.
• 21:31
  SPEAKER_01: Then, you know, we'll we'll uh we'll have an intro call.
• 21:35
  SPEAKER_01: We'll get to know them if we don't already know the size of their firm, the assets under management, um, track record, background, just trying to get to know them a bit better.
• 21:46
  SPEAKER_01: How long have you been doing this in this strategy?
• 21:49
  SPEAKER_01: How big is your team, right?
• 21:51
  SPEAKER_01: Do they have an acquisitions team?
• 21:53
  SPEAKER_01: Do they have an asset management team?
• 21:55
  SPEAKER_01: Are they doing property management in house, vertically integrated, or do they outsource it?
• 22:00
  SPEAKER_01: What's their geographic focus?
• 22:03
  SPEAKER_01: And then you you kind of say, okay, this is interesting.
• 22:07
  SPEAKER_01: This fits what we're looking for.
• 22:08
  SPEAKER_01: Let's move on, if we both agree, to a bit more of a due diligence process together.
• 22:15
  SPEAKER_01: Well, we'll send them over our due diligence checklist, which is a you know, formal, kind of I say informal, but formal, like we're expecting them to respond to it and give us answers and information and examples of reporting and this kind of thing.
• 22:29
  SPEAKER_01: Um, that's the first round of due diligence.
• 22:32
  SPEAKER_01: It's more general in nature about the firm.
• 22:36
  SPEAKER_01: And uh we're asking for you know statements.
• 22:40
  SPEAKER_01: How do you report to your investors?
• 22:42
  SPEAKER_01: What kind of detail are you providing or lacking thereof?
• 22:46
  SPEAKER_01: And so then we'll get further into the you know the deal specifics from there and do an underwriting analysis.
• 22:53
  SPEAKER_01: We'll get on the phone with them, sometimes with their acquisitions teams that sourced and created the proformas and the projections and really try and understand their methodology of determining, you know, rent growth, uh expenses.
• 23:09
  SPEAKER_01: We're looking at the sellers trailing 12, 24, 36 month financials, you know, line item by line item.
• 23:17
  SPEAKER_01: They've been doing it this way.
• 23:18
  SPEAKER_01: We expect the cost to go up, or we expect the cost to go down.
• 23:22
  SPEAKER_01: And here's why.
• 23:23
  SPEAKER_01: You know, are you being conservative, you're being aggressive?
• 23:26
  SPEAKER_01: And you know, for example, there's some operators that know a market in and out, right?
• 23:31
  SPEAKER_01: They might own thousands of apartments, for example, in a very specific market.
• 23:36
  SPEAKER_01: You have to know that that the seller's trailing 12 financials may not match what the operating partner can do, and they might be able to shave off costs.
• 23:45
  SPEAKER_01: That could be a benefit.
• 23:47
  SPEAKER_01: And then first glance, you might think, oh, they're just being aggressive with underwriting.
• 23:51
  SPEAKER_01: The operating partner was running a you know 55, 57% operating expense ratio.
• 23:57
  SPEAKER_01: Why do they think it could be 45, right?
• 24:00
  SPEAKER_01: So then if that happens, you'll say, you know, in their instance, show us your expense ratios on all your other deals in this submarket, right?
• 24:09
  SPEAKER_01: And so that we can see that they're running off their own comps, right?
• 24:13
  SPEAKER_01: There's a little bit of inside information, and so there's a benefit there.
• 24:16
  SPEAKER_01: But all this comes into play when when looking at a specific operator in a deal.
• 24:21
  SPEAKER_00: Yeah, I wonder too, with some of the developers that may be out there doing some of their first projects.
• 24:29
  SPEAKER_00: And I know as I'm speaking about developers, I know I may I may be talking about an asset that hasn't even been built yet.
• 24:35
  SPEAKER_00: But uh, you know, when they're relatively small, right?
• 24:39
  SPEAKER_00: They don't have the track record.
• 24:40
  SPEAKER_00: They don't, they're they're they wouldn't even in your case fit into the scenario where they have a big enough team for you to even want to consider investing in them.
• 24:48
  SPEAKER_00: Where do groups like that, where does it make sense for groups like that to turn when they're they're pretty early on?
• 24:55
  SPEAKER_00: Is that where you're in the friends and family?
• 24:56
  SPEAKER_00: And kind of like you talked about when your early days, where you were reaching out to different family members and trying to raise capital that way to start your business and get going, is that what it looks like for some of these younger developers in the industry?
• 25:09
  SPEAKER_01: I I think so.
• 25:10
  SPEAKER_01: Yeah.
• 25:10
  SPEAKER_01: I mean, uh again, depends on their background.
• 25:12
  SPEAKER_01: If they're coming uh out of an institutional shop where they were doing this for 20 years, it might be a different story.
• 25:18
  SPEAKER_01: But if they're kind of bootstrapping and and hugging along and doing it themselves with a partner or two, and they don't have a lot of history or track record, it's gonna be hard to attract, you know, I'd say larger checks from more sophisticated investors or institutional shops.
• 25:34
  SPEAKER_01: And so it doesn't mean you can't be successful, but you're gonna want to, you know, keep that inner circle close.
• 25:40
  SPEAKER_01: Friends, family referrals are huge.
• 25:43
  SPEAKER_01: Go to investor meetup groups, speak at them, you know, get get your local community to know like and trust you um and and start raising small.
• 25:54
  SPEAKER_01: Be uh transparent, be as generous as you can and still keep the lights on and make a profit.
• 26:00
  SPEAKER_01: I've seen so many young groups, not necessarily in development, but in other real estate sectors that just come out with crazy terms.
• 26:07
  SPEAKER_01: It's like, well, you have two years of experience and you want to take a 50% split, where the pros have been doing it for decades, you know, take a 20% split.
• 26:17
  SPEAKER_01: So why why is it that we should do this with you and not them?
• 26:20
  SPEAKER_01: Right.
• 26:20
  SPEAKER_01: And so, you know, be aware of what your competitors are offering and you know, surround yourselves with them so you can learn from them, especially if they're of high pedigree.
• 26:30
  SPEAKER_00: Do you have over the years a favorite project or deal that you have uh been a part of?
• 26:37
  SPEAKER_01: Oh man.
• 26:39
  SPEAKER_01: There's a couple that come to mind, of course, um that were favorite's a tough word, right?
• 26:46
  SPEAKER_01: Yeah, yeah.
• 26:47
  SPEAKER_00: No, I get that for sure.
• 26:48
  SPEAKER_01: We've got some that I love, and there's others that like, oh my gosh, you know, we'd for example, like a negative but turned into a positive.
• 26:54
  SPEAKER_01: We had a property in Florida that that burned down.
• 26:58
  SPEAKER_01: Um, go figure.
• 26:59
  SPEAKER_01: We've had, I mean, you do this long enough, there's always some kind of trouble you have to manage through.
• 27:05
  SPEAKER_01: But uh this one was a Ford excursion tenant's car in the garage that's spontaneously combusted one day while they're eating dinner, and they had to jump out the kitchen window to get out of the house in time.
• 27:19
  SPEAKER_01: So thankfully they were okay.
• 27:20
  SPEAKER_01: But um, we got the call from the manager and the property burned and it was uh it was a mess to say the least.
• 27:26
  SPEAKER_01: Thankfully, nobody was hurt, but we learned from that one.
• 27:29
  SPEAKER_01: We, you know, insurance company isn't necessarily on your side.
• 27:34
  SPEAKER_01: We hired a private claims adjuster, signed over a power of attorney, let them go fight with the insurance company, and they got almost twice as much proceeds out of them than they would have given us if we hadn't hired them.
• 27:47
  SPEAKER_01: And so there's a lesson learned for people that you know it turned out positive in the end, but it took about eight months, almost a year, to work through that process.
• 27:56
  SPEAKER_01: And then, of course, loss of rental rate and uh rental insurance coverage is critical, right?
• 28:02
  SPEAKER_01: So for that eight to twelve months, we were still getting the rents, even though the tenants obviously had to move out.
• 28:09
  SPEAKER_01: And so it you know, just that's a story that may not have been what you're looking for, but one that always comes up in my mind from lessons learned.
• 28:17
  SPEAKER_00: No, I think that's good because I think it it brings up things that not everybody's gonna think about when they haven't done many projects yet.
• 28:24
  SPEAKER_00: I mean, they may be thinking about, yeah, we need to insure this property or we need to, you know, buy insurance for this, but not thinking about, you know, we've had on some uh some attorney, real estate attorneys in the past, and some of the things they talk about is yeah, the lost, the lost use of property, maybe when uh when the city takes a portion of your property and or they block off a portion of your property and people can't get into your business, you know, there's lost, there's lost revenue and everything there.
• 28:50
  SPEAKER_00: And so um not thinking about some of those things and the fact that you there are insurers out there that you could potentially buy insurance for that is something important, I think, for people to think about.
• 28:59
  SPEAKER_00: Definitely.
• 29:00
  SPEAKER_00: Well, let's go ahead and shift into the last segment here, which is a lightning round.
• 29:04
  SPEAKER_00: So I've got five questions for you, um, all related to your experience and everything.
• 29:08
  SPEAKER_00: Some of these might overlap a little bit as I'm looking through them right here, because um we've talked about some of this, but we'll we'll go with it anyway and see uh might might be a little bit of a repeat here.
• 29:17
  SPEAKER_00: But first first one, what's the biggest red flag that makes you lose interest in a deal?
• 29:23
  SPEAKER_01: I mean, I would go with uh significant negative leverage and negative cash flow.
• 29:28
  SPEAKER_00: All right, second one, what's one thing that immediately gives you confidence in an operator?
• 29:34
  SPEAKER_01: Pedigree.
• 29:34
  SPEAKER_01: Let's go with track record, pedigree, and experience.
• 29:37
  SPEAKER_00: All right, third one, what's the best investment that you've ever made?
• 29:41
  SPEAKER_01: I'd say probably education into myself and our business, just a sponge for knowledge, always reading, learning, you know, chatting with with others in our industry, just to become better.
• 29:54
  SPEAKER_01: Always never, never just sitting on your laurels and saying, hey, we figured it all out.
• 29:58
  SPEAKER_01: That is not the case.
• 30:00
  SPEAKER_00: All right.
• 30:00
  SPEAKER_00: Fourth one.
• 30:01
  SPEAKER_00: What's one investment you passed on that you still think about today?
• 30:05
  SPEAKER_01: That's tough.
• 30:06
  SPEAKER_01: I I can't come up with one off the top of my head.
• 30:09
  SPEAKER_00: Um Well, maybe that's a good that's probably a good thing.
• 30:12
  SPEAKER_01: Yeah.
• 30:12
  SPEAKER_01: I mean, a lot of the deals, we just don't know what happens to them after they stop raising capital.
• 30:17
  SPEAKER_01: So it's hard to know.
• 30:18
  SPEAKER_01: Did we miss out on a home run?
• 30:20
  SPEAKER_00: Yeah, yeah.
• 30:21
  SPEAKER_00: Well, that's probably a good thing.
• 30:22
  SPEAKER_00: So you're not thinking about it forever.
• 30:24
  SPEAKER_00: All right.
• 30:25
  SPEAKER_00: Last one.
• 30:26
  SPEAKER_00: If you could give a new real estate investor one piece of advice, what would it be?
• 30:31
  SPEAKER_01: Surround yourself with you know highly experienced folks that are better than at it than what you do and learn from them, see how you can help them and ask a lot of questions and listen.
• 30:43
  SPEAKER_00: All right.
• 30:44
  SPEAKER_00: Well, what is the best way for people listening in uh to connect with you, Mark, and also to learn more about your company?
• 30:51
  SPEAKER_01: Sure.
• 30:51
  SPEAKER_01: Yeah, I mean, our focus again is you know, passive income investments in some of the real estate sectors we discussed.
• 30:57
  SPEAKER_01: If folks are interested in learning more about that um or even chatting about, you know, kind of our vetting process, I'm happy to connect.
• 31:05
  SPEAKER_01: But our website's the best place to go, smkcap.com.
• 31:10
  SPEAKER_01: Again, our company name is SMK Capital Management.
• 31:13
  SPEAKER_01: And uh I would encourage folks to sign up, join our investor network, and uh, you know, get access to our investment opportunities that way.
• 31:21
  SPEAKER_00: Perfect.
• 31:21
  SPEAKER_00: So if you guys look down in the description for this episode, you'll see a link there to the show notes page.
• 31:26
  SPEAKER_00: On the show notes page will be the link to that website that Mark just mentioned there.
• 31:30
  SPEAKER_00: Uh, Mark, really appreciate you coming on here and uh talking through some of your history in the industry and uh some of the projects and things that you've worked on over the years.
• 31:38
  SPEAKER_01: Yeah, my pleasure, Mike.
• 31:40
  SPEAKER_01: Thanks for having me on.
• 31:41
  SPEAKER_00: All right, guys, that's all for this episode.
• 31:43
  SPEAKER_00: If you're not already subscribed, please click that button.
• 31:45
  SPEAKER_00: We'd love to have you back for the next one.
• 31:47
  SPEAKER_00: Otherwise, we will talk to you all next week.