Transcription

• Speaker #0

  Where we focus on diversification, we like to spread capital across different real estate sectors, different operating partners, and do it in a way where they're very strategic about what we are investing in and what we say no to. Must-haves is track record experience. They need to be pros in their space. They need to have had full cycle deals. They need to have had enough of them, call it six to 10. There's no denying there's a heightened amount of uncertainty today. It's, it was. less earlier in the year and it's gotten worse.

• Speaker #1

  We were in negotiations, investing in real estate. They're winning, they're making money. What's up everyone? Welcome to the Real Estate Educators Podcast, where we provide the education you can build on. I am your host, Kevin Amos. We are back, another exciting episode. We have something we haven't done, really a fund to funds manager with us today. And there's going to be a lot of knowledge coming out of this episode. So Mark Curry, you've been in real estate for over 20 years. I know you do a lot of due diligence. You've looked at thousands and thousands of real estate projects. You've helped manage or started over 70 different real estate partnerships. We were talking just right before I hit record about some of the things that you're looking into or working on. It's kind of a crazy economy right now. It's stability. I know it's very stable, but stability is crazy. So welcome to the show.

• Speaker #0

  Thank you, Kevin. Appreciate it.

• Speaker #1

  Why don't we get into this? So you've been doing real estate for about as long as I have, it sounds like. 2001, I bought my first one. Kept it as a rental. Had my first rental property in 2003. So what is that? 23-ish years as a real estate investor? So similar to you, I think. So take me back 20-ish years ago. We're right in the early 2000s. How'd you get into real estate?

• Speaker #0

  Yeah, yeah. So similar to you. But... I was working W-2, corporate America, in corporate finance for a number of years, and a lot of spreadsheets and analysis and budgeting. And anyway, some of that transitions pretty well into real estate investing, as you know. So I started in 2005. I bought my first place. It was a condo in Los Angeles, grandma's condo. She had passed away. It wasn't in her will, so I had to go to court. It was a probate thing. No idea what I was doing at the time. Got super lucky. And there was a couple other people in that courtroom that raised their hands to pay more because I didn't realize that was even an option. I thought I already owned the place. My realtor didn't know what he was doing either. But their checks were made out incorrectly. And so the judge couldn't accept their deposits. And so I ended up getting the place and moving in and house hacking and getting a roommate and just going from there. I pulled money out of it, bought another fourplex with my brother and on we were.

• Speaker #1

  So start off with a little single family and then kind of small multis. And now you're doing much, much larger deals. So that's kind of a cool story there, Mark.

• Speaker #0

  Yeah, it was very memorable. What I remember is also like leaving the court after finally getting the place I thought I already owned. And then one of the guys that had raised his hand to pay more, he was going to pay $20,000, $30,000 more for this condo. He's in the elevator with me, leaving the courthouse. He looks at me and goes, oh, you're that kid that got super lucky on that deal. And I'm like, what do you say to that? I'm like, I guess so.

• Speaker #1

  But inside, you're like, hell yeah, you're feeling good, right?

• Speaker #0

  I was hooked at that point, Kevin, to say the least.

• Speaker #1

  And your house hacked it, so you just rented out a bedroom then?

• Speaker #0

  Yeah, I had a roommate. I renovated it myself with my friends. Went to Home Depot every day and just figured out, you know, this is grandma's old place. So there was carpet all the way up to the bathtub and wallpaper everywhere. We got it done and lived in it, rented it, and ended up keeping that place for about 10 years before selling it. But that got to start, I would say, in a little more context, for the next five years or so, my family and I were partnering with each other. We were pulling our own capital together and buying a lot of distressed bank-owned stuff, pretty much all cash required. Single family, small multifamily. We built up a small portfolio of properties in a couple different states where we were living and managing, renovating, doing all that while working full-time. And by 2010, you know, left the corporate world. opened up our company, SMK Capital Management. That's my father and I's initials. And that was about 16 years ago now.

• Speaker #1

  Okay. I was just going to get into SMK. I know you're the CEO and I know you've been doing co-founder, so it's your family business and now you're running it. Well, how did you go? I want to get to know what SMK is and what it does. And then how did you go from a condo and a fourplex up to these larger projects you're working on?

• Speaker #0

  Yeah. I mean, I'll just mention I was fortunate enough. My father's been a real estate investor since the 1970s. And so big inspiration and influence on my direction, of course. But from 2010 till 2017, Kevin, and we were kind of doing two things. As a company, we were an operating partner on the deals that we would present to our investor network. That was, again, single family, small multifamily, a lot of heavy value add, buying all cash, boarding up places. And we did about 60 transactions during that timeframe. At the same time, again, I had left corporate America and I had a 401k sitting idle. So I opened up a self-directed IRA and moved some of my retirement dollars into that. And you can't invest those monies into your own deal that you're a manager of. It's a prohibited transaction. And so over a couple of years, I started investing as an LP. into other deals. I wanted diversification, Kevin. I wanted to invest in stuff that had done well during 2008 and 2009, and there just really wasn't a lot of that. But I stumbled on mobile home parks and some self-storage, and you could see some of the data of how those sectors performed during the crash. And so my family and I ended up making about 20, 25 LP investments over a few years into other operators' deals. By 2016, 17-ish, we kind of knew that the window of opportunity for the deeply discounted single family, small multifamily deals that we were buying through SMK was closing. Margins were getting squeezed. Competition was much higher. You had to work much harder for a lower profit. And so, again, we saw that coming. We decided to pivot and, you know, move into what we continue to do today. So this is about 10 years ago now. We... Started partnering with some of our operating partners that we had been LPs with and offering more diversified options for our investor base. So mobile homes, self-storage, several other asset classes. And that continues to be what we do today, where we focus on diversification. We like to spread capital across different real estate sectors, different operating partners, and do it in a way where they're very strategic about what we are investing in and what we say no to.

• Speaker #1

  Okay. Yeah. I want to get into some of that as well. The question I had is like the LPGP relationship. So it sounds to me like you're more active in some of the deals you're in than normal. LP would be. So, and if I heard that wrong, correct me, but can you just help me understand the difference between GP and LP for the listener and then how you fit into that?

• Speaker #0

  Yeah, sure. I mean, so we stopped being the sole GP on our deals again, 10 years ago. And so what we do now is we will invest like into an opportunity with an operating partner that we want to invest in. So the kind of the way it works, we're looking at six to 700 deals a year, Kevin, in private real estate, we invest in five, maybe 10 a year. So 98, 99% of the deals we see, We will say no to. When we find one that we like with a team that we like and that we want to allocate to, we will either invest as a limited partner into their opportunity, their fund. Sometimes there's a JV partnership. Sometimes there's co-GP, depending on the size of their deal, how much we're bringing to the table versus the total equity, what our responsibilities are. And so it can range a little bit. Most of the time, I'd say we are passive on an operational standpoint. We want our operating partners and their team to manage the day-to-day, the tenants, rent collections, you name it, everything on operations, business plan, execution, et cetera. And we co-own it together through. pro rata ownership. So in that case, we're an LP. We might get, you know, typically we'll get preferential terms for our group so that the net return to our investors is about the same, sometimes better than if they went direct to the deal in the first place. And so there's technically two layers there where operating partners have their fee structure and so does SMK, but we offset that, you know, double promote. We're very sensitive about that. We don't want to over fee anybody. We offset that through negotiating terms to make sure our investors are about the same or better than if they went direct.

• Speaker #1

  So I'm a member of this group in Denver. Mark, it's called the Denver Ventures. It was a Denver Angels and now they call it Denver Ventures. And basically all it is is PE, private equity investments in early stage. And I started like looking similar to what you're doing, not at your level, but similar. Like I'd be looking at a deal or two a month and trying to just cherry pick these deals, right? And it was just so much work to underwrite. And you put just a very small amount of money into each of these because nine of 10 of them are going to fail. You're looking for that one, right? So what they ended up doing is creating a fund of funds, which it sounds like is what you did. And for me personally, I'm willing to pay a manager a management fee to go out and do that diligence and help. And then you go out and make the investment. I'm only sharing that with you because it's not bad for the listeners benefit here. It's not bad to be in a fund of funds and get charged two fees because they're going to work, right? Yep.

• Speaker #0

  Yep. Yeah. That's how we see it. I mean, obviously there's lots of ways to invest in real estate. We find this to be applicable for folks that number one, don't have the time to look at hundreds of deals a year. Number two, they don't really know or feel super comfortable in vetting and underwriting and choosing those deals that we think have the highest likelihood of performing, right? At the end of the day, whether the projected return is a 10 or 15 or 20, you know, what you want to do as an investor is to achieve that goal. And so which deals are most likely to get there is. our job to kind of go out and vet and find those and stay away from those that we think have a lot of fluff in them and are a higher likelihood of not performing. And that's 30,000 feet looking down what we do, of course. But then the diversification you get, right? So you take that and some of our funds will have a dozen different investments in them with different operating partners and different real estate sectors. And it could take us a year, year and a half to build that fund. As an investor, you can come in and invest in that and 50K, for example, minimum-ish, you can spread that across all the deals. And if you try to do that on your own, it's usually about one to one and a half million dollars just to hit the deal minimums. sometimes more. So that's another benefit of these funds of funds is you're relying on a manager. He's got great deal flow, more expertise, of course, in vetting, underwriting, picking the right deals, negotiating better terms and diversifying.

• Speaker #1

  Yeah. There's two benefits here, the deal flow, which is not always easy for investors that are busy, like where you find the deals, right? And then also the diligence. So you do both of those in your fund. Out of curiosity, how many of the investors that look at you and for as an opportunity or a potential investment actually dig into what you're investing in?

• Speaker #0

  I mean, we provide a lot of clarity. And so what I mean by that is, I'll give you an example. Our alternative fund for, we recently closed that, we made, excuse me, 11 investments across 11 different operating partners in our selected asset classes, where we want to invest. We put together, you know, it ended up being around 60 pages of our operating partners' information, who they are, the actual fund or properties we're investing in, lots of detail on every single one of those 11 investments. And so we don't get a ton of folks asking for too much more because it's already a lot of information in addition to, We record. sponsor calls with our operating partners so they can listen to an hour of several of these deals that we've already sourced and underwritten and investing into in the fund. There's an executive summary on every single deal. And so when you ask how much are they digging in, we tend to provide a lot by default for transparency and detail. And obviously there's folks that will want to go much deeper, but most people, it seems to be enough for them to make a decision.

• Speaker #1

  I suspect that's right. They're probably, their diligence is more on you. I'm thinking when I'm doing diligence on a deal, that sounds crazy. But when I'm doing that, I want to, I bet on the jockey over the horse. I want to understand who's operating it and who's running it. And then I will peel back and look at the deal itself. A lot of people, Mark, honestly, they just, they stop at the jockey. Like, oh, this is a good manager. This is a good track record. They've experienced trouble and came through that. Okay. And they are transparent. Okay. I'm in.

• Speaker #0

  Yeah, I've seen that too. It's definitely not how we work, but I get it. If you don't have time and you're going to invest in something and you already trust the people, maybe you've done well with them before and it's a similar type of deal. I get it. I don't agree with it, but I also understand that like, hey, I'm making a decision that's going to be rather quick and I don't want to spend two months trying to due diligence everything.

• Speaker #1

  Yeah, I'm glad you said that and you challenged me on that one. So it's not the right way to do it. I just, that's just what I said. I totally. So you're like, you like self-storage and what was the other asset class? Did you say mobile home? Mobile home. Yeah, those are the two that got you kind of going. So why those two?

• Speaker #0

  Yeah, I mean, again, so early on, there's this beautiful chart that I love that goes back to the 1990s and it shows Equity Lifestyle, which is a public manufactured housing and mobile home park firm. It shows their portfolios, net operating income, quarter over quarter going back to the 90s. And I saw that in, I don't know, 2010 or 11. And I said, you gotta be kidding me. This, it did very well during 2008, nine and 10, Kevin. So that got me very interested in the real estate sector, started investing in it shortly thereafter and haven't stopped since. Similarly, self-storage, although I'll say it's a little bit more, we say no to a lot more self-storage deals than we do mobile home parks. We say no to a lot of them, but self-storage is a little bit more susceptible to new supply risk where manufactured housing or mobile home parks are not. And so you got to look at it a little differently from an analysis standpoint. But historically, both of these sectors have proven to be very lowly correlated or even inversely correlated to the economy. They tend to do better than most other things during the recession. And, you know, you can force appreciation in both sectors. You can still buy a lot of them from. Mom and pop owners, this is a big advantage today that aren't managing it appropriately or mismanaging it or ignoring it, or don't even have a website for self-storage, you know, residents or tenants to book a space on. And so you come in, you can add a lot of value, force appreciation without relying on, you know, the overall market appreciation or organic growth.

• Speaker #1

  Yeah. I've seen that same thing with those two asset classes and it is more management intensive. So you tend to get more professional operators in those two. This episode is brought to you by Pine Financial Group. Pine Financial is a private lender specializing in short-term rehab lending to real estate investors. Got a property that needs some love? We can help. We are able to offer funding solutions because we raise private money from individual investors. With more than 15 years of experience, Pine offers passive investors an alternative that provides stability, consistency, and security to your portfolio. If you like real estate but want to avoid the ups and downs and effort, A Pine Mortgage Fund could be a perfect fit for you. Accredited investors will experience an 8% preferred return and profit sharing. Diversify your portfolio out of Wall Street and into Main Street with a Pine Financial Group Fund. To get more information at pinefinancialgroup.com, that's pinefinancialgroup.com. Now, I want to ask you about deal flow. So, you and I are both part of a real estate or... an investment organization in Colorado. In fact, I think that's how we met. So if I'm listening and I'm just like, I just want to deal flow, maybe it's really easy and I just invest with eMarket. That is obviously an option. But what if I want to look at my own deals? Where do I find these types of opportunities?

• Speaker #0

  I mean, for us, it started before the Jobs Act. I networked my butt off for two and a half years, Kevin, in person back then, right? There wasn't Zoom.

• Speaker #1

  Those are the days.

• Speaker #0

  Those are the days. And so it's, you know, you want to try and go to events or whether it's Zoom or whether it's in person where there is a speaker talking about a very specific topic that they are an expert in. And those are the kinds of events that you can start meeting sponsors. You can start meeting operating partners that, you know, are specialists in one thing. And that's a snowball effect, right? If you take that same concept and go and apply it online, you'll find... thousands and thousands of operators that you can, of course, work with, invest with, etc. And so for us, it's predominantly just over time, we've got over 300 operating partners that we've screened, we invest in about a dozen of them. And so it's a pretty big filtration process to find the folks in the groups that we think, you know, are definitely top notch and of the pedigree where we want to.

• Speaker #1

  uh you know partner with them that's really cool i didn't realize there was that few i know you said it takes what six to seven hundred to get five or ten deals but if you break that down even further i mean it's just a dozen sponsors that you work with yeah

• Speaker #0

  a lot of sponsors definitely tell me what are you looking for oh man that's a whole other hour-long conversation but Yeah, I mean, look, again, this is what we do all day, every day. We've been doing it for many, many years. And so the group, the people behind the deal is, of course, number one, like you said, Kevin, right? Betting on the jockey. I'll say this number one, two, and three, not in any sequential order, but must haves is track record experience. They need to be pros in their space. They need to have had full cycle deals. They need to have had enough of them, you know, call it six to 10 to show that they can repeat their model over and over. built out teams on the ground in the office, acquisitions team, asset management, property management, preferably vertically integrated. We're on asset management calls with most of our teams, Kevin. And so we're constantly, I mean, after we invest for a five-year deal, every month or every quarter, we're reviewing financials, we're reviewing business plan execution, reviewing market trends with them, performance. And so how do they communicate is the next one. Super critical. And track record experience are all great and must haves. But if they aren't super transparent, very quick to reply, great communicators provide you with anything you ask for. We're out. We're not interested. And so that's kind of a quick level of what we look for. Of course, we can dive in as much as you want on some of the due diligence we do. We have a 40 point checklist that we go through whenever, you know. on onboarding a new sponsor and a new deal.

• Speaker #1

  And I will disclose that you invested with us, which I didn't know that until I got on the call with you today. So the way this works for me, Mark, is I don't know exactly who I'm going to interview until I actually start loading up. And then I get this little intake form and I'm like, oh gosh, I recognize that. And then I'm like, oh gosh, you invested with us. So I didn't realize you went through a 40 point diligence on us.

• Speaker #0

  Yeah, I mean, it's... Monica on your team is awesome, just so you know. And so she'll let you know about, you know, there's a couple months of questions. You're smiling because you didn't have to go through that process, but she did.

• Speaker #1

  I just know she's great. She's like.

• Speaker #0

  Yeah, she's great.

• Speaker #1

  She's a CFA and a CPA. So she has that brain, you know, to just like dig into the details. So I love it.

• Speaker #0

  Yeah. I mean, look, if you've got some accounting background, financial background, it makes things a little bit smoother.

• Speaker #1

  So real estate debt is very different than the two asset classes that you prefer. What are you looking at right now? If I had some money and I was out looking for deals, what are you comfortable with right now?

• Speaker #0

  On the debt side or just in general?

• Speaker #1

  Just in general.

• Speaker #0

  Okay. So I'll start with debt and just go through it quickly. For us, we don't invest directly into a debt fund. We typically do that through one of our funds. And what I mean by that is, Like I mentioned, Alternative Fund 4 that we recently closed. That's the fund that we invested through with you guys, Kevin. And so an investor in that fund for us is diversified across 11 deals. Three of them are fixed income, we call it, or private real estate debt. We love sponsors that focus just on that, that have diversified portfolios, preferably some personal guarantees on the borrower that have... You know, the groups have a long track record. This is what they do. This is all they do. We're looking for yield of 8% to 11%. And, you know, it's first position collateralized by real estate. And then diversify it across the portfolio so there isn't any single borrower risk. You know, if one, two, or three of the borrowers don't pay up, it's not going to hurt your overall return much, right? And so that's a quick overview of debt. Again, that. those returns are great for an income slice in a portfolio is how we look at it. But we're not typically, we're trying to get a higher average annual ROI, Kevin, just to be transparent. And so net to our investors, low to mid-teens is usually where we want our opportunities to land. And so from there, we can shift over to equity deals, which is where we do the majority of our investing. And we will invest in, of course, mobile homes, self-storage. but we also invest in industrial and a few subsectors within industrial, including industrial outdoor storage, iOS. That is a asset class that most people, even in the industry, could never heard of. And we could talk about that. It's so fascinating to me about where it's at and where it's going, but a lot of opportunity there. We also do triple net sale leaseback, usually a manufacturing facility. And you do that in a portfolio and you get rent escalations and you have expenses or triple net. So the tenant pays all of them. So a really good hedge against inflation where your rents go up every year, but your expenses are zero. And so that's a good position to be in, especially today. What else? We also invest in. Small bay industrial, we love that as well. Lots of reasons for it. Typically, you'll see more tenants there, 15, 20 bays in one property. So much less single tenant rent risk exposure. And then we do some multifamily too, Kevin. The last few years, it's all been tax exempt apartments, meaning these apartments don't have to pay property taxes. Those deals are hard to find. There's an advantage to them, of course. Your expenses are a lot less when you get rid of taxes and your cash flow goes up right overnight. And so that's probably a mouthful, but that's kind of what we're looking for today. And we don't divert too much outside of those areas. A little bit in strip retail when there's a grocery anchor tenant, but you have to have a pretty attractive going in cap rate and nice cash flow year one.

• Speaker #1

  Like a strip mall, outdoor strip mall with a... Grocery anchor. Yeah, I'm seeing some of that as well. So there's a little bit of jargon in there. I just want to make sure that we didn't lose our listeners. So you said sale, lease, back end, triple net on that one asset class. I'm assuming that's single tenant, but can you just tell us triple net? I know you said no expenses, but what is that and what is a sale, lease, back end? Why would an owner do that?

• Speaker #0

  Yeah, yeah. Good question. So I'll tell you what it is first. And just to add to it, we call it a... triple net sale lease back. It's usually an industrial property. Think about a manufacturing business. The profile that we like to see is the business is operating very positively. They own the real estate that they operate out of. And a lot of times what happens is this business gets acquired by a private equity company and they don't want the real estate. Because they're not in the real estate investment business. They want to inject capital back into the operations of the business, improve, grow the NOI and value the business. So what they do is they sell the property that they use for their business. Usually, again, larger warehouse, industrial building, manufacturing, a lot of equipment in there. And then they immediately lease it back. And so the seller becomes your tenant. And they're already there. So you have 100% occupancy at day one. um one of the benefits usually these are 20-year leases kevin and so you're talking about a long term stable income producing asset again triple net means that the tenant or the previous seller is responsible for all the expenses and so that includes maintenance of the property taxes insurance utilities right everything they have to pay for it and so As the owner of the real estate, it's a very predictable income stream that goes up each year, assuming they stay in pay, of course, and stay in business. So that's that space there that we love.

• Speaker #1

  So very different than the value add you were talking about earlier. This is a turnkey, probably a lower cap rate. It's very similar to debt, I would think. It's safe. You invest in it. You just cash a check every month.

• Speaker #0

  Yes. In theory, that's the goal. There's always risks, Kevin. Sure, sure. Full disclosure. And you're right, there's not a lot of execution risk. And that's where value add is different, where you buy it and you have to go do a bunch of stuff to improve the value. Here, a lot of it is a basis play, making sure you're buying it at the right price. And then just ensuring, of course, that the tenant stays for long duration and sell it. And usually you're selling in five to seven years. That way there's... you know, 15, 13 years, 12 years left of lease runway for the next buyer.

• Speaker #1

  That makes sense. And that way you had some private rent escalation in there. So you get your NOI up, your net operating income, get that up. And then regardless if the cap rate moves, you're still selling it for more than you bought it for.

• Speaker #0

  Correct. That's the general feel. And some of these deals, if like we work with one operating partner, they focus a lot of their acquisitions on those companies that are being acquired by private equity company. That process can take a year plus, Kevin. And so you have to be patient. And then the private equity company wants the business acquisition timing of close to be simultaneous as the timing of the real estate sale. So to do that, you just kind of have to, not a lot of groups want to deal with that. It's a headache. But that's where you can get a really good basis, like going in cap rates of 8.5%.

• Speaker #1

  That's fantastic.

• Speaker #0

  Borrowing at 6, 6.25%. So you got. 200 basis points of positive leverage. Those are the kinds of deals that we like to see.

• Speaker #1

  Now, obviously, the tenant creditworthiness matters here a lot. And you alluded to it when you said I use the term safe because it is much safer than a value add. But it's It's not like safe as a CD or a treasury either. So make sure I'm being clear with that. There is obviously some risk, but an eight and a half cap rate, as long as it's a good tenant, I mean, that's, you're making money if you don't leverage it at all.

• Speaker #0

  Correct. Yeah. And that's like industrial outdoor storage. We've been investing in that sector, all cash purchases, no leverage. So it's another good strategy there.

• Speaker #1

  Yeah, no, that's great. All right, let's get into SMK. If I wanted to get more information on that and get involved. First of all, I'm curious on the structure or how you structure your funds. I'm assuming it's equity and I'm going to be getting a K-1. What are the economics, if you're comfortable sharing that here?

• Speaker #0

  Yeah, yeah, you're right about the K-1. So we create an LLC for every investment we have. It has its own tax ID, its own bank account, and investors invest into that. LLC, they become members and therefore owners in the underlying real estate, all pro rata. And so passive losses, depreciation all flows through to our investor members. And so most of our deals, the way they're structured, Kevin, you're going to see passive losses in the first year, two, three, sometimes four from bonus depreciation, cost segregation studies, and a lot of people like that, of course, for tax planning. But they're still getting distributions usually as long as the deal is supposed to provide distributions and doing well. And so you're having your cake and eating it too, right, is what we like to say. So that's one of the big advantages of how we structure things. But our investors are passive. They are not liable for any of the debt or the risk that comes with that. Our operating partners take on the leverage. And if there's recourse or guarantees, it's on them. LPs are... not exposed to that and also not exposed to slip and fall, tenant suits, any kind of on-site issues that could arise. We've been very active investors and obviously taking those risks off the table is comforting when you sleep at night. That's how we structure things. As far as splits and preferred returns, most everything we do will have a preferred return. to our investors, anywhere from 7% to 9%. That is, of course, the hurdle that investors have to meet annually before SMK participates in any of the cash flow of the profits. It accrues. So if you get a 5 in year one and you're owed an 8 in year two, we owe you the 3 plus the 8. And that keeps going on until it's paid in full. And then that's where SMK really profits and has interest in the deal. Up to that point. We have a 1% annual asset management fee on invested capital. Not a profit center, but it keeps everything rolling for us. We're really in it for the back end on almost everything we're investing in. And so we have to make sure we're picking the right deals or SMK is not going to really profit. So that's something that aligns us with our investors on how we structure things. Above the preferred return, there's a split anywhere from 70% to 90%. in favor of investors, depending on class share. So we have a few different minimums. And obviously, the higher the minimum, the more favorable economics people can get in our deals and a little better average annual ROI and multiple uninvested capital.

• Speaker #1

  And do you do any co-GP positions in these funds? I know I alluded to that earlier, but...

• Speaker #0

  A little bit. Yeah, it depends. Again, usually if we're doing that, it's a direct investment where we're just investing in this one property at 123 Main Street. And in that case, we're typically the majority of the equity on the deal, not 100% of it because we require our operating partners to co-invest in the deals as well. And so in those cases, yeah, there could be a co-GP split there where we're involved a bit more heavily on. due diligence, but also asset management going forward.

• Speaker #1

  And I'm assuming the real estate debt probably helps you a lot because it produces a monthly cashflow and you can get out of it and get liquidity when you need it. These equity deals is not like that, right, Mark? So you have deals that you're locked into. So what kind of a timeline are we looking at if I'm an investor with you?

• Speaker #0

  Most everything we're doing is five to seven years. If it's going to be longer than that, And we've done and we still will do 10 year investments. But we want to see in the business plan that there's a high likelihood of a refinance and a return of the majority of principal around year five or so. And then you just hold it for cash flow going forward. Right. And so we like those deals. We've done a number of them where we've gotten all of our equity out and we still own the asset and still get cash flow. And you can go take that money and reinvest in something else and compound your return. And so that's a. Good structure, but again, most everything, five to 10 years. We don't do a lot of short-term investments, meaning one, two, three years.

• Speaker #1

  Okay. So if I was investing, you get the money back from the refinance on the value add that you invested in, and then you redeploy that capital, or do you return that to the investors?

• Speaker #0

  We almost always return it to investors. Okay,

• Speaker #1

  gotcha, gotcha.

• Speaker #0

  You put $100K in, and in year three, we get back. 10% of that from one of the property refinances in the fund, you get a $10,000 check. So you select your menu,

• Speaker #1

  your 10 or 11 or 12, whatever deals for that fund, you're not going to expand your deal volume. You'll start returning capital.

• Speaker #0

  That's how almost all of our deals were structured, Kevin. Closed-end funds, we'll raise for a year, year and a half.

• Speaker #1

  You know,

• Speaker #0

  look, if we're... six months in and something happens to sell and have a big profit, then we might, in our documents, have the opportunity or option to redeploy that. But usually it's a couple of years before we see those value add initiatives taking hold and a refi or a property sale. So at that point, it was far enough along where we're just returning the money back to our investors.

• Speaker #1

  Well, what about capital calls? Do you require that?

• Speaker #0

  No.

• Speaker #1

  So if I say I want to invest $100,000 with you, I could just invest it all right now and there's not going to be any expectation of future calls.

• Speaker #0

  No, we just avoid capital calls. I've seen so many funds and we've done some. It's just honestly for us, especially in today's uncertain market, you don't know when they might call the money, right? Yeah.

• Speaker #1

  I'm in that fund of funds right now and that's how it's structured. You commit however much. And they are going to deploy over a two-year period. And they're going to call the capital when they're ready to deploy, when they find a deal. So that's how that one works. A lot of fund funds are like that.

• Speaker #0

  For sure. 100%. We tend to not do that for a few reasons. One, if my operating partner is structured that way, then they got to come to us and they call the capital. As a fund manager, I have to go then. hurt the cats and get all the investors to write a check and then if you don't do it in 10 days there's lots of penalties and interest and so you know the option for us would be okay we're going to call your money up front but only a portion of it is actually going to be invested the rest of it's sitting in t-bills or a money market account well my investors can put their own money in their money market account or t-bills and so it doesn't mean we won't do it but we typically haven't found the need or the benefit to do so okay um you

• Speaker #1

  We're running near the end here, but I'm just curious, like your team, I know your dad is probably still involved. What does your, what does your team look like?

• Speaker #0

  Yeah, my father is actually retired, but he and I chat every 48 hours. He knows what's going on, but he's 78 right now. And so he's, his, his run is slowed down from a work standpoint. So, but yeah, we've got a portfolio manager on our team that helps with. A lot of investment analysis, but also quarterly updates, asset management calls, overseeing their portfolio and reporting to our investors. And then from there, again, operations is all our operating partners. They have teams on the ground. They've got asset managers, regional managers, all of them reporting to the equity partners, which is us. Other than that, it's basically bookkeeping, CPAs. and attorneys on our team. And then of course, some contractors to help with various different aspects of the business here and there that are, we're working on, but that's, that's how we run things. And so far it's been going really well.

• Speaker #1

  Cool. So if I, I know we need to wrap up. I just got another question. I'm just very curious about this because there's a, it's an, it's a, an election year, right? We have the midterms this year coming up and I think this will air before that. So. If I'm an investor and a lot of people are feeling this way, I'm holding on to my cash right now. I don't know what's going on. And now we're hearing this $5,000 dividend payment and that's all that is, is inflationary. So that's going to create some chaos. So I don't know if I want to be investing anything right now. Stock market overvalued, in my personal opinion. What do you say to the investor that's just got a little bit of concern around it?

• Speaker #0

  Yeah. I mean, look, there's no denying there's a heightened amount of uncertainty today. It was less earlier in the year and it's gotten worse. And it's probably going to continue for another 6, 12 months, in my opinion. We'll see. It's hard to know. With that, you've got to look at your options, right? And so as an investor, and these are conversations I'm having every week with folks, Kevin, a lot of folks believe what you said, that the stock market is inflated and likely to... see a downturn soon. There was actually an article that came out this morning where basically the New Zealand Sovereign Wealth Fund is warning that the stock market is going to pull back pretty quickly here. And they actually outperformed every other sovereign wealth fund last year. And so people are listening to what they're saying, of course. But these headlines are everywhere. And so a lot of our folks are coming to us saying, look, Mark, I've done really well. in the stock market the last several years. It's been up and to the right, but I want to take some chips off the table. I want to diversify. I want to get into less correlated asset classes that are likely to continue to do well, even if there's a downturn or a potential recession, et cetera. And that lack of correlation is also really important, of course, to thinking for the next five years. And so that's one step. And then also just the old concept of Buy high, sell low. Real estate is on sale right now. It's the biggest sale we've seen in 15 plus years. And we think that's going to last another 12 to 24 months. I don't know, Kevin, where you think that's going, but this is the best time we've seen since we got started 16 years ago. From a price valuation standpoint, prices are down 20 to 40% from the peak values in 2022. And so it's been kind of bouncing around the bottom, depending on real estate sector and location for the last year, year and a half. But it feels like the worst is behind us from that point. And these times of uncertainty that we're in today, fear, headlines, et cetera, et cetera, where people tend to make the most money because they're taking the contrarian view and allocating when things are low and still a little scary and taking chips off the table when things are. high and scary. So it's how we look at things, 30,000 feet looking down as far as timing and optionality.

• Speaker #1

  Yeah, I totally agree with you. I actually could not agree more. I think that the real estate sale might last longer than you think. But other than that, I agree with everything. Look, I think the stock market is overvalued by every indication you could look at. There's a lot of tightness in real estate coming from the bond market. And for the listener that doesn't understand. Japan is creating the U.S. a big problem right now because they're threatening to sell U.S. treasuries. And so all that does is drive up or hold up interest rates. So that hurts real estate. So I think you're going to see a pretty steady real estate market for a while. I don't think you're going to see that same stability in other assets, stock market being the big one. So what we're seeing and I'm just I'll tell you what I'm doing, if you would like to know, but what I'm seeing our clients do, Mark, is pull money out of the stock market and put into real estate or real estate debt. They just feel more stable there. They're not looking for the home run, big, high returns. They're just looking for stability with all the noise that's going on.

• Speaker #0

  Absolutely. That's where almost all of our clients are at that point today. I mean, some of them are active investors too, right, Kevin? So they might go out and buy a property in a building, but they're also… doing a lot of passive with us to free up their time, but still get allocation to these lower correlated sectors.

• Speaker #1

  Yeah. And you've brought up the word diversification several times today. So obviously, Mark, that's important to you. Now, true diversification isn't, hey, put all my money with Mark and he's going to diversify over 11 real estate deals. No, you want some in bonds, you want some in stocks, you want some maybe in crypto, if that's your thing. But all these different asset classes, but some of it. could and should probably go into real estate. You could do that with a REIT. You could own your own rental properties, or you can invest in a fund of fun like Mark has. All of that is some exposure to real estate. So I know if you're listening to this, you enjoy real estate. You're either doing it or you want to, but if you're not getting some exposure to real estate, this is probably a decent time to do it.

• Speaker #0

  Agreed.

• Speaker #1

  Cool. Well, what I would like to do now is go through my notes. So every time I do one of these episodes, I write down some notes of what I've learned or what my takeaways from the episode are. And then I like to just do that as a summary for the listener. And then if you could just fill in any gaps, add some color. And then at the very end, if I'm a newer real estate investor, or someone just has some money that I'm looking to deploy to do something with, give me a final piece of advice before we wrap this up. And then obviously want to get to your contact information. So at the very beginning, Mark, we talked about your background and how you got started. I think it was 2006. And then you got going more heavily with SMK after the crash. So probably around 2010, 11, if my math is right. I think you said 16 years ago. And this all came from, you're inspired from your father. He was investing in real estate in the 70s, so he went through the savings and loans crisis, and he went through all of that in the 80s and into the 90s. So he's got a wealth of knowledge and he stuck with it through the ups and the downs and he inspired you. Then you got to go on with your IRA. You had your 401k and you moved over to a self-directed account. You talked about the prohibited transaction, which we didn't go into, but you decided to start investing that passively. So that's a nugget there for the listener. If you have a retirement account that's sitting there, this is an option. I love this. Six to 700 deals to buy five or 10. That's a lot of deals. I was going to ask you more about how you get through that many You probably look at a deal and get rid of it immediately and only dig into a few. But that's a lot of diligence. You like mobile home parks and self-storage because they're recession resistant. And that's what got you really excited about them. You could also force appreciation. There's still mom and pop owners in that that aren't professional operators. So there's a lot of value add in those two asset classes. We talked about deal flow and your main deal flow was the networking and going to events where there's a speaker. So get out there and hit the street and hustle if you want to find deal flow or just invest with Mark. You're looking for track record of the sponsors. Are they real estate pros? Have they gone through the full cycles? Do they have a built-out team? I wrote down how do they communicate with their investors? And are they focused in one asset class? And highly focused is what you're looking for. And do they have their own money invested in the deal? You did say that a couple of times. Finally, for real estate debt, you're looking for 8% to 11% returns, and you're looking to pay out to your investors low to mid-teens as a return. You have a PREF plus an upside. That's all I got. How did I do?

• Speaker #0

  Wonderful. I think you nailed it.

• Speaker #1

  Yes. All right. What's the final piece of advice for our listener?

• Speaker #0

  Yeah. Look, if you're looking for investment options, there's so much wealth of information online, of course, right? Depends on how much time you have to dig in. So you've got to decide to yourself, do I have time to go do this myself or do I need help? And that's where, of course, you know, plug in SMK, we can help. Right. But for those that do have time, you know, take that time, use it, ask a lot of questions, really just be very selective with who you decide to invest in. It's the biggest part of success is done up front in the diligence. Once the deal is live, you invest in it. There's not a lot you can do anymore. So take that time. Be very careful. Surround yourself with true experts that have your best interest in mind.

• Speaker #1

  I think that's all great advice. And I'm just going to add on. It's possible to go out and look for your own deals and invest with you. Like park some cash, but still try to get educated and still go out and look at deals. And that's an option as well.

• Speaker #0

  Yep.

• Speaker #1

  Well, Mark, you're running a very successful company. You got a lot going on. You still jumped on here with me for the last 40 minutes. We went a little bit long. Apologies for that. Thank you so much for your time.

• Speaker #0

  Yeah, my pleasure. Great to be here, Kevin. Good conversation today.

• Speaker #1

  All right, for the listener, you have other podcasts you could be listening to and you chose the Real Estate Educators podcast. And for that, I am so incredibly grateful. I hope you got value out of this one. This was a great one, guys. If you got some value, five-star review, share this episode with a friend and I hope you make this day a great one. I really hope you enjoyed this episode as much as I did. If you did, please be sure to follow and leave a five-star review. Oh yeah, and tell a friend.