72. Mark Khuri On Market Changes And Diversification From Different Asset Classes

PILF 72 | Asset Classes

 

We are pleased to have Mark Khuri, co-founder of SMK Capital Management, as our guest to share his insights from his over 17 years of real estate investing experience. In this episode, Mark joins host Jim Pfeifer to talk about asset classes that can thrive in difficult market conditions and the power of diversifying beyond just sponsor, market and asset class. Mark also talked about his role as a capital allocator – he is looking for best in class operators who are experienced in recession-resistant asset classes including self-storage, mobile home parks and work force housing. Listen in for insights on effective diversification with a an expert capital allocator!

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Mark Khuri On Market Changes And Diversification From Different Asset Classes

I’m pleased to have Mark Khuri with us. He has been an avid real estate investor for years and has sourced, underwritten, acquired, managed, and sold both residential and commercial real estate investments through multiple markets in the US. He has analyzed hundreds of investment opportunities and successfully bought, renovated, sold, and invested in over 120 properties with a combined value of over $1 billion. He created and managed over 45 real estate partnerships with investors. He’s running and managing SMK Capital Management. Mark, thank you so much for being on the show.

Thanks for having me, Jim.

The first thing we like to do is to understand your journey and where you came from. How did you get into real estate? From real estate, how did you get to be an operator or syndicator? Can you give us your whole story there?

I started a career working in finance for a large company with about 80,000 people doing a lot of financial analysis, budgets, planning, and internal auditing. There were a lot of spreadsheets. I got into real estate on the side, as many of us do. My first investment was in 2005 pre-recession. After work, I was going to the property and fixing it up. It was a very much hands-on and active investment. The market appreciated pretty significantly. I thought I was a genius. I pulled out appreciation and capital, partnered with my brother, and bought a four-unit that was 75% vacant. Off to the races we went.

I fell in love with real estate early on in my finance career because I could analyze it and change its value. It was tangible. It produced income and grew in value. You name it. There were a lot of reasons. That’s what I ended up doing. A few years later, we started investing as a family with my father, parents, brothers, cousins, and anyone that would listen. We would essentially partner with them. We started buying more properties. This was during the recession in 2008 and 2009.

We were getting stuff heavily discounted at the time compared to what they were worth a year or two before. We did that for a few years. By 2010 or so, I parted ways with my corporate gig and started our firm. My father and I partnered up and created our company, SMK Capital Management. The goal at the time was to keep doing what we were already doing. We were finding great deals and creating a lot of value. The marketplace was giving us tons of opportunities. We started to expand and raise capital from others outside of our family.

The first time we raised money outside of the family, we invited a lot of friends over to our home, gave them a PowerPoint presentation in our basement with food and drinks, and started raising money organically through people that already liked us and trusted us. That’s how we got our start. We started as an operating partner. We were handling everything from A to Z as far as acquisitions, financing, managing, asset management, and property management. We had staff.

We built a portfolio of around 50 properties in a few different states. There were a lot of flips as well. When I left Corporate America, I had a 401(k) that was sitting idle. There’s no more matching and contributions. I needed to find a place to invest some of my personal retirement funds. I went on a two-year networking binge where I met tons of people in Southern California at the time where I was living by going to meet-up groups, meetings, and investment groups and networking my tail off.

Through that process, we found some great operating partners and started investing as an LP passively to diversify and get that capital outside of things that we were already doing as a firm and personally. I fell in love with some asset classes that you could point to at the time and say, “This has been doing well during a time when there wasn’t much that was doing very well.” There were mobile homes, self-storage, some apartments, and a few other asset classes.

We did both for a number of years. We were the operating partner on many deals. We were also syndicating some of these larger commercial-institutional quality deals through relationships that we had built. By 2017, we essentially moved all of our focus to what we consider syndications, private equity, and raising capital from our investor group to invest alongside best-in-class operators that do one thing well. We partnered with them. We’re focusing on diversification, income, and growth. You name it. That has been a bit of our journey there.

You started as an operator. That’s the path that a lot of us have. You start with a single-family home, rental, or a small multi, catch the bug, and off you go, which is what you did. In your journey, you were an operator. That’s what we think of as a true syndicator. You’ve pivoted and now you’re raising capital for other operators. You’re a capital allocator. What made you think, “I’m going to find a few trusted best-in-class partners and have them operate the deals,” and you’re going to bring the money and some expertise? Why did you make that switch?

Interest rates are going up, and they're going to continue to go up. Click To Tweet

There are a few reasons. We have been doing both for many years. We could point and look at data, results, and risk as well. We analyzed both strategies and where the market was going. Remember, this was 2017 when we decided to shift all into commercial-institutional quality syndications. We felt that the market was better equipped to continue to provide us income, stability, and growth with less risk by diversifying our investors’ capital across asset classes, strategies, regions, and operating partners because everything keeps going up on the right.

We will see how all of that goes for. We have always had our eye on the market, trying to make the best bet for what we have out there and what has given us attractive returns. There’s always a sweet spot we want to achieve. What’s the highest return we can get with the lowest amount of risk? If you think about it that way, that’s essentially where we felt it would be more prudent to shift over to what we had been doing exclusively with partners and syndications.

I like to diversify by markets, sponsors, asset classes, and sometimes other things like maybe debt structure or something like that. You mentioned diversifying among those things but also across strategies. Can you talk about what you mean by diversification along with a strategy?

It means a few things when I mentioned that. One is income. The other is growth. Sometimes you have one more favorable than the other, sometimes you have a blend, and sometimes it’s all growth. That’s one way of diversifying across strategies. Also, investment duration is part of strategies. Pre-COVID, we didn’t look at short-term deals. Short-term to me is less than five years. We were very well positioned. Essentially, we assumed there was going to be a recession in 2018.

We saw a lot of fundamentals out there, thinking that we were pretty long in the cycle. We started preparing for that and created a recession-resistant fund. The purpose of that fund was to combine lowly correlated asset classes into a portfolio for investors where we could withstand a recession, continue to perform, and not have to sell and be a seller at the wrong time. Everything as far as the duration in that portfolio was projected to be a 5 to 10-year hold on purpose.

By Q3 of 2020 or so, we started noticing a change in the marketplace. We had been tracking it for a while. I’ll preface that by saying we stopped investing entirely for about 6 to 7 months in 2020. We put all pencils down, analyzed, watched, and waited. There was a ton of homework and conversations with savvy groups and folks looking at their portfolios, our portfolio, and macro-level trends. You name it. By Q3, we realized essentially there’s not going to be distress. The demand for what we were doing, not just from investors but also from residents or our customers, was extremely high.

We realized that there was this strong tailwind that we wanted to get in front of. What I mean by that is there’s significant market appreciation and demand. We started seeing a lot of rent growth by Q4 and Q1 of 2021. We decided late in 2020 to adjust our diversification strategy to include shorter-term deals. Prior to that, we were only doing medium to long-term. We started looking at 2 to 3-year holds as well. That’s part of some of the changes that we have adapted through these market cycles.

Why short-term? Is it still concerned about the recession, interest rates, inflation, and all of that combined? When I’m looking at a passive investment, if all other things are equal, I would much prefer to get in something for 3 years than 5. Talk about that shift.

We think that the landscape continues to have challenges. We have said this for a number of years. Long-term is more than five years. It’s quite questionable where asset pricing, interest rates, cap rates, and supply and demand will be. All of those variables that go into risk and return are harder to accurately project. We don’t try to do that.

We invest based on fundamentals and sound conservative underwriting so we can withstand the unknown and volatility, but the short term for us, at least in the last couple of years, has presented an opportunity to take advantage of a specific type of business model. I’ll review with you what that is and what that means. Essentially, we focus a lot on value-add, heavy renovations, and manipulation of net operating income. We want to grow the net operating income as quickly and as much as we possibly can.

One of the best ways to do that is to come into a property, make it a lot better, increase revenue, reduce expenses, increase occupancy, inject a lot of CapEx dollars into the asset, and have it perform much better. If you do that on an apartment building, for example, one of the areas that we have been focusing on short-term is we will underwrite as if we’re going to come into an asset that is called 1980s vintage with a few hundred units that haven’t been renovated in decades and is poorly managed.

PILF 72 | Asset Classes
Asset Classes: I fell in love with real estate early on in my finance career because I could analyze it and change its value. It was tangible. It produced income and grew in value.

 

We underwrite as if we’re going to renovate the whole property of all 200 units. We project that out. We’re quite conservative with post-renovation rents and our assumptions on natural rent growth from the market. When we get into the deal, what we find is that we have been in a flat or compressing cap rate environment. What we underwrite, too, is a growing and expanding cap rate environment.

What has happened several times is if you set yourself up to win by conservative underwriting and you plan to renovate all the units, but by the time you’ve got 25% of the property renovated, you’ve created a blueprint that you can then hand to another investment group or a buyer and say, “If you put this much money into these units, you’re going to get this much rent because we have already done it on a quarter of the property ourselves.”

There’s a ton of value to that for another investor group. It has a lot lower risk for them on the value-add model. They can say, “I already know exactly what paint colors, finishes, countertops, and stainless steel appliances to use. You name it. All I got to do is go finish the project and I’ll be able to create a lot of value growth.” After a year or two, a buyer of that asset will usually pay a premium for that lower risk.

If we’re projecting, I’ll give you an example. Let’s say the going-in cap rate on this type of deal is 3.5% in some of these markets like Phoenix, Vegas, and Texas. You name it. We’re projecting an exit cap rate of 5% by year three. In reality, we’re able to get a 3.25% to 3.5% exit cap rate and we have grown NOI substantially. You end up meeting or beating your projected returns in a much shorter period. That’s one of the reasons we like shorter-term deals.

We’re still conservatively underwriting and planning for the market to change with exit cap rate expansion, but in reality, this supply-demand disequilibrium and a lot of the other fundamentals of income and growth that people are seeking more and more of these days are hard to come by. You ended up finding yourself up to outperform in some of these deals.

How sustainable is that approach? Is it that you have the ability to change your business plan? You underwrite for the five-year hold and renovate all the units, but you’re selling after 2 or 3 years and renovating 25%. There are two questions there. You’re able to pivot and do a different exit if you want to. How sustainable is that business model? Will you switch again when the markets change?

It all depends on when the market has changed but also how. What’s going to happen? We all know that interest rates are going up and they’re going to continue to go up. We always project that in our underwriting assumptions that interest rates are going to keep going up. We also project that cap rates are going to go up. Assuming both those do happen, which may be part of the assumption of the question if and when markets change, we’re already planning for that with our underwriting.

Does it mean that you’re going to be able to hit huge home runs still? Probably not. If the margins are tighter, the cost of the price per unit and the cap rate are all going to get a little bit more competitive. It already has a little bit but not a ton. In short, we’re already expecting the pricing to tighten up and see a lot slower appreciation than what we have seen in the last couple of years. We’re already expecting rent growth to stabilize, normalize, or go back to normal.

That’s essentially what we underwrite too. Most deals don’t work because if you’re conservatively underwriting, you’re not going to be able to show a return on your projections. We try and find those that we think have a unique situation, special story, and special business plan. The goal at the end of the day is always to meet or beat projected returns. We will see where it goes, but we’re already looking several years out with our analysis on these deals to protect the downside and assume that the markets are changing right below our feet.

Rent growth might be stabilizing because it has been going up. Take a market like Phoenix. Rent increases are huge. I was looking at a deal. I don’t remember which deal it was, but the pro forma had 15% increases two years in a row. My question is this. How sustainable and realistic is that? You can’t on a dime increase the rents to 15% in year one because they’re all staggered. The pro forma is that it has been happening. Is it unrealistic? Should you run from that deal? Should you think, “These guys in Phoenix know what they’re doing.” Can you talk a little bit about that because that doesn’t feel like it’s stabilizing yet?

Rent growth can come from two sources. There’s natural market appreciation, which essentially means we’ve got a tenant in unit two. His rent comes up for renewal. He’s paying $1,100 a month. We don’t have to do anything. He wants to stay. We can raise it to $1,200 a month. He or she is not going anywhere. That’s natural market appreciation because you’re essentially increasing the rent on the existing unit to the market.

If the margins are tighter, the cost of the price per unit and the cap rate are all going to get a little bit more competitive. Click To Tweet

If that’s 15% in the underwriting, I would be very concerned at this stage in the cycle. I would probably run from that deal, but if you combine it with, “We’re also going to renovate 50 units in the first year,” and we know that you’re taking that $1,100 unit for post-renovation rents. You’re going to have the tenant relocate and then you’re going to come in and inject $10,000 to $15,000 of renovations into that unit. You know that you can get $1,400 a month.

You combine the two, natural market appreciation from tenant turnovers versus CapEx dollars being injected into the unit and getting more for a nicer unit. If that’s 15%, there might be a little more merit to it if the total is there, but we’re not underwriting to 15% rent growth on our deals. Here’s how we do it. We have been investing in Phoenix for a number of years. You can dig down. One of our asset class and trade gem beauties is we have insider information.

You can get so much data down to the submarket as to what rents are doing, what they have been doing, and occupancy levels. You can pretty accurately estimate and call 3, 6, to 12 months out where the rents are going to go. For example, we did a Phoenix deal in a sub-market in Phoenix that had a projected rent growth in 2022 of over 20%, which is what we saw in 2021. We didn’t put that into our model. There was no way. We had 4.5% projected for 2022.

What ends up happening if you can get the deal to pencil by smartly being conservative on the underwriting and projections? What happens if you do get that 20%? That $1,100 goes up to $1,350 without doing any renovations. You’re setting yourself up to outperform. That’s always the goal. It’s to meet or beat the projections. That’s one thing I would say. If you’re generally looking at deals that have a lot of appreciation built into the assumptions, I would be very cautious.

You’re cautious, but then also you need to understand the story behind it. I would much prefer someone to say, “We think we can get 20%, but we’re going to make the deal work at 4% and outperform.” If we can get 20% and then you end up with 4%, investors aren’t going to be happy with that. You want to have positive surprises.

I want to shift gears a little bit and talk about how you vet sponsors because that’s your main job. You’re not operating the property as much as you are vetting the sponsor. How do you find those best-in-class operators? What kind of due diligence do you do? How can that relate to what a passive investor does? Clearly, we can’t do the due diligence you do. We do a different kind of due diligence. Can you talk about your process?

We vet sponsors’ people. That’s critical, but you also got to vet the deals. It’s a two-step process. We have invested with a lot of sponsors over the years that we still pass on some of their deals. They both have to work. It’s the people and the deal. That still happens. We work with a lot of operating partners and sponsors. They will share an opportunity with us and it doesn’t pencil out for us, even though we have active capital with them and we have done great with them. It doesn’t mean every deal works for us.

There are two steps there. As far as underwriting people, a few thoughts come to mind. It takes a long time. We started underwriting people with our capital years ago. We still do that now. A lot of times, if we’re new with an operating partner, we will test them with our money first and see how they do. Let’s be frank. There are a lot of savvy folks out there that sound great, answer all the questions well, and look like they know what they’re doing, but it doesn’t always turn out that way.

Sometimes they can drop the ball and find out that reporting starts to get thin. There are details and transparency. After you write the check, they start leaving you a little questioning whether or not you made the right decision or is this going to go the way you thought and that kind of stuff. It’s vetting before and after you invest and doing due diligence.

We do a lot of asset management. When an operating partner sends us an update, there’s usually a call and a lot of emails back and forth to get more information. I’m sure you’ve seen this. You might scratch your head, asking yourselves a lot of questions after getting an update like, “It doesn’t tell me everything I need to know here to feel completely comfortable.” That’s how a lot of operating partners operate. They don’t give you a ton of information.

The vetting is a continuous ongoing process before and during the investment life cycle. When it comes to people, we have three buckets that I tell people about. We have vetted over 120 operating partners over the years. I’ve got Yes, Maybe, and No. The Yes bucket is the smallest amount, as you can imagine. There are about 14 to 15 groups. The Maybe bucket is around 55 or so and the remainders are Noes. It’s a process for us. It takes time and a ton of questioning and asking for information.

PILF 72 | Asset Classes
Asset Classes: We invest based on fundamentals and sound conservative underwriting, so we can withstand the unknown and volatility.

 

The noes can come quickly and very slowly too. It depends on how they respond and their transparency. We look closely at track records and specialties. We look for groups that do one thing well and repeat it over and over. It helps reduce risk. Most of our operators have at least $500 million in assets under management. They have done well for many years and some of them for decades. Essentially, maybe it’s a little bit of a boring rinse-and-repeat process. We like that. It reduces risk.

You also want to look for some tips. Look at references, ask for some, ask for more, and then ask those folks for other people that have invested with them. Call them, quiz them, go online, go on LinkedIn, see who they’re connected to, get your references, and do a lot of homework. We run background checks on everybody. Our operating partners usually come from 1 or 2 places. We have invested with them before, vetted them, and we like them, and they’re continuing to do quite well or referred to us by another investor who can say the same thing. That’s where we get our people from.

If someone wants to invest with you, that’s a whole other process. If you were to invest with a capital allocator like yourself instead of directly with the operating partner, what should a passive investor look at? How should they evaluate and screen you to make sure that they know you and they’re comfortable with you? You’re going to be picking investments, not for them, but you’re going to be still very much involved in the process. They can’t vet the underlying operator. They need to bet you. What are some questions they should be asking people like you?

Regarding us and our background, get to know us. Who are we? How do we think? Why do we want to do these investments? Are we trying to sell something? Those are real questions you want to ask anybody. Are we good marketers but maybe not good investment managers? That’s a big one for us with operating partners. Ask the same question to us. What makes you special? From there, they’re the same questions. Do your homework, run background checks, go talk to references, and see what kind of folks you’re relying on to execute.

At the end of the day, you want to be able to say that you’re excited about it. You feel thrilled that you’re able to work with people who will hopefully do very well for you time and time again and always have your best interest in mind. We use a process there with our operating partners and a process there that can also be used for investors looking at us.

In the past, I’ve always thought it’s better to invest directly with the sponsor and go right to the person who’s running the show, but lately, I find that in going through a company that does what you do or a capital allocator, I can work in and approve you as a sponsor using my process, referrals, or however I screen sponsors to get to know people. I’m having you do the rest of the work. It’s almost more passive than regular passive investing. Talk a little bit about the benefit of going with someone like you rather than directly to the underlying operator.

I’ll say a few things. You get to piggyback off of a company like ours, experience the vetting process, relationships, and asset management, and not have to do all of that yourself. That’s number one. It’s a daunting task, especially with the number of sponsors and operating partners out there. If you go online, you can find a hundred deals that you can invest in. It takes a lot of time. We essentially help with that process and reduce that for our folks. In turn, there’s a lower risk there because you’re getting vetted people that have deals.

You can also get more diversification because we do this across multiple asset classes. We can provide our folks with opportunities in different regions, assets, people, durations, and income growth. Essentially, you can leverage our experience and network to gain access to more deals and operators that you otherwise may not have found on your own or be even able to underwrite or evaluate the risks or the merits of the deal.

We also put together funds. We will combine different deals together into one offering. That’s a unique offering that typically you can’t get anywhere else. We will put several deals together. That can provide investors with the advantages of investing in a specific deal but also downside protection by spreading your capital into multiple deals. That fund essentially is a lot more diversified. It has a lower risk. You can invest in it at a much lower minimum than you could on your own if you want to put all those deals together into a portfolio.

To put that into context, in our recession-resistant fund, we invested in nine different deals across three different asset classes. It was over 12,000 units total. Our minimum investment for one of our folks was $50,000. That’s the minimum. To go and create that fund on your own, you would have to have $1.2 million. You couldn’t do it in that theory. We’re constantly looking at how we can provide folks with something unique or something that maybe they can’t get otherwise and ensure that they’re going to be in good hands. That’s always the end of the game or the goal for everything we’re doing.

That’s interesting creating a fund like that. Usually, it would be $1.2 million to get into all those deals. You can get into it for $50,000. We use a company called Tribevest that allows us to invest as a group. It’s not the same thing because you’re more of a professional. When you’re investing in a group, you’re with your buddies or people you’ve met. There are different degrees of it, but it’s similar in the way that it effectively allows you to diversify and get lower minimums on some things. You also mentioned the different recession-resistant asset classes. What asset classes are those that you believe are recession-resistant? Why?

The goal, at the end of the day, is always to meet or beat projected returns. Click To Tweet

I’ll keep it short because there’s a lot of information out there that people can search for. Recession resistance means that the asset and the investment have a high likelihood of continuing to perform during various economic conditions. If you think about mobile home parks, it’s usually number one as far as recession resistance goes. You’re dealing with one of the most affordable housing solutions in the country. The supply is limited, fixed, or possibly going down due to barriers to entry and zoning restrictions. You name it.

There are a lot of reasons why they’re not making many mobile home parks anymore these days. A lot of them are being demolished and then redeveloped for a higher and best use. That’s one of the reasons you have a flat supply. Demand continues to go up from residents for affordable housing. That’s a big problem in this country. We don’t see any type of short-term solution. Going back to Econ 101, the supply-demand disequilibrium is a big part.

At the end of the day, you’re offering folks one of the most affordable housing options. During recessions historically, and there are charts going back to the ’90s, net operating income growth remains stable or grows during downturns. There’s not a lot of stuff you can say that about. That’s one for mobile homes. Self-storage is another for some of similar reasons. During a recession or economic trouble, people will typically change something in their lives. That change in moving and downsizing often results in an increase in demand to store their stuff. We have seen that correlation over cycles.

We also focus a lot on what we call workforce housing and apartment communities in growth markets and close to transit that is still affordable based on the local median income. It’s a very specific type of apartment that we like to also invest in. That also would stand the test of time if you look back far enough and look at some of the results of the demand, rent growth, net operating income, growth, value, and stabilization over tough periods. Those are three that are top of mind when it comes to recession resistance.

Talk a little bit about the workforce affordable housing because people use those words, but I’m not sure it’s always clear what that means. Most of the offerings you see out there are like, “We’re going to do a big value-add and raise rents as high as we can.” I’m sure you want to do that with all of it, but what’s the difference between a typical multifamily property and workforce housing or affordable housing types of properties?

Workforce housing is essentially an affordable housing option for the local community based on the median household income or the average income per person as well. You’re offering a housing option that the local community can afford. There’s a formula. You look and see how much can the local community afford. Do the post-renovation rents fit that bill?

You might want to look at the rent-to-income ratio. We typically look at one-month rent when we’re looking at post-renovation rent. If it’s $1,500 a month for a two-bedroom after we renovate the unit, you will typically pay around $35,000 to $40,000 local average income to be able to afford that rent. If it’s lower or significantly lower than that, it’s not necessarily affordable.

The other thing to keep in mind too when thinking about that is for two bedrooms, we’re finding that dual incomes are occupying more two-bedroom apartments or both people are working. It makes it even more affordable. Technically, if you’re paying $750 and your roommate, spouse, or partner is also paying $750 and you’ve got two incomes, it’s a lot easier to make ends meet. Those are the kinds of apartments we focus on. We’re looking at our post-renovation rents and making sure that the local population can still afford them.

I haven’t looked at it that way before because it’s always hard for me. All the multifamily look the same. Everyone is putting in, granted, they’re making the pool look pretty and all that. You want that in any apartment, whether it’s workforce or not. Tying it to the income makes sense to me.

It’s important to make sure that there’s going to be a strong demand once you’re done doing all the work.

The last question I ask on the show is this. What is a great podcast or two that you listen to? If you’ve got real estate ones, that’s great. If you have one for your free time, that’s good as well.

PILF 72 | Asset Classes
Asset Classes: Recession resistance means that the asset and the investment have a high likelihood of continuing to perform during various economic conditions.

 

There are a couple that comes to mind. I like Hunter Thompson’s Cash Flow Connections. He provides a lot of great interviews with folks from a little bit more of an economic outlook as well, which is something we watch very closely. We like Invest Like a Billionaire. It’s the same concept. They have great guests and content as well. Yours, Jim, is awesome. That’s enough. You’re also looking at things from an investor’s standpoint. You’re someone who’s deep in the industry as well. You provide tons of great content.

Thank you. Those first two are great. I listen to those as well. The third one, I appreciate the recommendation. I don’t listen to that one because I can’t listen to my voice anymore. I appreciate that. If readers want to get in touch with you or get on your newsletter list or deal list, what’s the best way to do that?

Check us out. We have a website. It’s SMKCap.com. Our company name is SMK Capital Management. There are tons of information on our website. We’ve got investment examples, recent stuff we have done, and a lot of questions about us. We try to be as transparent as possible. People can sign up there to learn more. They can email us and reach out. We’re happy to connect.

Mark, we appreciate you being on the show. It was a great show. We will be watching you as you continue to grow.

We appreciate it. Thank you, Jim.

Thank you.

That was a good conversation with Mark. I got to know him a little bit. He’s a good guy. One of the things that stood out for me is that I’m always about the diversification of asset class by sponsors, markets, and some other metrics. He added income versus growth, which makes sense if you want cashflow or you’re looking for appreciation depending on where you are.

Having a nice mix of that is a good idea. There’s duration. Another one I’ve been looking at lately is getting things shorter in duration because there’s so much uncertainty in the market that I don’t want to lock in for longer-term deals. We were alike in that. I liked the pivot when he’s into a deal. He plans to renovate all the units, but once he gets to 25% or so, if the market is still going great, he’s got proof of concept.

He can sell that property before his business plan is complete because he has derisked it somewhat for the buyer. They know, “If we do these renovations, here’s the rent we’re going to get.” It makes it a lot easier to sell. A pivot is what you want. It’s the ability to change the business plan while it’s going. Rent growth was interesting because I always look at rent growth and I’m like, “Fifteen percent is too high,” or whatever the numbers are.

He put it into two buckets. Market appreciation is the rent you’re going to get if you don’t do anything. That’s one component. If that’s 15%, it’s a big red flag. The other is the post-renovation rents. If those go up by large amounts, that makes more sense depending on the market, property, and all that. I still am curious or I would ask a lot of questions if they think they’re going to get 15% in year one because it’s so tough to get everything done in year one to raise the whole book to 15%.

If you look at those two different aspects, market appreciation versus post-renovation rents, that gives you a little bit different perspective on it. We always say, “Screen the sponsor. Make sure the sponsor and the deal come second.” Mark agrees with that, but he also added, “You still have to look at the deal.” Sometimes we get so caught up in making sure you’re good with the sponsor that you know, like, trust, and all of that.

Sometimes they send you a deal and you’re like, “I’m going to do it because I’ve vetted the sponsor properly.” You still need to look at the deal and analyze the deal to make sure it still fits within the parameters you’re looking for. I kept saying, “People like you.” I didn’t mean anything by it other than he’s more of a capital allocator and less than a true syndicator we normally think of. I like that if he finds a new sponsor, asset class, or something, he’s going to test it with his family’s money before he puts it out to investors.

I like it when one of those capital allocators has that kind of plan because they test it with their money. They’re eating what they’re cooking. I like that. Lastly, a lot of people are talking about recession-resistant asset classes. He put out mobile home parks and gave great reasons for it. Self-storage is the same. There are reasons why those are recession-resistant.

Workforce housing is a new one. We have talked about it, but digging down and getting a better idea of what he means by workforce housing was helpful for me, at least. I’m in one deal with Mark. It’s brand new. I have no idea what’s going to happen, but I’m going to be keeping an eye on him. I will sit on the sidelines for a while to see how this deal pans out before I look for a second one. I like Mark. He has come highly recommended. I’m going to keep my eye on him. That’s all we have in the show.

 

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About Mark Khuri

PILF 72 | Asset ClassesMark has been an avid real estate investor for over 17 years and has sourced, underwritten, acquired, raised capital, renovated, managed, and sold both residential and commercial real estate investments throughout multiple markets in the US. He has analyzed hundreds of investment opportunities and has successfully bought, renovated, sold, and invested in over 120 properties with a combined value of over $1 billion and created and managed over 45 real estate partnerships with investors.

 


 

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